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KCS
[If STB approval is received before 10-K filing: On [approval date], the STB approved CP’s control application for KCS, with an effective date of [effective date], [subject to certain conditions]. On or after the effective date and the Company’s determination that none of the conditions imposed by the STB would cause the Company to decline to exercise control, the voting trust will be terminated and CP (through an indirect wholly owned subsidiary) will acquire control of the shares and take control of KCS (the date on which such control occurs, the "Control Date"), subject to conditions imposed in the STB’s approval decision. [The Company may also (or alternatively) determine to seek review of the conditions imposed by the STB (e.g., via a petition for reconsideration to the STB or petition for review filed with a U.S. Court of Appeals).] Until the Control Date, the Company continues to record its investment in KCS using the equity method of accounting (see Note 10 and Note 11).

Upon acquiring control of KCS, the voting Trust will cease. This change in control will be accounted for as a business combination achieved in stages, using the acquisition method of accounting, with the date of control reflecting the business combination acquisition date. Accordingly, the identifiable assets acquired and the liabilities assumed will be measured and recorded as of this acquisition date.

The fair values of the previously held equity interest in KCS, and the identifiable assets acquired and the liabilities and non-controlling interest assumed will be determined using valuation techniques, including but not limited to, market approach, cost approach, multi-period excess earnings method, replacement cost method, and net asset value approach.]
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 001-01342
Canadian Pacific Railway Limited

(Exact name of registrant as specified in its charter)
 
Canada 98-0355078
(State or Other Jurisdiction
of Incorporation or Organization)
 (IRS Employer
Identification No.)
  
7550 Ogden Dale Road S.E. 
CalgaryABT2C 4X9
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (403) 319-7000
Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class Trading Symbol(s)  Name of Each Exchange on which Registered 
Common Shares, without par value, of
Canadian Pacific Railway Limited
CP New York Stock Exchange
Toronto Stock Exchange
Perpetual 4% Consolidated Debenture Stock of Canadian Pacific Railway CompanyCP/40New York Stock Exchange
BC87London Stock Exchange

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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 þ
Accelerated filer
Non-accelerated filer
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company
Emerging growth company


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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐

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

As of June 30, 2022, 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 $64,936,373,457, 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 23, 2023, there were 930,767,959 shares of the registrant's common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.

EXPLANATORY NOTE

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

CPRL prepares and files a management information circular and related material under Canadian requirements. As CPRL's management information circular is not filed pursuant to Regulation 14A, CPRL may not incorporate by reference information required by Part III of this Form 10-K from its management information circular. Accordingly, in reliance upon and as permitted by Instruction G(3) to Form 10-K, CPRL will be filing an amendment to this Form 10-K containing the Part III information no later than 120 days after the end of the fiscal year covered by this Form 10-K. All references to our websites contained herein do not constitute incorporation by reference of information contained on such websites and such information should not be considered part of this document.




CP 2022 ANNUAL REPORT 1

CANADIAN PACIFIC RAILWAY LIMITED
FORM 10-K TABLE OF CONTENTS
PART I
Page
Item 1.Business
Item 1A. Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
Information about our Executive Officers
PART II
Item 5.Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6.[Reserved]
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8.Financial Statements and Supplementary Data
Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10.Directors, Executive Officers and Corporate Governance
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accounting Fees and Services
PART IV
Item 15.Exhibits, Financial Statement Schedule
Item 16.Form 10-K Summary
Signatures




2 CP 2022 ANNUAL REPORT
PART I




CP 2022 ANNUAL REPORT 3

ITEM 1. BUSINESS

Company Overview
Canadian Pacific Railway Limited (“CPRL”), together with its subsidiaries (“CP”), owns and operates a transcontinental freight railway in Canada and the United States (“U.S.”). CP provides rail and intermodal transportation services over a network of approximately 13,000 miles, directly serving the principal business centres of Canada from Montréal, Québec, to Vancouver, British Columbia ("B.C."), and the U.S. Northeast and Midwest regions. CP’s railway network feeds directly into the U.S. Midwest from the East and West coasts. Agreements with other carriers extend CP's market reach in Canada, through the U.S. and into Mexico. CP transports bulk commodities, merchandise freight, and intermodal traffic. For additional information regarding CP's network and geographical locations, refer to Item 2. Properties.

CPRL was incorporated on June 22, 2001, under the Canada Business Corporations Act and controls and owns all of the Common Shares of Canadian Pacific Railway Company (“CPRC”), which was incorporated in 1881 by Letters Patent pursuant to an Act of the Parliament of Canada. CPRL's registered, executive and corporate head office is located at 7550 Ogden Dale Road S.E., Calgary, Alberta, T2C 4X9, Canada. CPRL's Common Shares (the "Common Shares") are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”) under the symbol “CP”.

For purposes of this annual report, all references herein to “CP”, “the Company”, “we”, “our” and “us” refer to CPRL, CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or more of CPRL's subsidiaries, as the context may require. All references to currency amounts included in this annual report, including the Consolidated Financial Statements, are in Canadian dollars unless specifically noted otherwise.

Strategy
The Company’s strategy remains focused on precision scheduled railroading as embedded within our five foundations:

Provide Service: Providing efficient and consistent transportation solutions for the Company’s customers. “Doing what we say we are going to do” is what drives the Company in providing a reliable product with a lower cost operating model. Centralized planning aligned with local execution is bringing the Company closer to the customer and accelerating decision-making.
Control Costs: Controlling and removing unnecessary costs from the organization, eliminating bureaucracy, and continuing to identify productivity enhancements are the keys to success.
Optimize Assets: Through longer and heavier trains, and improved asset utilization, the Company is moving increased volumes with fewer locomotives and cars while unlocking capacity for future growth potential.
Operate Safely: Each year, the Company 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. The Company strives for continuous implementation of state-of-the-art safety technology, safety management systems, and safety culture with our employees to ensure safe, efficient operations across our network.
Develop People: The Company recognizes that none of the other foundations can be achieved without its people. Every employee is a railroader and the Company has established a culture focused on our values of accountability, diversity and pride, in everything we do. Coaching and mentoring all employees into becoming leaders will continue to drive the Company forward.
Today, we continue to apply our long-term strategy: leverage our lower cost base, network strengths, and improve service to drive sustainable, profitable growth. While the accomplishments during the operational turnaround were tremendous, the Company's journey to become North America's best-performing rail carrier is far from over. As a Company, we remain focused on our next level of service, productivity, and innovation to continue to generate sustainable value for our customers, employees, and shareholders.

Business Developments
Kansas City Southern ("KCS") transaction
The U.S. Surface Transportation Board's ("STB") review of CP's proposed control of KCS while KCS is in the voting trust is expected to be completed in the first quarter of 2023. Upon obtaining control approval from the STB, provided it is granted, the two companies will be combined. Mr. Creel will serve as the Chief Executive Officer of the combined company. The combined business will be named Canadian Pacific Kansas City Limited ("CPKC"). Calgary, Alberta will be the global headquarters of CPKC, and Kansas City, Missouri will be designated as the U.S. headquarters. The Mexico headquarters will remain in Mexico City and Monterrey. CP's current U.S. headquarters in Minneapolis-St. Paul, Minnesota will remain an important base of operations. Four KCS Directors are expected to join CP's expanded Board at the appropriate time, bringing their experience and expertise in overseeing KCS's multinational operations.



4 CP 2022 ANNUAL REPORT

The transaction will combine the two railroads to create the first rail network connecting the U.S., Mexico, and Canada and will deliver dramatically expanded market reach for customers served by CP and KCS, provide new competitive transportation service options, and support North American economic growth.

Specific risk factors related to the KCS transaction are included in Part I, Item 1A. Risk Factors.

Other current business developments
In the fourth quarter of 2022, the Company was named to the S&P Global Dow Jones Sustainability World Index ("DJSI World") for the first time and to the North American Index ("DJSI North America") for the third consecutive year. According to S&P Global, the DJSI North America comprises of North American sustainability leaders as identified through the Corporate Sustainability Assessment. The index represents the top 20% of the largest 600 North American companies in the S&P Global Broad Market Index and measures corporate sustainability leaders' performance based on long-term economic, environmental, and social criteria. The DJSI World Index comprises global sustainability leaders as identified by S&P Global through the Corporate Sustainability Assessment. It represents the top 10% of the largest 2,500 companies in the S&P Global BMI based on long-term economic, environmental and social criteria.

Additionally, the Company was named to CDP Worldwide ("CDP")’s A List for the second consecutive year. CDP is an international nonprofit organization that annually assesses organizations on environmental performance and transparency. According to CDP, nearly 20,000 organizations disclosed climate-related and environmental metrics and information through the organization in 2022.

On July 20, 2022, KCS and its affiliate Kansas City Southern de México, S.A. de C.V. ("KCSM") announced an agreement, effective July 14, 2022, extending the concession exclusivity rights granted to KCSM for an additional 10 years to now expire in 2037. Additionally, KCSM reached an agreement with the Mexican Ministry of Infrastructure, Communications and Transportation to fund a new investment in the Celaya-NBA Line Railway Bypass and other infrastructure.

On May 3, 2022, the Company became the first freight rail company in North America to participate in the United Nations ("UN") Global Compact, a voluntary leadership platform for the development, implementation and disclosure of socially responsible business practices. Launched in 2000, the UN Global Compact is the largest corporate sustainability initiative in the world, with more than 15,000 participating companies in over 160 countries.

On April 27, 2022, at the Company's Annual and Special Meeting of Shareholders, all nine director nominees were elected to the Board of Directors of the Company.

On March 16, 2022, the Company issued a 72-hour notice to the Teamsters Canada Rail Conference ("TCRC") - Train & Engine, of its plan to lock-out employees at 00:01 Eastern Time on March 20, 2022 if the TCRC leadership and the Company were unable to come to a negotiated settlement or agree to binding arbitration. The TCRC represents approximately 3,000 locomotive engineers, conductors, and train and yard workers across Canada. On March 19, 2022, while the Company was still engaged in ongoing negotiations facilitated by federal mediators, the TCRC withdrew its services in the final hours before the deadline for a legal strike or lockout to potentially occur. On March 22, 2022, the Company reached an agreement with the TCRC Negotiating Committee to enter into binding arbitration. This agreement enabled the Company's employees to return to work effective at noon on March 22, 2022 local time to resume our essential services for our customers and the North American supply chain. On August 15, 2022, the Company entered into a new two-year collective agreement with the TCRC following binding arbitration. The new agreement includes a 3.5 percent wage increase in 2022 and 2023 as well as increased benefits. Under the arbitration decision, the TCRC has joined a pension improvement account. The new collective agreement is effective from January 1, 2022 to December 31, 2023.

Prior Developments
On December 14, 2021, following approval of the transaction by the shareholders of both the Company and KCS, receipt of Mexican regulatory approvals, and satisfaction or waiver of customary closing conditions and pursuant to the terms set forth in the Agreement and Plan of Merger (the "Merger Agreement") with KCS dated September 15, 2021, the acquisition of KCS was consummated and all outstanding stock of KCS was deposited into a voting trust and held by a single trustee as trust stock. Under the terms of the Merger Agreement, the Company issued 262.6 million Common Shares to existing KCS common stockholders at the exchange ratio of 2.884 Common Shares per share of KCS common stock and paid cash consideration to existing KCS stockholders of U.S. $90 per share of KCS common stock held and U.S. $37.50 per share of KCS preferred stock held for a total of approximately $10.5 billion (U.S. $8.2 billion). Share consideration, cash consideration, and the above described payments to KCS totaled approximately $36 billion (U.S. $28 billion). For additional information regarding this acquisition, refer to Item 8. Financial Statements and Supplementary Data, Note 10 Business acquisitions.

On September 15, 2021, upon KCS's termination of the Agreement and Plan of Merger with Canadian National Railway Company ("CN") (the "CN Merger Agreement"), the Company entered into the Merger Agreement with KCS. Pursuant to the terms of the CN Merger Agreement, KCS paid a merger termination fee of U.S. $700 million and refunded the CP merger termination fee of U.S. $700 million to CN (together, the "CN merger termination



CP 2022 ANNUAL REPORT 5

fees"). In connection with the Merger Agreement, the Company remitted $1,773 million (U.S. $1,400 million) to KCS on September 15, 2021 in connection with KCS's payment of the CN merger termination fees.

On April 21, 2021, the five-for-one Share Split of the issued and outstanding Common Shares was approved at the Annual and Special Meeting of Shareholders. On May 13, 2021, the Company’s shareholders of record as of May 5, 2021 received four additional Common Shares for every Common Share held. Ex-distribution trading in the Company’s Common Shares on a split-adjusted basis commenced on May 14, 2021. Proportional adjustments were also made to outstanding awards under the Company's stock-based compensation plans in order to reflect the share split. All outstanding Common Shares, stock-based compensation awards, and per share amounts herein have been retrospectively adjusted to reflect the share split.

Operations
The Company operates in only one operating segment: rail transportation. Although the Company provides a breakdown of revenue by business line, the overall financial and operational performance of the Company is analyzed as one segment due to the integrated nature of the rail network. Additional information regarding the Company's business and operations, including revenue and financial information, and information by geographic location is presented in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, Note 26 Segmented and geographic information.

Lines of Business
The Company transports freight, consisting of bulk commodities, merchandise, and intermodal traffic. Bulk commodities, which typically move in large volumes across long distances, include Grain, Coal, Potash, and Fertilizers and sulphur. Merchandise freight consists of industrial and consumer products, such as Forest products, Energy, chemicals and plastics, Metals, minerals and consumer products, and Automotive. Intermodal traffic consists largely of retail goods in overseas containers that can be transported by train, ship and truck, and in domestic containers that can be moved by train and truck.

In 2022, the Company generated Freight revenues totalling $8,627 million ($7,816 million in 2021). The following chart shows the percentage of the Company’s total Freight revenues derived from each of the three major business lines in 2022:

cp-20221231_g1.jpg
2022 Freight Revenues



















6 CP 2022 ANNUAL REPORT
BULK
The Company's Bulk business represented approximately 38% of total Freight revenues in 2022.

Bulk includes the Grain, Coal, Potash, and Fertilizer and sulphur lines of business. Bulk traffic predominantly moves in unit train service moving from one origin to one destination on a single train without reclassification. The following chart shows the percentage of the Company's Bulk freight revenues by Line of business in 2022:
cp-20221231_g2.jpg
2022 Bulk Revenues
(38% of Freight Revenues)

Grain
The Company’s Grain business represented approximately 54% of Bulk revenues, and was 20% of total Freight revenues in 2022.

The Company's Grain network is unique among railways in North America as it is strategically positioned in the heart of grain-producing regions of western Canada and the Northern Plains of the U.S. The Company provides a service advantage to its customers through grain transportation in 8,500-foot High Efficiency Product ("HEP") trains including high-capacity hopper cars which enables the Company to efficiently serve farmers, shippers, and the entire grain supply chain. The 8,500-foot HEP train can move approximately 40 percent more grain than the prior generation of grain train.

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

Canadian grain includes a division of business that is regulated by the Canadian government through the Canada Transportation Act (the “CTA”). This regulated business is subject to a maximum revenue entitlement (“MRE”). Under the CTA, railways can set their own rates for individual movements. However, the MRE governs aggregate revenue earned by the railway based on a formula that factors in the total volumes, length of haul, average revenue per ton, and inflationary adjustments. The regulation applies to western Canadian export grain shipments to the ports of Vancouver and Thunder Bay.

U.S. grain transported by the Company consists of both whole grains, such as corn, wheat, soybeans, and durum, and processed products such as feed, meals, oils, and flour. This business is centred in the states of Minnesota, North Dakota, and Iowa. Grain destined for domestic consumption is interchanged with other carriers to the U.S. Midwest, the U.S Northeast via Chicago, Illinois, and the U.S. Pacific Northwest. The Company also delivers direct shipments of U.S. grain to western Canada primarily for animal feed. In partnership with other railways, the Company moves U.S. grain to export terminals in the U.S. Pacific Northwest and the Gulf of Mexico. Export U.S. grain traffic is also shipped to the Port of Vancouver and the ports at Superior, Wisconsin and Duluth, Minnesota.

Coal
The Company’s Coal business represented approximately 18% of Bulk revenues, and was 7% of total Freight revenues in 2022.

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




CP 2022 ANNUAL REPORT 7

In the U.S., the Company moves primarily thermal coal from connecting railways, serving the thermal coal fields in the Powder River Basin in Montana and Wyoming, which is delivered to power-generating facilities in the U.S. Midwest.

Potash
The Company's Potash business represented approximately 18% of Bulk revenues, and was 7% of total Freight revenues in 2022.

The Company’s Potash traffic moves mainly from Saskatchewan to offshore markets through the ports of Vancouver, Portland, and Thunder Bay, and to markets in the U.S. All potash shipments for export beyond Canada and the U.S. are marketed by Canpotex Limited or K+S Potash Canada. Canpotex is an export company owned in equal shares by Nutrien Ltd. and The Mosaic Company. Independently, The Mosaic Company, Nutrien Ltd., and K+S Potash Canada move domestic potash with the Company primarily to the U.S. Midwest for local application.

Fertilizers and Sulphur
The Company's Fertilizers and sulphur business represented approximately 10% of Bulk revenues, and was 4% of total Freight revenues in 2022.

The Company’s fertilizer traffic includes dry fertilizers, which are phosphate, urea, nitrate, and ammonium sulphate, and wet fertilizers, which are primarily anhydrous ammonia. Approximately half of the Company's fertilizer shipments originate from production facilities in Alberta, where abundant sources of natural gas and other chemicals provide feedstock for fertilizer production.

Most sulphur is produced in Alberta as a byproduct of oil and gas activity. Sulphur is a raw material used primarily in the manufacturing of sulphuric acid, which is used most extensively in the production of phosphate fertilizers.

MERCHANDISE
The Company’s Merchandise business represented approximately 36% of total Freight revenues in 2022.

Merchandise products move in both mixed freight and unit trains in a variety of car types. Service involves delivering products to many different customers and destinations. In addition to traditional rail service, the Company moves merchandise traffic through a network of truck-rail transload facilities, expanding the reach of the Company's network to non-rail served facilities. The following chart shows the percentage of the Company's Merchandise freight revenue by Line of Business in 2022:

cp-20221231_g3.jpg
2022 Merchandise Revenues
(36% of Freight Revenues)













8 CP 2022 ANNUAL REPORT
Forest Products
The Company’s Forest products business represented approximately 13% of Merchandise revenues, and was 5% of total Freight revenues in 2022.

Forest products traffic primarily includes pulp and paper, and lumber and panel products shipped from key producing areas in B.C., Ontario, Alberta, Québec, the U.S. Southeast, New Brunswick, and the U.S. Northeast, to destinations throughout North America, including the U.S. Midwest, the U.S. Northeast, the U.S. Southeast, and to export markets via Vancouver.

Energy, Chemicals and Plastics
The Company’s Energy, chemicals and plastics business represented approximately 45% of Merchandise revenues, and was 16% of total Freight revenues in 2022.

The Company moves energy products consisting of commodities such as liquefied petroleum gas ("LPG"), fuel oil, asphalt, gasoline, and other energy products. The majority of the Company’s western Canadian energy traffic originates in the Alberta Industrial Heartland, Canada's largest hydrocarbon processing region, and Saskatchewan. The Company accesses key destinations and export markets in the U.S. West Coast, the U.S. Gulf Coast, the U.S. Northeast, the U.S. Midwest, and Mexico.

The Company's biofuels traffic originates mainly from facilities in the U.S. Midwest, shipping primarily to destinations in the U.S. Northeast, the U.S. Gulf Coast, and Alberta.

The Company moves crude primarily from production facilities throughout Alberta to refining markets primarily in the Gulf Coast. The majority of the Company’s crude is now moving as DRUbitTM, a sustainable heavy crude oil specifically designed for rail transportation and produced using an innovative facility known as a Diluent Recovery Unit ("DRU"), which enables the removal of diluent at origin. This technology enables the safe and economical transportation of crude oil and is cost competitive with pipeline transportation. The Company transports DRUbitTM from the Hardisty Rail Terminal in Alberta to Port Neches, Texas, via interchange in Kansas City.

The Company’s chemical traffic includes products such as ethylene glycol, caustic soda, sulphuric acid, methanol, and other chemical products. These shipments originate from western Canada, the Gulf Coast, eastern Canada, and the U.S. Midwest, and move to end markets in the U.S., Canada, and overseas.

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

Metals, Minerals and Consumer Products
The Company’s Metals, minerals and consumer products business represented approximately 28% of Merchandise revenues, and was 10% of total Freight revenues in 2022.

The Company's Metals, minerals and consumer products freight revenues are generated from aggregates (including frac sand), steel, food and consumer products, and non-ferrous metals. Aggregate products include coarse particulate and composite materials such as frac sand, cement, limestone, gypsum, and other aggregate products.

The majority of frac sand originates at mines located along the Company's network in Wisconsin and moves to the Bakken and Marcellus shale formations, Permian shale basin, and other shale formations across North America.

Cement is shipped directly from production facilities in Alberta, the U.S. Midwest, Ontario, and Québec to energy and construction projects in the U.S. Midwest, western Canada, and the U.S. Pacific Northwest.

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

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









CP 2022 ANNUAL REPORT 9

Automotive
The Company’s Automotive business represented approximately 14% of Merchandise revenues, and was 5% of total Freight revenues in 2022.

The Company’s Automotive portfolio consists of four finished vehicle traffic components: Canadian-produced vehicles that ship to the U.S. from Ontario production facilities; vehicles from overseas that move through the Port of Vancouver primarily to eastern Canadian markets as well as western Canadian markets; U.S.-produced vehicles that ship cross-border to Canadian markets as well as within the U.S.; and Mexican-produced vehicles that ship to Canada and the U.S. In addition to finished vehicles, the Company ships pre-owned vehicles, machinery, 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 26% of total Freight revenues in 2022.

The Company's Intermodal freight revenues are generated from domestic and international movements. Domestic intermodal freight consists primarily of manufactured consumer products that are predominantly moved in 53-foot containers within North America. International intermodal freight moves in marine containers to and from ports and North American inland markets. The following chart shows the percentage of the Company's Intermodal freight revenues generated from domestic intermodal and international intermodal in 2022:

cp-20221231_g4.jpg
2022 Intermodal Revenues
(26% of Freight Revenues)

Domestic Intermodal
The Company's domestic business represented approximately 53% of Intermodal revenues, and was 14% of total freight revenues in 2022.

The Company’s domestic intermodal business moves goods from a broad spectrum of industries including wholesale, retail, food, and various other commodities. Key service factors in domestic intermodal include consistent on-time delivery and the ability to provide door-to-door service. The majority of the Company’s domestic intermodal business originates in Canada, where the Company markets its services directly to retailers and manufacturers and maintains direct relationships with its customers. In the U.S., the Company’s service is delivered mainly through intermodal marketing companies.

International Intermodal
The Company's international business represented approximately 47% of Intermodal revenues, and was 12% of total freight revenues in 2022.

The Company’s international intermodal business consists primarily of containerized traffic moving between the ports of Vancouver, Montréal, Saint John, 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. The Company works closely with the Port of Montréal, a major year-round East Coast gateway to Europe, to serve markets primarily in Canada and the U.S. Midwest. The Company's access to the Port of Saint John provides the fastest rail service from the east coast to the Canadian and U.S. Midwest markets for import and export cargo from Europe, South America, and Asia.

Fuel Cost Adjustment Program
The short-term volatility in fuel prices may adversely or positively impact revenues. The Company 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 revenues are a function of freight volumes and fuel prices. Fuel surcharge



10 CP 2022 ANNUAL REPORT
revenues accounted for approximately 15% of the Company's Freight revenues in 2022. The Company is also subject to carbon taxation systems and levies in some jurisdictions in which it operates, the costs of which are passed on to the shipper. As such, fuel surcharge revenue includes carbon taxes and levy recoveries.

Freight revenues included fuel surcharge revenues of $1,303 million in 2022, an increase of $768 million, or 144%, from $535 million in the same period of 2021. This increase was primarily due to higher fuel prices and increased carbon tax recoveries.

Significant Customers
For each of the years ended December 31, 2022 and 2021, the Company's revenues and operations were not dependent on any major customers.

Competition
The Company is in the ground transportation and logistics business. The Company sees competition in this segment from other railways, motor carriers, ship and barge operators, and pipelines. Depending on the specific market, competing railways, motor carriers, and other competitors may exert pressure on price and service levels. The Company continually evaluates the market needs and the competition. The Company responds as it deems appropriate to provide competitive services to the market. This includes developing new offerings such as transload facilities, new train services, and other logistics services.

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, which results in reduced capacity under the winter operating plan with train length restrictions, the closure of the Port of Thunder Bay, and reduced transportation of retail goods. Second and third quarter revenues generally improve compared to the first quarter, as fertilizer volumes are typically highest during the second quarter and demand for construction-related goods is generally highest in the third quarter. Revenues are typically strongest in the fourth quarter, primarily as a result of the transportation of grain after the harvest, fall fertilizer programs, and increased demand for retail goods moved by rail. Operating income is also affected by seasonal fluctuations. Operating income is typically lowest in the first quarter due to lower freight revenue and higher operating costs associated with winter conditions.

Government Regulation
The Company’s railway operations are subject to extensive federal laws, regulations, and rules in the countries in which it operates, which directly affect how operations and business activities are managed.

Canada
The Company’s rail operations in Canada are subject to economic regulation by the Canadian Transportation Agency (the "Agency”) pursuant to authorities under the CTA. The CTA establishes a common carrier obligation and it indirectly regulates rates by providing shippers access to regulatory mechanisms for challenging freight rates, including ancillary charges, and access to regulated interswitching rates and long-haul interswitching rates; and regulatory mechanisms to challenge level of service. The CTA also establishes an MRE for the transportation of Canadian export grain and other agriculture products, which is administered by the Agency. Finally, the Agency makes regulatory determinations regarding the construction and abandonment of railway lines, commuter and passenger access, and noise and vibration-related disputes.

The Company’s rail operations in Canada are subject to safety and security regulatory requirements enforced by Transport Canada ("TC") pursuant to the Railway Safety Act ("RSA") and the Transportation of Dangerous Goods Act (the "TDGA"). The RSA regulates safety-related aspects of railway operations in Canada, including the delegation of inspection, investigation, and enforcement powers to TC. TC is also responsible for overseeing the safe and secure transportation of dangerous goods.

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

U.S.
The Company’s U.S. rail operations are subject to economic regulation by the STB. The STB provides economic regulatory oversight and administers Title 49 of the United States Code and related Code of Federal Regulations. The STB has jurisdiction over railroad rate and service issues, proposed railroad mergers, and other transactions.

The Company’s U.S. operations are subject to safety regulations enforced by the Federal Railroad Administration (the “FRA”), and the Pipeline and Hazardous Materials Safety Administration (“PHMSA”). The FRA regulates safety-related aspects of the Company’s railway operations in the U.S. under the Federal Railroad Safety Act, as well as rail portions of other safety statutes. The PHMSA regulates the safe transportation of hazardous materials by



CP 2022 ANNUAL REPORT 11

rail. The Company’s U.S. rail operations are also subject to security regulations and directives by the Transportation Security Administration, a component of the U.S. Department of Homeland Security.

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

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 air pollutants, greenhouse gas ("GHG") emissions, management and remediation of historical contaminant sites, discharges to waters and the handling, storage, transportation, and disposal of waste and other materials. If the Company is found to have violated such laws or regulations, it could have a material adverse effect on the Company’s business, financial condition, or operating results. In addition, in operating a railway, it is possible that releases of hazardous materials during derailments or other accidents may occur that could cause harm to human health or to the environment. Costs of remediation, damages and changes in regulations could materially affect the Company’s operating results, financial condition, and reputation.

The Company has implemented an Environmental Management System to facilitate the reduction of environmental risk. Specific environmental programs are in place to address areas such as locomotive air emissions, GHG reporting, management of vegetation, wastewater, chemicals and waste, storage tanks, and fueling facilities. The Company 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 its network 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 review by senior management.

The Company focuses on key strategies, identifying tactics and actions to support and operationalize our environmental commitments. The Company’s strategies include:
Implementing measures to minimize or prevent environmental impacts from our operations and facilities, and to ensure compliance with applicable environmental laws and regulations;
Maintaining an Environmental Management System to provide consistent, effective guidance and resources to the Company's employees in regard to the management of air emissions, dangerous goods and waste materials, emergency preparedness and response, petroleum products management, and water and wastewater systems;
Reducing environmental and safety risk through business processes to identify and mitigate potential environmental impacts related to all the Company's operations and activities;
Ensuring that new or altered operations and other business activities are evaluated, planned, permitted in accordance with applicable regulations, and executed to mitigate environmental risk;
Engaging with relevant stakeholders to consider and discuss the Company’s environmental management practices and environmental issues and concerns associated with our operations;
Employing best practices, proven technologies, and safe operating standards for activities involving elevated environmental risk; and
Planning and preparing for emergency responses to ensure all appropriate steps are taken in the event of a derailment, spill, or other incident involving a release to the environment.

Security
The Company is subject to statutory and regulatory requirements across its network that address security concerns. The Company 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, actions by criminal and non-criminal organizations, and activities by individuals. Regulations by the U.S. Department of Transportation and the U.S. Department of Homeland Security 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 hazards ("TIH") materials. Regulations issued by TC under the TDGA have added requirements for railway companies to take actions to mitigate security risks of transporting dangerous goods by rail.
 
The Company takes the following security measures:
The Company 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, the Company's Police Services has a central headquarter that oversees police officers assigned to field offices responsible for railway police operations across its network. The Company's Police Services operate on the Company's rail network as well as in areas where the Company has non-railway operations;
The Company's Corporate Security department is committed to providing a safe and secure work environment for the Company’s employees, contractors, visitors, and other authorized persons on the Company's property, and to protecting the Company’s assets, operations, information, the



12 CP 2022 ANNUAL REPORT
public and the environment from damage, interference, and undue liability. As part of this commitment, Corporate Security is responsible for ensuring: the security of the International Supply Chain and its requisite programs; providing training and awareness to employees and contractors; assessing the risk and vulnerability of the Company’s properties; establishing appropriate countermeasure to secure and protect the Company’s properties and assets; and engage with customers and the public. Specifically, the Company employs the following to support these initiatives:
The Company’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, the Company routinely examines and prioritizes railway assets, physical and cyber vulnerabilities, and threats, as well as tests and revises measures to provide essential railway security;
The Company’s Public Safety Communication Centre ("PSCC") operates 24 hours a day. PSCC 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. PSCC ensures that proper emergency responders and governing bodies are notified; and
To address cyber security risks, the Company’s Enterprise Security Department 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, the Company is able to maintain network fluidity.

Focus on Sustainability
Sustainability at the Company is rooted in a long-standing legacy of building for the future. We recognize that integrating sustainability into our business processes is imperative to future growth and long-term success as an organization. As one of North America’s top-performing railways, we seek to continue to innovate and to advance practices to create value for the Company’s stakeholders, including employees, customers, shareholders, suppliers, and local and Indigenous communities. We are proud to be recognized as a corporate sustainability leader in our industry.

To ensure that the Company manages the sustainability topics most significant to our business and stakeholders, we have structured our management approach across three strategic areas. Our sustainability practice is grounded in our commitment to safety, operational excellence, and social impact, and is designed to inspire action across our business.

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CP 2022 ANNUAL REPORT 13

Sustainability Governance
Recognizing the importance of sustainability to our business and to our internal and external stakeholders, the Company has established a clear governance structure to effectively communicate and respond to environmental, social and governance ("ESG") topics, while proactively implementing our commitments and practices. The Board of Directors, through its committees, is responsible for the monitoring, measurement and oversight of the Company's key risks, strategies and sustainability topics. The Risk and Sustainability Committee of the Board reviews ESG performance against short- and long-term sustainability objectives and evaluates results of stakeholder engagement to ensure alignment with the Company’s strategic planning.

With oversight from the President and CEO of the Company, decisions on day-to-day implementation of the Company’s sustainability priorities are guided by a cross-functional executive Sustainability Steering Committee. The Sustainability Steering Committee regularly reports progress and advances recommendations on the Company’s sustainability objectives, policies, and management approach to the Risk and Sustainability Committee of the Board.

Through ongoing engagement and collaboration across and beyond our organization, the Company continually refines its sustainability approach, which is driven by our values and based on a shared sense of purpose, community, and vision for the future. We value feedback from our stakeholders, strive to learn from our performance and constantly challenge ourselves to improve our practices. As we continue to embed sustainability practices in our business, we are committed to improving our ESG disclosures to align with best practices and recognized sustainability disclosure standards.

Climate Change
Climate change represents a significant global challenge and the Company is committed to adapting our business and operations. The Company published its first Climate Strategy in 2021, outlining our approach to managing potential climate-related impacts, reducing our carbon footprint, and seeking to position the Company as an industry leader in the transition to a low-carbon future. As part of the Climate Strategy, the Company established science-based GHG emissions reduction targets covering 100% of Scope 1 and 2 emissions and more than half of our Scope 3 emissions.

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Science-based targets are used by many companies to establish a pathway for GHG emissions reduction across their organizations. Emissions reduction targets are considered science-based if they align with both current climate science and the objectives of the Paris Agreement. Over the past year, the Company has taken action to support the execution of our Climate Strategy. The Science Based Targets initiative (SBTi) works with the private sector to set and validate science-based emissions targets, and align corporate ambitions with global goals and investor expectations for business resilience in a net-zero economy. The SBTi has developed standardized tools, resources, and sector-specific methodologies to support company-specific emissions reduction targets. The SBTi is a partnership of the World Resources Institute, CDP, United Nations Global Compact, and the World Wildlife Fund for Nature.



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To respond to the risks and opportunities posed by climate change and meet our decarbonization commitments, our Climate Strategy includes actions across five strategic pillars. We are strengthening roles and responsibilities for climate governance. The Company's President and CEO's oversight of the Sustainability Steering Committee includes performance related to climate change, while the Risk and Sustainability Committee of the Board provides oversight and reviews climate-related risks and opportunities. To lead our focus on decarbonization, we have established a Carbon Reduction Task Force, composed of the Company’s industry-leading engineers and operations experts. Reporting to the Sustainability Steering Committee, the Carbon Reduction Task Force evaluates, recommends, and implements climate action measures to reduce GHG emissions and drive performance in the direction of our science-based targets.

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CP is building North America’s first line-haul hydrogen-powered locomotive using fuel cells and batteries to power the locomotive’s electric traction motors. In 2022, the Company advanced production on three hydrogen locomotive conversions and installing hydrogen production and fueling facilities. This industry-leading project is demonstrating the technical performance in real-world operations and generating critical industry knowledge and experience that is informing future commercialization and development activities. CP's Hydrogen Locomotive program passed a significant milestone in 2022 by completing the first successful movement and freight service testing on the initial hydrogen locomotive.

CP aligns our reporting by including the recommendations from the Task Force on Climate-related Financial Disclosure ("TCFD") and has issued a TCFD aligned Index to demonstrate CP's full alignment to the recommendations. In addition, we regularly report on climate-related efforts through CDP and supplemental sustainability disclosures.

Human Capital Management
The Company is focused on attracting, developing, and retaining a resilient, high-performing workforce that delivers on providing service for our customers. The Company's culture is guided by three core values: Accountability, Diversity, and Pride. These values drive our actions. Everything we do is grounded in precision scheduled railroading and our five foundations of Provide Service, Control Costs, Optimize Assets, Operate Safely, and Develop People.

A team of approximately 13,000 railroaders across North America underpins the Company’s success and brings value to our customers and shareholders. Accordingly, Develop People is one of the foundations of how we do business, illustrating our focus and energy towards empowering our people, providing an engaging culture, and cultivating an industry leading team.




CP 2022 ANNUAL REPORT 15

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 total number of employees as of December 31, 2022, was 12,754, an increase of 920 compared to 11,834 as at December 31, 2021.

Workforce is defined as total employees plus contractors and consultants. The total workforce as at December 31, 2022 was 12,824, an increase of 952 compared to 11,872 as at December 31, 2021.

Unionized Workforce
Class I railways are party to collective bargaining agreements with various labour unions. The majority of the Company's employees belong to labour unions and are subject to these agreements. The Company manages collaborative relationships with union members in both Canada and the U.S.

Unionized employees represent nearly 74% of our workforce and are represented by 37 active bargaining units.

Canada
Within Canada there are nine bargaining units representing approximately 7,200 Canadian unionized active employees. From time to time, we negotiate to renew collective agreements with various unionized groups of employees. In such cases, the collective agreements remain in effect until the bargaining process has been exhausted (pursuant to the Canada Labour Code). Four agreements are open for renewal of which one has been tentatively agreed and in the ratification stage. Agreements are in place with the other five bargaining units in Canada, of which two collective agreements are effective until December 31, 2023, one is effective until December 31, 2024, one is effective until December 31, 2025 and the last one until December 31, 2026.

U.S.
In the U.S., there are currently 28 active bargaining units on four subsidiary railroads representing approximately 2,300 unionized active employees. Agreements are in place with respect to 17 bargaining units which will expire in or beyond 2023. Negotiations have concluded on 2 agreements that are pending ratification, and negotiations are ongoing with the remaining 9 agreements.

Health and Safety
The Company is an industry leader in rail safety and we are committed to protecting our employees, our communities, our environment, and our customers’ goods. The Company remained an industry leader in train accident statistics for the 17th consecutive year and achieved the lowest ever train accident frequency recorded by a Class I railway. FRA personal injury frequency for 2022 was also the second lowest ever recorded by the Company. The Company's leadership approach has been the most impactful driver of the strong safety performance metrics and we are committed to continually improving on them. Aside from running trains, many of our employees work in yards, terminals, and shops across our network with machinery and heavy equipment, or in extreme weather conditions. Their safety is of utmost importance to the Company and through 2022 we have continued to look at ways to improve safety in these areas of the operation. Operate Safely is one of our five foundations of successful railroading and it starts with knowing and following the rules. The reportable train accident and personal injury frequency rates are key metrics as part of the Company's annual incentive plan.

The ongoing reinforcement of our HomeSafe initiative continues to drive improvement by tapping into the human side of safety and promoting both safety engagement and feedback. HomeSafe defines the commitment and actions needed to ensure everyone goes home safely each day. HomeSafe puts everyone on the same level and empowers all employees to begin a safety conversation, no matter their role or position. We intend to continue strengthening our strong HomeSafe culture in 2023 through active peer engagement, safety walkabouts, and awareness initiatives.

Our reportable personal injury incidents rate per 200,000 employee-hours increased 10% to 1.01 (2021 - 0.92) and our reportable train accident rate per million train-miles decreased 15% to 0.93 (2021 - 1.10). The Company’s safety performance is disclosed publicly on a quarterly basis using standardized metrics set out by the FRA.

Talent Management
The Company’s approach for talent management begins with our Human Resources department, which oversees recruitment, development, engagement, and retention with the current and future workforce and leadership of the Company.

The Management Resources and Compensation Committee of the Board of Directors reviews and informs the Company’s compensation plan and programming, and makes recommendations to the Board on succession planning for senior management and processes to identify, develop, and retain executive talent. Additionally, as part of the Company’s succession planning program, senior leaders are actively engaged in building the pool of future leaders and present their development plans to the Board.

The Company maintains a number of internal policies and processes related to recruitment, relocation, compensation, employment equity, and diversity and inclusion. The effective implementation of these policies alongside our ongoing workforce initiatives ensures the Company’s attraction and



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recruitment, employee development, succession, engagement, and diversity and inclusion practices are consistent and aligned with the Company’s commitments, foundations, and values.

Attraction and Recruitment
We employ a number of recruitment strategies and retention tactics to attract and retain talent across North America. The Company offers many rewarding career opportunities in a variety of roles within the organization in both operating and support functions. We base our recruitment strategy on workforce planning needs, and our focus is on ensuring that we have a diverse candidate pool to fill our open positions.

The Company recognizes the valuable skills and experience that veterans have gained from serving their country. Our veteran program was recognized as part of Canada's Best Diversity Employers® of 2021 and we were named part of the top 10 Military Friendly® Employers in the U.S. for 2023. The Company was also named Canada's Top 100 Employers for 2023 as well as Alberta's Top 75 Employers for 2023.

The Company tracks recruitment performance and success rates to better understand which tactics, benefits, and strategic partnerships are most successful in bringing in and retaining new talent.

Talent Development & Succession
As part of our core foundation and commitment to Develop People, we encourage all employees to take an active role in their career planning and development. We believe that investing in our employees leads to improved workplace morale and fosters a supportive working environment.

Training and Development
One of the Company’s five foundations is to Develop People, which is integral to the way we do business at the railway. Our strategy involves delivering specialized training, best practices, and skill-broadening opportunities to all employees.

The Company offers a variety of training opportunities, providing both technical/on-the-job training, role-specific offerings as well as optional courses. Training includes instructor-led classes and online on-demand, self-directed online learning.

Non-union employees also complete annual performance management and development action plans with their leaders to set individual goals tied to the Company's five key foundations and track progress against Company expectations as well as career development goals.

Diversity and Inclusion
Diversity is one of our core values. We believe that different backgrounds, experiences, and perspectives enhance creativity and innovation and encourage diversity of thought in the workplace. Fostering an inclusive environment where all employees feel empowered to strive for and achieve success supports our high-performance culture and is integral to our growth and success as an organization. Our Diversity and Inclusion team with support from senior leadership is responsible for developing programs and initiatives to achieve our diversity commitments. We are continually working on programs and opportunities to ensure we are attracting, retaining, and developing the best people and skill sets for the Company. The Company is committed to increasing diversity throughout all levels of the organization.

The Company recognizes the importance of Board member diversity as a critical component of objective oversight and continuous improvement. As of December 31, 2022, four of the nine directors (44%) are women. Additionally, one of our male directors identifies as a minority, which makes the majority of the Board of Directors (56%) members of "designated groups" as defined in the Employment Equity Act of Canada.

The Company has regulatory requirements to report on workforce diversity representation in Canada (Employment Equity Act) and the U.S. (Equal Employment Opportunity Commission). The Company currently collects diversity data on the following categories: women, persons with disabilities, minorities (visible minorities), and Indigenous peoples (Canada) from employees through voluntary self-disclosure. The Company continues to focus our efforts on attracting, recruiting, and developing a diverse workforce. This data is shared in various disclosures and government reporting, internally with employees and leaders, as well as our Board of Directors.












CP 2022 ANNUAL REPORT 17

Year over Year Diversity Representation
Canada and U.S. Diversity Percentages(1)
20222021
Women9 %10 %
Persons with disabilities3 %%
Minorities (visible minorities)(2)
16 %14 %
Indigenous peoples (Canada only)4 %%
(1) Percentages are based on total active employees at year-end.
(2) Minority is a term used in the U.S., Visible Minority is a term used in Canada.

The Company continues to work collaboratively with our employees, communities, and partner organizations along our network to progress and support the Company’s commitment toward a more representative and inclusive workplace. Some of our initiatives include:
Establishing three diversity councils (Indigenous, Gender, and Racial). Each council is chaired by an executive and represents a diverse group of employees. The councils work to ensure we consider diversity and inclusion when we make decisions, provide feedback on corporate directions and promote initiatives that relate to each council’s area of focus;
Providing a company wide diversity and inclusion anonymous survey, the results of which aid in putting in place initiatives and educational opportunities;
Continuing our existing partnerships with associations and organizations that attract, recruit, and support skilled immigrants, transitioning veterans, persons with disabilities, and women;
Working with Indigenous groups to develop relationships that are more meaningful, create targeted outreach programs and employment opportunities, and better understand Indigenous history, culture, and opportunities for collaboration;
Supporting the development and advancement of women at the Company; and
Increasing employee awareness regarding the Company’s workplace diversity and inclusion practices through communications, education, and training.

We pride ourselves on offering a diverse workplace with a variety of careers in both our corporate and field locations. We recruit and hire talent based on relevant skills and experience, and seek to attract the highest quality candidates regardless of gender, age, cultural heritage, or ethnic origin. One of our primary objectives is attracting, recruiting, retaining, and developing a workforce representative of the communities in which we operate.

Available Information
The Company 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 filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Our website also contains charters for each of the committees of our Board of Directors, our corporate governance guidelines and our Code of Business Ethics. This Form 10-K and other SEC filings made by the Company are also accessible through the SEC’s website at www.sec.gov.

All references to our websites contained herein do not constitute incorporation by reference of information contained on such websites and such information should not be considered part of this document.



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ITEM 1A. RISK FACTORS

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

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

Business and Operational Risks
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 the Company, 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. The Company 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 the Company arising from personal injury, property or natural resource damage, environmental penalties, and remediation obligations. Such claims, if insured, could exceed the existing insurance coverage commercially available to the Company, which could have a material adverse effect on the Company’s financial condition, operating results, and liquidity. The Company is also required to comply with rules and regulations regarding the handling of dangerous goods and hazardous materials across its network. 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 faces competition from other transportation providers and failure to compete effectively could adversely affect financial results. The Company faces significant competition for freight transportation across its network, including competition from other railways, motor carriers, ship and barge operators, and pipelines. Competition is based mainly on quality of service, freight rates, and access to markets. Other transportation modes generally use public rights-of-way that are built and maintained by government entities, while the Company and other railways must use internal resources to build and maintain their rail networks. Competition with the trucking industry is generally based on freight rates, flexibility of service, and transit time performance. Any future improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation, or legislation that eliminates or significantly reduces the burden of the size or weight limitations currently applicable to trucking carriers, could have a material adverse effect on the Company's financial results.

The operations of carriers with which the Company interchanges may adversely affect operations. The Company's ability to provide rail services to customers across its network 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 the Company's inability to meet customers' demands or require the Company to use alternate train routes, which could result in significant additional costs and network inefficiencies and adversely affect our business, operating results, and financial condition.

The Company may be affected by acts of terrorism, war, or risk of war. The Company plays a critical role in the North American transportation system and therefore could become the target for acts of terrorism or war. The Company is also involved in the transportation of hazardous materials, which could result in the Company's equipment or infrastructure being direct targets or indirect casualties of terrorist attacks. Acts of terrorism, or other similar events, any government response thereto, and war or risk of war could cause significant business interruption to the Company and may adversely affect the Company’s results of operations, financial condition and liquidity.

The Company may be affected by fluctuating fuel prices. Fuel expense constitutes a significant portion of the Company’s operating costs. Fuel prices can be subject to dramatic fluctuations, and significant price increases could have a material adverse effect on the Company's results of operations. The Company currently employs a fuel cost adjustment program to help reduce volatility in changing fuel prices, but the Company cannot be certain that it will always be able to fully mitigate rising or elevated fuel costs through this program. Factors affecting fuel prices include worldwide oil demand, international politics, weather, refinery capacity, supplier and upstream outages, unplanned infrastructure failures, environmental and sustainability policies, and labour and political instability.

The Company relies on technology and technological improvements to operate its business and we are subject to cybersecurity risks. Information technology is critical to all aspects of the Company’s business, and the Company relies on technology systems operated by us or under control of third parties. Although the Company devotes significant resources to protect its technology systems and proprietary data, there can be no assurance that the systems we have designed to prevent or limit the effects of cyber incidents or attacks will be sufficient to prevent or detect such incidents or attacks, or to avoid a material adverse impact on our systems after such incidents or attacks do occur. The Company is continually evaluating attackers’ techniques and tactics, and the Company is diligent in its monitoring, training, planning, and prevention. However, due to the increasing sophistication of



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cyber-attacks and greater complexity in our IT supply chain, the Company may be unable to anticipate or implement appropriate preventive measures to detect and respond to a security breach. This includes the raising rates of reported ransomware events, increased human error, or other cyber-attack methods disrupting the Company’s systems or the systems of third parties. If the Company or third parties whose technology systems we rely on were to experience a significant disruption or failure of one or more of their information technology or communications systems (either as a result of an intentional cyber or malicious act, or an unintentional error) it could result in significant service interruptions or other failures, safety failures, other operational difficulties unauthorized access to, the loss of access to or misappropriation of competitively sensitive, confidential or other critical information or systems, loss of customers, financial losses, regulatory fines, and misuse or corruption of critical data and proprietary information, which could have a material adverse effect on the Company's results of operations, financial condition, and liquidity. The Company also may experience security breaches that could remain undetected for an extended period and, therefore, have a greater impact on the services we offer. In addition, if the Company is unable to acquire or implement new technology in general, the Company may suffer a competitive disadvantage, which could also have an adverse effect on its results of operations, financial condition, and liquidity.

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

Strikes or work stoppages could adversely affect the Company's operations. Class I railways are party to collective bargaining agreements with various labour unions. The majority of the Company'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.

Legal and Regulatory Risks
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 the countries it operates. Operations are subject to economic and safety regulations in Canada primarily by the Agency and TC. The Company’s U.S. operations are subject to economic and safety regulation by the STB and the FRA. Any new rules from our regulators could have a material adverse effect on the Company's financial condition, results of operations and liquidity as well as its ability to invest in enhancing and maintaining vital infrastructure. Various other regulators, including the FRA, and its sister agency within the U.S. Department of Transportation, the PHMSA, directly and indirectly affect the Company’s operations in areas such as health, safety, security, environmental and other matters. Together, FRA and PHMSA have broad jurisdiction over railroad operating standards and practices, including track, freight cars, locomotives, and hazardous materials requirements. In addition, the U.S. Environmental Protection Agency (“EPA”) has regulatory authority with respect to matters that impact the Company's properties and operations. Additional regulation of the rail industry by these regulators or federal and state or provincial legislative bodies, whether under new or existing laws, may result in increased capital expenditures and operating costs and 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 business, 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 is subject to environmental laws and regulations that may result in significant costs. The Company’s operations are subject to extensive federal, state, provincial (Canada) 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 the Company’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.




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The Company may be subject to claims and litigation that could result in significant expenditures. Due to the nature of its operations, the Company is exposed to the potential for claims and litigation arising out of personal injury, property damage or freight damage, employment, labour, contract or other commercial disputes, and environmental or other liability. The Company accrues for potential losses in accordance with applicable accounting standards, based on ongoing assessments of the likelihood of an adverse result in a claim or litigation together with the monetary relief or other damages sought or potentially recoverable. Material changes to litigation trends, a significant rail or other incident or series of incidents involving freight damage or loss, property damage, personal injury, or environmental or other liability, and other significant matters could have a material adverse impact to the Company's operations, reputation, financial position or liquidity.

Supply Chain Risks
Disruptions within the supply chain could negatively affect the Company's operational efficiencies and increase costs. The North American transportation system is integrated. The Company’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 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 the Company 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, the Company’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.

Risks Related to the Kansas City Southern Transaction
Following the closing of the KCS acquisition into a voting trust, although the Company does not control KCS, KCS’s operational and financial performance could have an adverse effect on the Company’s financial condition or results of operations. On December 14, 2021, the KCS acquisition closed into a voting trust, whereby the Company indirectly acquired a 100% beneficial ownership interest in KCS but does not control KCS. KCS’s voting stock was deposited into a voting trust that insulates KCS from control by the Company. The Company will not control KCS until STB control approval is obtained. Until that time, KCS will be managed by its own executive team overseen by its own Board of Directors and the voting trust.

The voting trust precludes the Company from exercising control over the business strategy or other operational aspects of KCS. The Company’s investment in this unconsolidated entity was considered significant under Rule 3-09 of Regulation S-X for the year ended December 31, 2022. The Company cannot provide assurance that KCS will operate in a manner that will increase the value of the Company’s investments, that the Company’s income or losses from KCS will continue at the current level in the future, or that the Company will not incur losses from KCS. Write-downs to the carrying amount of the Company’s equity interest could adversely impact the Company’s results of operations.

The Company incurred substantial indebtedness in connection with consummation of the acquisition, which may pose risks and/or intensify existing risks. Prior to the closing into voting trust that occurred on December 14, 2021, the Company incurred additional indebtedness of approximately U.S. $6.7 billion and $2.2 billion notes and a U.S. $500 million term loan to indirectly fund the acquisition.

The foregoing indebtedness, as well as any additional indebtedness we may incur, could have the effect, among other things, of reducing our liquidity and may limit our flexibility in responding to other business opportunities and increasing our vulnerability to adverse economic and industry conditions.

Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which will be subject to general economic, financial and business conditions, sufficient cash flow from KCS during the period in which it is in the voting trust, the implementation of the integration with KCS (if the STB approves our assuming control of KCS), and other factors affecting our operations, many of which are beyond our control. In addition, we may be required to redeem all of the outstanding 2.450% notes due 2031 and 3.000% notes due 2041 pursuant to a special mandatory redemption requirement of those notes, which could have a significant adverse impact on the business and financial condition of the Company. For more information, see "The combination is subject to final approval by the STB, and there can be no assurance as to whether and when it may be approved or if such approval will be granted with conditions acceptable to the parties; accordingly, the combination may be delayed, jeopardized or prevented entirely and the anticipated benefits of the combination could be reduced".

Our increased indebtedness could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages relative to other companies with lower debt levels. If we obtain control of KCS but we do not achieve the



CP 2022 ANNUAL REPORT 21

expected benefits and cost savings from the combination, or if the financial performance of the combined company does not meet current expectations, then our ability to service our indebtedness may be adversely impacted.

The agreements that govern the indebtedness that has been incurred in connection with the KCS acquisition contain various affirmative and negative covenants that may, subject to certain customary exceptions, restrict our ability to, among other things, create liens over our property, change our line of business and/or merge or consolidate with any other person or sell or convey certain of our assets to another person. In addition, some of the agreements that govern our debt financings contain a financial covenant that requires us to maintain certain financial ratios. Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants and failure to comply with them could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations. Under these circumstances, we may not have sufficient funds or other resources to satisfy all of our obligations.

Moreover, we may be required to raise substantial additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements. Our ability to arrange additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. There can be no assurance that we will be able to obtain additional financing or refinancing on terms acceptable to us or at all.

The pendency of the STB's regulatory review of the combination could have an adverse effect on the Company’s businesses, results of operations, financial condition, cash flows or the market value of the Company’s common stock and debt securities. The pendency of the regulatory review of the combination could disrupt the Company’s businesses, and uncertainty about the outcome of that review may have an adverse effect on the Company or the combined company. The attention of the Company’s management may be directed towards obtaining final approval from the STB and addressing related requests from the third parties for conditions on STB approval and may be diverted from the day-to-day business operations of the Company. Matters related to the combination may require commitments of time and resources that could otherwise have been devoted to other opportunities that might have been beneficial to the Company. Further, the combination may give rise to potential liabilities, including as a result of pending and future shareholder lawsuits relating to the combination. In addition, the Company has incurred, and expects to incur additional, material non-recurring expenses in connection with the completion of the combination. Any of these matters could adversely affect the businesses of, or harm the results of operations, financial condition or cash flows of the Company, and the market value of the Company’s common stock.

The combination is subject to final approval by the STB, and there can be no assurance as to whether and when it may be approved or if such approval will be granted with conditions acceptable to the parties; accordingly, the combination may be delayed, jeopardized or prevented entirely and the anticipated benefits of the combination could be reduced. The STB has the authority to impose conditions on its approval of a control transaction to alleviate competitive and other public interest harm. If such conditions were imposed, the anticipated benefits of the combination might be reduced. There is no assurance that final approval from the STB will be obtained or obtained on terms acceptable to the Company.

In addition, the STB's review process allows railroad competitors of the Company and KCS and other interested parties to intervene to oppose the STB application or seek conditions in the event approval by the STB is granted, which might delay the approval process or reduce the anticipated benefits of the combination. For example, on February 28, 2022, CN filed a responsive application asking the STB to condition any approval of a CP-KCS combination on the divestiture of KCS lines from Kansas City, Missouri to Springfield and East St. Louis, Illinois to CN, pursuant to the STB’s statutory authority to order “the divestiture of parallel tracks” as a merger condition. Furthermore, if the STB does not provide final approval or imposes conditions on its approval in a final order, and the Company and KCS decide to appeal such final order from the STB, any such appeal might not be resolved for a substantial period of time after the entry of such order by the STB.

If we determine in our reasonable judgment that the STB final approval will not be sought or has not or will not be received prior to March 25, 2023, then we will be required to redeem all of the outstanding 2.450% notes due 2031 and 3.000% notes due 2041 at a special mandatory redemption price equal to 101% of the aggregate principal amount of the applicable notes plus accrued and unpaid interest, if any. The Company may not have sufficient funds or other resources to satisfy such repurchase obligation, which could have a significant adverse impact on the business and financial condition of the Company.

If either (i) final approval from the STB has not been obtained by December 31, 2023 or (ii) the STB has, by a final and non-appealable order, refused to provide final approval (an “STB denial”), the Company would be required to dispose of its investment in KCS. Similarly, if the STB imposes onerous conditions on its final approval, the Company may choose to dispose of its investment in KCS rather than agreeing to the conditions imposed by the STB. In either case, the Company would be obligated under the voting trust agreement to directly or indirectly divest the trust stock in a manner that is acceptable to the STB. In the case of a divestiture, the market and divestiture alternatives for the trust stock might be limited, and such a disposition could cause the Company to incur significant losses and expenses in connection with the transaction, which could have a significant adverse impact on the business and financial condition of the Company.

The Company may be unable to integrate KCS successfully, and the Company may not experience the growth being sought from the combination. The Company and KCS have operated and, until the receipt of final approval from the STB, will continue to operate, independently.



22 CP 2022 ANNUAL REPORT
Integrating KCS with CP following STB approval of CP control will involve operational, technological and personnel-related challenges. This process will be time-consuming and expensive, may disrupt the businesses of either or both of the companies, and may reduce the growth opportunities sought from the combination. There can be no guarantee of the successful integration of KCS or that the combined company will realize the anticipated benefits of the business combination, whether financial, strategic or otherwise, and this may be exacerbated by changes to the economic, political and global environment in which the merged company would operate.

Climate-Related Risks
Climate change presents both physical and transition risks to our business. A summary of climate-related risks that could adversely affect our business, operations and financial results is discussed below.

Physical Risks
Changing climate conditions, severe weather or natural disasters could result in significant business interruptions and costs to the Company. The Company is exposed to severe weather conditions and natural disasters, including earthquakes, hurricanes, tropical storms, tornadoes, floods, fires, avalanches, mudslides, extreme temperatures, and significant precipitation that may cause track outages, severe damage to infrastructure, and business interruptions that can adversely affect the Company’s entire rail network. These events can result in substantial costs to respond during the event and recover following the event. Costs can include modifications to existing infrastructure or implementation of new infrastructure to prevent future impacts to our business.

Impacts from these types of events are highly variable based on the severity and length of the event and scope of network impact. Climate-related changes such as rising mean temperatures and severe weather events can increase physical climate risk potentially compounding impacts to the business and operations. Such events have had and in the future could have a material adverse effect on the Company’s results of operations, financial condition, and liquidity.

Insurance maintained by the Company to protect against loss of business and other related consequences resulting from these natural occurrences is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of the Company's damages or damages to others, and may 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.

Transition Risks
Reputational Risks
The Company has established GHG emission reduction targets to guide the implementation of the Company's Climate Strategy. The Company's inability to achieve GHG emissions reduction targets could negatively impact both our reputation and financial results. The Company has established two science-based GHG emissions reduction targets to address a substantial portion of the Company's Scope 1, Scope 2 and Scope 3 emissions by 2030. The primary risks associated with achieving these commitments include but are not limited to future investments in and the availability of GHG emissions-reduction tools and technologies, significant changes in the Company's GHG emissions profile as a result of changes to its railway asset base, the Company's ability to work with governments and third parties to mitigate the impacts of climate change, domestic and international economic conditions, including exchange rates, the effects of competition and regulation, uncertainties in the financial markets, capital spending, actions of vendors, the willingness of customers to acquire our services, cost of network expansion, maintenance and retrofits, and physical impact of climate change on our business. Our targets are subject to the successful implementation of the actions and plans outlined in the Climate Strategy as well as the accuracy of the assumptions in the science-based methodology used to calculate these targets. We cannot assure that the Company's plans to reduce GHG emissions will be viable or successful. Inability to meet GHG emissions reduction targets could have a material adverse effect on the Company's reputation, results of operations, or financial position.

Policy and Regulatory Risks
An escalating price on carbon emissions could materially increase direct costs related to fuel purchases and indirect expenses related to purchased goods, materials, and electricity required to operate our business. As a fuel-intensive operation, the Company is exposed to both emerging and escalating carbon pricing regulations. The Company is regulated under multiple carbon taxation systems and cap and trade market mechanisms in the Canadian provinces in which we operate. Approximately 75% of the Company’s Scope 1 and Scope 2 GHG emissions are generated through our operations in Canada and are impacted by carbon pricing mechanisms.

In most provinces, energy providers and utilities are directly regulated through carbon pricing programs. The Company’s carbon costs are generally assessed by our primary fuel suppliers based on fuel purchase transactions. The amount collected by our suppliers follows current regulatory carbon pricing rates multiplied by the total volume of fuel purchased. The Company’s carbon costs are also paid to a province as part of tax returns in some locations, based on reported locomotive fuel consumption in a specific region. The Company is further exposed to carbon pricing through electricity purchases, where electric utilities pass on carbon costs to customers. Introduction of, or changes to, regulations by government bodies in response to climate change that increase the cost of carbon emissions could result in a significant increase in expenses and could adversely affect our business performance, results of operations, financial position, and liquidity.



CP 2022 ANNUAL REPORT 23


Market Risks
A number of the sectors the Company serves have the potential to be significantly impacted by climate-related transitional risks, including increased regulations, technology changes, and shifts in consumer preferences. The Company’s business is based on transporting a wide variety of commodities from suppliers to the marketplace. The Company regularly transports energy commodities that serve refineries, processing locations, and end-users across North America and global markets. The Company’s business lines include thermal and metallurgical coal, crude oil and petroleum products, including liquefied petroleum gas, fuel oil, asphalt, gasoline, condensate (diluent), and lubricant oils.

Shifting consumer demand to lower-carbon products and increased climate-focused regulations, such as carbon pricing and fuel regulations, may instigate a broad transition in the energy sector. Programs that place a price on carbon emissions or other government restrictions on certain market sectors may further impact current and potential freight rail customers in the energy sector. A comprehensive transition in the energy sector could significantly impact the markets of the Company's energy customers or lead to market differentiation through geographic variation in policies and demand trends. A portion of the Company’s business could be materially affected by potential future changes and instability such a transition.

General Risk Factors
Global Risks
Global economic conditions could negatively affect demand for commodities and other freight transported by the Company. A decline or disruption in domestic, cross border or global economic conditions that affect the supply or demand for the commodities that the Company transports may decrease the Company’s freight volumes and may result in a material adverse effect on the Company’s financial or operating results and liquidity. Economic conditions resulting in bankruptcies of one or more large customers could have a significant impact on the Company's financial position, results of operations, and liquidity in a particular year or quarter.

Our business, financial condition, and results of operations have been adversely affected, and in the future, could be adversely affected by pandemics or other public health crises. The future impacts of COVID-19 on the Company's business or operating and financial results are unpredictable and cannot be identified or assessed with certainty at this time. The COVID-19 pandemic has adversely affected the global economy and resulted in a widespread economic downturn which has adversely impacted and could continue to adversely impact demand for our services and otherwise cause interruptions, including fluctuations to commodity prices, disruptions or restrictions on the ability to transport freight in the ordinary course, temporary closures of facilities and ports, or the facilities and ports of our customers, partners, suppliers or other third-party service providers, and/or changes to export/import restrictions. The pandemic caused by COVID-19 has impacted and may continue to impact the seasonal trends that typically characterize our revenues and operating income. There is no assurance that the pandemic will not continue to have a material and adverse impact on our business or results of operations. Additionally, our operations could be further negatively affected if a significant number of our employees are unable to perform their normal duties, including because of contracting COVID-19 or based on further direction from governments, public health authorities or regulatory agencies. The extent of the impact, if any, will depend on developments, many of which are beyond our control, including actions taken by governments, financial institutions, monetary policy authorities, and public health authorities to contain and respond to public health concerns and general economic conditions as a result of the pandemic. The COVID-19 pandemic may also result in continued substantial market volatility and declines, which could adversely impact future net periodic benefit costs and funding requirements of the Company’s pension plans. Furthermore, certain impacts of the COVID-19 pandemic, including demand for our services and to economic conditions generally, could continue following the pandemic or the expiration or termination of government actions in respect of the pandemic.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required or recommended by federal, provincial, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, shareholders, and other stakeholders. We cannot be certain of potential effects that any such alterations or modifications may have on our business or operating and financial results in future fiscal periods.

To the extent COVID-19 adversely affects our business or operating and financial results, it may also have the effect of heightening many of the other risks described above and below. In addition, we could be materially and adversely affected by other public health crises, including another widespread epidemic or pandemic.

Liquidity Risks
The state of capital markets could adversely affect the Company's liquidity. Weakness in the capital and credit markets could negatively impact the Company’s access to capital. From time to time, the Company relies on the capital markets to provide some of its capital requirements, including the issuance of long-term debt instruments and commercial paper. Significant instability or disruptions of the capital markets and the credit markets, or deterioration of the Company's financial condition due to internal or external factors could restrict or eliminate the Company's access to, and/or significantly increase the cost of, various financing sources, including bank credit facilities and issuance of corporate bonds. Instability or disruptions of the capital markets and deterioration of the Company's financial condition, alone or in combination, could also result in a reduction in the Company's credit rating to below investment grade, which could also further prohibit or restrict the Company from accessing external sources of short-term and long-term debt financing, and/or significantly increase the associated costs.



24 CP 2022 ANNUAL REPORT

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Network Geography
The Company operates on a network of approximately 13,000 miles of first main track, of which the Company accesses 2,100 miles under trackage rights. The Company's owned track miles include leases with wholly owned subsidiaries where the term of the lease exceeds 99 years. The Company's track miles do not include approximately 7,100 miles of tracks owned and operated by KCS and its subsidiaries. The Company's track network represents the size of the Company's operations that connects markets, customers, and other railways. Of the total mileage operated, approximately 5,200 miles are located in western Canada, 2,500 miles in eastern Canada (including CMQ Canada), 4,500 miles in the U.S. Midwest, and 600 miles in the U.S. Northeast. The Company’s network accesses the U.S. markets directly through four wholly owned subsidiaries: Soo Line Railroad Company (“Soo Line”), a Class I railway operating in the U.S. Midwest; the Dakota, Minnesota & Eastern Railroad ("DM&E"), which operates in the U.S. Midwest; Delaware & Hudson Railway Company, Inc., which operates between eastern Canada and the U.S. Northeast; and the Central Maine & Quebec Railway U.S. Inc., which operates in the U.S. Northeast.

The Company’s network in Canada extends from the Port of Vancouver, B.C. on Canada’s Pacific Coast to the Port of Montréal, Québec and eastern Québec and to the Port of Saint John, New Brunswick via a haulage agreement, and to the U.S. industrial centres of Chicago, Illinois; Detroit, Michigan; Buffalo and Albany, New York; Kansas City, Missouri; and Minneapolis, Minnesota.

cp-20221231_g8.jpg

At December 31, 2022, the breakdown of the Company's operated track miles is as follows:
Total
First main track12,822 
Second and other main track1,041 
Passing sidings and yard track4,256 
Industrial and way track866 
Total track miles18,985 



CP 2022 ANNUAL REPORT 25

Rail Facilities
The Company operates numerous facilities including: terminals for intermodal, transload, automotive and other freight; classification rail yards for train-building and switching, storage-in-transit and other activities; offices to administer and manage operations; dispatch centres to direct traffic on the rail network; crew quarters to house train crews along the rail line; shops and other facilities for fuelling; maintenance and repairs of locomotives; and facilities for maintenance of freight cars and other equipment. The Company continues to invest in terminal upgrades and new facilities to accommodate incremental growth in volumes. Typically in all of our major yards, the Company's Police Services has offices to ensure the safety and security of the yards and operations.

Equipment
The Company'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. In this section, owned equipment includes units acquired by the Company, equipment leased to third parties, units held under finance leases, and equipment leased to the Company under short-term or long-term operating leases.

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 as compared with standard direct current locomotives. The Company has entered into locomotive leases in the past to ensure there is appropriate capacity to meet market demand. The Company’s locomotive productivity, defined as the daily average GTMs divided by daily average operating horsepower, for the years ended December 31, 2022 and 2021, was 196 and 201 GTMs per Operating horsepower, respectively. Operating horsepower excludes units offline, tied up or in storage, or in use on other railways, and includes foreign units online. As of December 31, 2022, the Company had 262 locomotives in storage. As of December 31, 2022, the Company owned or leased the following locomotive units: 
LocomotivesOwnedLeasedTotalAverage Age
(in years)
Line haul767 56 823 14 
Road switcher536 543 30 
Total locomotives1,303631,36621 

The Company’s average in-service utilization percentage for freight cars, for the years ended December 31, 2022 and 2021, was 79% and 83%, respectively. Average in-service utilization is defined as average active fleet for the year divided by total cars, excluding company service cars and tank cars as these are utilized only as required for non-revenue movements. As of December 31, 2022, the Company owned and leased the following freight cars:

Freight carsOwnedLeasedTotalAverage Age
(in years)
Box car2,336421 2,75731 
Covered hopper11,0385,59216,63015 
Flat car1,4051,1102,51527 
Gondola3,5791,7215,30021 
Intermodal1,2641491,41317 
Multi-level autorack2,6541,1033,75726 
Company service car2,3741762,55046 
Open top hopper11— 1133 
Tank car30104016 
Total freight cars24,69110,28234,97321 




26 CP 2022 ANNUAL REPORT
As of December 31, 2022, the Company owned and leased the following units of intermodal equipment:

Intermodal equipmentOwnedLeasedTotalAverage Age
(in years)
Containers7,548— 7,5486
Chassis7,075997,17412
Total intermodal equipment14,6239914,7229

Headquarters Office Building
The Company 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 across 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, the Company has a fully integrated Business Continuity Centre, should the Company's operations centre be affected by any natural disaster, fire, cyber-attack, or hostile threat.

The Company 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 in the U.S.

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

Encumbrances
Refer to Item 8. Financial Statements and Supplementary Data, Note 15 Debt, for information on the Company's finance lease obligations and assets held as collateral under these agreements.

ITEM 3. LEGAL PROCEEDINGS

For further details, refer to Item 8. Financial Statements and Supplementary Data, Note 24 Commitments and contingencies.

SEC regulations require the disclosure of any proceeding under environmental laws to which a government authority is a party unless the registrant reasonably believes it will not result in sanctions over a certain threshold. The Company uses a threshold of U.S. $1 million for the purposes of determining proceedings requiring disclosure.

From time to time, the Company or its subsidiaries may be subject to information requests from U.S. State or Federal environmental regulatory authorities inquiring as to the Company’s compliance or remediation practices in the U.S. In September 2020, the Company received an initial request for information from the EPA inquiring into the Company’s compliance with the mobile source provisions of the Clean Air Act (“CAA”). The Company has been providing information in response to the EPA’s initial and follow-up requests, and the EPA has issued Notices of Violations, which preliminarily identify certain categories of alleged non-compliance with civil provisions of the CAA pertaining to locomotives and locomotive engines. In December 2022, the U.S. Department of Justice (“DOJ”) sent a communication requesting a meeting with the Company to discuss potentially resolving any alleged noncompliance which included an initial draft consent decree from the DOJ. Neither the EPA nor the DOJ has issued a final compendium of alleged violations, demand for corrective or mitigating actions, or articulated a preliminary civil penalty assessment, and it remains too early to provide a fulsome evaluation of the likely outcome with respect to either the nature of any alleged violations or the amount of any potential civil penalty. The Company will continue to fully cooperate and engage in discussions to resolve the matter.





CP 2022 ANNUAL REPORT 27

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.



28 CP 2022 ANNUAL REPORT
INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Our executive officers are appointed by the Board of Directors and they hold office until their successors are appointed, subject to resignation, retirement or removal by the Board of Directors. There are no family relationships among our officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. As of the date of this filing, the executive officers’ names, ages, and business experience are:

Name, Age and PositionBusiness Experience
Keith Creel, 54
President and Chief Executive Officer
Mr. Creel became President and CEO of the Company on January 31, 2017. Previously, he was President and Chief Operating Officer ("COO") from February 5, 2013, to January 30, 2017.

Prior to joining the Company, 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. Mr. Creel holds a Bachelor of Science in marketing from Jacksonville State University and completed the Advanced Management Program at Harvard Business School.
Nadeem Velani, 50
Executive Vice-President and Chief Financial Officer
Mr. Velani has been Executive Vice-President and Chief Financial Officer ("CFO") of the Company since October 17, 2017. Previous to this appointment, he was the Vice-President and CFO of the Company from October 19, 2016, to October 16, 2017, Vice-President, Investor Relations from October 28, 2015, and Assistant Vice-President, Investor Relations from March 11, 2013.

Prior to joining the Company, Mr. Velani spent 15 years at CN where he worked in a variety of positions in Strategic and Financial Planning, Investor Relations, Sales and Marketing, and the Office of the President and CEO.

Mr. Velani holds a Bachelor of Economics degree from Western University and an MBA in Finance/International Business from McGill University. He also completed the Advanced Management Program at Harvard Business School.
John Brooks, 52
Executive Vice-President and Chief Marketing Officer
Mr. Brooks has been Executive Vice-President and Chief Marketing Officer ("CMO") of the Company since February 14, 2019. Previous to this appointment, he was the Senior Vice-President and CMO of the Company from February 14, 2017, to February 13, 2019. He has worked in senior marketing roles at the Company since he joined the Company in 2007, including past experience as Vice-President, Marketing – Bulk and Intermodal.

Mr. Brooks began his railroading career with Union Pacific Corporation 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 the Company in 2007.

With more than 24 years in the railroading business, Mr. Brooks brings a breadth of experience to the CMO role that is pivotal to the Company's continued and future success. 
Mark Redd, 52
Executive Vice-President, Operations
Mr. Redd has been Executive Vice-President Operations since September 1, 2019. Before this appointment, he was Senior Vice-President Operations Western Region from February 2, 2017, to August 31, 2019, and Vice-President Operations Western Region from April 20, 2016, to February 1, 2017.

Previous to these roles, he was General Manager Operations U.S. West and General Manager Operations Central Division. He was named the Company's 2016 Railroader of the Year. Prior to joining the Company in October 2013, Mr. Redd worked for over 20 years at Kansas City Southern Railway where he held a variety of leadership positions in network and field operations. Mr. Redd holds a Bachelor and Master of Science in Management from the University of Phoenix and an Executive MBA from the University of Missouri – Kansas City.



CP 2022 ANNUAL REPORT 29

Jeffrey Ellis, 55
Chief Legal Officer and Corporate Secretary
Mr. Ellis has been Chief Legal Officer and Corporate Secretary of the Company since November 23, 2015. Mr. Ellis is accountable for the overall strategic leadership, oversight and performance of the legal, corporate secretarial, government relations, and public affairs functions of the Company in Canada and the U.S.

Prior to joining the Company in 2015, Mr. Ellis was the U.S. General Counsel at BMO Financial Group ("BMO"). Before joining BMO in 2006, Mr. Ellis was with the law firm of Borden Ladner Gervais LLP in Toronto, Ontario.

Mr. Ellis holds a Bachelor of Arts and a Master's of Arts degree from the University of Toronto, Juris Doctor and Master of Laws degrees from Osgoode Hall Law School, and an MBA from the Richard Ivey School of Business, Western University. Mr. Ellis is a member of the bars of New York, Illinois, Ontario and Alberta.
Laird Pitz, 78
Senior Vice-President and Chief Risk Officer
Mr. Pitz has been Senior Vice-President and Chief Risk Officer ("CRO") of the Company since October 17, 2017. Previously, he was the Vice-President and CRO of the Company from October 29, 2014, to October 16, 2017, and the Vice-President, Security and Risk Management of the Company from April 2014 to October 2014.

Prior to joining the Company, Mr. Pitz was retired from March 2012 to April 2014, and Vice-President, Risk Mitigation of CN from September 2003 to March 2012.

Mr. Pitz, a Vietnam War veteran and former Federal Bureau of Investigation special agent, is a 40-year career professional who has directed strategic and operational risk mitigation, security and crisis management functions for companies operating in a wide range of fields, including defence, logistics and transportation.
James Clements, 53
Senior Vice-President, Strategic Planning and Technology Transformation
Mr. Clements has been Senior Vice-President, Strategic Planning and Technology Transformation since September 1, 2019. Before this appointment, he was the Vice-President, Strategic Planning and Transportation Services of the Company from 2014. Mr. Clements has responsibilities that include strategic network issues, Network Service Centre operations, and Information Services. 

Mr. Clements has more than 20 years' experience at the Company, including an extensive understanding of the Company's customers, processes, and systems. His previous experience and leadership roles cover a wide range of areas of the Company’s business, including car management, finance, logistics, grain marketing and sales in both Canada and the U.S., as well as marketing and sales responsibilities for various other lines of business.

Mr. Clements holds an MBA in International Business and Finance from McGill University and a Bachelor of Science in Computer Science and Mathematics from McMaster University.
Mike Foran, 49
Vice-President, Market Strategy and
Asset Management


Mr. Foran has been Vice-President, Market Strategy and Asset Management of the Company since February 14, 2017. His prior roles with the Company include Vice-President Network Transportation from 2014 to 2017, Assistant Vice-President Network Transportation from 2013 to 2014, and General Manager – Asset Management from 2012 to 2013. In over 20 years at the Company, 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.



30 CP 2022 ANNUAL REPORT
Chad Rolstad, 46
Vice-President, Human Resources and Chief Culture Officer
Mr. Rolstad has been Vice-President, Human Resources since February 14, 2019, and the Chief Culture Officer since September 1, 2019. Previous to this appointment, he was Assistant Vice-President, Human Resources of the Company from August 1, 2018, to February 13, 2019, and Assistant Vice-President, Strategic Procurement of the Company from April 10, 2017, to July 31, 2018.

Prior to joining the Company, Mr. Rolstad held various leadership positions at BNSF Railway in marketing and operations.

Mr. Rolstad has a Bachelor of Science from the Colorado School of Mines and an MBA from Duke University.
Pam Arpin, 47
Vice-President and Chief Information Officer
Ms. Arpin has been Vice-President and Chief Information Officer since July 19, 2021. Previous to this appointment, she was the Company's first Vice-President Innovation & Business Transformation, a portfolio she retains in her current role, including oversight of the Company's Network Service Centre.

Ms. Arpin has navigated an extensive and varied career at the Company, and has 20-plus years of experience covering a wide range of areas including commercial, operations, finance, and customer service roles. She was named the 2019 Railway Woman of the Year by the League of Railway Women and was named one of Canada's Most Powerful Women: Top 100 by the Women's Executive Network that same year.

Ms. Arpin holds a Bachelor of Commerce from the University of Saskatchewan.




CP 2022 ANNUAL REPORT 31

PART II




32 CP 2022 ANNUAL REPORT
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Share Information
The Common Shares are listed on the TSX and on the NYSE under the symbol "CP".

Share Capital
At February 23, 2023, the latest practicable date prior to the date of this Annual Report on Form 10-K, there were 930,767,959 Common Shares and no preferred shares issued and outstanding, which consisted of 14,837 holders of record of the Common Shares. In addition, the Company has a Management Stock Option Incentive Plan (“MSOIP”), under which key officers and employees are granted options to purchase the Common Shares. Options issued prior to the share split further described in Item 1. Business, Business Developments now each provide rights over five shares. For consistency, all number of options presented herein are shown on the basis of the number of shares subject to the options. On April 27, 2022, at the Annual and Special Meeting, the Company's shareholders approved an amendment to the MSOIP to increase the maximum number of shares available for issuance under the MSOIP, effective at and after April 27, 2022, by 20,000,000 Common Shares. At February 23, 2023, 7,708,866 options were outstanding under the MSOIP and stand-alone option agreements entered into with Mr. Keith Creel. There are 21,883,561 options available to be issued by the Company’s MSOIP in the future. The Company also has a Director's Stock Option Plan (“DSOP”), under which directors are granted options to purchase Common Shares. There are no outstanding options under the DSOP, which has 1,700,000 options available to be issued in the future.

Stock Performance Graph
The following graph provides an indicator of cumulative total shareholder return on the Common Shares, of an assumed investment of $100, as compared to the TSX 60 Index (“TSX 60”), the Standard & Poor's 500 Stock Index (“S&P 500”), and the peer group index (comprising Canadian National Railway Company, Union Pacific Corporation, Norfolk Southern Corporation and CSX Corporation) 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.

cp-20221231_g9.jpg
(1) KCS was excluded from the peer group index in 2021 as shares were no longer publicly listed effective December 14, 2021. Comparative periods were restated to conform with the current year presentation.




CP 2022 ANNUAL REPORT 33

Issuer Purchase of Equity Securities
In connection with the KCS transaction, the Company suspended share repurchases and did not have an active program as at December 31, 2022. Purchases made in prior years are further described in Item 8. Financial Statements and Supplementary Data, Note 19 Shareholders' equity.

ITEM 6. [RESERVED]



34 CP 2022 ANNUAL REPORT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS
Page
Executive Summary
Performance Indicators
Results of Operations
Operating Revenues
Operating Expenses
Other Income Statement Items
Impact of Foreign Exchange on Earnings and Foreign Exchange Risk
Impact of Fuel Price on Earnings
Impact of Share Price on Earnings and Stock-based Compensation
Liquidity and Capital Resources
Share Capital
Non-GAAP Measures
Critical Accounting Estimates
Forward-Looking Statements




CP 2022 ANNUAL REPORT 35

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to enhance a reader’s understanding of the Company’s results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes in Item 8. Financial Statements and Supplementary Data, and other information in this annual report. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars. The following section generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

For purposes of this report, all references herein to “CP”, “the Company”, “we”, “our” and “us” refer to Canadian Pacific Railway Limited ("CPRL"), CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or more of CPRL's subsidiaries, as the context may require.

Executive Summary
2022 Results
Financial performance – In 2022, the Company reported Diluted earnings per share ("EPS") of $3.77, a 10% decrease from $4.18 in 2021. Core adjusted diluted EPS has remained unchanged at $3.77. The Company’s commitment to service and operational efficiency produced an Operating ratio of 62.2% and an Adjusted operating ratio of 61.4%. Core adjusted diluted EPS and Adjusted operating ratio are defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Total revenues – The Company’s Total revenues increased by 10% to $8,814 million in 2022 from $7,995 million in 2021, driven primarily by higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates.

Performance Indicators
The following table lists the key measures of the Company’s operating performance:
For the year ended December 3120222021% Change
Gross ton-miles (“GTMs”) (millions)269,134 271,921 (1)
Train miles (thousands)28,899 29,397 (2)
Fuel efficiency (U.S. gallons of locomotive fuel consumed /1,000 GTMs)0.955 0.931 
Total employees (average)12,57012,337

These key measures are used by management as comparisons to historical operating results and in the planning process to facilitate decisions that continue to drive further productivity improvements in the Company's operations. Results of these key measures reflect how effective the Company’s management is at controlling costs and executing the Company’s operating plan and strategy. Continued monitoring of these key measures ensures that the Company can take appropriate actions to ensure the delivery of superior service and be able to grow its business at low incremental cost.

A GTM is defined as the movement of one ton of train weight over one mile. GTMs are calculated by multiplying total train weight by the distance the train moved. Total train weight comprises the weight of the freight cars, their contents, and any inactive locomotives. An increase in GTMs indicates additional workload. GTMs for 2022 were 269,134 million, a slight decrease compared with 271,921 million in 2021. The decrease in GTMs was mainly attributable to lower volumes of Canadian grain, Coal, and Energy, chemicals and plastics. This decrease was partially offset by higher volumes of Intermodal, U.S. grain, Potash, and frac sand.

Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles provide a measure of the productive utilization of our network. A smaller increase in train miles relative to increases in volumes, as measured by RTMs, and/or workload, as measured by GTMs, indicates improved train productivity. Train miles for 2022 were 28,899 thousands, a decrease of 2% compared with 29,397 thousands in 2021. This decrease reflects the impact of a slight decrease in workload (GTMs), as well as the impact of a 1% increase in average train weights.

Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs. Fuel consumed includes gallons from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities. An improvement in fuel efficiency indicates operational cost savings and the Company's commitment to corporate sustainability through a reduction of greenhouse gas emissions intensity. Fuel efficiency for 2022 was 0.955 U.S. gallons/1,000 GTMs, a decrease of 3% compared to 0.931 U.S. gallons/1,000 GTMs in 2021. This decrease was due to harsher winter



36 CP 2022 ANNUAL REPORT
operating conditions in 2022, higher volumes of Intermodal, which has lower horsepower utilization, and lower locomotive productivity defined as the daily average GTMs divided by daily average operating horsepower.

An employee is defined as an individual currently engaged in full-time, part-time, or seasonal employment with the Company. The Company monitors employment levels in order to efficiently meet service and strategic requirements. The number of employees is a key driver to total compensation and benefits costs.

The average number of total employees for 2022 was 12,570, an increase of 233, or 2%, compared to 12,337 in 2021 to support anticipated future volume growth.

Results of Operations
Operating Revenues

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)(1)
$8,627 $7,816 $811 10 
Non-freight revenues (in millions)187 179 
Total revenues (in millions)$8,814 $7,995 $819 10 
Carloads (in thousands)2,782.1 2,735.5 46.6 
Revenue ton-miles (in millions)148,228 149,686 (1,458)(1)
Freight revenue per carload (in dollars)$3,101 $2,857 $244 
Freight revenue per revenue ton-mile (in cents)5.82 5.22 0.60 11 
(1) Freight revenues include fuel surcharge revenues of $1,303 million in 2022 and $535 million in 2021. Fuel surcharge revenues include recoveries of carbon taxes, levies, and obligations under cap-and-trade program

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

Total Revenues
The increase in Freight revenues was primarily due to increased freight revenue per RTM, partially offset by lower volumes as measured by RTMs. The increase in Non-freight revenues was primarily due to higher leasing revenue, higher passenger revenue from passenger service operators, and higher interline switching fees, partially offset by lower revenue from logistical services.

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. The decrease in RTMs was mainly attributable to lower volumes of Canadian grain, Coal, and Energy, chemicals and plastics. This decrease was partially offset by higher volumes of Intermodal, U.S. grain, Potash, and frac sand.

Freight revenue per RTM
Freight revenue per RTM is defined as freight revenue per revenue-producing ton of freight over a distance of one mile. This is an indicator of yield. The increase in Freight revenue per RTM was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of $709 million, higher freight rates, and the favourable impact of the change in foreign exchange ("FX") of $142 million. This increase was partially offset by lower crude liquidated damages, including customer volume commitments, due to completion of customer contracts.

Lines of Business
Grain

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$1,776 $1,684 $92 
Carloads (in thousands)382.1 426.2 (44.1)(10)
Revenue ton-miles (in millions)35,325 37,999 (2,674)(7)
Freight revenue per carload (in dollars)$4,648 $3,951 $697 18 
Freight revenue per revenue ton-mile (in cents)5.03 4.43 0.60 14 

The increase in Grain revenue was primarily due to increased freight revenue per RTM and higher volumes of U.S. corn from the U.S. Midwest to western Canada, partially offset by lower volumes of Canadian grain to Vancouver, B.C. and eastern Canada due to drought conditions that impacted the 2021-2022 Canadian crop size. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX. RTMs decreased less than carloads due to moving higher volumes of U.S. corn from the U.S. Midwest to western Canada, which has a longer length of haul.

Coal

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$577 $625 $(48)(8)
Carloads (in thousands)269.8 291.5 (21.7)(7)
Revenue ton-miles (in millions)14,970 18,345 (3,375)(18)
Freight revenue per carload (in dollars)$2,139 $2,144 $(5)— 
Freight revenue per revenue ton-mile (in cents)3.85 3.41 0.44 13 

The decrease in Coal revenue was primarily due to lower volumes of Canadian coal to Vancouver as a result of production challenges at the mines, partially offset by higher volumes of Canadian coal to Kamloops, B.C. and increased freight revenue per RTM. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. RTMs decreased more than carloads due to moving lower volumes of Canadian coal to Vancouver, which has a longer length of haul, and moving higher volumes of Canadian coal to Kamloops, which has a shorter length of haul.

Potash

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$581 $463 $118 25 
Carloads (in thousands)160.0 150.9 9.1 
Revenue ton-miles (in millions)18,176 16,671 1,505 
Freight revenue per carload (in dollars)$3,631 $3,068 $563 18 
Freight revenue per revenue ton-mile (in cents)3.20 2.78 0.42 15 

The increase in Potash revenue was primarily due to increased freight revenue per RTM and higher volumes of export potash to Vancouver and Thunder Bay, Ontario. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, the favourable impact of the change in FX, and higher freight rates.

Fertilizers and Sulphur

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$332 $305 $27 
Carloads (in thousands)61.8 64.4 (2.6)(4)
Revenue ton-miles (in millions)4,772 4,845 (73)(2)
Freight revenue per carload (in dollars)$5,372 $4,736 $636 13 
Freight revenue per revenue ton-mile (in cents)6.96 6.30 0.66 10 

The increase in Fertilizers and sulphur revenue was primarily due to increased freight revenue per RTM and higher volumes of dry fertilizers, partially offset by lower volumes of wet fertilizers and sulphur. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX.

Forest Products

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$403 $348 $55 16 
Carloads (in thousands)73.1 73.6 (0.5)(1)
Revenue ton-miles (in millions)5,741 5,718 23 — 
Freight revenue per carload (in dollars)$5,513 $4,728 $785 17 
Freight revenue per revenue ton-mile (in cents)7.02 6.09 0.93 15 

The increase in Forest products revenue was primarily due to increased freight revenue per RTM and higher volumes of newsprint from Saint John, New Brunswick, partially offset by lower volumes of lumber. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX.

Energy, Chemicals and Plastics

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$1,394 $1,563 $(169)(11)
Carloads (in thousands)297.4 320.1 (22.7)(7)
Revenue ton-miles (in millions)24,625 25,469 (844)(3)
Freight revenue per carload (in dollars)$4,687 $4,883 $(196)(4)
Freight revenue per revenue ton-mile (in cents)5.66 6.14 (0.48)(8)

The decrease in Energy, chemicals and plastics revenue was primarily due to decreased freight revenue per RTM and lower volumes of conventional crude, LPG, and other energy products. This decrease was partially offset by higher fuel surcharge revenue as a result of higher fuel prices, higher volumes of DRUbitTM crude to Kansas City, Missouri and ethylene glycol to Vancouver, the favourable impact of the change in FX, and higher freight rates. Freight revenue per RTM decreased due to lower crude liquidated damages, including customer volume commitments, as a result of the completion of customer contracts. RTMs decreased less than carloads due to moving higher volumes of DRUbitTM crude to Kansas City, which has a longer length of haul.

Metals, Minerals and Consumer Products

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$884 $728 $156 21 
Carloads (in thousands)248.3 236.7 11.6 
Revenue ton-miles (in millions)11,710 11,170 540 
Freight revenue per carload (in dollars)$3,560 $3,076 $484 16 
Freight revenue per revenue ton-mile (in cents)7.55 6.52 1.03 16 

The increase in Metals, minerals and consumer products revenue was primarily due to increased freight revenue per RTM and higher volumes of frac sand to the Marcellus and Bakken shale formations, partially offset by lower volumes of steel and aggregates. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher freight rates, and the favourable impact of the change in FX.

Automotive

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$438 $376 $62 16 
Carloads (in thousands)104.4 109.2 (4.8)(4)
Revenue ton-miles (in millions)1,736 1,765 (29)(2)
Freight revenue per carload (in dollars)$4,195 $3,443 $752 22 
Freight revenue per revenue ton-mile (in cents)25.23 21.30 3.93 18 

The increase in Automotive revenue was primarily due to increased freight revenue per RTM, partially offset by lower volumes as a result of global supply chain challenges. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, the favourable impact of the change in FX, and higher freight rates.

Intermodal

For the year ended December 3120222021Total Change% Change
Freight revenues (in millions)$2,242 $1,724 $518 30 
Carloads (in thousands)1,185.2 1,062.9 122.3 12 
Revenue ton-miles (in millions)31,173 27,704 3,469 13 
Freight revenue per carload (in dollars)$1,892 $1,622 $270 17 
Freight revenue per revenue ton-mile (in cents)7.19 6.22 0.97 16 

The increase in Intermodal revenue was primarily due to increased freight revenue per RTM, higher volumes due to onboarding new international intermodal customers, higher international intermodal volumes to and from the Port of Saint John, the Port of Vancouver, and the Port of Montreal, and higher domestic intermodal retail and wholesale volumes. This increase was partially offset by lower domestic intermodal cross-border volumes. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices, higher intermodal ancillary revenue, higher freight rates, and the favourable impact of the change in FX.




37 CP 2022 ANNUAL REPORT
Operating Expenses

cp-20221231_g10.jpg
2022 Operating Expenses

For the year ended December 31
(in millions of Canadian dollars)
20222021Total Change% Change
Compensation and benefits$1,570 $1,570 $— — 
Fuel1,400 854 546 64 
Materials260 215 45 21 
Equipment rents140 121 19 16 
Depreciation and amortization853 811 42 
Purchased services and other1,262 1,218 44 
Total operating expenses$5,485 $4,789 $696 15 

Operating expenses were $5,485 million in 2022, an increase of $696 million, or 15%, from $4,789 million in 2021. This increase was primarily due to:
the unfavourable impact of higher fuel prices of $483 million;
the impact of cost inflation;
the unfavourable impact of the change in FX of $71 million;
a gain on the exchange of property and construction easements in Chicago of $50 million in 2021 and lower gains on land sales of $15 million; and
a decrease in efficiencies primarily due to harsh winter weather conditions in the first quarter of 2022.

This increase was partially offset by lower acquisition-related costs of $109 million associated with the KCS acquisition recorded in Purchased services and other, and lower incentive and stock-based compensation primarily due to lower payout assumptions.

Compensation and Benefits
Compensation and benefits expense includes employee wages, salaries, fringe benefits, and stock-based compensation. Compensation and benefits expense was $1,570 million in 2022, unchanged compared to $1,570 million in 2021. This was primarily due to lower incentive and stock-based compensation primarily due to lower payout assumptions, and lower post-retirement benefits current service cost of $24 million.

These decreases were offset by:
the impact of wage and benefit inflation;
the unfavourable impact of the change in FX of $18 million; and
increased new hire training cost.

Fuel
Fuel expense consists mainly of fuel used by locomotives and includes provincial, state, and federal fuel taxes. Fuel expense was $1,400 million in 2022, an increase of $546 million, or 64%, from $854 million in 2021. This increase was primarily due to:
the unfavourable impact of higher fuel prices of $483 million;



CP 2022 ANNUAL REPORT 38

a decrease in fuel efficiency of 3% due to harsher winter operating conditions in 2022, higher volumes of Intermodal, which has lower horsepower utilization, and lower locomotive productivity defined as the daily average GTMs divided by daily average operating horsepower; and
the unfavourable impact of the change in FX of $27 million;

This increase was partially offset by a decrease in workload, as measured by GTMs.

Materials
Materials expense includes the cost of material used for maintenance of track, locomotives, freight cars, and buildings as well as software sustainment. Materials expense was $260 million in 2022, an increase of $45 million, or 21%, from $215 million in 2021. This increase was primarily due to:
the impact of cost inflation particularly in non-locomotive fuel prices;
higher spending on track and locomotive maintenance and;
an increase in non-locomotive fuel consumption.

Equipment Rents
Equipment rents expense includes the cost associated with using other companies’ freight cars, intermodal equipment, and locomotives, net of rental income received from other railways for the use of the Company’s equipment. Equipment rents expense was $140 million in 2022, an increase of $19 million, or 16%, from $121 million in 2021. This increase was primarily due to:
lower price incentives received on intermodal cars;
slower cycle times; and
greater usage of pooled freight cars.

This increase was partially offset by higher receipts for CP freight cars used by other railways.

Depreciation and Amortization
Depreciation and amortization expense represents the charge associated with the use of track and roadway, buildings, rolling stock, information systems, and other depreciable assets. Depreciation and amortization expense was $853 million for 2022, an increase of $42 million, or 5%, from $811 million in 2021. This increase was primarily due to a higher asset base, as a result of the capital program spending in 2022 and recent years as well as the unfavourable impact of the change in FX of $8 million.

Purchased Services and Other

For the year ended December 31
(in millions of Canadian dollars)
20222021Total Change% Change
Support and facilities$334 $293 $41 14 
Track and operations294 260 34 13 
Intermodal225 205 20 10 
Equipment112 105 
Casualty103 125 (22)(18)
Property taxes133 128 
Other85 191 (106)(55)
Land sales(24)(89)65 (73)
Total Purchased services and other$1,262 $1,218 $44 

Purchased services and other expense encompasses a wide range of third-party costs, including contractor and consulting fees, locomotive and freight car repairs performed by third parties, property and other taxes, intermodal pickup and delivery services, casualty expense, expenses for joint facilities, and gains on land sales. Purchased services and other expense was $1,262 million in 2022, an increase of $44 million, or 4%, from $1,218 million in 2021. This increase was primarily due to:
the impact of cost inflation, including higher pickup and delivery, which is reported in Intermodal;
a gain on the exchange of property and construction easements in Chicago of $50 million in 2021 and lower gains on land sales of $15 million;
higher expenses primarily due to higher events and sponsorship costs;
the unfavourable impact of the change in FX of $13 million;
increased purchased services due to harsher weather conditions, reported in Track and operations; and
a $7 million arbitration settlement in 2021, reported in Track and operations.





39 CP 2022 ANNUAL REPORT
This increase was partially offset by:
lower acquisition-related costs of $109 million associated with the KCS acquisition, reported in Other;
lower expenses from lower volumes, reported in Intermodal, and Track and operations; and
lower expenses primarily due to the reduced severity of casualty incidents.

Other Income Statement Items
Equity Earnings (Loss) of Kansas City Southern
On December 14, 2021, following the consummation of the KCS acquisition, the shares of KCS were placed into a voting trust while the United States Surface Transportation Board (“STB”) considers the Company's application for control of KCS.

In 2022, the Company recognized $1,074 million (U.S. $820 million) of equity earnings of KCS in the Company's Consolidated Statements of Income. This amount is net of amortization of basis differences of $163 million (U.S. $125 million) associated with KCS purchase accounting, and includes acquisition-related costs incurred by KCS. These basis differences relate to depreciable property, plant and equipment, intangible assets with definite lives, and long-term debt, and are amortized over the related assets' remaining useful lives, and the remaining terms to maturity of the debt instruments. Equity earnings for 2022 represent a full year of income attributable to CP, whereas the $141 million equity loss recognized in 2021 was limited to the 18 day period from the date of acquisition of KCS closing into the voting trust to December 31, 2021. The equity loss in 2021 was attributable to acquisition-related costs incurred by KCS during that period. Equity earnings of KCS recognized in 2022 also included KCS's gain on unwinding of interest rate hedges of $212 million, which is net of CP's associated purchase accounting basis difference and tax. KCS's gain on unwinding of interest rate hedges and acquisition-related costs are discussed further and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

On a historical basis, without any effect of purchase accounting, KCS recorded net income attributable to controlling interests of $1,278 million (U.S. $982 million) in 2022, a favourable change of $620 million (U.S. $457 million), or 94%, from $658 million (U.S. $525 million) net income in 2021. Included within the $1,278 million (U.S $982 million) net income was a $254 million (net of tax) (U.S $195 million) gain from the unwinding of interest rate hedges. The remainder of the change was primarily due to higher revenues of $692 million (U.S. $423 million) and lower acquisition related costs, partially offset by higher fuel cost of $208 million (U.S. $148 million). Acquisition-related costs (net of tax) incurred by KCS in 2022 were $50 million (U.S. $38 million), a decrease of $221 million (U.S. $178 million), or 82%, from $271 million (U.S. $216 million) in the same period of 2021. These values have been translated at the average FX rate of $1.30 and $1.25 CAD per USD for 2022 and 2021, respectively.

Other Expense (Income)
Other expense (income) consists of gains and losses from the change in FX on debt and lease liabilities and working capital, costs related to financing, shareholder costs, equity income, and other non-operating expenditures. Other expense was $17 million in 2022, a decrease of $220 million, or 93%, from expense of $237 million in 2021. This decrease was primarily due to acquisition-related costs of $247 million in 2021, which included losses on interest rate hedges of $264 million and bridge facility and backstop revolver fees of $52 million, partially offset by gains on cash held for the KCS acquisition of $56 million, and gains on FX hedges of $13 million. This decrease was partially offset by lower net FX gains on US-denominated cash, working capital, debt, and lease liabilities of $11 million in 2022 and higher amortization of fees of $11 million related to debt issued for the KCS acquisition in the last quarter of 2021.

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

Merger Termination Fee
On May 21, 2021, KCS terminated the Agreement and Plan of Merger (the "Original Merger Agreement") with CP to enter into a definitive agreement with CN. At the same time and in accordance with the terms of the Original Merger Agreement, KCS paid CP a termination fee of $845 million (U.S. $700 million). This amount was reported as "Merger termination fee" in the Company's Consolidated Statements of Income in 2021. No similar items were received in 2022. Merger termination fee is discussed further and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Other Components of Net Periodic Benefit Recovery
Other components of net periodic benefit recovery is related to the Company's pension and other post-retirement and post-employment benefit plans. It includes interest cost on benefit obligations, expected return on plan assets, recognized net actuarial losses, and amortization of prior service costs. Other components of net periodic benefit recovery were $411 million in 2022, an increase of $24 million, or 6%, from $387 million in 2021. This increase was primarily due to a decrease in recognized net actuarial losses of $57 million, partially offset by an increase in interest cost on the benefit obligation of $32 million.





CP 2022 ANNUAL REPORT 40

Net Interest Expense
Net interest expense includes interest on long-term debt and finance leases. Net interest expense was $652 million in 2022, an increase of $212 million, or 48%, from $440 million in 2021. This increase was primarily due to interest of $234 million on long-term debt issuances and term facility related to the KCS acquisition, a change in FX of $15 million, and higher commercial paper interest of $10 million. This increase was partially offset by the favourable impacts of maturing long-term debt repayments of $32 million and $14 million resulting from lower effective interest rates.

Income Tax Expense
Income tax expense was $628 million in 2022, a decrease of $140 million, or 18%, from $768 million in 2021. This decrease was primarily due to:
lower taxable earnings, mainly due to the $845 million (U.S. $700 million) merger termination payment received in 2021 in connection with KCS's termination of the Original Merger Agreement, partially offset by lower acquisition-related costs associated with the KCS acquisition;
a reversal of an uncertain tax position related to a prior period of $24 million; and
income tax recoveries of $12 million as a result of a decrease in the Iowa state tax rate.

This decrease was partially offset by lower deferred tax recoveries of $14 million on changes in the outside basis difference of the equity investment in KCS.

The effective income tax rate for 2022 was 15.16% and 22.24% on an adjusted basis. The effective income tax rate for 2021 was 21.23% and 23.85% on an adjusted basis. The adjusted effective tax rate is a Non-GAAP measure, calculated as the effective tax rate adjusted for significant items as they are not considered indicative of future financial trends either by nature or amount or provide improved comparability to past performance, and, in 2022, the adjusted effective tax rate also excluded equity earnings of KCS. This Non-GAAP measure does not have a standardized meaning and is not defined by GAAP and, therefore, may not be comparable to similar measures presented by other companies. Significant items are discussed further in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company's 2023 effective tax rate is expected to be approximately 24%, which excludes discrete tax items, the impact of the change in the equity investment in KCS, and associated deferred tax on the outside basis difference during the year (discussed further in Critical Accounting Estimates of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation). The Company’s 2023 outlook for its effective tax rate is based on certain assumptions about events and developments that may or may not materialize, or that may be offset entirely or partially by new events and developments. These assumptions are discussed further in Item 1A. Risk Factors.

Impact of Foreign Exchange on Earnings and Foreign Exchange Risk
Although the Company conducts business primarily in Canada, a significant portion of its revenues, expenses, assets and liabilities including debt are denominated in U.S. dollars. In addition, equity earnings or losses of KCS are denominated in U.S. dollars. The value of the Canadian dollar is affected by a number of domestic and international factors, including, without limitation, economic performance, commodity prices, and Canadian, U.S., and international monetary policies. 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 2022, the U.S. dollar has strengthened to an average rate of $1.30 Canadian/U.S. dollar, compared to $1.25 Canadian/U.S. dollar in 2021. In 2022, the impact of a stronger U.S. dollar resulted in an increase in Total revenues of $143 million, an increase in Total operating expenses of $71 million, and an increase in Net interest expense of $15 million.

In 2023, excluding impacts of KCS, the Company expects that every $0.01 weakening (or strengthening) of the Canadian dollar relative to the U.S. dollar, positively (or negatively) impacts Total revenues by approximately $37 million (2022 – approximately $35 million), negatively (or positively) impacts Operating expenses by approximately $18 million (2022 – approximately $19 million), and negatively (or positively) impacts Net interest expense by approximately $4 million (2022 – approximately $4 million) on an annualized basis.

The Company uses U.S. dollar-denominated debt and operating lease liabilities to hedge its net investment in U.S. operations. As at December 31, 2022, the net investment in U.S. operations is greater than the total U.S. denominated debt. Consequently, FX translation on the Company's unhedged net investment in U.S. operations is recognized in Other comprehensive income. There is no additional impact on earnings in Other expense (income) related to the FX translation on the Company’s debt and operating lease liabilities.

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




41 CP 2022 ANNUAL REPORT
Impact of Fuel Price on Earnings
Fluctuations in fuel prices affect the Company’s results because fuel expense constitutes a significant portion of the Company'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.

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

In 2022, the favourable impact of fuel prices on Operating income was $226 million. Higher fuel prices and increased carbon tax recoveries resulted in an increase in Total revenues of $709 million from 2021. Higher fuel prices resulted in an increase in Total operating expenses of $483 million.

Impact of Share Price on Earnings and Stock-Based Compensation
Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The Company's Common Shares are listed on the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") with ticker symbol "CP".

In 2022, the impact of the change in Common Share prices resulted in stock-based compensation expense of $16 million, an increase of $5 million, from $11 million in 2021.

Based on information available at December 31, 2022 and expectations for 2023 grants, excluding impacts of KCS, for every $1.00 change in share price, stock-based compensation expense has a corresponding change of approximately $1.2 million to $1.8 million (2021 – approximately $1.5 million to $2.0 million). This excludes the impact of changes in share price relative to the S&P/TSX 60 Index, S&P 500 Industrials Index, and to Class I railways, which may trigger different performance share unit payouts. Stock-based compensation may also be impacted by non-market performance conditions.

Additional information concerning stock-based compensation is included in Item 8. Financial Statements and Supplementary Data, Note 22 Stock-based compensation.

Liquidity and Capital Resources
The Company's primary sources of liquidity include its Cash and cash equivalents, commercial paper program, bilateral letter of credit facilities, and revolving credit facility. The Company believes that these sources as well as cash flow generated through operations and existing debt capacity are adequate to meet its short-term and long-term cash requirements. The Company is not aware of any material trends, events, or uncertainties that would create any deficiencies in the Company's liquidity.

As at December 31, 2022, the Company had $451 million of Cash and cash equivalents compared to $69 million at December 31, 2021.

As at December 31, 2022, the Company's revolving credit facility was undrawn, unchanged from December 31, 2021, from a total available amount of U.S. $1.3 billion. Effective April 9, 2021, the Company amended its revolving credit facility to modify certain provisions relating to the calculation of the financial covenant ratio in its revolving credit facility. Effective September 24, 2021, the Company entered into an amendment to extend the two-year tranche and the five-year tranche of its revolving credit facility to September 27, 2023 and September 27, 2026, respectively. Effective September 29, 2021, the Company entered into a further amendment to its revolving credit facility in order to provide financial covenant flexibility for acquisition financing pertaining to the KCS acquisition, which is in place for a two-year period until December 14, 2023. In 2021, the Company also entered into a U.S. $500 million unsecured non-revolving term credit facility with a maturity date of March 15, 2022. Effective March 14, 2022, the Company extended the maturity date of the U.S. $500 million term facility to September 15, 2022. During the year ended December 31, 2022, the Company repaid in full the borrowings of $636 million (U.S. $500 million) on this unsecured non-revolving term credit facility. The facility was automatically terminated on September 15, 2022, following the final principal repayment.

The Company has a commercial paper program that enables it to issue commercial paper up to a maximum aggregate principal amount of U.S. $1.0 billion in the form of unsecured promissory notes. This commercial paper program is backed by the revolving credit facility. As at December 31, 2022, the Company did not have any borrowings on its commercial paper program (December 31, 2021 – U.S. $265 million).

As at December 31, 2022, under its bilateral letter of credit facilities, the Company had letters of credit drawn of $75 million from a total available amount of $300 million (December 31, 2021 - $58 million). Under the bilateral letter of credit facilities, the Company has the option to post collateral in the form of Cash or cash equivalents, equal at least to the face value of the letter of credit issued. As at December 31, 2022, the Company did not have any collateral posted on its bilateral letter of credit facilities (December 31, 2021 – Nil).






CP 2022 ANNUAL REPORT 42

Contractual Commitments
The Company’s material cash requirements from known contractual obligations and commitments to make future payments primarily consist of long-term debt and related interest, supplier purchases, leases, and other long term liabilities. Outstanding obligations related to debt and leases can be found in Item 8. Financial Statements and Supplementary Data, Note 15 Debt and Note 18 Leases. Interest obligations related to debt and finance leases amount to $649 million within the next 12 months, with the remaining amount committed thereafter of $13,710 million.

Supplier purchase agreements and other long-term liabilities amount to $1,036 million and $57 million within the next 12 months, respectively, with the remaining amount committed thereafter of $364 million and $443 million, respectively. Other long-term liabilities includes expected cash payments for environmental remediation, post-retirement benefits, worker’s compensation benefits, long-term disability benefits, pension benefit payments for the Company’s non-registered supplemental pension plan, and certain other long-term liabilities. Pension payments are discussed further in Critical Accounting Estimates of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Guarantees
Refer to Item 8. Financial Statements and Supplementary Data, Note 25 Guarantees for details.

Operating Activities
Cash provided by operating activities was $4,142 million in 2022, an increase of $454 million, or 12%, compared to $3,688 million in 2021. This increase was primarily due to higher cash generating income in 2022 including dividends received from KCS of $1,157 million, partially offset by the $845 million merger termination fee received in 2021.

Investing Activities
Cash used in investing activities was $1,496 million in 2022, a decrease of $12,234 million, or 89%, from $13,730 million in 2021. This decrease was primarily due to cash payments made to KCS and their stockholders for the acquisition of KCS in 2021.

Capital Programs
For the year ended December 31
(in millions of Canadian dollars, except for track miles and crossties)
20222021
Additions to capital
Track and roadway$1,048 $970 
Rolling stock 243 297 
Buildings 75 105 
Other(1)
199 179 
Total – accrued additions to capital1,565 1,551 
Less:
Non-cash transactions8 19 
Cash invested in additions to properties (per Consolidated Statements of Cash Flows)$1,557 $1,532 
Track installation capital programs
Track miles of rail laid (miles)271 284 
Track miles of rail capacity expansion (miles)17 
Crossties installed (thousands)1,215 1,222 
(1) Comparative figures have been reclassified to conform with current period presentation.

Track and roadway expenditures include the replacement and enhancement of the Company’s track infrastructure. Of the $1,048 million additions in 2022 (2021 – $970 million), approximately $967 million (2021 – $917 million) was invested in the renewal of depleted assets, namely rail, ties, ballast, signals, and bridges. Approximately $81 million (2021 – $53 million) was invested in network improvements and growth initiatives.

Rolling stock investments encompass locomotives and railcars. In 2022, expenditures on locomotives were approximately $84 million (2021 – $121 million) and were focused on the continued re-investment in the Company's existing locomotive fleet. Railcar investment of approximately $159 million (2021 – $176 million) was largely focused on renewal of depleted assets, including the acquisition of covered hoppers for grain transportation.




43 CP 2022 ANNUAL REPORT
In 2022, investments in buildings were approximately $75 million (2021 - $105 million) and included items such as facility upgrades, renovations, and shop equipment. Other items were $199 million (2021 – $179 million) and included investments in work equipment, information system software, vehicles, containers, and other growth initiatives.

For 2023, the Company expects to invest approximately $1.6 billion in its standalone capital programs, excluding any capital spend that the Company may require following acquisition of control of KCS. Capital programs will be financed with cash generated from operations. Approximately 60% to 70% of the planned capital programs is for track and roadway. Approximately 15% to 20% is expected to be allocated to rolling stock, including railcars and locomotive improvements. Approximately 5% is expected to be allocated to information services, and 5% is expected to be allocated to buildings. Other investments is expected to be 5% to 10%. Additional discussion of capital commitments can be found in Item 8. Financial Statements and Supplementary Data, Note 24 Commitments and Contingencies.

Financing Activities
Cash used in financing activities was $2,297 million in 2022, a change of $12,233 million, or 123%, from cash provided by financing activities of $9,936 million in 2021. This change was primarily due to:
issuance of U.S $6.7 billion and $2.2 billion notes (total proceeds of $10,673 million) along with a U.S. $500 million ($633 million) term loan to fund the cash consideration component of the KCS acquisition in 2021;
principal repayments of $636 million (U.S. $500 million) on a term loan in 2022;
principal repayments of $125 million of the Company's 5.100% 10-year Medium Term Notes, $313 million (U.S. $250 million) of the Company's 4.500% 10-year Notes at maturity in January 2022, and principal repayment of $97 million (U.S. $76 million) of the Company's 6.99% Finance lease at maturity in March 2022, compared to principal repayment of $312 million (U.S $250 million) of the Company's 9.450% notes in 2021; and
increased dividend payments of $200 million in 2022 due to a higher number of shares outstanding resulting from shares issued to fund the share consideration component of the KCS acquisition at the end of 2021.

Credit Measures
Credit ratings provide information relating to the Company’s operations and liquidity, and affect the Company’s ability to obtain short-term and long-term financing and/or the cost of such financing. The applicable margin that applies to outstanding loans under the Company’s revolving credit facility is based on the credit rating assigned to CP’s senior unsecured and unsubordinated debt.

If CP’s credit ratings were to decline to below investment-grade levels, the Company could experience a significant increase in its interest cost for new debt along with a negative effect on its ability to readily issue new debt.

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

As at December 31, 2022, the Company's credit ratings from Standard & Poor's Rating Services ("Standard & Poor's") and Moody's Investor Service ("Moody's") remain unchanged from December 31, 2021. The following table shows the ratings issued for CP by the rating agencies noted herein as of December 31, 2022 and is being presented as it relates to the Company’s cost of funds and liquidity.

Credit ratings as at December 31, 2022(1)

Long-term debtOutlook
Standard & Poor'sBBB+stable
Moody'sBaa2stable
Commercial paper program
Standard & Poor'sA-2N/A
Moody'sP-2N/A
(1) Credit ratings are not recommendations to purchase, hold, or sell securities and do not address the market price or suitability of a specific security for a particular investor. Credit ratings are based on the rating agencies' methodologies and may be subject to revision or withdrawal at any time by the rating agencies.

Financial Ratios
The Long-term debt to Net income ratio was 5.6 in 2022, compared with 7.1 in 2021. This decrease was due to higher net income for the year ended December 31, 2022 and lower long-term debt.



CP 2022 ANNUAL REPORT 44


The Pro-forma Adjusted Net Debt to Pro-forma Adjusted earnings before interest, tax, depreciation, and amortization ("EBITDA") ratio was 3.8 in 2022, compared with 4.0 in 2021. This decrease was primarily due to higher pro-forma adjusted EBITDA for the year ended December 31, 2022. Beginning in the first quarter of 2022, the Company added disclosure of Pro-forma Adjusted Net Debt to Pro-forma Adjusted EBITDA Ratio to better align with the Company’s debt covenant calculation, which takes into account the trailing twelve month adjusted EBITDA of KCS as well as KCS’s outstanding debt. Please see Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion. Over the long term, the Company targets a Pro-forma Adjusted Net debt to Pro-forma Adjusted EBITDA ratio of 2.0 to 2.5.

Although the Company has provided a target Non-GAAP measure (Pro-forma Adjusted Net Debt to Pro-forma Adjusted EBITDA ratio), management is unable to reconcile, without unreasonable efforts, the target Pro-forma Adjusted Net debt to Pro-forma Adjusted EBITDA ratio to the most comparable GAAP measure (Long-term debt to Net income ratio), due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In recent years, the Company has recognized acquisition-related costs, the merger termination payment received, KCS's gain on unwinding of interest rate hedges (net of CP's associated purchase accounting basis differences and tax), the FX impact of translating the Company’s debt and lease liabilities (including borrowings under the credit facility), discrete tax items, changes in the outside basis tax difference between the carrying amount of the Company's equity investment in KCS and its tax basis of the investment, changes in income tax rates, and changes to an uncertain tax item. Acquisition-related costs include legal, consulting, financing fees, integration planning costs consisting of third-party services and system migration, fair value gain or loss on FX forward contracts and interest rate hedges, FX gain on U.S. dollar-denominated cash on hand from the issuances of long-term debt to fund the KCS acquisition, and transaction and integration costs incurred by KCS which were recognized within Equity earnings of Kansas City Southern in the Company's Consolidated Statements of Income. KCS has also recognized significant transaction costs and FX gains and losses. These or other similar, large unforeseen transactions affect Net income but may be excluded from the Company’s Pro-forma Adjusted EBITDA. Additionally, the U.S.-to-Canada dollar exchange rate is unpredictable and can have a significant impact on the Company’s reported results, but may, along with interest, taxes, and FX impact of translating the Company’s debt and lease liabilities, be excluded from Pro-forma Adjusted EBITDA. Please see Forward-Looking Statements in this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Supplemental Guarantor Financial Information
Canadian Pacific Railway Company (“CPRC”), a 100%-owned subsidiary of Canadian Pacific Railway Limited (“CPRL”), is the issuer of certain securities which are fully and unconditionally guaranteed by CPRL on an unsecured basis. The other subsidiaries of CPRC do not guarantee the securities and are referred to below as the “Non-Guarantor Subsidiaries”. The following is a description of the terms and conditions of the guarantees with respect to securities for which CPRC is the issuer and CPRL provides a full and unconditional guarantee.

As of the date of the filing of the Form 10-K, CPRC had U.S. $12,050 million principal amount of debt securities outstanding due through 2115, and U.S. $30 million and GBP £3 million in perpetual 4% consolidated debenture stock, for all of which CPRL is the guarantor subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. As of the same date, CPRC also had $3,300 million principal amount of debt securities issued under Canadian Securities Law due through 2050 for which CPRL is the guarantor and not subject to the Exchange Act.

CPRL fully and unconditionally guarantees the payment of the principal (and premium, if any) and interest on the debt securities and consolidated debenture stock issued by CPRC, any sinking fund or analogous payments payable with respect to such securities, and any additional amounts payable when they become due, whether at maturity or otherwise. The guarantee is CPRL’s unsubordinated and unsecured obligation and ranks equally with all of CPRL’s other unsecured, unsubordinated obligations.

CPRL will be released and relieved of its obligations under the guarantees after obligations to the holders are satisfied in accordance with the terms of the respective instruments.

Pursuant to Rule 13-01 of the SEC's Regulation S-X, the Company provides summarized financial and non-financial information of CPRC in lieu of providing separate financial statements of CPRC.

More information on the securities under this guarantee structure can be found in Exhibit 22.1 List of Issuers and Guarantor Subsidiaries of this annual report.

Summarized Financial Information

The following tables present summarized financial information for CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor) on a combined basis after elimination of (i) intercompany transactions and balances among CPRC and CPRL; (ii) equity in earnings from and investments in the Non-Guarantor Subsidiaries; and (iii) intercompany dividend income.






45 CP 2022 ANNUAL REPORT
Statements of Income

CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor)
(in millions of Canadian dollars)For the year ended December 31, 2022For the year ended December 31, 2021
Total revenues$6,384 $5,924 
Total operating expenses4,110 3,712 
Operating income (1)
2,274 2,212 
Less: Other (2)
234 (522)
Income before income tax expense2,040 2,734 
Net income$1,533 $2,548 
(1) Includes net lease costs incurred from non-guarantor subsidiaries for the year ended December 31, 2022, and 2021 of $410 million and $431 million, respectively.
(2) Includes Other expense (income), Merger termination fee, Other components of net periodic benefit recovery, and Net interest expense.

Balance Sheets

CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor)
(in millions of Canadian dollars)As at December 31, 2022As at December 31, 2021
Assets
Current assets$1,395 $963 
Properties11,791 11,342 
Other non-current assets3,337 2,536 
Liabilities
Current liabilities$2,759 $2,789 
Long-term debt18,137 18,574 
Other non-current liabilities3,178 3,008 

Excluded from the Income Statements and Balance Sheets above are the following significant intercompany transactions and balances that CPRC and CPRL have with the Non-Guarantor Subsidiaries:

Cash Transactions with Non-Guarantor Subsidiaries

CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor)
(in millions of Canadian dollars)For the year ended December 31, 2022For the year ended December 31, 2021
Dividend income from non-guarantor subsidiaries$133 $297 
Capital contributions to non-guarantor subsidiaries (134)
Return of capital from non-guarantor subsidiaries115 1,370 













CP 2022 ANNUAL REPORT 46

Balances with Non-Guarantor Subsidiaries

CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor)
(in millions of Canadian dollars)As at December 31, 2022As at December 31, 2021
Assets
Accounts Receivable, intercompany$186 $344 
Short-term advances to affiliates2,209 2,859 
Long-term advances to affiliates7,502 7,616 
Liabilities
Accounts payable, intercompany$199 $