equity report - cpr - harbie

Canadian Pacific Railway


1Q 2016 & 2015 Analysis CP – TSX Railroads Industrials Sector

Recommendation

The recommendation for CP is a market perform rating and a C$193.20 target price. The company has been increasing sales YoY and has continued to improve on its operating ratios from 80% to 60%, which provides CP leeway to survive during distressed economic times, versus its peers that are still struggling around 70%. The company has been reducing inefficiencies in its business by reducing headcount and consolidating certain divisions, and it is aggressively marketing to customers (3000 cold calls last year). The company is expected to deliver strong revenue and EBITDA CAGRs of 1.90% and 5.21%, respectively, through 2017E as the economy recovers.

Analysis Almost all business lines are affected positively due to a cheaper Canadian dollar, which will benefit the company in 2016. Although the Norfolk Southern acquisition has failed to materialize, it has left a

precedent that the company seeks to diversify in the U.S. Also, operating ratios have been improving (2015: 60%, 2011: 80%), but diminishing returns will prevent further significant decreases

The crude oil business line is decreasing in sales as pipeline companies continue to substitute in a low price environment, and the fire in Fort McMurray has reduced production of crude oil, which adversely effects domestic transport by rail; however, pipelines are running over capacity, so oil & gas companies need to resort to rail for long haul transport that will partially offset the substitution for pipeline

Automotive revenues have been fueled significantly by auto loans and subprime lending, and auto sales in Canada and U.S. have been increasing steadily and will continue to do so in a low interest environment. Also, there are price discrepancies of cars (not all) in North America, which will lead to transports from the western and eastern region of Canada a long with imports from U.S

Brazil increased credit available to farmers, which will increase demand for fertilizers, but demand, potentially, in Asia will be reduced due to dry weather conditions; however, overall fertilizer volumes will increase as farmers benefit from cheap inputs

Coal markets are contracting in many economies due to government initiatives to consume less coal, and the going concern of global warming may accelerate that transition.

The housing starts in Canada is showing an increasing trend because of a low interest environment and cheap financing for mortgages, which indicates higher demand for lumber (this is also the case for the U.S.)

China shows increasing manufacture by the PMI index and has planned infrastructure projects for around $721.8B over 3 years – increasing metal imports

The global confidence index indicates a reading of 97 with retails sales in Canada and U.S. YoY continues to stay steady, which will increase economic activity in intermodal

Valuation The target price of $193.20 is based on an average of 10.75x EBITDA of C$3,558.83.1 (2017E), and a DCF computation, for an value of C$190.80 and C$195.60 respectively. CP warrants a premium valuation relative to its railroad peer group average of 8.90x EBITDA (2017E) as its growth rate is projected to be higher than its peers.

Equity Research

By: Harbie Dhillon

May 12, 2016

Company Report – Canadian Company

Market Perform C$193.20

Current Price (May 12) C$177.00 52-Week Range C$220.86 – C$140.02 Average Daily Volume (000s) 496.29

Source: Investing.com

Market Data (in millions) Market Capitalization C$27,094 Net Debt C$7,882 Enterprise Value C$34,976 Dividend/Yield C$2.00/1.13% Shares Outstanding 153.8

Key Financial Metrics

LTM 2016E 2017E

P/E 17.24 14.81 15.78

EV/EBIT 13.14 12.24 14.36

EV/EBITDA 10.69 10.10 9.83

Company Description Canadian Pacific is the 2nd largest Canadian railroad and the 6th largest North American Class I railroad. Its Canadian network runs from Vancouver to Montreal, and its U.S. network spans from Saskatchewan and Manitoba to Minneapolis-St. Paul, Chicago and Kansas City over a total network of approximately 12,500 miles.

Equity Report Page 1 of 21


Company Overview

Canadian Pacific Railway (CP) operates a railway in Canada and the United States over a network of approximately 12,500 miles. In exhibit 1, the Company’s network spans from the west of Vancouver, British Columbia, to the east of Montreal, Quebec, and to the U.S. industrial areas of Chicago, Illinois; Detroit, Michigan; Buffalo, New York; Kansas City, Missouri; and Minneapolis, Minnesota. Exhibit 1 - Canadian Pacific Railway’s Network from Canada to U.S.

Source: Company Reports The company is focused on providing customers with industry-leading rail service. CP is executing its strategic plan to become the lowest cost rail carrier centred on five key foundations:

Providing efficient and consistent transportation for customers

Controlling and removing costs from the organization

Improving asset utilization by moving more volume with fewer assets

Providing utmost safety for employees

Mentoring and developing people

The company operates in only one operating segment: rail transportation. CP provides a breakdown of revenue for each business line, but the operations of the company is analyzed as one segment because rail networks are integrated, and the breakdown depicts the company’s most profitable line of business. The company primarily transports bulk commodities, merchandise freight and intermodal traffic, which consist of various goods:

Bulk commodities - grain, coal, potash, fertilizers and sulphur.

Merchandise freight consists of finished vehicles, automotive parts, forest products, industrial, and consumer products.

Intermodal transportation retail goods in overseas containers, which can be transported by train, ship and truck and in domestic containers that are accessible for only train and truck.

Merchandise products move in trains of mixed freight and in a variety of car types, which services involve delivering products to many different customers and destinations. In addition, CP transports merchandise through a network of truck rail facilities and provides logistics services. Domestic intermodal freight consists of manufactured consumer products transported in 53-foot containers within North America. International intermodal freight moves in marine containers to and from ports and North American markets.

CP’s revenue segment consists of bulk commodities, merchandise freight and intermodal traffic. The Company’s revenues are primarily received from transporting freight. In exhibit 2, the chart indicates the percentage of the Company’s total freight revenues derived from its business lines.

1Q - 2015 The Company completed the sale of approximately 283 miles of the Delaware and Hudson Railway Company for C$281 million (U.S. $214 million).

2Q - 2015 CP entered into a joint venture with Canadian Dream Venture LP called Dream VHP Limited Partnership. The joint venture was formed to determine real estate value.

3Q - 2015 The Company completed the sale of approximately 660 miles of the Dakota, Minnesota, & Eastern for C$236 million (U.S. $218 million).

4Q - 2015 CP proposed a business combination with Norfolk Southern Corporation; however, NS has rejected CP’s proposal, and CP is now in the progress to persuade NS shareholders to get their Board of Directors to discuss in good faith with regards to the business combination that would benefit both parties.

1Q - 2016 The Company announced the sale of CP’s Arbutus Corridor to the City of Vancouver for C$55 million - a gain on sale of $50 million before tax ($43 million after tax) was recorded. The merger with Norfolk Southern has failed to materialize because of opposition from shipper groups, politicians, and other railroad companies.



Exhibit 2 – CP’s Revenue Segments

Source: Company Reports Volumes and revenues from certain goods are stronger during different periods of the year. First-quarter revenues are generally lower because winter weather conditions results in closure of Great Lakes ports and reduces transportation of retail goods. Second and third-quarter revenues generally improve over the first quarter as fertilizer volumes are usually highest during the second quarter and demand for construction-related goods are highest in the third quarter. In the fourth quarter, revenues are the strongest from the transportation of grain after the harvest, fall fertilizer programs, and the increased demand for retail goods. As a result of theses seasonal fluctuations, operating income is affected by the cyclical nature of some of these industries, and operating costs are associated with winter conditions. The Company faces competition from other railways, motor carriers, ship, and pipelines. Price and service are important as shippers and receivers choose a transportation service provider, and transit time and reliability plays a significant role for customers. In exhibit 3, there are a few national rail companies where CP’s primary rail competitors are Canadian National Railway (CN), which operates throughout most of the company’s areas of operation in Canada, and Burlington Northern Santa Fe (BNSF) that operates throughout most of the company’s area of operation in the U.S. Midwest. Also, depending on the specific market, competing railroads and motor carriers can put pressure on prices and services. Exhibit 3 – Major Rail Competitors in North America

Source: Associate of American Railroads

Segment Highlights FY2014 FY2015 1Q2015 1Q2016

Canadian Grain 14.92% 15.91% 15.38% 15.96%

U.S. Grain 7.60% 7.78% 8.23% 7.10%

Coal 9.38% 9.52% 9.61% 9.11%

Potash 5.24% 5.35% 5.59% 5.15%

Fertilizers & Sulphur 3.53% 4.05% 4.26% 5.09%

Forest Products 3.11% 3.71% 3.42% 4.46%

Chemicals & Plastics 9.62% 10.56% 10.69% 12.19%

Crude 7.31% 5.86% 5.89% 4.46%

Metals, Minerals & Consumer Pro10.76% 9.58% 9.55% 8.36%

Automotive 5.39% 5.20% 4.92% 5.72%

Domestic Intermodal 11.89% 11.28% 11.65% 10.75%

International Intermodal 8.88% 8.82% 8.71% 8.93%

Non-Freight Other 2.36% 2.38% 2.10% 2.70%

Bulk Revenue

Merchandise

Revenue

Intermodal

Revenue



Investment Thesis

Canadian Pacific Railway reported lower revenue figures in 1Q-2016 of $1,591 (2015: $1,665) compared to last years first quarter by 5% which was offset with efficiency in the business by lower operating costs of $938 (2015: $1,053), and it translated to operating profits of $653 (2015: $612). The primary reason for the reduced revenue figure is the lower economic activity in the commodity sector. The divisions which had the most unfavorable impact in CP’s business are U.S Grain (-27%), Potash (-17%), Crude (-35%), and Metals & Minerals, and Consumer Products (-24%) compared to 1Q-2015. Although the economy has done poorly in FY2014 and FY2015, CP seems to be successful in bargaining power for long haul transports during those financial years as indicated in exhibit 4 with a 3.53% increase in revenue per carload. This can be explained by the oligopoly nature of CP as there are only two national railroad companies in Canada, and the company has been aggressively marketing as it has cold called over 3000 potential customers in the past year. In 1Q-2016, freight revenue per carload has decreased because of partially lower fuel surcharge revenue. Exhibit 4 – Freight Revenue per Carload for each Business Line

Source: Company Reports In exhibit 5, carloads have dropped due to lower volume of goods, but the increase in revenue per carload offset the decreased economic activity, which resulted in revenues of $6,712 in FY2015 (2014: $6,620). The carloads have been decreasing YoY, and it has continued in 1Q-2016. Exhibit 5 – Amount of Carloads (in 000s) Utilized in Financial Years

Source: Company Reports In exhibit 6, revenue ton-miles (RTM) has been decreasing because of lower volumes in the U.S. Grain, Crude, Potash and other energy related products in CP’s line of business. This decrease in RTMs was partially offset by increased shipments of Canadian grain. Even though revenue ton-miles have been decreasing, a part of the better revenue in tonnes was the increased efficiency of network speeds. In 1Q-2016, the average train miles in thousands was 7,854 (2015: 8540), and the average train weight was 8,498 (2015: 8,183). The RTM figure can be somewhat misleading as fuel surcharges have decreased, which are now reflected in lower costs.

Freight Revenue per Carload FY2014 FY2015 (%) 1Q2015 1Q2016 (%)

Canadian Grain 3,391 3,750 10.59% 4,214 3,861 -8.4%

U.S. Grain 2,909 3,326 14.33% 3,408 3,272 -4.0%

Coal 1,985 1,978 -0.35% 1,939 2,001 3.2%

Potash 2,941 2,887 -1.84% 3,028 3,064 1.2%

Fertilizers & Sulphur 3,801 4,410 16.02% 4,268 4,993 17.0%

Forest Products 3,493 4,026 15.26% 3,857 4,216 9.3%

Chemicals & Plastics 3,214 3,483 8.37% 3,500 3,605 3.0%

Crude 4,419 4,309 -2.49% 4,500 4,227 -6.1%

Metals, Minerals & Consumer Pro 2,814 2,963 5.29% 2,878 2,977 3.4%

Automotive 2,670 2,659 -0.41% 2,692 2,754 2.3%

Domestic Intermodal 1,837 1,831 -0.33% 1,894 1,736 -8.3%

International Intermodal 1,077 1,061 -1.49% 1,070 1,049 -2.0%

Total Revenue Per Carload 2,408 2,493 3.53% 2,541 2,520 -0.8%

Carloads (000s) FY2014 FY2015 (%) 1Q2015 1Q2016 (%)

Canadian Grain 291 285 -2.06% 61 66 8.2%

U.S. Grain 173 157 -9.25% 40 34 -15.0%

Coal 313 323 3.19% 82 72 -12.2%

Potash 118 124 5.08% 31 27 -12.9%

Fertilizers & Sulphur 61 62 1.64% 17 16 -5.9%

Forest Products 59 62 5.08% 15 17 13.3%

Chemicals & Plastics 198 203 2.53% 51 54 5.9%

Crude 110 91 -17.27% 22 17 -22.7%

Metals, Minerals & Consumer Pro 253 217 -14.23% 55 45 -18.2%

Automotive 134 131 -2.24% 30 33 10.0%

Domestic Intermodal 428 414 -3.27% 103 98 -4.9%

International Intermodal 546 559 2.38% 135 135 0.0%

Total 2,684 2,628 -2.09% 642 614 -4.4%



Exhibit 6 – Revenue Ton-Miles in Millions

Source: Company Reports In regards to operations, CP has transformed into a low cost entity by increasing efficiency through network speeds, which partially was from a minor decline in carloads, fuel efficiency, and locomotive productivity as shown in exhibit 7. This translated into a better operating ratio, and CP has continued to improve on their operations becoming one of the leaders in low operating costs in the railroad industry.

Exhibit 7 – Operating Performance

Source: Company Reports In exhibit 8, operating ratios have been successfully improving as Hunter Harrison, the CEO of CP, has been reducing headcount as indicated by 14,259 employees in 1Q-2015 to 12,443 in 2016. He has successful track record at Canadian National Railway during his tenure as a CEO by reducing costs and efficiently employing capital. There are further opportunities, such as reducing headcount further and consolidating business divisions, for management to decrease costs for future years. However, due to diminishing effects, CP will not be able to continue to drive costs lower as effectively compared to previous years. The company’s management has been able to maintain revenue to certain degree in a distressed economy and outpaced expenses without the use of financial engineering. Exhibit 8 – Operating Ratios for Financial Years

Source: Company Reports Compared to CP’s peers operating ratios, its rivals, like CSX corporation, are still struggling with operating ratios around 70% despite operating in similar business conditions. A lower ratio translates to a CP’s ability to sustain profits during periods of distressed economic times.

Overall, since CP lowered fuel surcharges for customers, this decreased revenue and some of it can also be explained by lower volume of goods. The lowered fuel surcharges were offset in lower fuel costs for the company, which 1Q-2016 ended with a normalized EPS of $2.50 (2015: $2.26).

Revenue Ton-Miles (mln) FY2014 FY2015 (%) 1Q2015 1Q2016 (%)

Canadian Grain 26,691 27,442 2.81% 6,405 6,941 8.37%

U.S. Grain 11,724 10,625 -9.37% 2,944 2,314 -21.40%

Coal 22,443 22,164 -1.24% 5,704 5,348 -6.24%

Potash 14,099 15,117 7.22% 3,675 3,185 -13.33%

Fertilizers & Sulphur 4,180 4,044 -3.25% 1,115 1,167 4.66%

Forest Products 3,956 4,201 6.19% 1,019 1,157 13.54%

Chemicals & Plastics 13,635 13,611 -0.18% 3,570 3,662 2.58%

Crude 16,312 13,280 -18.59% 3,032 2,460 -18.87%

Metals, Minerals & Consumer Pro 11,266 9,020 -19.94% 2,283 1,807 -20.85%

Automotive 1,953 1,750 -10.39% 419 417 -0.48%

Domestic Intermodal 11,867 12,072 1.73% 3,024 2,847 -5.85%

International Intermodal 11,723 11,931 1.77% 2,873 3,030 5.46%

Total 149,849 145,257 -3.06% 36,063 34,335 -4.79%

Operations FY2014 FY2015 (%) 1Q2015 1Q2016 (%)

Terminal Dwell (hours) 8.7 7.2 -17.24% 8.9 6.9 -22.47%

Network Speed (mph) 18.0 21.4 18.89% 19.5 23.5 20.51%

-4.77%Fuel Efficency

(gallons per 1000 GTMs)

Locomotive Productivity

(GTMs per available HP)

1.035 0.994

20.00%163 183

-3.96%

12.27%

1.048 0.998

165 198

Normalized Operations FY2011 FY2012 FY2013 FY2014 FY2015

Revenue 5,177 5,695 6,133 6,464 6,552

Operating Expenses 4,210 4,428 4,285 4,281 4,092

Operating Ratio 81.32% 77.75% 69.87% 66.23% 62.45%



Last year, CP proposed a merger with Norfolk Southern (NS); however, in 1Q-2016 CP withdrew from its bid as BNSF, Union Pacific (UP), and other railroads had been strongly lobbying the government to prevent the deal from materializing. The merger would have provided an opportunity to diversify CP’s revenue streams as it generates the majority of its freight loads in Canada. A combination would likely have boosted profits and reduced costs as both railroads could connect and leverage its business lines through synergies. Despite this immaterial transaction, it has left precedent that the company seeks to develop business further in the U.S.

Although the company reported overall positive results in FY2015 with operating income of $2,688 (2014: $2,339), transportation companies rely on demand for other economic services as they are sensitive to changes in the economic cycle. During economic expansion, there is an increases in the demand for raw materials, and goods to be shipped by rail, and there is little influence for a railroad company to stimulate demand for their services. In the past year, the company has experienced a significant drop in its stock price because of the current economic conditions in the commodity market (2015: 44% bulk revenue) and given it mainly operates in Canada. The Canadian economy has become sluggish because of many factors, such as fundamental changes in global supply and demand for particular commodities. As indicated in exhibit 9, the Canadian economy has not been doing well, which was reflected in CPR’s stock price. However, the economy is shifting and prices seem to be rebounding, which will be addressed in correspondence to CPR’s main revenue/operating drivers. Exhibit 9 - Canadian GDP

Source: Trading Economics The Baltic index and transportation GDP in exhibit 10 has rebounded in 1Q-2016, which could indicate that transportation companies are increasing prices in Canada. Exhibit 10 – Canadian GDP from Transporting

Source: Trading Economics Since CPR, and like all transportation companies, is dependent in the industries it does operations in, the analysis of each of its business line will be to determine if these specific industries show signs of increased economic activity. In addition, CPR has idle assets (2015: 600 locomotives) if demand starts to pick up.

Baltic Dry Index

Source: Trading Economics The Baltic Dry Index a measures the costs to ship raw materials, such as iron, cement, coal, around the world. There has been a recent rebound in shipping prices around the globe in 1Q-2016.



Grain

Canadian and U.S grains transported by the company consists of whole grains, such as wheat, corn, soybeans and canola, and processed products such as meals, oils and flour. This Canadian grain business operates in Alberta, Saskatchewan and Manitoba, with grain shipped to Vancouver, British Columbia, and Thunder Bay, Ontario, for export. In regards to U.S grain, the business primality operates in North Dakota, Minnesota, Iowa and South Dakota, with grain shipped to ports at Duluth and Superior in Minnesota. In exhibit 11, the production and consumption seem to be nearly equal; however, ignoring weather calamities, there is a probability for higher supply of grains because of cheaper input costs from various sources: oil, natural gas, and fertilizers. The agriculture is roughly four to fives more energy intensive than manufacturing, and the cheaper inputs provide high cost producers, such as North America, Brazil, China, and Europe, the opportunity to produce more with a lower marginal cost and maintain adequate profit margins. Furthermore, the demand for grain will remain stable and increase a few percent a year with the global population. Exhibit 11 – The Production and Consumption of World Grains

Source: World Bank In exhibit 12, transportation of grain by rail has dropped in 2015, but the overall growth of rail transportation for grain has increased (CAGR 2.97% from 2011 – 2015). With the cheap Canadian dollar, countries will be able to take advantage of cheap grains, and Canadian exports are expected to increase for FY2016. Exhibit 12 – Grain Transportation by Rail in Canada

Source: Stats Canada Although supply might increase more than demand if input commodity prices stay low, CP will still be growing its grain business line because the Canadian currency has depreciated, and consumers are able to take advantage of the Canadian dollar. The company will continue to increase sales for the upcoming quarters in both the Canadian and U.S business lines.

Global Yearly Population Growth Rate

Source: World-o-meters According to world-o-meters, the global population is currently growing at a rate of around 1.13% per year as of 2016, which translates to roughly around 80 million people per year.

Canadian Grain Exports

Source: Stats Canada The U.S. imports a majority of Canada’s grains (3.9 million tonnes), and Japan imports the second most (3.8 million tonnes).

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Coal CP primarily transports metallurgical coal that is exported from Vancouver for producing steel in the Pacific Rim, Europe and South America. In the U.S., CP transports thermal coal from the thermal coal fields in the Powder River Basin in Montana and Wyoming. The coal is delivered to power-generating facilities in the U.S. Midwest, and CP also serves petroleum coke operations in Canada and the U.S. China’s thermal imports fell because of lower power demand from substations and government policies, which are trying to reduce pollution and limit coal consumption. Coal markets are also contracting in many developed economies under government initiatives to consume less coal, and the going concern of global warming may accelerate that transition. In addition, low-priced natural gas is substituting coal, which is a cheaper alternative for energy consumption. Thermal coal, and coal in general, has become relatively cheap primarily because of the Chinese economy consuming less of the commodity, and the trend towards green energy. The prices for coal will continue to fall from a surplus of supply indicated in exhibit 13, and it will continue to decline as fossil fuels become replaced. However, the low price of coal could delay green energy because of the cheap cost. This will be transitory as green energy starts to become more efficient, and government regulators start to act. Exhibit 13 – Global Coal Supply & Demand

Source: World Bank In exhibit 14, the volume of coal is starting to decline due to transitions away from thermal coal, which adversely effects CP’s coal transport, and it will continue to decline. However, metallurgical coal will continue to prosper because it is required in the steel making process, which emerging economies still require, so this particular coal will partially offset thermal coals decline. Exhibit 14 – Coal Transportation by Rail in Canada

Source: Stats Canada This specific business line could become very unprofitable for CP in the future years as regulators start to take initiatives to shift away from coal consumption. However, metallurgical coal will still be important for steel production, which will offset some of the decline in its coal transportation business.

China’s Import of Coal

Source: Trading Economics China is the worlds largest consumer of coal (40% of world supply) and determines coal prices on the demand side.

Canadian Coal Exports & Production

Source: Stats Canada Statistics Canada did not report 2014 and 2015 exports due to confidentiality issues.

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Production Exports



Potash

The Company’s potash traffic moves from Saskatchewan to offshore markets through the ports of Thunder Bay, Vancouver, and Portland, Oregon and to markets in the U.S. All potash shipments for export that are not for consumption in Canada or the U.S. are marketed by Canpotex Ltd., which is a joint venture for Saskatchewan’s potash producers. Potash prices have fell due to weak demand and a surplus of supply. Although potash prices fell, in exhibit 15 portrays an increase in exports of potash because the Canadian dollar has depreciated, which lower costs for countries to produce agriculture. Brazil increased credit available to farmers, which will increase demand for fertilizers, but demand, potentially, in Asia will be reduced due to dry weather conditions. This could hurt potash prices further as China is the worlds bigger consumer of this specific commodity, but it will increase overall volume for countries that want to benefit from cheaper input costs and take advantage of the Canadian dollar. Exhibit 15 – Canada Exports of Potash

Source: Trading Economics Rail transportation is projected to increase further because of the Canadian dollar, and the U.S. and other countries importing more potash from Canada. In exhibit 16, potash transportation by rail has been increasing since potash originates from Saskatchewan (no nearby docks for offshore markets), and rail would be more ideal than trucking as rail is more efficient over long distances. Exhibit 16 – Potash Transportation by Rail in Canada

Source: Stats Canada With the competitive Canadian dollar, there will be more volume of exports. Canada controls roughly 30% of potash supply in the global market, so there will be a lot of economic activity for CP in this specific business line, which will continue to grow the company’s sales.

China’s Import of Fertilizers

Source: Trading Economics China consumes roughly 20% of the world’s potash supply, which has significant influence on pricing.

India’s Import of Fertilizers

Source: Trading Economics India consumes roughly 6% of the worlds potash supply, which has somewhat influence on pricing.

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Fertilizer & Sulphur

Chemical fertilizers are transported to markets in Canada and the U.S. from the Canadian Prairies. CP also has accessibility to fertilizer distribution terminals at Minneapolis-St. Paul, Minnesota, and Thunder Bay. Most sulphur is produced in Alberta as a by product produced in the Alberta oil sands, and demand for sulphur is correlated with demand for fertilizers According to the Food and Agriculture Organization (FAO), world phosphate demand has increased from 40.6 million tonnes in 2011 to 45 million tonnes in 2016. Demand was expected to be 3.5 million tonnes between 2012 and 2016, which 58 percent would come from Asia and 24 percent from the U.S. The majority of demand from Asia originates from India, followed by China and Pakistan. Fertilizer consumption was strong in East Asia, Latin America and Africa, and lower demand was observed in North America, Europe and West Asia, while demand remained stagnant in South Asia. The demand weakness stems from inadequate profit margins for farmers due to low crop prices, and depreciated currencies from major importers, which is reversing due to the cheap dollar. In exhibit 17, fertilizer transportation has been stable and will be stable going forward as farmers benefit from cheap inputs. Exhibit 17 – Fertilizer Exports & Shipments to Canadian Agriculture

Source: Stats Canada Although the trend for shipping by rail has been declining in exhibit 18, the projection for 2016 is an increase as countries, specifically the U.S, take advantage of Canada’s dollar. As most fertilizers originate in the west, rail transport would be economical for importers (rail is efficient over long distances vs. other transports) due to shipping to the Great Plains in the US, which is the dominant area for agriculture. Exhibit 18 – Fertilizer & Sulphur Transportation by Rail in Canada

Source: Stats Canada The fertilizers, along with potash, are cheaper for farmers to have adequate profit margins even with low crop prices as the U.S. decides to import more from Canada, so there will be more volume of exports going forward with CP.

US Imports of Fertilizers & Pesticides

Source: Trading Economics The U.S. imports a majority of its fertilizers from Canada: approx. figures – nitrogen (20%), potash (85%), phosphate (15%).

US Imports of Sulphur & Non-metallic Minerals

Source: Trading Economics The U.S. imports a majority of its sulphur from Canada: approx. figure – sulphur (80%).

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Forest Products

Forest products carloads include wood pulp, paper, paperboard, newsprint, lumber, panel shipped from producing areas in B.C., northern Alberta, northern Saskatchewan, Ontario and Quebec, which are transported throughout North America There has been a recent decline of pulp, paper, newsprint and like substances because of the trend for paperless, which paper is being replaced by technology, such as computer tablets. However, forest products such as lumber and timber more than offset this decline for this business line. In Canada, the overnight rate for banks is currently at 0.5% from 1%, which a 50 basis point reduction was reaction to low commodity prices to stimulate the Canadian economy. In exhibit 19, the housing starts in Canada is showing an increasing trend because of a low interest environment and cheap financing for mortgages, which indicates higher demand for lumber (this is also the case for the U.S.). It is unlikely to see an increase in interest rates because the Canadian GDP is not at its former state from year 2013-2014, and the economy is highly dependent on commodity prices for trade (21% of GDP). Exhibit 19 – Canada Housing Starts

Source: Trading Economics In exhibit 20 indicates further evidence of higher economic activity in the forest products industry, which CP will experience higher sales. Rail companies exhibit economies of scale more effectively than trucking companies, so rail transportation is more economically feasible for transporting large quantity of lumber compared to other means of transportation, such as trucking. Exhibit 20 – Forest Products Transportation by Rail in Canada

Source: Stats Canada The growth for CP in forest products will continue as long as interest rates stay low, so financing for mortgages are cheap for borrowers. Interest rates will not raise in the foreseeable future because it will take some time for the economy to recover.

U.S Housing Starts

Source: Trading Economics A majority of lumber is imported from Canada and with the favorable forex of US/CAD $1.30 will result in higher residential construction, which is one of the many variables that is associated with a higher housing starts in the U.S.

Canada Exports of Forest Products

Source: Trading Economics Exports of Forest Products are expected to increase with the U.S. housing starts

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Chemicals & Plastics

Petroleum products, which represents the largest segment, consist of commodities

such as liquefied petroleum gas, gasoline, diesel, etc. and the majority of traffic

originates in Saskatchewan and Alberta. The Company’s chemical shipments originate

from Eastern Canada, Alberta, the U.S. Midwest and the Gulf of Mexico and move to

end markets in Canada, the U.S. and overseas. The Company’s plastics originate in

central and northern Alberta and move to various North American destinations.

Refinery companies aren’t severely impacted as exploration & development oil firms

because of the main cost driver for refineries is crude oil. In Canada, refineries have

been reaping significant cash flow as crude oil prices drop, and gasoline at pumps

have not dropped as significantly. When crude was at $100 a barrel, it cost roughly

$1.40 per liter ($5.29 per gallon) of gas and now per liter of gas costs roughly $1.10

($4.29 per gallon) with crude at approximately at $40 a barrel. In exhibit 21, exports

of petroleum products have shown a decline because refiners are able to generate a

bigger profit in the Canadian economy compared to the U.S (C$4.29 vs. C$2.78 per

gallon respectively).

Exhibit 21 – Canada Exports of Petroleum Energy

Source: Trading Economics Although pipeline companies are substituting rail transportation, Canadian pipeline companies are running on overcapacity, which forces refiners to choose from a select few transportation methods, which explains the recent rebound in 2015 indicated in exhibit 22. In addition, chemicals are projected to increase by rail transportation as global demand is still strong, but plastics are expected to decline temporarily as the fire in Fort McMurray (Northern Alberta) has become catastrophic and resulted in evacuating 88,000 residents. Exhibit 22 – Petroleum, Chemicals & Plastics Transportation by Rail in Canada

Source: Stats Canada Since there is more opportunity for profit in Canada compared to the U.S., this specific business line will continue to increase sales for the upcoming quarters. The refiners will push aggressively to reap as much profits in Canada. Although economic activity might deteriorate minimally in the plastics segment, the chemicals segment will more than offset this decline.

Canada Exports of Basic Chemicals

Source: Trading Economics Asia Pacific are the biggest importers of chemicals, where China contributes the most.

Canada Exports of Plastics

Source: Trading Economics The fire in Fort McMurrary will reduce plastic exports marginally due to reduced production in Northern Alberta.

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Crude

CP moves Crude from production facilities throughout Alberta, Saskatchewan and

North Dakota. Oil sands products from North Alberta are delivered by pipeline

systems to Edmonton, and throughout Alberta, where rail and pipeline are used for

onward transportation.

There has been a recent rise in Crude oil prices to $40 per barrel, but supply &

demand fundamentals, shown in exhibit 23, will continue to adversely impact crude

prices. In addition, OPEC still has the capacity to increase supply, and Iran wants to

raise its production to pre-sanction levels.

Exhibit 23 – World Crude Oil Supply and Demand

Source: International Energy Agency Despite record high export volumes of 482,525 barrels in 2015 (2014: 453,659), in exhibit 24, rail exports are declining because of severe competition from pipeline companies and due to low oil prices causing rail transport economically infeasible for crude oil companies. According to statistics Canada, the transportation cost for rail from Alberta to the U.S. Gulf Coast is approximately US$15 to US$22 per barrel, versus US$7 to US$13 per barrel for pipeline. Shipping crude oil by rail increase because higher prices in markets, such as the Gulf Coast offset the higher cost of rail. Furthermore, there are debates around regulating rail transportation for crude oil (nothing specific at this time), which could adversely impact rail and increase costs. A long with the uncertainty of regulation, there is a fire in Northern Alberta (Fort McMurray) where it will slow down oil production from oil sand companies and negatively impact CPs sales. Exhibit 24 – Crude Oil Transportation by Rail in Canada

Source: Stats Canada

The supply surplus of crude and substition of the company’s services by pipeline companies will more likely continue the decline in the companies business line. The decline will be at a slower pace, and the $40 a barrel will marginally increase fuel costs. Moreover, crude prices are unlikely to go to $80 a barrel as new energy alternatives become more prominent in the market place, such as solar power, and wind energy, but the forecast is crude prices will start to pick up in Q1 2017 as more high cost producers start to leave the market (a few have filed for bankruptcy).

Canada Crude Oil Production

Source: Trading Economis The fire in Fort McMurray will more likely push back crude oil production from 2.5 mmb/d to 1.5 mmb/d.

Canada Exports of Crude Oil

Source: Trading Economis The decline of Canada exports of crude Oil have primarily been the price of oil instead of volume.

Pipeline GDP in Canada

Source: Stats Canada Pipeline GDP has been increasing in Canada as it’s a better medium for transport for oil

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Metals & Minerals

Metals & minerals include commodities such as, steel, consumer products and non-ferrous metals, where frac sand and cement are the main segments. The majority of the Company’s cement traffic is shipped from production facilities in Alberta, Iowa and Ontario to energy and construction projects. China is the world’s largest consumer of metals and minerals, and the country has been consuming raw materials at a phenomenal rate, but it has recently slowed down from many factors, such as the government attempting to reduce housing in the lower-tiered cities by limiting credit. Although the government wants to reduce housing in specific areas, it has reduced interest rates from 6% to roughly 4.5%, and according to the National Development and Reform commission, the country plans to provide funding of approximately RMB 4.7tn (USD$721.8bn) on infrastructure projects. The PMI manufacturing index shown in exhibit 25 indicates China will start to consume more raw materials, and the manufacturing sector is starting to pick up in China; however, China is trying to shift away from a manufacturing dependent to a consumer driven based economy, so it is unlikely to see high imports as prior years. Exhibit 25 – China PMI Manufacturing Index

Source: Trading Economics Although Canadian exports of metals & minerals have not been doing well, in exhibit 26, there is higher activity for rail transportation companies because of substitution away from trucking due to shipping from Alberta to docks (closet dock roughly 900 miles from Alberta). Not to mention, Canada is trading more with other countries. In 2000, less than 2% of Canada’s mineral exports went to China but trade now has increased to 7.3% in 2013 (trade with U.S. has been declining marginally since 1999). Exhibit 26 – Metals & Minerals Transportation by Rail in Canada

Source: Stats Canada Even though Canadian exports for metals & minerals have been stagnant, with the cheaper dollar and evidence of China’s recovery in the manufacturing and construction sector, economic activity will soon start to pick up for Canada. The forecast in 2Q -3Q of 2016 will be stale as it will take time for economic activity to pick up in this business line, but it will be partially offset with the consumer products as it shows strong demand.

Canadian Exports of Metals & Minerals

Source: Trading Economics The metal & minerals export accounted for 4579.30 million of exports for Canada. It averaged 2986.92 million from 1988 to 2015.

China Imports of Base Metals

Source: Trading Economics China consumes around 50% of the worlds metals & minerals.

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Automotive

CP imports vehicles from the Vancouver terminal to the Eastern Canadian markets, ships Canadian-produced vehicles from Ontario to the U.S., and ships within the U.S. as well as cross-border into the Canadian market. In addition, CP ships automotive parts, machinery and pre-owned vehicles. In exhibit 27, the automotive industry in U.S. has been prospering over the years with strong sales and volume of goods (automobiles and auto parts). A significant portion of sales have been fueled by auto loans (USD$1 trillion in the U.S.), and there is concern of subprime lending as these borrowers are starting to default; however, cars are easy to find, repossess and resell, which mitigates the losses on defaults. Automakers have extensively retooled several of their assembly plants and a more competitive currency are helping the Canadian auto industry. In addition, in a low interest rate environment, sales will continue to increase as consumers continue to get loans. Significant defaults will adversely impact the primary auto market as lenders will become more risk averse which will reduce auto sales; however, the secondary market will still grow as cars are selling at a discount. Exhibit 27 – US Total Vehicle Sales

Source: Trading Economics In exhibit 28, transportation by rail has been steady, and it will slightly increase as smart consumers take advantage of price discrepancies between certain cities in North America. For instance, a used Honda Accord 2015 in Saskatchewan (C$30,000) vs. in Kansas City (USD$33,000), and the costs associated with importing it in the US is still cheaper. In Canada, a Honda Civic 2012 in Vancouver (C$17,000) vs. in Toronto (C$14,000) is still cheaper with transportation. Exhibit 28 – Automotive Transportation by Rail in Canada

Source: Stats Canada Even if consumers default on their auto loans, the car will be sold due to ease of repossession and resell, which will require transportation if the buyer is in a remote area. There are also a lot of price discrepancies at this time, and the economic activity in the auto industry doesn’t show signs of slowing down, which will increase sales for CP.

Canada Exports of Motor Vehicles & Parts

Source: Trading Economics The U.S. consumer have been importing vehicles from Canada due to the price discrepancies.

Canada Motor Vehicle Sales

Source: Trading Economics Auto loans in Canada have spurred sales in the auto markets.

U.S. Auto Loans

Source: Federal Reserve According to Experian, approximately 20.8% (USD$218.61b) of auto loans in the U.S. are subprime. The interest rates are roughly 20% for borrowers. As a reference, the financial crisis had 10 trillion dollars’ worth of mortgages outstanding with 14% being subprime. There will be no global recession from subprime lending for cars as the capital requirements are lower for a car vs. a house, and it is easier to sell a car (30k vs 300k, respectively). Also, a car is viewed as depreciable asset vs. a house as an investment asset.

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Intermodal CP’s Domestic intermodal business moves goods from a various industries including food, retail, and other consumer products. The majority of the Company’s Domestic intermodal traffic originates in Canada where CP markets its services directly to retailers. In the U.S., the Company’s service is delivered through wholesalers. CP’s International intermodal business consists primarily of containerized traffic moving between the ports of Vancouver, Montreal and New York. The domestic intermodal will continue to increase due to increasing consumer confidence shown in exhibit 29, and steady YoY increase in retail sales in Canada. The housing market has been growing, which will lead to higher consumption as new home owners purchase furniture, TV’s, and other goods. Since Canada has a high confidence level, it will also affect international intermodal as Canadians will import, but this will be on a minor scale due to the depreciated dollar. In addition, Canada has continued to export retail goods, which will increase due to forex. Exhibit 29 – Global Consumer Confidence Index

Source: Nielsen In exhibit 30, transportation by intermodal has been increasing over the years as railroads are more cost effective, and more fuel efficient compared to trucking over the long haul; however, trucking is still required for short haul trips, so this requires collaboration between rail and trucking. Any impact in the trucking business will impact CP’s intermodal business. For instance, according to American Trucking Associations and Conference Board of Canada, there is a shortage of overall truck drivers in U.S. and Canada, which has pushed shippers to rails, but a significant decrease in truck drivers will limit intermodal growth. Exhibit 30 – Intermodal Transportation by Rail in Canada

Source: Stats Canada Intermodal has shaped rail road companies, and with strong consumer confidence and no signs of slowing down in the retail industry, retail sales will continue to increase, which will affect CP’s sales positively.

Canada Retails Sales YoY

Source: Trading Economics Retail sales increased to 5.60% in February 2016, and YoY have averaged 4.41% from 1992 – 2016.

U.S Retail Sales

Source: Trading Economics Retail sales increased to 1.3% in April 2016, and MoM have averaged 0.36% from 1992 – 2016.

Canada Exports of Consumer Goods

Source: Trading Economics Consumer goods decreased to C$5,987.70 million from C$6267.90 and have averaged C$3,227 from 1988 – 2015.

Canada Exports of Food, Beverage, and Tobacco

Source: Trading Economics Food, beverage, and tobacco have decreased to C$2,673.30 million from C$2,751.80 and have averaged C$1,266 from 1988 – 2015.

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Valuation & Recommendation

The recommendation for CP is a market perform rating and a C$193.20 target price. The target price of $193.20 is based on an average of 10.75x EBITDA of C$3,558.83.1 (2017E), and a DCF computation, for an value of C$190.80 and C$195.60 respectively. CP warrants a premium valuation relative to its railroad peer group average of 8.90x EBITDA (2017E) as its growth rate is projected to be higher than its peers. EV/EBITDA Valuation Methodology A target EV/EBITDA multiple of 10.75x for 2017E operating EBITDA of $3,558.83 million, which is a premium compared to its peers of 8.90x 2017E EBITDA. CP warrants a premium valuation relative to its peers as it has a higher projected growth trajectory. CP is expected to deliver strong revenue and EBITDA CAGRs of 1.90% and 5.21%, respectively, through 2017E as the economy recovers. In addition, the company has a significantly better operating ratios among most of its peers, which supports a higher return on capital and higher free cash flow for a higher valuation. Exhibit 31 – WACC and Exit EBITDA Multiple Sensitivity Analysis

DCF Methodology The DCF assumes a 4.34% cost of equity based on a 10-year government bond with a risk-free rate of 1.05%, an equity beta of 0.92, and a 4.27% after-tax cost of debt, computed to a weighted average cost of capital (WACC) of 5.3%. In addition, the terminal growth rate is assumed to be 1.75% (assuming 40% goes to CP), which is aligned with the Canadian rail transportation GDP CAGR. The WACC is in-line with historical discount rates (low WACC) as a dollar spent on railroad infrastructure has offered a more certain return than a dollar spent on infrastructure in other industries.

Exhibit 32 – WACC and Terminal Growth Rate Sensitivity Analysis

Canada Rail Transportation Real GDP

Source: Stats Canada The Rail transportation sector has been increasing at CAGR of 4.13% in real terms from 2011 – 2015.

Exit EBITDA Multiple

9.50x 9.75x 10.00x 10.25x 10.50x 10.75x 11.00x 11.25x

4.90% $165.39 $170.75 $176.12 $181.49 $186.85 $192.22 $197.59 $202.95

5.10% 164.76 170.11 175.46 180.81 186.16 191.51 196.86 202.21

5.30% 164.13 169.46 174.80 180.13 185.47 190.80 196.14 201.47

5.50% 163.50 168.82 174.14 179.46 184.78 190.10 195.42 200.74

5.70% 162.88 168.18 173.49 178.79 184.09 189.40 194.70 200.00

WA

CC

Long-Term Growth Rate

1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25%

4.90% $206.82 $226.93 $250.49 $278.49 $312.31 $353.98 $406.60 $475.12

5.10% 192.49 210.33 231.04 255.37 284.38 319.54 363.06 418.32

5.30% 179.67 195.60 213.94 235.28 260.43 290.50 327.09 372.59

5.50% 168.13 182.44 198.80 217.66 239.67 265.67 296.86 334.97

5.70% 157.69 170.62 185.29 202.08 221.50 244.20 271.11 303.49

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Peer Group Comparison

Source: Thomson Reuters

P/E EV/EBIT EV/EBITDA LTM 2016E 2017E LTM 2016E 2017E LTM 2016E 2017E

Canadian Pacific Railway $177.00 153.80 27,094.19 17.24 14.81 15.78 13.14 12.24 14.36 10.69 10.10 9.83

Canadian National Railway $76.49 781.63 59,786.44 16.77 17.09 15.53 12.66 12.84 12.29 10.43 10.40 9.81

Union Pacific Corporation $109.28 841.03 91,911.19 15.82 16.27 14.56 10.61 11.33 10.56 8.47 8.90 8.33

CSX Corporation $34.35 955.87 32,838.55 13.47 14.58 13.28 9.64 10.23 9.66 7.16 7.41 7.05

Norfolk Southern Corporation $114.88 295.74 33,975.61 16.49 15.63 14.25 11.34 11.27 10.56 8.44 8.50 7.97

Genesee & Wyoming $77.84 57.16 4,510.70 15.25 17.00 15.73 15.34 15.80 14.39 10.04 9.79 9.18

Kansas City Southern $118.70 107.99 12,825.94 20.45 19.75 17.52 16.64 15.06 13.69 12.02 11.08 10.14

Group Metrics

Mean 16.50x 16.44x 15.24x 12.77x 12.68x 12.21x 9.61x 9.46x 8.90x

Median 16.49x 16.27x 15.53x 12.66x 12.24x 12.29x 10.04x 9.79x 9.18x

High 20.45x 19.75x 17.52x 16.64x 15.80x 14.39x 12.02x 11.08x 10.14x

Low 13.47x 14.58x 13.28x 9.64x 10.23x 9.66x 7.16x 7.41x 7.05x

Group Metrics (without CP)

Mean 16.37x 16.72x 15.14x 12.70x 12.76x 11.86x 9.43x 9.35x 8.75x

Median 16.15x 16.63x 15.04x 12.00x 12.08x 11.42x 9.25x 9.34x 8.76x

High 20.45x 19.75x 17.52x 16.64x 15.80x 14.39x 12.02x 11.08x 10.14x

Low 13.47x 14.58x 13.28x 9.64x 10.23x 9.66x 7.16x 7.41x 7.05x

Share Price

/1/2016

Shares

O/S (mln)

Market

Cap. (mln) Trading Comparable



Financial Statements

Net Income Statement 2013A 2014A 2015A 1Q16 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E

(Year ended December)

Revenues

Canadian Grain 869.00 988.00 1,068.00 254.00 275.58 276.41 305.52 1,111.52 267.58 276.97 279.97 314.53 1,139.04

Growth (%) 13.69% 8.10% -0.78% 8.07% 5.91% 3.22% 4.07% 5.35% 0.50% 1.29% 2.95% 2.48%

U.S Grain 431.00 503.00 522.00 113.00 112.27 159.91 164.50 549.67 129.98 114.74 163.07 154.77 562.56

Growth (%) 16.71% 3.78% -17.52% 5.91% 8.05% 25.57% 5.30% 15.03% 2.20% 1.98% -5.91% 2.35%

Coal 627.00 621.00 639.00 145.00 171.87 160.27 158.54 635.68 149.39 167.19 158.94 151.80 627.32

Growth (%) -0.96% 2.90% -9.38% 2.92% -1.68% 6.41% -0.52% 3.03% -2.72% -0.83% -4.26% -1.32%

Potash 312.00 347.00 359.00 82.00 109.83 80.80 91.97 364.60 91.53 111.61 84.19 87.46 374.79

Growth (%) 11.22% 3.46% -11.83% 3.61% -1.46% 17.91% 1.56% 11.63% 1.62% 4.19% -4.90% 2.80%

Fertilizers and Sulphur 258.00 234.00 272.00 81.00 77.69 69.73 66.55 294.97 82.55 78.42 69.83 75.72 306.52

Growth (%) -9.30% 16.24% 14.08% 15.96% 12.46% -7.57% 8.45% 1.91% 0.93% 0.15% 13.78% 3.91%

Forest Products 206.00 206.00 249.00 71.00 64.00 67.34 70.28 272.62 69.81 66.22 71.99 74.57 282.59

Growth (%) 0.00% 20.87% 24.56% 4.92% 2.03% 8.12% 9.48% -1.68% 3.47% 6.90% 6.11% 3.66%

Chemicals and Plastics 565.00 637.00 709.00 194.00 163.48 181.83 193.23 732.53 195.08 172.55 185.61 195.50 748.75

Growth (%) 12.74% 11.30% 8.99% -4.40% 5.10% 3.33% 3.32% 0.56% 5.55% 2.08% 1.18% 2.21%

Crude 375.00 484.00 393.00 71.00 80.42 101.18 97.29 349.90 76.01 74.43 95.66 92.77 338.87

Growth (%) 29.07% -18.80% -27.55% -0.71% -7.17% -7.34% -10.97% 7.06% -7.45% -5.46% -4.65% -3.15%

Metals, Minerals, and Consumer Products 608.00 712.00 643.00 133.00 149.52 167.70 180.47 630.69 150.31 158.56 176.20 169.58 654.65

Growth (%) 17.11% -9.69% -16.35% -6.55% -3.06% 19.52% -1.91% 13.01% 6.04% 5.07% -6.03% 3.80%

Automotive 403.00 357.00 349.00 91.00 95.58 83.49 84.67 354.74 89.93 98.07 89.38 91.05 368.42

Growth (%) -11.41% -2.24% 10.98% 5.03% -4.03% -4.87% 1.64% -1.18% 2.61% 7.04% 7.54% 3.86%

Domestic Intermodal 684.00 787.00 757.00 171.00 180.54 199.06 198.19 748.78 188.33 192.43 200.02 196.29 777.06

Growth (%) 15.06% -3.81% -11.86% -5.97% 5.32% 8.89% -1.09% 10.13% 6.59% 0.48% -0.96% 3.78%

International Intermodal 644.00 588.00 592.00 142.00 152.88 156.02 143.26 594.16 148.67 158.89 161.49 147.59 616.64

Growth (%) -8.70% 0.68% -2.07% -0.08% 1.31% 2.33% 0.36% 4.70% 3.93% 3.51% 3.02% 3.78%

Non-Freight 151.00 156.00 160.00 43.00 41.00 42.00 42.00 168.00 44.00 42.00 43.00 43.00 172.00

Growth (%) 3.31% 2.56% 22.86% 0.00% 0.00% 0.00% 5.00% 2.33% 2.44% 2.38% 2.38% 2.38%

Total Revenue 6,133.00 6,620.00 6,712.00 1,591.00 1,674.66 1,745.74 1,796.46 6,807.86 1,683.17 1,712.06 1,779.34 1,794.63 6,969.21

Revenue Growth (%) \ 7.94% 1.39% -4.44% 1.43% 2.15% 6.49% 1.43% 5.79% 2.23% 1.92% -0.10% 2.37%

Operating Expenses

Compensation and Benefits 1,418.00 1,348.00 1,371.00 329.00 326.56 361.15 346.54 1,363.25 328.58 326.62 367.30 337.21 1,359.72

Fuel 1,004.00 1,048.00 708.00 125.00 139.95 154.61 168.09 587.65 156.27 158.90 163.13 172.25 650.55

Materials 249.00 193.00 184.00 56.00 46.23 48.57 45.28 196.09 57.02 47.90 50.20 44.77 199.91

Equipment Rents 173.00 155.00 174.00 45.00 43.25 40.27 42.82 171.34 45.03 45.96 42.39 44.79 178.17

Purchases Services and Other 876.00 985.00 1,060.00 221.00 267.00 261.75 277.01 1,026.76 226.30 265.60 261.24 268.89 1,022.04

EBITDA 3,720.00 2,891.00 3,215.00 815.00 851.67 879.38 916.72 3,462.77 869.96 867.07 895.08 926.71 3,558.83

EBITDA Growth (%) -22.28% 11.21% 7.52% 7.67% 5.44% 10.18% 7.71% 6.74% 1.81% 1.79% 1.09% 2.77%

EBITDA Margin (%) 56.19% 43.67% 47.90% 51.23% 50.86% 50.37% 51.03% 50.86% 51.69% 50.64% 50.30% 51.64% 51.07%

Depreciation and Amortization 565.00 552.00 595.00 162.00 142.59 146.63 154.15 605.37 159.29 148.28 152.28 159.61 619.46

Total Operating Expesnes 4,285.00 4,281.00 4,092.00 938.00 965.58 1,012.98 1,033.89 3,950.46 972.50 993.27 1,036.54 1,027.53 4,029.84

Operating Expense Change (%) -0.09% -4.41% -10.92% -3.92% -1.08% 2.37% -3.46% 3.68% 2.87% 2.33% -0.62% 2.01%

Operating Ratio (%) 69.87% 64.67% 60.97% 58.96% 57.66% 58.03% 57.55% 58.03% 57.78% 58.02% 58.25% 57.26% 57.82%

EBIT 1,848.00 2,339.00 2,620.00 653.00 709.08 732.75 762.57 2,857.40 710.67 718.80 742.80 767.10 2,939.37

EBIT Growth (%) 26.57% 12.01% 6.70% 9.76% 6.97% 12.64% 9.06% 8.83% 1.37% 1.37% 0.59% 2.87%

EBIT Margin (%) 30.13% 35.33% 39.03% 41.04% 42.34% 41.97% 42.45% 41.97% 42.22% 41.98% 41.75% 42.74% 42.18%

Other Charges 428.00 - (68.00) - - - - - - - - - -

Other Income & Charges 17.00 19.00 335.00 (181.00) - - - (181.00) - - - - -

Net Interest Expense 278.00 282.00 394.00 124.00 125.41 125.66 125.55 500.62 125.65 125.87 125.86 125.64 503.03

EBT 1,125.00 2,038.00 1,959.00 710.00 583.66 607.10 637.03 2,537.79 585.01 592.93 616.94 641.46 2,436.34

EBT Growth (%) 81.16% -3.88% 56.39% 2.94% 25.95% 39.70% 29.54% -17.60% 1.59% 1.62% 0.70% -4.00%

EBT Margin (%) 18.34% 30.79% 29.19% 44.63% 34.85% 34.78% 35.46% 37.28% 34.76% 34.63% 34.67% 35.74% 34.96%

Income Tax expesne/(recovery) 250.00 562.00 607.00 170.00 172.70 182.92 182.51 708.13 156.37 180.27 194.70 188.25 719.59

Effective Tax Rate (%) 22.22% 27.58% 30.99% 23.94% 29.59% 30.13% 28.65% 27.90% 26.73% 30.40% 31.56% 29.35% 29.54%

Net Income 875.00 1,476.00 1,352.00 540.00 410.96 424.18 454.51 1,829.65 428.64 412.66 422.24 453.21 1,716.75

Net Income Growth (%) 68.69% -8.40% 68.75% 5.37% 31.32% 42.48% 35.33% -20.62% 0.41% -0.46% -0.29% -6.17%

Net Income Margin (%) 14.27% 22.30% 20.14% 33.94% 24.54% 24.30% 25.30% 26.88% 25.47% 24.10% 23.73% 25.25% 24.63%

Earning Per share

Basic EPS 5.00 8.54 8.47 3.53 2.69 2.79 3.00 12.08 2.85 2.75 2.83 3.06 11.58

Diluted EPS 4.96 8.46 8.40 3.51 2.69 2.79 3.00 12.08 2.85 2.75 2.83 3.06 11.58

Weighted-Averge Number of Shares

Basic 174.90 172.80 159.70 153.00 153.00 152.20 151.40 151.40 150.60 149.80 149.00 148.20 148.20

Diluted 176.50 174.40 161.00 153.80 153.00 152.20 151.40 151.40 150.60 149.80 149.00 148.20 148.20



Balance Sheet 2013A 2014A 2015A 1Q16 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E


Assets

Current Assets

Cash & Equivalents 476.00 226.00 650.00 571.00 191.48 359.42 288.91 288.91 263.36 100.43 270.51 293.46 293.46

Restricted Cash & Equivalents 411.00 - - - - - - - - - - - -

Accounts Receivable 580.00 702.00 645.00 629.00 690.12 755.02 701.70 701.70 724.95 708.45 760.63 693.57 693.57

Materials and Supplies 165.00 177.00 188.00 181.00 174.92 176.68 190.43 190.43 182.18 179.63 180.62 195.12 195.12

Deferred Income Taxes 344.00 56.00 - - - - - - - - - - -

Other Current Assets 53.00 116.00 54.00 69.00 80.59 70.78 87.95 87.95 70.36 92.53 71.99 72.65 72.65

Non-Current Assets

Investments 92.00 112.00 152.00 148.00 148.00 148.00 148.00 148.00 148.00 148.00 148.00 148.00 148.00

Properties 13,327.00 14,438.00 16,273.00 16,013.00 16,198.89 16,497.98 16,847.90 16,847.90 16,968.60 17,172.30 17,480.90 17,815.09 17,815.09

Assets Held for Sale 222.00 182.00 - - - - - - - - - - -

Goodwill & Intagible Assets 162.00 176.00 211.00 196.00 196.00 196.00 196.00 196.00 196.00 196.00 196.00 196.00 196.00

Pension Assets 1,028.00 304.00 1,401.00 1,489.00 1,489.00 1,489.00 1,489.00 1,489.00 1,489.00 1,489.00 1,489.00 1,489.00 1,489.00

Other Assets 200.00 151.00 63.00 53.00 53.00 53.00 53.00 53.00 53.00 53.00 53.00 53.00 53.00

Total Assets 17,060.00 16,640.00 19,637.00 19,349.00 19,222.01 19,745.88 20,002.90 20,002.90 20,095.45 20,139.34 20,650.66 20,955.88 20,955.88

Liabilities & Shareholder's Equity

Current Liabilities

Accounts Payable and Accrued Liabilities 1,189.00 1,277.00 1,417.00 1,143.00 1,301.17 1,444.56 1,406.20 1,406.20 1,251.59 1,355.23 1,562.35 1,456.09 1,456.09

Long-term Debt Maturing within One Year 189.00 134.00 30.00 23.00 23.00 23.00 - - - - - - -

Non-Current Liabilities

Pension and Other Benefit Liabilities 657.00 755.00 758.00 750.00 750.00 750.00 750.00 750.00 750.00 750.00 750.00 750.00 750.00

Other Long-Term Liabilities 338.00 432.00 318.00 291.00 291.00 291.00 291.00 291.00 291.00 291.00 291.00 291.00 291.00

Long-term Debt 4,687.00 5,659.00 8,927.00 8,430.00 8,430.00 8,430.00 8,430.00 8,430.00 8,430.00 8,430.00 8,430.00 8,430.00 8,430.00

Deffered income Taxes 2,903.00 2,773.00 3,391.00 3,422.00 2,943.98 3,125.06 3,220.74 3,220.74 3,278.48 3,053.09 3,190.27 3,412.40 3,412.40

Total Liabilities 9,963.00 11,030.00 14,841.00 14,059.00 13,739.15 14,063.62 14,097.94 14,097.94 14,001.07 13,879.32 14,223.61 14,339.49 14,339.49

Shareholder's Equity

Share Capital 2,240.00 2,185.00 2,058.00 2,065.00 2,065.00 2,065.00 2,065.00 2,065.00 2,065.00 2,065.00 2,065.00 2,065.00 2,065.00

Additional Paid-in-Capital 34.00 36.00 43.00 48.00 48.00 48.00 48.00 48.00 48.00 48.00 48.00 48.00 48.00

Accumulated Other Comprehnsive Income/(Loss) (1,503.00) (2,219.00) (1,477.00) (1,481.00) (1,481.00) (1,481.00) (1,481.00) (1,481.00) (1,481.00) (1,481.00) (1,481.00) (1,481.00) (1,481.00)

Retained Earnings 6,326.00 5,608.00 4,172.00 4,658.00 4,850.86 5,050.26 5,272.96 5,272.96 5,462.38 5,628.02 5,795.04 5,984.39 5,984.39

Total Shareholder's Equity 7,097.00 5,610.00 4,796.00 5,290.00 5,482.86 5,682.26 5,904.96 5,904.96 6,094.38 6,260.02 6,427.04 6,616.39 6,616.39

Total Liabilities & Shareholder's Equity 17,060.00 16,640.00 19,637.00 19,349.00 19,222.01 19,745.88 20,002.90 20,002.90 20,095.45 20,139.34 20,650.66 20,955.88 20,955.88

Cash Flow Statement 2013A 2014A 2015A 1Q16 2Q16E 3Q16E 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E


Operating Activities

Net Income 875.00 1,476.00 1,352.00 540.00 410.96 424.18 454.51 1,829.65 428.64 412.66 422.24 453.21 1,716.75

Depreciation & Amortization 565.00 552.00 595.00 162.00 142.59 146.63 154.15 605.37 159.29 148.28 152.28 159.61 619.46

Deferred Income Taxes 212.00 354.00 234.00 93.00 (478.02) 181.08 95.68 (108.26) 57.74 (225.39) 137.18 222.13 191.66

Pension Funding in Excess of Expense (55.00) (132.00) (49.00) (42.00) - - - (42.00) - - - - -

Other Operating Activities 355.00 (3.00) 52.00 (247.00) - - - (247.00) - - - - -

Change in Non-Cash Working Capital (2.00) (124.00) 275.00 (288.00) 91.53 86.55 (15.97) (125.88) (152.02) 100.52 174.48 (54.35) 68.63

Cash Flow from Operating Activities 1,950.00 2,123.00 2,459.00 218.00 167.07 838.43 688.38 1,911.88 493.65 436.06 886.18 780.60 2,596.50

Investing Activities

Capital Expenditure (1,236.00) (1,449.00) (1,522.00) (278.00) (328.48) (445.71) (504.08) (1,556.27) (279.99) (351.97) (460.89) (493.80) (1,586.64)

Proceeds from the Sale of Properties & Other Assets 73.00 290.00 415.00 60.00 - - - 60.00 - - - - -

Other (434.00) 409.00 (16.00) - - - - - - - - - -

Cash Flow From Investing Activities (1,597.00) (750.00) (1,123.00) (218.00) (328.48) (445.71) (504.08) (1,496.27) (279.99) (351.97) (460.89) (493.80) (1,586.64)

Financing Activities

Dividiends Paid (244.00) (244.00) (226.00) (54.00) (76.50) (76.10) (75.70) (282.30) (75.30) (74.90) (74.50) (74.10) (298.80)

Issuance of Common Shares 83.00 62.00 43.00 5.00 - - - 5.00 - - - - -

Purchase of Common Shares - (2,050.00) (2,787.00) - (141.60) (148.68) (156.11) (446.39) (163.92) (172.12) (180.72) (189.76) (706.51)

Issuance of Long-term Debt - - 3,411.00 - - - - - - - - - -

Repayment of Long-term Debt (56.00) (183.00) (505.00) (11.00) - - (23.00) (34.00) - - - - -

Net issuance of Commercial Paper - 771.00 (893.00) - - - - - - - - - -

Settlement of Fereign Exchange on Long-term Debt - 17.00 - - - - - - - - - - -

Other (3.00) (3.00) - (2.00) - - - (2.00) - - - - -

Cash Flow from Financing Activities (220.00) (1,630.00) (957.00) (62.00) (218.10) (224.78) (254.81) (759.69) (239.22) (247.02) (255.22) (263.86) (1,005.31)

Cash & Equivalents, Beg 333.00 476.00 226.00 650.00 571.00 191.48 359.42 650.00 288.91 263.36 100.43 270.51 288.91

Effect of Fereign Currency Fluctuations 10.00 7.00 45.00 (17.00) - - - (17.00) - - - - -

Increase/(Decrease) in Cash & Equivalents 133.00 (257.00) 379.00 (62.00) (379.52) 167.94 (70.51) (344.09) (25.55) (162.93) 170.07 22.95 4.54

Cash & Equivalents, End 476.00 226.00 650.00 571.00 191.48 359.42 288.91 288.91 263.36 100.43 270.51 293.46 293.46



Risk Factors

Competitive Landscape The Company faces significant competition for freight transportation in Canada and the U.S., from other railways, pipelines, and trucking. Competition is based mainly on price, quality of service and access to markets. The Company’s ability to provide rail services to customers in Canada and the U.S. that are out of its reach depends on its ability to maintain relationships with connecting carriers. Negative impacts in operations or services provided by connecting carriers could hinder CP’s ability to meet customers’ demands or force the company to use an alternate train route, which will result in network inefficiencies and additional cost. Economic Conditions Global economic conditions negatively affect demand for commodities and other freight transported by the Company. Any conditions that affect the supply or demand for the commodities that CP transports may decrease freight volumes and have adverse effect on CP’s operations. Economic conditions resulting in bankruptcies of one or more large customers will negatively effect CP (there is no customer with more than 10% associated with revenues). Environmental Laws and Regulations CP is subject to federal laws, regulations and rules in both Canada and the U.S., which affect how business activities are managed. In operating a railway, it is possible that derailment can occur and release hazardous materials or other accidents that could cause harm to human health or to the environment. If the Company is found to have violated the law, it could have an adverse effect on the company’s operations and reputation. Any additional regulation of the rail industry by regulation in Canada or U.S. could negatively impact the company’s ability to provide competitive prices for rail services. These adverse effects could result in reduced capital expenditures. Reliance on Key Suppliers The company is dependent on key suppliers for railway equipment and materials that could result in shortages of materials. There are a limited number of suppliers of rail equipment and materials available, and if these suppliers experience supply shortages, it could result in difficult of obtaining rail equipment and materials, which could increase costs if it to were import from a different geographic location. In addition, a significant fuel supply shortage could have adverse effects on the company’s revenues. Seasonality and Weather CP is exposed to severe weather conditions directly and indirectly that can cause business disruption and can adversely affect the company’s operations and result in increased costs, and decreased revenues. Bad weather can damage crops and in return affect fertilizer, which reduces freight transport. The company has Insurance that protects it against loss of business and other related consequences but is subject to coverage limitations. Even with insurance, the company may need to delay services to restore operations. Employee Union The majority of CP’s employees belong to labour unions and are subject to collective bargaining agreements. Any raised disputes in regards to the terms of the agreements or the company’s failure to negotiate a contract with the unions could result in strikes or lockouts, which could have adverse effects on business operations. In addition, if the contract expires, any labour agreements related to health care, could increase the Company costs for health and welfare benefits.

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