Edgar Filing: CANADIAN PACIFIC RAILWAY LTD/CN

CANADIAN PACIFIC RAILWAY LIMITED

(Registrant)

Date: July 25, 2012

/s/ Paul Bachand

Paul Bachand

Assistant Corporate Secretary

Form 6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 under

the Securities Exchange Act of 1934

For the month of July, 2012

CANADIAN PACIFIC RAILWAY LIMITED

(Commission File No. 1-01342)

CANADIAN PACIFIC RAILWAY COMPANY

(Commission File No. 1-15272)

(translation of each Registrant’s name into English)

Suite 500, Gulf Canada Square, 401 - 9th Avenue, S.W., Calgary, Alberta, Canada, T2P 4Z4

(address of principal executive offices)

Indicate by check mark whether the registrants file or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F ¨ Form 40-F x

Indicate by check mark if the registrants are submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

Indicate by check mark if the registrants are submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

The interim financial statements, Management’s Discussion and Analysis, and updated earnings coverage calculations included in this Report furnished on Form 6-K shall be incorporated by reference into, or as an exhibit to, as applicable, each of the following Registration Statements under the Securities Act of 1933 of the registrant: Form S-8 No. 333-140955 (Canadian Pacific Railway Limited), Form S-8 No. 333-127943 (Canadian Pacific Railway Limited), Form S-8 No. 333-13962 (Canadian Pacific Railway Limited), and Form F-10 No. 333-175033 (Canadian Pacific Railway Limited) and Form F-9 No. 333-175032 (Canadian Pacific Railway Company).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LOGO

Canadian Pacific

Second Quarter Report 2012

LOGO

Release: Immediate July 25, 2012

CANADIAN PACIFIC ANNOUNCES SECOND-QUARTER 2012 RESULTS

CALGARY – Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) announced its second-quarter 2012 results today with reported net income of $103 million and diluted earnings per share of $0.60, inclusive of the negative impact of approximately $0.30 from significant items including management transition and advisory costs and an Ontario corporate income tax rate change. In addition, the nine-day strike is estimated to have reduced diluted earnings per share by $0.25 to $0.30.

For the first half of 2012 Canadian Pacific’s net income was $245 million, an increase of $83 million, or 51 per cent and diluted earnings per share of $1.42, an increase of $0.47, or 49 per cent. These increases were primarily due to increased volumes and improved operating performance.

SECOND-QUARTER 2012 RESULTS COMPARED WITH SECOND-QUARTER 2011

•

Total revenues were $1.4 billion, an increase of $101 million

•

Operating expenses were $1.1 billion, an increase of $93 million

•

Average fuel price was essentially flat at $3.49 U.S. dollars per U.S. gallon compared to $3.50 U.S. dollars per U.S. gallon

•

Operating income was $239 million, an increase of $8 million

•

Operating ratio was 82.5 per cent, an increase of 80 basis points

•

Net income was $103 million, a decrease of $25 million

•

Diluted earnings per share were $0.60 per share, a decrease of $0.15 per share

Canadian Pacific’s newly appointed President and Chief Executive Officer, E. Hunter Harrison said, “I look forward to working with a solid team of dedicated railroaders to improve CP’s service offering and drive long-term shareholder value. Canadian Pacific is a strong franchise with positive market opportunities.”

Conference Call Information

CP will discuss its results with analysts in a conference call beginning at 1:00 p.m. Eastern time (11:00 a.m. Mountain time) on July 25, 2012.

Conference Call Access

Toronto participants dial in number: (647) 427-7450

Operator assisted toll free dial in number: 1-888-231-8191

Callers should dial in 10 minutes prior to the call.

Webcast

For those with Internet access we encourage you to listen via CP’s website. To access the webcast and the presentation material, click on “Invest In CP” tab.

A replay of the conference call will be available by phone through August 22, 2012 at 416-849-0833 or toll free 1-855-859-2056, password 91414131. A webcast of the presentation and an audio file will be available at www.cpr.ca under “Invest In CP” tab.

About Canadian Pacific

Canadian Pacific (CP: TSX)(NYSE: CP) operates a North American transcontinental railway providing freight transportation services, logistics solutions and supply chain expertise. Incorporating best-in-class technology and environmental practices, CP is re-defining itself as a modern 21st century transportation company built on safety, service reliability and operational efficiency. Visit www.cpr.ca to learn more.

Contacts:

Media

Nicole Sasaki

Tel.: 403-835-9005

24/7 Media Pager: 855-242-3674

email: nicole_sasaki@cpr.ca

Investment Community

Janet Weiss

Tel.: 403-319-3591

email: investor@cpr.ca

CANADIAN PACIFIC RAILWAY LIMITED

CONSOLIDATED STATEMENTS OF INCOME

(in millions of Canadian dollars, except per share data)

(unaudited)


	For the three months					For the six months
	ended June 30					ended June 30
	2012		2011			2012		2011
Revenues
Freight	$	1,332	$	1,233		$	2,672	$	2,368
Other		34		32			70		60

Total revenues		1,366		1,265			2,742		2,428
Operating expenses
Compensation and benefits (Note 11)		366		337			757		701
Fuel		242		237			511		463
Materials		57		57			121		129
Equipment rents		56		54			106		105
Depreciation and amortization		135		122			262		244
Purchased services and other (Notes 10 and 11)		271		227			472		446

Total operating expenses		1,127		1,034			2,229		2,088

Operating income		239		231			513		340
Less:
Other income and charges		19		(5	)		32		(6	)
Net interest expense		69		63			138		127

Income before income tax expense		151		173			343		219

Income tax expense (Note 3)		48		45			98		57

Net income	$	103	$	128		$	245	$	162

Earnings per share (Note 4)
Basic earnings per share	$	0.60	$	0.76		$	1.43	$	0.96
Diluted earnings per share	$	0.60	$	0.75		$	1.42	$	0.95

Weighted-average number of shares (millions)
Basic		171.1		169.4			170.8		169.3
Diluted		172.4		170.7			172.2		170.6

Dividends declared per share	$	0.3500	$	0.3000		$	0.6500	$	0.5700

See Notes to Interim Consolidated Financial Statements.

CANADIAN PACIFIC RAILWAY LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions of Canadian dollars)

(unaudited)


	For the three months						For the six months
	ended June 30						ended June 30
	2012			2011			2012			2011
Net income	$	103		$	128		$	245		$	162
Net loss in foreign currency translation adjustments, net of hedging activities		(7	)		(2	)		(2	)		—
Change in derivatives designated as cash flow hedges		(8	)		(7	)		2			(3	)
Change in defined benefit pension and post-retirement plans		54			40			108			76

Other comprehensive income before income taxes		39			31			108			73
Income tax expense		(4	)		(11	)		(28	)		(31	)

Other comprehensive income		35			20			80			42

Comprehensive income	$	138		$	148		$	325		$	204

See Notes to Interim Consolidated Financial Statements.

CANADIAN PACIFIC RAILWAY LIMITED

CONSOLIDATED BALANCE SHEETS

(in millions of Canadian dollars)

(unaudited)


	June 30			December 31
	2012			2011
*Assets*
Current assets
Cash and cash equivalents	$	82		$	47
Accounts receivable, net		497			518
Materials and supplies		151			138
Deferred income taxes		175			101
Other current assets		69			52

		974			856

Investments		138			167
Net properties		12,964			12,752
Goodwill and intangible assets		192			192
Other assets		138			143

*Total assets*	$	14,406		$	14,110

*Liabilities and shareholders’ equity*
Current liabilities
Short-term borrowing	$	—		$	27
Accounts payable and accrued liabilities		1,101			1,133
Long-term debt maturing within one year		52			50

		1,153			1,210

Pension and other benefit liabilities (Note 8)		1,240			1,372
Other long-term liabilities		313			365
Long-term debt (Note 5)		4,745			4,695
Deferred income taxes		2,017			1,819

*Total liabilities*		9,468			9,461

Shareholders’ equity
Share capital		1,934			1,854
Additional paid-in capital		81			86
Accumulated other comprehensive loss		(2,656	)		(2,736	)
Retained earnings		5,579			5,445

		4,938			4,649

*Total liabilities and shareholders’ equity*	$	14,406		$	14,110

Commitments and contingencies (Note 9)

See Notes to Interim Consolidated Financial Statements.

CANADIAN PACIFIC RAILWAY LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions of Canadian dollars)

(unaudited)


	For the three months ended June 30						For the six months ended June 30
	2012			2011			2012			2011
Operating activities
Net income	$	103		$	128		$	245		$	162
Reconciliation of net income to cash provided by operating activities:
Depreciation and amortization		135			122			262			244
Deferred income taxes (Note 3)		48			52			94			60
Pension funding in excess of expense (Note 8)		(23	)		(13	)		(30	)		(24	)
Other operating activities, net		6			(15	)		(23	)		(13	)
Change in non-cash working capital balances related to operations		57			(61	)		(21	)		(81	)

Cash provided by operating activities		326			213			527			348

Investing activities
Additions to properties		(292	)		(219	)		(525	)		(352	)
Proceeds from the sale of properties and other assets (Note 6)		17			15			62			21
Other		—			(1	)		(1	)		(1	)

Cash used in investing activities		(275	)		(205	)		(464	)		(332	)

Financing activities
Dividends paid		(51	)		(46	)		(102	)		(92	)
Issuance of common shares		17			2			55			11
Issuance of long-term debt (Note 5)		—			—			71			—
Repayment of long-term debt		(13	)		(6	)		(25	)		(18	)
Net decrease in short-term borrowing		—			—			(27	)		—

Cash used in financing activities		(47	)		(50	)		(28	)		(99	)

Effect of foreign currency fluctuations on U.S. dollar-denominated cash and cash equivalents		1			(1	)		—			(10	)

Cash position
Increase (decrease) in cash and cash equivalents		5			(43	)		35			(93	)
Cash and cash equivalents at beginning of period		77			311			47			361

Cash and cash equivalents at end of period	$	82		$	268		$	82		$	268

Supplemental disclosures of cash flow information:
Income taxes (refunded) paid	$	(11	)	$	4		$	(7	)	$	3
Interest paid	$	83		$	91		$	134		$	140

See Notes to Interim Consolidated Financial Statements.

CANADIAN PACIFIC RAILWAY LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in millions of Canadian dollars, except common share amounts)

(unaudited)


	Common							Accumulated
	shares				Additional			other						Total
	(in		Share		paid-in			comprehensive			Retained			shareholders’
	millions)		capital		capital			loss			earnings			equity
Balance at January 1, 2012		170.0	$	1,854	$	86		$	(2,736	)	$	5,445		$	4,649
Net income		—		—		—			—			245			245
Other comprehensive income		—		—		—			80			—			80
Dividends declared		—		—		—			—			(111	)		(111	)
Effect of stock-based compensation expense		—		—		18			—			—			18
Shares issued under stock option plans		1.3		80		(23	)		—			—			57

Balance at June 30, 2012		171.3	$	1,934	$	81		$	(2,656	)	$	5,579		$	4,938


	Common							Accumulated
	shares				Additional			other						Total
	(in		Share		paid-in			comprehensive			Retained			shareholders’
	millions)		capital		capital			loss			earnings			equity
Balance at January 1, 2011		169.2	$	1,813	$	24		$	(2,086	)	$	5,073		$	4,824
Net income		—		—		—			—			162			162
Other comprehensive income		—		—		—			42			—			42
Dividends declared		—		—		—			—			(97	)		(97	)
Effect of stock-based compensation expense		—		—		11			—			—			11
Changes to stock-based compensation awards (Note 7)		—		—		52			—			—			52
Shares issued under stock option plans		0.2		13		(2	)		—			—			11

Balance at June 30, 2011		169.4	$	1,826	$	85		$	(2,044	)	$	5,138		$	5,005

See Notes to Interim Consolidated Financial Statements.

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

1	*Basis of presentation*

These unaudited interim consolidated financial statements of Canadian Pacific Railway Limited (“CP”, or “the Company”) reflect management’s estimates and assumptions that are necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“GAAP”). They do not include all disclosures required under GAAP for annual financial statements and should be read in conjunction with the 2011 consolidated financial statements. The accounting policies used are consistent with the accounting policies used in preparing the 2011 consolidated financial statements.

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

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

2	*Accounting changes*

Fair value measurement

In May 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance on fair value measurement which updates some of the measurement guidance and includes enhanced disclosure requirements. The amended guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption did not impact the results of operations or financial position but resulted in increased note disclosure (see Note 6).

Other comprehensive income

In June 2011, the FASB issued an accounting standard update on the Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income and its components in the Consolidated Statement of Changes in Shareholders’ Equity. The Company has elected to present items of net income and other comprehensive income in two separate, but consecutive, statements as opposed to one continuous statement. With FASB’s deferral of certain aspects of this accounting standard update in December 2011 and as the new guidance does not change those components that are recognized in net income or those components that are recognized in other comprehensive income, adoption did not impact the results of operations or financial position.

Intangibles – goodwill and other

In September 2011, the FASB issued amended guidance on the testing of goodwill for impairment. The amendments allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company will consider this option when testing goodwill for impairment. As it does not change how a goodwill impairment loss is measured, the adoption of the guidance does not impact the results of operations and financial position.

3	*Income taxes*

During the three months ended June 30, 2012, legislation was enacted to cancel the previously planned province of Ontario’s corporate income tax rate reductions. As a result of these changes, the Company recorded an income tax expense of $11 million in the quarter, based on its deferred income tax balances as at December 31, 2011.

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

3	*Income taxes (continued)*


	For the three months ended June 30					For the six months ended June 30
(in millions of Canadian dollars)	2012		2011			2012		2011
Current income tax expense	$	—	$	(7	)	$	4	$	(3	)
Deferred income tax expense		48		52			94		60

Income tax expense	$	48	$	45		$	98	$	57

The effective income tax rate for the three and six months ended June 30, 2012 was 31.8% and 28.6% respectively, (three and six months ended June 30, 2011 – 26.0%) as a result of the change in the province of Ontario’s corporate income tax rate.

4	*Earnings per share*

At June 30, 2012, the number of shares outstanding was 171.3 million (June 30, 2011 – 169.4 million).

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

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


	For the three months				For the six months
	ended June 30				ended June 30
(in millions)	2012		2011		2012		2011
Weighted-average shares outstanding		171.1		169.4		170.8		169.3
Dilutive effect of stock options		1.3		1.3		1.4		1.3

Weighted-average diluted shares outstanding		172.4		170.7		172.2		170.6

For the three and six months ended June 30, 2012, 388,067 and 313,000 options, respectively, were excluded from the computation of diluted earnings per share because their effects were not dilutive (three and six months ended June 30, 2011 – 2,023,500 and 1,456,021, respectively).

5	*Long-term debt*

During the first quarter of 2012, the Company issued US$71 million 4.28% Senior Secured Notes due in 2027 for net proceeds of $71 million. These Notes are secured by locomotives previously acquired by the Company with a carrying value of $71 million at June 30, 2012. The Company pays equal blended semi-annual payments of principal and interest up to and including March 2027. Final repayment of the remaining principal of US$35 million is due in March 2027.

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

6	*Financial instruments*

Fair values of financial instruments

GAAP establishes a fair value hierarchy that prioritizes, with respect to reliability, the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets and liabilities and have the highest priority. Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and have lower priorities.

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

The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt which has a fair value of approximately $5,632 million at June 30, 2012 (December 31, 2011 – $5,314 million) with a carrying value of $4,797 million (December 31, 2011 – $4,745 million). The estimated fair value of current and long-term borrowings has been determined based on market information where available, or by discounting future payments of interest and principal at estimated interest rates expected to be available to the Company at period end. All derivatives and long-term debt are classified as Level 2.

A detailed analysis of the techniques used to value long-term floating rate notes, which are classified as Level 3, is discussed below:

Long-term floating rate notes

During the first quarter of 2012, the Company sold all of its Master Asset Vehicle (“MAV”) 2 Class A-2 Notes which had a carrying value of $33 million (original cost – $46 million) for proceeds and interest of $33 million.

At June 30, 2012, the Company’s investment in MAV 2 Class A-1 Notes has a carrying value, being the estimated fair value of the notes, reported in “Investments” of $48 million (original cost – $59 million). During June 2012, DBRS upgraded the rating of the Notes from A (high) to AA (low).

Accretion and other minor changes in market assumptions resulted in net unrealized income of $1 million and $2 million in the three and six months ended June 30, 2012, respectively (three and six months ended June 30, 2011 – gains of $9 million and $10 million, respectively) which were reported in “Other income and charges”.

The valuation technique and assumptions used by the Company to estimate the fair value of its investment in long-term floating rate notes at June 30, 2012 and December 31, 2011, incorporates probability weighted discounted cash flows considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments. The valuation of the Notes is prepared by the Company’s Treasury department and results are reviewed by senior finance officials, at a minimum, on a quarterly basis. The Notes at June 30, 2012, are expected to mature in January 2017 and are modelled using an average coupon interest rate of 0.8%, a discount rate of 4.8%, and assumed no credit losses. Similar assumptions were modelled at December 31, 2011, with the exception of the discount rate which was 6.1%.

Changes in the fair value of the Notes resulting from a 50 basis point increase/decrease in the coupon interest rate or discount rate would have a negligible impact on earnings during the three and six months ended June 30, 2012 and 2011.

Financial risk management

The Company’s policy with respect to using derivative financial instruments is to selectively reduce volatility associated with fluctuations in interest rates, foreign exchange (“FX”) rates, the price of fuel and stock-based compensation expense. Where derivatives are designated as hedging instruments, the relationship between the hedging instruments and their associated hedged items is documented, as well as the risk management

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

6	*Financial instruments (continued)*

objective and strategy for the use of the hedging instruments. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the Consolidated Balance Sheet, commitments or forecasted transactions. At the time a derivative contract is entered into, and at least quarterly thereafter, an assessment is made whether the derivative item is effective in offsetting the changes in fair value or cash flows of the hedged items. The derivative qualifies for hedge accounting treatment if it is effective in substantially mitigating the risk it was designed to address.

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

Foreign exchange management

The Company is exposed to fluctuations of financial commitments, assets, liabilities, income or cash flows due to changes in FX rates. The Company conducts business transactions and owns assets in both Canada and the United States; as a result, revenues and expenses are incurred in both Canadian and U.S. dollars. The Company enters into foreign exchange risk management transactions primarily to manage fluctuations in the exchange rate between Canadian and U.S. currencies. In terms of net income, excluding FX on long-term debt, mitigation of U.S. dollar FX exposure is provided primarily through offsets created by revenues and expenses incurred in the same currency. Where appropriate, the Company negotiates with customers and suppliers to reduce the net exposure.

Occasionally the Company will enter into short-term FX forward contracts as part of its cash management strategy.

Net investment hedge

The FX gains and losses on long-term debt are mainly unrealized and can only be realized when U.S. dollar denominated long-term debt matures or is settled. The Company also has long-term FX exposure on its investment in U.S. affiliates. The majority of the Company’s U.S. dollar denominated long-term debt has been designated as a hedge of the net investment in foreign subsidiaries. This designation has the effect of mitigating volatility on net income by offsetting long-term FX gains and losses on U.S. dollar denominated long-term debt and gains and losses on its net investment. The effective portion recognized in “Other comprehensive income” for the three and six months ended June 30, 2012 was an unrealized foreign exchange loss of $66 million and $6 million, respectively (three and six months ended June 30, 2011 – unrealized gain of $16 million and $90 million, respectively). There was no ineffectiveness for the three and six months ended June 30, 2012, and comparative periods.

Foreign exchange forward contracts

The Company may enter into FX forward contracts to lock-in the amount of Canadian dollars it has to pay on its U.S. denominated debt maturities.

At June 30, 2012, the Company had FX forward contracts to fix the exchange rate on US$50 million of principal outstanding on a capital lease due in January 2014, US$175 million of its 6.50% Notes due in May 2018, and US$100 million of its 7.25% Notes due in May 2019. At June 30, 2011, the Company had FX forward contracts to fix the exchange rate on US$101 million of its 5.75% 2013 Notes due in May 2013, US$175 million of its 6.50% Notes due in May 2018, and US$100 million of its 7.25% Notes due in May 2019. These derivatives, which are accounted for as cash flow hedges, guarantee the amount of Canadian dollars that the Company will repay when these obligations mature.

During the three and six months ended June 30, 2012, an unrealized foreign exchange gain of $5 million and $1 million, respectively (three months and six months ended June 30, 2011 – unrealized loss of $1 million and $5 million, respectively) was recorded in “Other income and charges” in relation to these derivatives. These gains in 2012 recorded in “Other income and charges” were largely offset by the unrealized losses on the underlying debt which the derivatives were designated to hedge. Similarly, the losses in 2011 were largely offset by the unrealized gains on the underlying debt.

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

6	*Financial instruments (continued)*

At June 30, 2012, the unrealized gain derived from these FX forwards was $12 million which was included in “Other assets” with the offset reflected as an unrealized gain of $4 million in “Accumulated other comprehensive loss” and as an unrealized gain of $8 million in “Retained earnings”. At December 31, 2011, the unrealized gain derived from these FX forwards was $6 million which was included in “Other assets” with the offset reflected as an unrealized loss of $1 million in “Accumulated other comprehensive loss” and as an unrealized gain of $7 million in “Retained earnings”.

At June 30, 2012, the Company expected that, during the next twelve months, unrealized pre-tax losses of $2 million would be reclassified to “Other income and charges”.

Interest rate management

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

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

At June 30, 2012 and December 31, 2011, the Company had no outstanding interest rate swaps.

Stock-based compensation expense management

Total Return Swaps (“TRS”)

The Company is exposed to stock-based compensation risk, which is the probability of increased compensation expense due to the increase in the Company’s share price.

The Company has a TRS to reduce the volatility to the Company over time on three types of stock-based compensation programs: Tandem share appreciation rights (“TSARs”), Deferred share units (“DSUs”), and Restricted share units (“RSUs”). As the Company’s share price appreciates, these programs create increased compensation expense. The TRS is a derivative that provides a gain to offset increased compensation expense as the share price increases and a loss to offset reduced compensation expense when the share price falls. This derivative is not designated as a hedge and changes in fair value are recognized in net income in the period in which the change occurs.

During the six months ended June 30, 2012, the Company reduced the size of the TRS program by 0.3 million share units for proceeds of $1 million. During the same period of 2011 the program was reduced by 0.5 million share units at minimal cost. At June 30, 2012, the Company had 0.3 million share units (December 31, 2011 – 0.6 million) remaining in the TRS.

Fuel price management

The Company is exposed to commodity risk related to purchases of diesel fuel and the potential reduction in net income due to increases in the price of diesel. Fuel expense constitutes a large portion of the Company’s operating costs and volatility in diesel fuel prices can have a significant impact on the Company’s income. Items affecting volatility in diesel prices include, but are not limited to, fluctuations in world markets for crude oil and distillate fuels, which can be affected by supply disruptions and geopolitical events.

The impact of variable fuel expense is mitigated substantially through fuel cost recovery programs which apportion incremental changes in fuel prices to shippers through price indices, tariffs, and by contract, within agreed upon guidelines. While these programs provide effective and meaningful coverage, residual exposure remains as the fuel expense risk cannot be completely recovered from shippers due to timing and volatility in the market. The Company continually monitors residual exposure, and where appropriate, may enter into derivative instruments.

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

6	*Financial instruments (continued)*

Energy futures

At June 30, 2012, the Company had diesel futures contracts, which are accounted for as cash flow hedges, to purchase approximately 20 million U.S. gallons during the period July 2012 to June 2013 at an average price of $3.01 per U.S. gallon. This represents approximately 7% of estimated fuel purchases for this period. At June 30, 2012, the unrealized loss on these futures contracts was $5 million (December 31, 2011 – $3 million) and was reflected in “Accounts payable and accrued liabilities” with the offset, net of tax, reflected in “Accumulated other comprehensive loss” on the Consolidated Balance Sheets.

The impact of settled commodity swaps increased “Fuel” expense by $1 million in the three months ended June 30, 2012, as a result of realized losses on diesel swaps. During the six months ended June 30, 2012, these swaps had a negligible impact to “Fuel” expense. During the three and six months ended June 30, 2011, these swaps decreased “Fuel” expense by $4 million and $7 million, respectively, as a result of realized gains. At June 30, 2012, the Company expected that, during the next twelve months, $5 million of unrealized pre-tax holding losses on diesel future contracts would be realized and recognized in “Fuel” expense as a result of these derivatives being settled.

7	*Stock-based compensation*

At June 30, 2012, the Company had several stock-based compensation plans, including stock option plans, various cash settled liability plans, which are remeasured to fair value quarterly based on share price and vesting conditions, and an employee stock savings plan. These plans resulted in an expense of $3 million for the three months ended June 30, 2012 and an expense of $26 million for the six months ended June 30, 2012 (three and six months ended June 30, 2011 expense of $3 million and $15 million, respectively). Most of the stock-based compensation plans include a provision whereby vesting is accelerated should certain changes in the composition of the Board of Directors occur. These provisions were triggered on June 26, 2012 and the recognition of the revised vesting terms as outlined in the stock-based compensation plans resulted in a credit to “Compensation and benefits” of $8 million in the second quarter of 2012. RSUs and TSARs were not impacted by this change and for DSUs 14,080 units were subject to immediate vesting. The impact discussed above on options and performance share units is outlined in more detail below.

Regular options

In the three months ended June 30, 2012, under CP’s stock option plans, the Company issued 1,230,600 regular options, including options granted upon management transition (see Note 11) at the weighted-average price of $74.48 per share, based on the last closing price immediately prior to the grant (first six months of 2012 - 1,236,100 regular options at the weighted-average price of $74.48 per share). Pursuant to the employee plans, these regular options vest between 12 and 48 months after the grant date, and will expire after 10 years. Certain of these options granted are only exercisable after employment is terminated.

The recent changes to the composition of the Board triggered the immediate vesting on June 26, 2012 of all unvested regular options granted prior to 2012, 4,000 unvested options granted in 2012, and all unvested performance options. As at June 30, 2012, 5,276,345 options are exercisable.

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

7	*Stock-based compensation (continued)*

Under the fair value method, the fair value at the grant date of the regular options issued in the six months ended June 30, 2012 was $22 million. The weighted-average fair value assumptions were approximately:


	For the six months
	ended June, 30 2012
Grant price	$	74.48
Expected option life (years) ⁽¹⁾		5.99
Risk-free interest rate ⁽²⁾		1.48	%
Expected stock price volatility ⁽³⁾		31	%
Expected annual dividends per share ⁽⁴⁾	$	1.40
Expected forfeiture rate⁽⁵⁾		1.00	%
Weighted-average grant date fair value of regular options granted during the period	$	17.66

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

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

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

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

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

Performance share unit (“PSU”) plan

In the first six months of 2012, the Company issued 278,670 PSUs with a grant date fair value of $21 million. These units attract dividend equivalents in the form of additional units based on the dividends paid on the Company’s Common Shares. PSUs vest and are settled in cash approximately three years after the grant date contingent upon CP’s performance (performance factor). The fair value of PSUs is measured, both on the grant date and each subsequent quarter until settlement, using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the performance and market conditions stipulated in the grant.

Recent changes to the Board also resulted in the immediate vesting of a pro-rata portion of all unvested PSUs during the second quarter of 2012. The number of units that vested was based on the number of months of the total performance period that had passed and the fair value of the units to be settled was based on the average closing price of the 30 trading days prior to June 26, 2012. The payout of $32 million will occur in the third quarter of 2012.

The performance period for the first grant of PSUs issued in 2009 ended December 31, 2011. These PSUs are earned based on the Total Shareholder Return (“TSR”) compared to the S&P/TSX60 index, and Return on Capital Employed (“ROCE”). The TSR for the three-year period exceeded target, while ROCE targets were not met. The TSR component of the plan resulted in a total PSU payout equal to 200% for half of the award, in effect resulting in a target payout. The payout of $24 million occurred in March 2012 and was calculated using the Company’s average share price during the last 30 trading days ending on December 31, 2011.

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

7	*Stock-based compensation (continued)*

Tandem share appreciation rights (“TSARs”)

As a result of changes to Canadian tax legislation, which eliminated the favourable tax treatment on cash settled compensation awards, the Company offered employees the option of cancelling the outstanding SAR and keeping in place the outstanding option. During the first quarter of 2011, the Company cancelled 3.1 million SARs and reclassified the fair value of the previously recognized liability ($70 million) and the recognized deferred tax asset ($18 million) to “Additional paid-in capital”. The terms of the awards were not changed and as a result no incremental cost was recognized. The weighted average fair value of the units cancelled during the first quarter of 2011 was $25.36 per unit.

8	*Pensions and other benefits*

In the three and six months ended June 30, 2012, the Company made contributions of $33 million and $50 million, respectively (2011 - $24 million and $47 million, respectively) to its defined benefit pension plans. The elements of net periodic benefit cost for defined benefit pension plans and other benefits recognized in the three and six months ended June 30, 2012, included the following components:


	For the three months ended June 30
	Pensions						Other benefits
(in millions of Canadian dollars)	2012			2011			2012		2011
Current service cost (benefits earned by employees in the period)	$	33		$	26		$	5	$	4
Interest cost on benefit obligation		113			115			6		6
Expected return on fund assets		(188	)		(168	)		—		—
Recognized net actuarial loss		52			35			2		1
Amortization of prior service costs		—			3			—		—

Net periodic benefit cost	$	10		$	11		$	13	$	11

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

8	*Pensions and other benefits (continued)*


	For the six months ended June 30
	Pensions						Other benefits
(in millions of Canadian dollars)	2012			2011			2012		2011
Current service cost (benefits earned by employees in the period)	$	66		$	52		$	10	$	8
Interest cost on benefit obligation		226			230			12		13
Expected return on fund assets		(376	)		(336	)		—		—
Recognized net actuarial loss		104			71			3		2
Amortization of prior service costs		—			6			—		—

Net periodic benefit cost	$	20		$	23		$	25	$	23

9	*Commitments and contingencies*

In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damages to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at June 30, 2012 cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company’s financial position or results of operations.

At June 30, 2012, the Company had committed to total future capital expenditures amounting to $396 million and operating expenditures amounting to $1,763 million for the years 2012-2030.

Minimum payments under operating leases were estimated at $771 million in aggregate, with annual payments in each of the five years following 2012 of (in millions): 2013 – $135; 2014 – $101; 2015 – $87; 2016 – $68 and 2017 – $44.

Environmental remediation accruals cover site-specific remediation programs. Environmental remediation accruals are measured on an undiscounted basis and are recorded when the costs to remediate are probable and reasonably estimable.

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

The expense included in “Purchased services and other” for the three and six months ended June 30, 2012 was $1 million and $1 million, respectively (three and six months ended June 30, 2011 - $1 million and $2 million, respectively). Provisions for environmental remediation costs are recorded in “Other long-term liabilities”, except for the current portion which is recorded in “Accounts payable and accrued liabilities”. The total amount provided at June 30, 2012 was $95 million (December 31, 2011 - $ 97 million). Payments are expected to be made over 10 years to 2022.

CANADIAN PACIFIC RAILWAY LIMITED

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(unaudited)

9	*Commitments and contingencies (continued)*

The Dakota, Minnesota & Eastern Railroad Corporation was purchased for $1.5 billion resulting in goodwill of $150 million (US$147 million) as at June 30, 2012. Future contingent payments of up to approximately US$1.2 billion consisting of US$441 million which would become due if construction of the Powder River Basin expansion project starts prior to December 31, 2025 and up to approximately US$777 million would become due upon the movement of specified volumes over the Powder River Basin extension prior to December 31, 2025. Certain interest and inflationary adjustments would also become payable up to December 31, 2025 upon achievement of certain milestones. The contingent payments would be accounted for as an increase in the purchase price.

10	*Insurance recovery*

In 2010, the Company suffered losses due to flooding in southern Alberta and Saskatchewan. An amount of $12 million for business interruption insurance recoveries was recognized in “Purchased services and other” for the six months ended June 30, 2012. In addition, in the fourth quarter of 2011 the Company recorded $5 million of insurance recoveries with respect to the same incident.

11	*Management transition*

On June 28, 2012, Mr. E. Hunter Harrison was appointed by the Board as President and Chief Executive Officer. As a result of the appointment of Mr. Harrison, the Company recorded a charge of $38 million with respect to compensation and other transition costs, including $2 million of associated costs, in the second quarter of 2012. This charge was recorded in “Compensation and benefits” and “Purchased services and other”, $16 million and $22 million, respectively.

Included in this charge were amounts totalling $16 million in respect of deferred retirement compensation for Mr. Harrison and $20 million which was payable at June 30, 2012, to Pershing Square Capital Management, L.P. (“Pershing Square”) and related entities. Pershing Square and related entities own or control approximately 14% of the Company’s outstanding shares, and two Board members, Mr. William Ackman and Mr. Paul Hilal, are partners of Pershing Square. The amount payable to Pershing Square and related entities was to reimburse them, on behalf of Mr. Harrison, for certain amounts they had previously paid to or incurred on behalf of Mr. Harrison pursuant to an indemnity in favour of Mr. Harrison in connection with losses suffered in legal proceedings commenced against Mr. Harrison by his former employer. Reimbursement on behalf of Mr. Harrison was a precondition of Mr. Harrison accepting the Company’s offer of employment. As a result of the payment, the Company would be entitled to enforce Mr. Harrison’s rights in the aforementioned legal proceedings, which will allow the Company to recover to the extent of Mr. Harrison’s success in those proceedings. The Company may also receive repayment in other circumstances in the event of certain breaches of Mr. Harrison’s employment obligations to it. Mr. Harrison was also granted stock options and DSUs upon commencing employment that had a grant date fair value of $12 million (see Note 7).

In addition, the Company agreed to indemnify Mr. Harrison for certain other amounts, to a maximum of $3 million plus legal fees. No amount has been accrued at June 30, 2012.

The Company also recorded a charge of $4 million in the second quarter of 2012 with respect to a retirement allowance for Mr. Green.

LOGO

Summary of Rail Data


Second Quarter												Year-to-date
2012		2011			Fav/(Unfav)			%			Financial (millions, except per share data)	2012		2011			Fav/(Unfav)			%
											Revenues
$	1,332	$	1,233		$	99			8		Freight revenue	$	2,672	$	2,368		$	304			13
	34		32			2			6		Other revenue		70		60			10			17

	1,366		1,265			101			8		Total revenues		2,742		2,428			314			13


											Operating expenses
	366		337			(29	)		(9	)	Compensation and benefits		757		701			(56	)		(8	)
	242		237			(5	)		(2	)	Fuel		511		463			(48	)		(10	)
	57		57			—			—		Materials		121		129			8			6
	56		54			(2	)		(4	)	Equipment rents		106		105			(1	)		(1	)
	135		122			(13	)		(11	)	Depreciation and amortization		262		244			(18	)		(7	)
	271		227			(44	)		(19	)	Purchased services and other		472		446			(26	)		(6	)

	1,127		1,034			(93	)		(9	)	Total operating expenses (OE)		2,229		2,088			(141	)		(7	)

	239		231			8			3		Operating income		513		340			173			51
											Less:
	19		(5	)		(24	)		—		Other income and charges		32		(6	)		(38	)		—
	69		63			(6	)		(10	)	Net interest expense		138		127			(11	)		(9	)

	151		173			(22	)		(13	)	Income before income tax expense		343		219			124			57
	48		45			(3	)		(7	)	Income tax expense		98		57			(41	)		(72	)

$	103	$	128		$	(25	)		(20	)	Net income	$	245	$	162		$	83			51

	82.5		81.7			(0.8	)		(80	)bps	Operating ratio (%)		81.3		86.0			4.7			470	bps
$	0.60	$	0.76		$	(0.16	)		(21	)	Basic earnings per share	$	1.43	$	0.96		$	0.47			49

$	0.60	$	0.75		$	(0.15	)		(20	)	Diluted earnings per share	$	1.42	$	0.95		$	0.47			49


											Shares Outstanding
	171.1		169.4			1.7			1		Weighted average number of shares outstanding (millions)		170.8		169.3			1.5			1
	172.4		170.7			1.7			1		Weighted average number of diluted shares outstanding (millions)		172.2		170.6			1.6			1

											Foreign Exchange
	0.99		1.03			0.04			4		Average foreign exchange rate (US$/Canadian$)		0.99		1.02			0.03			3
	1.01		0.97			0.04			4		Average foreign exchange rate (Canadian$/US$)		1.01		0.98			0.03			3

LOGO

Summary of Rail Data (Page 2)


Second Quarter											Year-to-date
2012		2011		Fav/(Unfav)			%				2012		2011		Fav/(Unfav)			%
										Commodity Data

										Freight Revenues (millions)
$	233	$	255	$	(22	)		(9	)	- Grain	$	521	$	487	$	34			7
	148		145		3			2		- Coal		285		251		34			14
	150		150		—			—		- Sulphur and fertilizers		276		279		(3	)		(1	)
	306		232		74			32		- Industrial and consumer products		604		463		141			30
	116		84		32			38		- Automotive		221		164		57			35
	48		46		2			4		- Forest products		98		91		7			8
	331		321		10			3		- Intermodal		667		633		34			5

$	1,332	$	1,233	$	99			8		Total Freight Revenues	$	2,672	$	2,368	$	304			13

										Millions of Revenue Ton-Miles (RTM)
	6,712		7,816		(1,104	)		(14	)	- Grain		15,312		15,076		236			2
	5,329		5,564		(235	)		(4	)	- Coal		10,534		9,534		1,000			10
	5,617		5,643		(26	)		—		- Sulphur and fertilizers		9,659		10,512		(853	)		(8	)
	7,020		5,515		1,505			27		- Industrial and consumer products		14,056		11,477		2,579			22
	658		545		113			21		- Automotive		1,317		1,068		249			23
	1,169		1,179		(10	)		(1	)	- Forest products		2,384		2,471		(87	)		(4	)
	6,054		5,961		93			2		- Intermodal		12,108		11,769		339			3

	32,559		32,223		336			1		Total RTMs		65,370		61,907		3,463			6


										Freight Revenue per RTM (cents)
	3.47		3.26		0.21			6		- Grain		3.40		3.23		0.17			5
	2.78		2.61		0.17			7		- Coal		2.71		2.63		0.08			3
	2.67		2.66		0.01			—		- Sulphur and fertilizers		2.86		2.65		0.21			8
	4.36		4.21		0.15			4		- Industrial and consumer products		4.30		4.03		0.27			7
	17.63		15.41		2.22			14		- Automotive		16.78		15.36		1.42			9
	4.11		3.90		0.21			5		- Forest products		4.11		3.68		0.43			12
	5.47		5.39		0.08			1		- Intermodal		5.51		5.38		0.13			2

	4.09		3.83		0.26			7		Total Freight Revenue per RTM		4.09		3.83		0.26			7

										Carloads (thousands)

	91		112		(21	)		(19	)	- Grain		201		212		(11	)		(5	)
	82		81		1			1		- Coal		160		141		19			13
	54		54		—			—		- Sulphur and fertilizers		96		103		(7	)		(7	)
	113		96		17			18		- Industrial and consumer products		228		196		32			16
	42		37		5			14		- Automotive		84		73		11			15
	16		18		(2	)		(11	)	- Forest products		34		36		(2	)		(6	)
	248		249		(1	)		—		- Intermodal		499		492		7			1

	646		647		(1	)		—		Total Carloads		1,302		1,253		49			4


										Freight Revenue per Carload
$	2,560	$	2,277	$	283			12		- Grain	$	2,592	$	2,297	$	295			13
	1,805		1,790		15			1		- Coal		1,781		1,780		1			—
	2,778		2,778		—			—		- Sulphur and fertilizers		2,875		2,709		166			6
	2,708		2,417		291			12		- Industrial and consumer products		2,649		2,362		287			12
	2,762		2,270		492			22		- Automotive		2,631		2,247		384			17
	3,000		2,556		444			17		- Forest products		2,882		2,528		354			14
	1,335		1,289		46			4		- Intermodal		1,337		1,287		50			4

$	2,062	$	1,906	$	156			8		Total Freight Revenue per Carload	$	2,052	$	1,890	$	162			9

LOGO

Summary of Rail Data (Page 3)


Second Quarter											Year-to-date
2012		2011 ⁽¹⁾		Fav/(Unfav)			%				2012		2011 ⁽¹⁾		Fav/(Unfav)			%
										Operations Performance

	1.85		1.65		(0.20	)		(12	)	OE per GTM (cents)⁽²⁾		1.80		1.75		(0.05	)		(3	)
	1.78		1.65		(0.13	)		(8	)	OE, less land sales, fuel price impact, and CEO transition costs, per GTM (cents)⁽³⁾		1.75		1.76		0.01			1
	16,992		16,219		(773	)		(5	)	Average number of active employees - Total⁽⁴⁾		16,490		15,567		(923	)		(6	)
	14,477		13,947		(530	)		(4	)	Average number of active employees - Expense⁽⁴⁾		14,717		13,978		(739	)		(5	)
	17,701		16,439		(1,262	)		(8	)	Number of employees at end of period - Total		17,701		16,439		(1,262	)		(8	)
	15,141		14,067		(1,074	)		(8	)	Number of employees at end of period - Expense		15,141		14,067		(1,074	)		(8	)
	41.2		54.2		13.0			24		Average daily active cars on-line (thousands)		40.5		54.7		14.2			26
	1,057		1,114		57			5		Average daily active road locomotives on-line		1,045		1,088		43			4

	60,926		62,763		(1,837	)		(3	)	Freight gross ton-miles (millions)		123,614		118,998		4,616			4
	9,681		10,059		(378	)		(4	)	Train miles (thousands)		20,023		19,304		719			4
	6,690		6,654		36			1		Average train weight - excluding local traffic (tons)		6,550		6,577		(27	)		—
	5,764		5,732		32			1		Average train length - excluding local traffic (feet)		5,673		5,670		3			—
	23.7		20.0		3.7			19		Average train speed - AAR definition (mph)		24.5		19.9		4.6			23
	18.0		20.1		2.1			10		Average terminal dwell - AAR definition (hours)		17.7		21.8		4.1			19
	194.2		154.3		39.9			26		Car miles per car day		201.2		146.1		55.1			38
	164.7		164.0		0.7			—		Locomotive productivity (daily average GTMs/active HP)		169.7		160.8		8.9			6
	4.2		4.5		(0.3	)		(7	)	Employee productivity (million GTMs/expense employee)		8.4		8.5		(0.1	)		(1	)

	1.14		1.14		—			—		Fuel efficiency⁽⁵⁾		1.19		1.22		0.03			2
	68.8		70.2		1.4			2		U.S. gallons of locomotive fuel consumed (millions)⁽⁶⁾		145.4		143.3		(2.1	)		(1	)
	3.49		3.50		0.01			—		Average fuel price (U.S. dollars per U.S. gallon)		3.49		3.31		(0.18	)		(5	)

										Safety
	1.26		1.76		0.50			28		FRA personal injuries per 200,000 employee-hours		1.21		1.77		0.56			32
	1.55		1.82		0.27			15		FRA train accidents per million train-miles		1.53		2.15		0.62			29

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

⁽²⁾	Gross Ton-Mile (GTM) is the movement of the combined tons (freight car tare, inactive locomotive tare, and contents) a distance of one mile.

⁽³⁾

OE, less land sales, fuel price impact, and CEO transition costs, per GTM is calculated consistently with OE per GTM except for the exclusion of net gains on land sales, fuel price impact, the latter to remove the volatility of fuel prices and to provide comparative fuel expenses at the 2011 fuel price, and CEO transition costs. Net gains on land sales were $3 million and $2 million for the three months ended June 30, 2012 and 2011, respectively, and $7 million and $2 million for the six months ended June 30, 2012 and 2011, respectively. The impact in fuel price was unfavourable $2 million for the three months ended June 30, 2012 and unfavourable $31 million for the six months ended June 30, 2012. CEO transition costs were $42 million for the three and six months ended June 30, 2012.

⁽⁴⁾	Average number of active employees total and expense have been adjusted for the strike.

⁽⁵⁾	Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs – freight and yard.

⁽⁶⁾	Includes gallons of fuel consumed from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities.

TABLE OF CONTENTS


1.	BUSINESS PROFILE	1
2.	STRATEGY	1
3.	FORWARD-LOOKING INFORMATION	2
4.	ADDITIONAL INFORMATION	2
5.	FINANCIAL HIGHLIGHTS	3
6.	OPERATING RESULTS	4
7.	PERFORMANCE INDICATORS	6
8.	LINES OF BUSINESS	8
9.	OPERATING EXPENSES	13
10.	OTHER INCOME STATEMENT ITEMS	17
11.	QUARTERLY FINANCIAL DATA	17
12.	CHANGES IN ACCOUNTING POLICY	18
13.	LIQUIDITY AND CAPITAL RESOURCES	18
14.	NON-GAAP MEASURES	20
15.	BALANCE SHEET	20
16.	FINANCIAL INSTRUMENTS	21
17.	OFF-BALANCE SHEET ARRANGEMENTS	23
18.	CONTRACTUAL COMMITMENTS	23
19.	FUTURE TRENDS AND COMMITMENTS	24
20.	BUSINESS RISKS	25
21.	CRITICAL ACCOUNTING ESTIMATES	32
22.	SYSTEMS, PROCEDURES AND CONTROLS	35
23.	GLOSSARY OF TERMS	36

LOGO

This Management’s Discussion and Analysis (“MD&A”) is provided in conjunction with the Consolidated Financial Statements and related notes for the three and six months ended June 30, 2012 prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All information has been prepared in accordance with GAAP, except as described in Section 14, Non-GAAP Measures of this MD&A. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars.

July 25, 2012

In this MD&A, “our”, “us”, “we”, “CP” and “the Company” 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. Other terms not defined in the body of this MD&A are defined in Section 23, Glossary of Terms.

Unless otherwise indicated, all comparisons of results for the second quarter and year to date of 2012 are against the results for the second quarter and year to date of 2011.

1. BUSINESS PROFILE

Canadian Pacific Railway Limited, through its subsidiaries, operates a transcontinental railway in Canada and the United States (“U.S.”) and provides logistics and supply chain expertise. We provide rail and intermodal transportation services over a network of approximately 14,400 miles, serving the principal business centres of Canada from Montreal, Quebec, to Vancouver, British Columbia (“B.C.”), and the U.S. Northeast and Midwest regions. Our railway feeds directly into the U.S. heartland from the East and West coasts. Agreements with other carriers extend our market reach east of Montreal in Canada, throughout the U.S. and into Mexico. We transport bulk commodities, merchandise freight and intermodal traffic. Bulk commodities include grain, coal, sulphur and fertilizers. Merchandise freight consists of finished vehicles and automotive parts, as well as forest and industrial and consumer products. Intermodal traffic consists largely of high-value, time-sensitive retail goods in overseas containers that can be transported by train, ship and truck, and in domestic containers and trailers that can be moved by train and truck.

2. STRATEGY

Our vision is to become the safest and most fluid railway in North America. Our objective is to create long-term value for our customers, shareholders and employees by disciplined execution of our Integrated Operating Plan (“IOP”); and by aligning all parts of the organization around our five core beliefs:

•

Service: Reliable and consistent service is our product. We are committed to executing our IOP in order to meet and exceed the needs of our customers in a cost-effective manner.

•

Safety: There is no job at CP that is so important that we can’t take the time to do it safely. Our comprehensive safety framework safeguards our employees, the communities we operate through, the environment and our customers’ freight enabling us to provide an effective transportation solution.

•

Productivity and Efficiency: Based on a culture of continuous improvement and accountability, we are always looking for better, less costly, more reliable ways to operate our business.

•

People: We pride ourselves in our well trained and knowledgeable team of railroaders. We are committed to executing the IOP and collaboratively working with our customers.

•

Growth: We invest in our franchise to enhance productivity and service, which allows us to capitalize on growth opportunities with new and existing customers at low incremental cost.

3. FORWARD-LOOKING INFORMATION

This MD&A contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and other relevant securities legislation. These forward-looking statements include, but are not limited to statements concerning our operations, anticipated financial performance, business prospects and strategies as well as statements concerning the anticipation that cash flow from operations and various sources of financing will be sufficient to meet debt repayments and future obligations in the foreseeable future, statements regarding future payments including income taxes and pension contributions, and capital expenditures. Forward-looking information typically contains statements with words such as “anticipate”, “believe”, “expect”, “plan” or similar words suggesting future outcomes.

Readers are cautioned not to place undue reliance on forward-looking information because it is possible that we will not achieve predictions, forecasts, projections and other forms of forward-looking information. Current economic conditions render assumptions, although reasonable when made, subject to greater uncertainty. In addition, except as required by law, we undertake no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

By its nature, our forward-looking information involves numerous assumptions, inherent risks and uncertainties, including but not limited to the following factors: changes in business strategies; general North American and global economic and business conditions; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demands; inflation; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions on the financial position of pension plans and liquidity of investments; various events that could disrupt operations, including severe weather, droughts, floods, avalanches and earthquakes; security threats and governmental response to them; and technological changes.

There are more specific factors that could cause actual results to differ materially from those described in the forward-looking statements contained in this MD&A. These more specific factors are identified and discussed in Section 20, Business Risks and elsewhere in this MD&A. Other risks are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States.

2012 Financial Assumptions

Defined benefit pension contributions are currently estimated to be between $100 million and $125 million in each of the years through 2016. These contribution levels reflect the Company’s intentions with respect to the rate at which we apply the voluntary prepayments to reduce contribution requirements. Defined benefit pension expense for 2012 is expected to be $41 million. For 2013, defined benefit pension expense is expected to be approximately $125 million and in the range of $125 million to $135 million through 2016. These pension contributions and pension expense estimates assume normal equity market returns and modest increases in bond yields over this period, discussed further in Section 21, Critical Accounting Estimates.

4. ADDITIONAL INFORMATION

Additional information, including our Consolidated Financial Statements, Annual Information Form, press releases and other required filing documents, are available on SEDAR at www.sedar.com in Canada, on EDGAR at www.sec.gov in the U.S. and on our website at www.cpr.ca. The aforementioned documents are issued and made available in accordance with legal requirements and are not incorporated by reference into this MD&A.

Canadian Pacific — 2012 MD&A — Q2

5. FINANCIAL HIGHLIGHTS


	For the three months ended June 30						For the six months ended June 30
(in millions, except percentages and per-share data)	2012			2011			2012			2011
Revenues	$	1,366		$	1,265		$	2,742		$	2,428
Operating income		239			231			513			340
Net income		103			128			245			162

Basic earnings per share		0.60			0.76			1.43			0.96
Diluted earnings per share		0.60			0.75			1.42			0.95
Dividends declared per share		0.3500			0.3000			0.6500			0.5700

Return on capital employed (“ROCE”)⁽¹⁾		8.4	%		7.8	%		8.4	%		7.8	%
Operating ratio		82.5	%		81.7	%		81.3	%		86.0	%
Free cash⁽²⁾		1			(39	)		(39	)		(86	)

Total assets at June 30		14,406			13,556			14,406			13,556
Total long-term financial liabilities at June 30⁽³⁾		4,857			4,050			4,857			4,050

⁽¹⁾

ROCE is defined as earnings before interest and taxes (“EBIT”) (on a rolling 12 month basis), divided by the average for the year of total assets, less current liabilities excluding current portion of long-term debt, as measured under GAAP, and it is discussed further in Section 14, Non-GAAP Measures.

⁽²⁾

This measure has no standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures of other companies. This measure is discussed in Section 14, Non-GAAP Measures along with a reconciliation of free cash to GAAP cash position in Section 13, Liquidity and Capital Resources.

⁽³⁾	Excludes deferred income taxes: $2,017 million and $1,924 million; and other non-financial deferred liabilities of $1,441 million and $1,307 million at June 30, 2012 and 2011 respectively.

Q2 2012 Summary

During the second quarter of 2012, the Company experienced a number of noteworthy events.

Strike

On May 23, 2012, the Teamsters Canada Rail Conference Running Trade Employees (“TCRC-RTE”) and the Rail Canada Traffic Controllers (“TCRC-RCTC”), representing 4,800 engineers, conductors and rail traffic controllers in Canada, commenced a strike on the Company that caused a Canadian work stoppage. The work stoppage lasted for 9 days (“the strike”). Bill C-39, the Restoring Rail Service Act, was passed on May 31, 2012 and employees returned to work on June 1, 2012, discussed further in Section 20, Business Risks.

The strike caused a significant loss of revenue during the second quarter. Partly offsetting this revenue loss were cost savings in Compensation and benefits, Fuel, and Equipment rents. During the strike, we took the opportunity to advance track and other maintenance including mechanical and engineering work.

Once the unions returned to work the Company quickly re-established service and reset the network.

Management transition

On May 17, 2012, Mr. Fred Green resigned as a director from the Board of Directors and left his position as President and Chief Executive Officer of the Company. That same day, Mr. Stephen Tobias, a new Board member elected at the Company’s annual shareholders meeting held on May 17, 2012, was appointed by the Board as Interim Chief Executive Officer and served in that role until June 28, 2012. On June 28, 2012, Mr. E. Hunter Harrison was appointed by the Board as President and Chief Executive Officer. As a result of the appointment of Mr. Harrison, the Company recorded a charge of $38 million with respect to compensation and other transition costs, including $2 million of associated costs, in the second quarter of 2012. This charge was recorded in Compensation and benefits and Purchased services and other, $16 million and $22 million, respectively.

Included in this charge were amounts totalling $16 million in respect of deferred retirement compensation for Mr. Harrison and $20 million which was payable at June 30, 2012 to Pershing Square Capital Management, L.P. (“Pershing Square”) and related entities. Pershing Square and related entities own or control approximately 14% of the Company’s outstanding shares and two Board members, Mr. William Ackman and Mr. Paul Hilal, are partners of Pershing Square. The amount payable to Pershing Square and related entities was to reimburse them, on behalf of Mr. Harrison, for certain amounts they had previously paid to or incurred on behalf of Mr. Harrison pursuant to an indemnity in favour of Mr. Harrison in connection with losses suffered in legal proceedings commenced against Mr.

Canadian Pacific — 2012 MD&A — Q2

Harrison by his former employer. Reimbursement on behalf of Mr. Harrison was a precondition of Mr. Harrison accepting the Company’s offer of employment. As a result of the payment, the Company would be entitled to enforce Mr. Harrison’s rights in the aforementioned legal proceedings, which allow the Company to recover to the extent of Mr. Harrison’s success in those proceedings. The Company may also receive repayment in other circumstances in the event of certain breaches of Mr. Harrison’s employment obligations to it. In addition, the Company recorded a charge of $4 million in the second quarter of 2012 with respect to a retirement allowance for Mr. Green.

Change in Board of Directors

On May 17, 2012, Messrs. John Cleghorn, Tim Faithfull, Fred Green, Edmond Harris, Michael Phelps and Roger Phillips advised the Company that they did not intend to stand for re-election.

At the Company’s annual shareholders meeting held on May 17, 2012, seven new directors were elected to the Board namely Messrs. William Ackman, Gary Colter, Paul Haggis, Paul Hilal, Ms. Rebecca MacDonald, Messrs. Anthony Melman and Stephen Tobias. The other members of the Board elected at the May 17, 2012 meeting were Mr. Richard George, Ms. Krystyna Hoeg, Messrs. Tony Ingram, Richard Kelly, the Hon. John Manley, Ms. Linda Morgan, Ms. Madeleine Paquin, Messrs. David Raisbeck and Hartley Richardson. Following the meeting, the new Board selected Ms. Paquin to serve as acting Chair of the Company. On June 4, 2012, Mr. Haggis was appointed Chairman of the Company’s Board.

On June 11, 2012, Mr. Raisbeck resigned from the Board; on June 26, 2012, Mr. George resigned from the Board; and on July 5, 2012, Mr. Ingram resigned from the Board of Directors.

As a result of the aforementioned changes to the composition of the Board, certain accelerated vesting provisions for certain grants under the Company’s management stock option incentive plan, performance share unit plan and deferred share unit plan, were triggered effective June 26, 2012. The effect of this was a credit to Compensation and benefits of $8 million in the second quarter and an associated payout of $32 million to be made in the third quarter of 2012.

2011 Operating conditions

During the first quarter of 2011, the Company experienced unusually difficult operating conditions due to extreme winter weather and other related supply chain issues. Inefficient operations continued into the second quarter of 2011 driven by the residual impacts of winter and the prolonged flooding conditions experienced along the Company’s right of way.

6. OPERATING RESULTS

Income

Operating income in the second quarter of 2012 was $239 million, an increase of $8 million, or 3%, from $231 million in the same period of 2011.

Operating income increased primarily due to:

•

increased volumes of traffic prior to and after the strike, generating higher freight revenue;

•

higher freight rates, including fuel surcharge;

•

improved operating conditions relative to 2011; and

•

improved operating performance of the railway in 2012.

This increase in operating income was partially offset by:

•

reduced shipments during the strike;

•

management transition costs;

•

higher depreciation and amortization expenses;

•

contract termination costs associated with a locomotive warranty service agreement as part of our insourcing strategy; and

•

higher incentive compensation expense.

Operating income in the first six months of 2012 was $513 million, an increase of $173 million, or 51% from $340 million in the same period of 2011.

Operating income increased primarily due to:

•

increased volumes of traffic generating higher freight revenue;

•

improved operating conditions relative to 2011;

•

improved operating performance of the railway in 2012; and

Canadian Pacific — 2012 MD&A — Q2

•

higher freight rates including fuel surcharge.

This increase in operating income was partially offset by:

•

management transition costs;

•

higher fuel costs;

•

higher depreciation and amortization expenses;

•

higher incentive and stock-based compensation expense; and

•

wage and benefits inflation.

Net income was $103 million in the second quarter of 2012, a decrease of $25 million, or 20%, from $128 million in the same period of 2011.

Net income decreased primarily due to higher:

•

other charges due to advisory fees related to shareholder matters;

•

income tax expense due to the impact of the province of Ontario’s corporate income tax rate change; and

•

interest expense associated with higher debt levels and the unfavourable change in foreign exchange.

This decrease was partially offset by higher operating income.

Net income was $245 million for the first six months of 2012, an increase of $83 million, or 51%, from $162 million in the same period of 2011.

Net income increased primarily due to higher operating income, partially offset by higher:

•

income tax expense due to the impact of higher earnings and the province of Ontario’s corporate income tax rate change;

•

other charges due to advisory fees related to shareholder matters; and

•

interest expense associated with higher debt levels and the unfavourable change in foreign exchange.

Diluted Earnings per Share

Diluted earnings per share (“EPS”) was $0.60 in the second quarter of 2012, a decrease of $0.15, or 20%, from $0.75 in the same period of 2011. This decrease was primarily due to lower net income.

Diluted EPS for first six months of 2012 was $1.42, an increase of $0.47, or 49%, from $0.95 in the same period of 2011. This increase was primarily due to higher net income.

Operating Ratio

The operating ratio provides the percentage of revenues used to operate the railway, and is calculated as total operating expenses divided by total revenues. A lower percentage normally indicates higher efficiency in the operation of the railway. The operating ratio was 82.5% in the second quarter of 2012, compared with 81.7% in the same period of 2011. This increase was primarily due to the impact of the strike and management transition costs. The operating ratio was 81.3% for the six months ended June 30, 2012, compared with 86.0% in the same period of 2011. This decrease was primarily due to improved operational performance, higher traffic volumes and improved operating conditions, partially offset by the impact of management transition costs and the strike.

Return on Capital Employed

Return on capital employed was 8.4% at June 30, 2012, compared with 7.8% in the same period of 2011. This increase was primarily due to higher operating income.

Impact of Foreign Exchange on Earnings

Fluctuations in foreign exchange (“FX”) affect our results because U.S. dollar-denominated revenues and expenses are translated into Canadian dollars. U.S. dollar-denominated revenues and expenses decrease when the Canadian dollar strengthens in relation to the U.S. dollar.

Canadian Pacific — 2012 MD&A — Q2


Canadian to U.S. dollar

Average exchange rates	2012		2011
For the three months ended - June 30	$	1.01	$	0.97

For the six months ended - June 30	$	1.01	$	0.98


Canadian to U.S. dollar

Exchange rates	2012		2011
Beginning of year - January 1	$	1.02	$	0.99
Beginning of quarter - April 1	$	1.00	$	0.97
End of quarter - June 30	$	1.02	$	0.96


Average Fuel Price

(U.S. dollars per U.S. gallon)	2012		2011
For the three months ended - June 30	$	3.49	$	3.50

For the six months ended - June 30	$	3.49	$	3.31

7. PERFORMANCE INDICATORS


	For the three months ended June 30							For the six months ended June 30
	2012		2011		% Change			2012		2011		% Change
Operations performance
Average number of active employees – expense⁽¹⁾		14,477		13,947		4			14,717		13,978		5
Average daily active cars on-line (thousands)		41.2		54.2		(24	)		40.5		54.7		(26	)
Average daily active road locomotives on-line		1,057		1,114		(5	)		1,045		1,088		(4	)
Freight gross ton-miles (“GTMs”) (millions)		60,926		62,763		(3	)		123,614		118,998		4
Train miles (thousands)		9,681		10,059		(4	)		20,023		19,304		4
Average train weight - excluding local traffic (tons)		6,690		6,654		1			6,550		6,577		—
Average train length - excluding local traffic (feet)		5,764		5,732		1			5,673		5,670		—
Average train speed – AAR definition (mph)		23.7		20.0		19			24.5		19.9		23
Average terminal dwell – AAR definition (hours)		18.0		20.1		(10	)		17.7		21.8		(19	)
Car miles per car day		194.2		154.3		26			201.2		146.1		38
Locomotive productivity (daily average GTMs/active horse power (“HP”))		164.7		164.0		—			169.7		160.8		6
Employee productivity (million GTMs/expense employee)		4.2		4.5		(7	)		8.4		8.5		(1	)
Fuel efficiency⁽²⁾		1.14		1.14		—			1.19		1.22		(2	)
Safety indicators
FRA personal injuries per 200,000 employee-hours⁽³⁾		1.26		1.76		(28	)		1.21		1.77		(32	)
FRA train accidents per million train-miles⁽³⁾		1.55		1.82		(15	)		1.53		2.15		(29	)

⁽¹⁾	Average number of active employees-expense have been adjusted for the strike.

⁽²⁾	Fuel efficiency is defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs – freight and yard.

⁽³⁾	Certain prior period figures have been revised to conform with current presentation or have been updated to reflect new information.

The indicators listed in this table are key measures of our operating performance. Definitions of these performance indicators are provided in Section 23, Glossary of Terms.

Canadian Pacific — 2012 MD&A — Q2

Operations Performance

The average number of active expense employees for the second quarter increased by 530 or 4%, compared with the same period of 2011 and for the first six months of 2012 increased by 739 or 5%. These increases were primarily due to additional hiring to address volume growth projections and attrition, partially offset by the impact of the strike including temporary layoffs.

The average daily active cars on-line for the second quarter of 2012 improved by approximately 13,000 cars, or 24%, compared with the same period of 2011 and for the first six months of 2012 decreased by approximately 14,200 cars, or 26%, compared with the same period of 2011. These improvements were primarily due to improved network fluidity, our successful execution of our First Mile-Last Mile program and a focus on the storage, disposal or return to lessors of surplus cars.

The average daily active road locomotives on-line for the second quarter of 2012 was 1,057 units, an improvement of 57 units or 5%, compared with 1,114 units in the same period of 2011 and for the first six months of 2012 decreased by approximately 43 units, or 4%, compared with the same period of 2011. These improvements were primarily the result of improved asset velocity due to more efficient and fluid operations, improved fleet reliability and the successful execution of the IOP, offset in part by higher daily traffic volumes excluding days impacted by the strike.

GTMs for the second quarter of 2012 were 60,926 million which decreased by 3%, compared with 62,763 million in the same period of 2011. This decrease was primarily due to the nine day strike that caused a Canadian work stoppage. GTMs for the first six months of 2012 increased by 4% compared to the same period of 2011. This increase was due to higher traffic volumes and improved operating conditions, partially offset by significantly reduced shipments during the strike.

Train miles decreased by 4% in the second quarter of 2012, compared with the same period of 2011. This decrease was mainly due to the strike and by improvements in train weights and train lengths. Train miles increased by 4% for the first six months of 2012, compared to the same period of 2011. This increase was due to higher workload. Daily average train miles, excluding the period impacted by the strike, increased 6% in the second quarter of 2012 and 8% during the first six months of 2012, compared to the same periods of 2011. These increases were due to increased workload and improved operating conditions.

Average train weight for the second quarter of 2012 was 6,690 tons, an increase of 1%, compared with 6,654 tons in the same period of 2011. Average train weight for the first six months of 2012 was essentially unchanged compared with the same period of 2011.

Average train length for the second quarter of 2012 was 5,764 feet, an increase of 1%, compared with 5,732 feet in the same period of 2011. Average train length for the first six months of 2012 was essentially unchanged compared with the same period of 2011.

Average train weight and average train length benefited from increased workload, improved operating conditions and the successful execution of the IOP, partially offset by the impact of the strike.

Average train speed improved by 19% and 23%, in the second quarter and first six months of 2012 respectively, compared with the same periods of 2011. These increases were primarily due to ongoing capacity investments, improved operating conditions and the successful execution of the IOP.

Average terminal dwell, the average time a freight car resides in a terminal, improved by 10% and 19% in the second quarter and first six months of 2012 respectively, compared with the same periods of 2011. These improvements were primarily due to a focus on maintaining yard fluidity and implementation of our local service reliability program.

Car miles per car day were 194.2 in the second quarter of 2012, an improvement of 26% compared to 154.3 in the same period of 2011 and were 201.2, an improvement of 38% in the first six months of 2012, compared to 146.1 in the same period of 2011. These improvements were primarily due to the successful execution of the IOP, approximately 13,000 active cars stored, disposed, or returned to lessors and improved operating conditions relative to 2011, partially offset by the impact of the strike. Daily average car miles per car day excluding the period impacted by the strike increased by 35% in the second quarter of 2012 and 43% during the first six months of 2012, compared to the same periods of 2011.

Locomotive productivity, which is daily average GTMs per active HP, for the second quarter of 2012 was 164.7, essentially unchanged from the same period of 2011. Locomotive productivity for the first six months of 2012 was 169.7, an improvement of 6%, compared with the same period of 2011. Locomotive productivity excluding the days impacted by the strike increased 9% in the second quarter and 10% in the first six months of 2012. These increases

Canadian Pacific — 2012 MD&A — Q2

were primarily due to improved fluidity resulting from both improved operating conditions and the successful execution of the IOP.

Employee productivity, measured as million GTMs per expense employee, for the second quarter of 2012, was 4.2, a decrease of 7% from 4.5 in the same period of 2011. Employee productivity for the first six months of 2012 was 8.4, a decrease of 1%, compared with the same period of 2011. These decreases reflect the impact of the strike and the Company’s aggressive hiring plan in advance of anticipated attrition, partially offset by the productivity benefits realized through the successful execution of the IOP. Daily average employee productivity excluding the period impacted by the strike was unchanged in the second quarter of 2012 and improved by 1% during the first six months of 2012, compared to the same periods of 2011.

Fuel efficiency in the second quarter of 2012 was unchanged compared to the same period of 2011 and improved by 2% in the first six months of 2012, compared to the same period of 2011. This improvement was primarily due to improved operating conditions and the advancement of the Company’s fuel conservation strategies including replacement of older units with new more fuel efficient locomotives, offset primarily by the inefficiencies of the strike including the impact of winding down and subsequent resumption of train operations.

Safety Indicators

Safety is a key priority for our management, employees and Board of Directors. Our two main safety indicators – personal injuries and train accidents – follow strict U.S. Federal Railroad Administration (“FRA”) reporting guidelines. CP strives to continually improve its safety performance through key strategies and activities such as training and technology.

The FRA personal injury rate per 200,000 employee-hours for CP was 1.26 for the second quarter of 2012, compared with 1.76 in the same period of 2011. This rate was 1.21 for the first six months of 2012, compared with 1.77 for the same period of 2011.

The FRA train accident rate for CP for the second quarter of 2012 was 1.55 accidents per million train-miles, compared with 1.82 in the same period of 2011. This rate was 1.53 for the first six months of 2012, compared with 2.15 for the same period of 2011.

8. LINES OF BUSINESS

Revenues


	For the three months							For the six months
	ended June 30							ended June 30
(in millions)	2012		2011		% Change			2012		2011		% Change
Freight revenues
Grain	$	233	$	255		(9	)	$	521	$	487		7
Coal		148		145		2			285		251		14
Sulphur and fertilizers		150		150		—			276		279		(1	)
Industrial and consumer products		306		232		32			604		463		30
Automotive		116		84		38			221		164		35
Forest products		48		46		4			98		91		8
Intermodal		331		321		3			667		633		5

Total freight revenues		1,332		1,233		8			2,672		2,368		13
Other revenue		34		32		6			70		60		17

Total revenues	$	1,366	$	1,265		8		$	2,742	$	2,428		13

Our revenues are primarily derived from transporting freight. Other revenue is generated from leasing of certain assets, switching fees, other engagements including logistical services, and contracts with passenger service operators.

Freight Revenues

Freight revenues are earned from transporting bulk commodities, merchandise and intermodal goods, and include fuel recoveries billed to our customers. Freight revenues were $1,332 million in the second quarter of 2012, an increase of $99 million, or 8%, from $1,233 million in the same period of 2011.

Canadian Pacific — 2012 MD&A — Q2

This increase was primarily due to:

•

higher Industrial and consumer products and Automotive shipments;

•

the favourable impact in the change in FX;

•

higher freight rates; and

•

higher fuel surcharge revenues.

This increase was partially offset by the strike impacting Canadian shipments.

Freight revenues were $2,672 million in the first six months of 2012, an increase of $304 million, or 13%, from $2,368 million in the same period of 2011.

This increase was primarily due to:

•

higher overall traffic volumes;

•

higher fuel surcharge revenues;

•

higher freight rates; and

•

the favourable impact in the change in FX.

This increase was partially offset by the strike impacting Canadian shipments in the second quarter.

Fuel Cost Recovery Programs

The short term volatility in fuel prices may adversely impact expenses and revenues. CP employs a fuel cost recovery program designed to mechanistically respond to fluctuations in fuel prices and help mitigate the financial impact of rising fuel prices.

Grain

Grain revenue was $233 million in the second quarter of 2012, a decrease of $22 million, or 9%, from $255 million in the same period of 2011.

This decrease was primarily due to lower U.S. originating shipments due to weaker U.S. crop production and reduced export market demand for U.S. originating grain and the strike impacting Canadian shipments.

This decrease was partially offset by increased freight rates and the favourable impact in the change in FX.

Grain revenue was $521 million for the first six months of 2012, an increase of $34 million, or 7%, from $487 million in the same period of 2011.

This increase was primarily due to:

•

higher overall Canadian originating traffic volumes, as measured in carloads;

•

higher fuel surcharge revenues;

•

increased freight rates; and

•

the favourable impact in the change in FX.

This increase was partially offset by lower U.S. originating shipments due to weaker U.S. crop production and reduced export market demand and the strike impacting Canadian shipments in the second quarter.

Coal

Coal revenue was $148 million, in the second quarter of 2012, an increase of $3 million, or 2%, from $145 million in the same period of 2011.

This increase was primarily due to increased exports from the Powder River Basin through a Canadian west coast port and higher freight rates.

This increase was partially offset by the strike impacting Canadian shipments.

Coal revenue was $285 million for the first six months of 2012, an increase of $34 million, or 14%, from $251 million in the same period of 2011.

This increase was primarily due to higher Canadian originating shipments of metallurgical coal reflecting strong market demand and improved operating conditions and higher U.S. originating coal shipments due to increased thermal coal to Midwestern U.S. markets and exports from the Powder River Basin through a Canadian west coast port.

Canadian Pacific — 2012 MD&A — Q2

This increase was partially offset by the strike impacting Canadian shipments in the second quarter.

Sulphur and Fertilizers

Sulphur and fertilizers revenue was $150 million in the second quarter of 2012, unchanged from 2011. While revenue was essentially unchanged, there were some impacts on revenues in the quarter from the strike.

Sulphur and fertilizers revenue was $276 million for the first six months of 2012, a decrease of $3 million, or 1%, from $279 million in the same period of 2011. This decrease was primarily due to weaker export potash demand and delays of purchases by some domestic potash customers due to market uncertainty in the first quarter.

This decrease was partially offset by higher:

•

sulphur shipments due to overall demand;

•

fuel surcharge revenues; and

•

freight rates.

Industrial and Consumer Products

Industrial and consumer products revenue was $306 million in the second quarter of 2012, an increase of $74 million, or 32%, from $232 million in the same period of 2011. Industrial and consumer products revenue was $604 million for the first six months of 2012, an increase of $141 million, or 30%, from $463 million in the same period of 2011.

These increases were primarily due to:

•

higher volumes of energy related inputs and outputs as a result of strong growth driven by the development of shale formations;

•

higher fuel surcharge revenues;

•

increased freight rates; and

•

the favourable impact of the change in FX.

These increases were partially offset by the strike impacting Canadian shipments.

Automotive

Automotive revenue was $116 million in the second quarter of 2012, an increase of $32 million, or 38%, from $84 million in the same period of 2011. Automotive revenue was $221 million for the first six months of 2012, an increase of $57 million, or 35%, from $164 million in the same period of 2011.

These increases were primarily due to:

•

higher shipments due to the recovery of Japanese manufacturers from the impacts of the March 2011 tsunami as well as higher North American auto sales;

•

higher overall auto production;

•

higher fuel surcharge revenues; and

•

increased freight rates.

These increases were partially offset by the strike impacting Canadian shipments and the closure on our line of a plant by a domestic producer.

Forest Products

Forest products revenue was $48 million in the second quarter of 2012, an increase of $2 million, or 4%, from $46 million in the same period of 2011. Forest products revenue was $98 million for the first six months of 2012, an increase of $7 million, or 8%, from $91 million in the same period of 2011.

These increases were primarily due to higher:

•

lumber and panel shipments due to improving market conditions;

•

freight rates; and

•

fuel surcharge revenues.

These increases were partially offset by the strike impacting Canadian shipments and weaker market conditions for pulp and paper products.

Canadian Pacific — 2012 MD&A — Q2

Intermodal

Intermodal revenue was $331 million in the second quarter of 2012, an increase of $10 million, or 3%, from $321 million in the same period of 2011. Intermodal revenue was $667 million for the first six months of 2012, an increase of $34 million, or 5%, from $633 million in the same period of 2011.

These increases were primarily due to:

•

higher volumes driven by consumer demand in Canada and the U.S.;

•

improved operating performance enabling the recovery of CP market share;

•

higher fuel surcharge revenues; and

•

higher freight rates.

These increases were partially offset by the strike impacting Canadian domestic intermodal and import/export shipments in the second quarter.

Other Revenues

Other revenues were $34 million in the second quarter of 2012, an increase of $2 million, or 6%, from $32 million in the same period of 2011. This increase was primarily due to higher passenger revenues.

Other revenues were $70 million for the first six months of 2012, an increase of $10 million, or 17%, from $60 million in the same period of 2011. This increase was primarily due to higher leasing revenues and higher passenger revenues.

Volumes


	For the three months							For the six months
	ended June 30							ended June 30
	2012		2011		% Change			2012		2011		% Change
Carloads (in thousands)
Grain		91		112		(19	)		201		212		(5	)
Coal		82		81		1			160		141		13
Sulphur and fertilizers		54		54		—			96		103		(7	)
Industrial and consumer products		113		96		18			228		196		16
Automotive		42		37		14			84		73		15
Forest products		16		18		(11	)		34		36		(6	)
Intermodal		248		249		—			499		492		1

Total carloads		646		647		—			1,302		1,253		4

Revenue ton-miles (in millions)
Grain		6,712		7,816		(14	)		15,312		15,076		2
Coal		5,329		5,564		(4	)		10,534		9,534		10
Sulphur and fertilizers		5,617		5,643		—			9,659		10,512		(8	)
Industrial and consumer products		7,020		5,515		27			14,056		11,477		22
Automotive		658		545		21			1,317		1,068		23
Forest products		1,169		1,179		(1	)		2,384		2,471		(4	)
Intermodal		6,054		5,961		2			12,108		11,769		3

Total revenue ton-miles		32,559		32,223		1			65,370		61,907		6

Changes in freight volumes generally contribute to corresponding changes in freight revenues and certain variable expenses, such as fuel, equipment rents and crew costs.

Volumes in the second quarter of 2012, as measured by total carloads, decreased by approximately 1,000 units, essentially unchanged compared to the same period of 2011.

This decrease in carloads was primarily due to lower Canadian shipments in coal, grain, and intermodal due to the impact of the strike and decreased U.S. originating grain shipments.

Canadian Pacific — 2012 MD&A — Q2

This decrease in carloads was partially offset by higher shipments of:

•

Industrial and consumer products;

•

Automotive; and

•

U.S. originating coal.

Volumes for the six months of 2012, as measured by total carloads, increased by approximately 49,000 units, or 4% compared to the same period of 2011.

This increase in carloads was primarily due to higher shipments of:

•

Industrial and consumer products;

•

Coal;

•

Canadian originating grain;

•

Automotive; and

•

intermodal containers.

This increase in carloads was partially offset by lower shipments of:

•

U.S. originating grain;

•

potash in Sulphur and fertilizer; and

•

pulp and paper in Forest products.

Revenue ton miles (“RTMs”) in the second quarter of 2012 increased by approximately 336 million, or 1%, compared to the same period of 2011.

This increase in RTMs, despite essentially unchanged carloads, was primarily due to growth in energy related commodities which have above average length of haul compared to other traffic. This increase in RTMs was partially offset by lower grain shipments and lower volumes of Canadian originating coal traffic.

RTMs for the first six months of 2012 increased by approximately 3,463 million, or 6%, compared to the same period of 2011.

This increase in RTMs was primarily due to higher:

•

growth in energy related commodities which have above average RTMs compared to other traffic;

•

long haul volumes in Automotive shipments due to the recovery of Japanese manufacturers from the impacts of the March 2011 tsunami; and

•

Intermodal shipments through Port Metro Vancouver with above average RTMs per unit.

This increase in RTMs was partially offset by lower export and domestic potash shipments in Sulphur and fertilizers and lower volume of U.S. originating grain shipments.

Freight Revenue per Carload


	For the three months						For the six months
	ended June 30						ended June 30
(dollars)	2012		2011⁽¹⁾		% Change		2012		2011⁽¹⁾		% Change
Freight revenue per carload
Grain	$	2,560	$	2,277		12	$	2,592	$	2,297		13
Coal		1,805		1,790		1		1,781		1,780		—
Sulphur and fertilizers		2,778		2,778		—		2,875		2,709		6
Industrial and consumer products		2,708		2,417		12		2,649		2,362		12
Automotive		2,762		2,270		22		2,631		2,247		17
Forest products		3,000		2,556		17		2,882		2,528		14
Intermodal		1,335		1,289		4		1,337		1,287		4

Total freight revenue per carload	$	2,062	$	1,906		8	$	2,052	$	1,890		9

⁽¹⁾	Certain prior period figures have been revised to conform with current presentation with respect to rounding.

Total freight revenue per carload in the second quarter of 2012 increased by 8% and for the first six months of 2012 by 9% compared to the same periods of 2011.

Canadian Pacific — 2012 MD&A — Q2

These increases were due to:

•

higher volumes of traffic generating higher freight revenue per carload;

•

higher fuel surcharge revenues;

•

increased freight rates; and

•

the favourable impact in the change of FX.

Freight Revenue per Revenue Ton-mile


	For the three months						For the six months
	ended June 30						ended June 30
(cents)	2012		2011⁽¹⁾		% Change		2012		2011⁽¹⁾		% Change
Freight revenue per revenue ton-mile
Grain	$	3.47	$	3.26		6	$	3.40	$	3.23		5
Coal		2.78		2.61		7		2.71		2.63		3
Sulphur and fertilizers		2.67		2.66		—		2.86		2.65		8
Industrial and consumer products		4.36		4.21		4		4.30		4.03		7
Automotive		17.63		15.41		14		16.78		15.36		9
Forest products		4.11		3.90		5		4.11		3.68		12
Intermodal		5.47		5.39		1		5.51		5.38		2

Total freight revenue per revenue ton-mile	$	4.09	$	3.83		7	$	4.09	$	3.83		7

⁽¹⁾	Certain prior period figures have been revised to conform with current presentation with respect to rounding.

Freight revenue per RTM in the second quarter and first six months of 2012 was 7% higher compared to the same periods of 2011.

These increases were primarily due to:

•

higher fuel surcharge revenues;

•

increased freight rates; and

•

the favourable impact in change of FX.

9. OPERATING EXPENSES


	For the three months ended June 30						For the six months ended June 30
(in millions)	2012		2011		% Change		2012		2011		% Change
Operating expenses
Compensation and benefits	$	366	$	337		9	$	757	$	701		8
Fuel		242		237		2		511		463		10
Materials		57		57		—		121		129		(6	)
Equipment rents		56		54		4		106		105		1
Depreciation and amortization		135		122		11		262		244		7
Purchased services and other		271		227		19		472		446		6

Total operating expenses	$	1,127	$	1,034		9	$	2,229	$	2,088		7

Operating expenses was $1,127 million in the second quarter of 2012, an increase of $93 million, or 9%, from $1,034 million in the same period of 2011.

This increase was primarily due to:

•

management transition costs, reflected in Compensation and benefits and Purchased services and other;

•

the unfavourable impact of the change in FX;

•

higher volume variable expenses, such as fuel and crews, as a result of an increase in workload as measured by GTMs prior to and after the strike;

•

higher depreciation and amortization expenses;

•

contract termination costs associated with a locomotive warranty service agreement as part of our insourcing strategy;

•

higher incentive and stock-based compensation expenses; and

•

higher casualty costs.

Canadian Pacific — 2012 MD&A — Q2

This increase was partially offset by certain volume variable expenses saved as a result of the strike and improved operating conditions and improved operating performance producing improved road crew efficiency and asset utilization.

Operating expense was $2,229 million for the first six months of 2012, an increase of $141 million, or 7%, from $2,088 million in the same period of 2011.

This increase was primarily due to:

•

higher volume variable expense, such as fuel and crews, as a result of an increase in workload as measured by GTMs;

•

management transition costs, reflected in Compensation and benefits and Purchased services and other;

•

the unfavourable impact of the change in FX;

•

higher fuel prices;

•

higher incentive and stock-based compensation expenses;

•

higher depreciation and amortization expenses;

•

wage and benefits inflation; and

•

contract termination costs associated with a locomotive warranty service agreement as part of our insourcing strategy.

This increase was partially offset by:

•

certain volume variable expenses saved as a result of the strike;

•

improved operating conditions and improved operating performance; and

•

the receipt of a business interruption insurance recovery related to flooding in southern Alberta and Saskatchewan in 2010.

Compensation and Benefits

Compensation and benefits expense was $366 million in the second quarter of 2012, an increase of $29 million, or 9%, from $337 million in the same period of 2011.

This increase was primarily due to:

•

management transition costs of $20 million;

•

increased crew costs, as a result of an increase in workload prior to and after the strike;

•

higher incentive compensation expense resulting from improved corporate performance;

•

an increase in the number of employees to meet business demand and anticipated attrition;

•

labour and benefits inflation; and

•

the unfavourable impact in the change in FX.

This increase was partially offset by crew and dispatching costs saved as a result of the strike and improved operating conditions, producing improved crew efficiency.

Compensation and benefits expense was $757 million for the first six months of 2012, an increase of $56 million, or 8%, from $701 million in the same period of 2011.

This increase was primarily due to:

•

increased crew costs, as a result of an increase in workload measured by GTMs;

•

management transition costs of $20 million;

•

higher incentive and stock-based compensation expenses resulting from improved corporate performance;

•

an increase in the number of employees to meet business demand and anticipated attrition;

•

labour and benefits inflation; and

•

the unfavourable impact in the change in FX.

This increase was partially offset by crew and dispatching costs saved as a result of the strike and improved operating conditions, producing improved road crew efficiency.

Fuel

Fuel expense was $242 million in the second quarter of 2012, an increase of $5 million, or 2%, from $237 million in the same period of 2011.

Canadian Pacific — 2012 MD&A — Q2

This increase was primarily due to:

•

increased fuel costs as a result of higher workload prior to and after the strike;

•

the unfavourable impact in the change in FX; and

•

the gain on settled diesel futures contracts recorded in the second quarter of 2011.

This increase was partially offset by fuel costs saved during the strike and lower fuel prices prior to the impact of hedges.

Fuel expense was $511 million for the first six months of 2012, an increase of $48 million, or 10%, from $463 million in the same period of 2011.

This increase was primarily due to:

•

higher fuel prices;

•

increased traffic volumes, as measured by GTMs; and

•

the unfavourable impact in the change in FX.

This increase was partially offset by a favourable change in fuel efficiency which was primarily due to operational fluidity and the enhancement of the Company’s fuel conservation strategies including replacement of older units with new more fuel efficient locomotives.

Materials

Materials expense was $57 million in the second quarter of 2012, unchanged from $57 million in the same period of 2011. Materials expense was $121 million for the first six months of 2012, a decrease of $8 million, or 6%, from $129 million in the same period of 2011.

Fewer freight cars were on line due to improved operating conditions and performance in the second quarter and the first six months of 2012, compared to the same periods of 2011. This resulted in the need to replace fewer freight car wheels and reduced servicing and repair costs for locomotives. The reduction in expense was partially offset by additional licensing costs associated with new software maintenance and support services.

Equipment Rents

Equipment rents expense was $56 million in the second quarter of 2012, an increase of $2 million or 4%, from $54 million in the same period of 2011, and was $106 million for the first six months of 2012, an increase of $1 million or 1%, from $105 million in the same period of 2011.

These increases were primarily due to:

•

higher freight car lease costs due to higher rates;

•

lower receipts, reflecting reduced usage of CP owned cars by foreign railways; and

•

the unfavourable impact in the change in FX.

Improved asset velocity and operating conditions resulted in freight car and locomotive efficiency benefits. This included reduced payments to foreign railways for the use of their freight cars on our lines and the return of certain leased freight cars. In addition, the impact of the strike reduced Equipment rents.

Depreciation and Amortization

Depreciation and amortization expense was $135 million in the second quarter of 2012, an increase of $13 million, or 11%, from $122 million in the same period of 2011. Depreciation and amortization expense was $262 million for the first six months of 2012, an increase of $18 million, or 7%, from $244 million in the same period of 2011. These increases were primarily due to higher depreciable assets as a result of our capital program and the decommissioning of certain IT assets as we invest in and renew our IT infrastructure.

Canadian Pacific — 2012 MD&A — Q2

Purchased Services and Other


	For the three months									For the six months
	ended June 30									ended June 30
(in millions)	2012			2011			% Change			2012			2011			% Change
Purchased services and other
Support and facilities	$	107		$	97			10		$	206		$	195			6
Track and operations		51			44			16			94			93			1
Intermodal		37			38			(3	)		74			72			3
Equipment		29			20			45			41			27			52
Casualty		26			23			13			43			45			(4	)
Other		24			7			243			21			16			31

		274			229			20			479			448			7
Land sales		(3	)		(2	)		50			(7	)		(2	)		250

Total purchased services and other	$	271		$	227			19		$	472		$	446			6

Purchased services and other expense was $271 million in the second quarter of 2012, an increase of $44 million, or 19% from $227 million in the same period of 2011.

This increase was primarily due to:

•

management transition costs of $22 million included in Other;

•

contract termination costs associated with a locomotive warranty service agreement as part of our insourcing strategy, included in Equipment;

•

higher casualty expenses, associated with an incident in the first quarter of 2012, reflecting additional required cleanup costs;

•

increased expenses related to the advancement of track and other maintenance due to open track time during the strike, included in Track and operations;

•

higher locomotive overhaul and freight car repair costs performed by third parties included in Equipment; and

•

the unfavourable impact in the change in FX.

This increase was partially offset by the favourable impact of improved operating conditions.

Purchased services and other expense was $472 million for the first six months of 2012, an increase of $26 million, or 6% from $446 million in the same period of 2011.

This increase was primarily due to:

•

management transition costs of $22 million included in Other;

•

higher locomotive overhaul and freight car repair costs performed by third parties included in Equipment;

•

contract termination costs associated with a locomotive warranty service agreement as part of our insourcing strategy, included in Equipment;

•

increased expenses related to higher workload included in Track and operations, Intermodal and Equipment;

•

IT costs associated with outsourced infrastructure and maintenance services reported in Support and facilities; and

•

the unfavourable impact in the change in FX.

This increase was partially offset by:

•

the favourable impact of improved operating conditions, which primarily affected Support and facilities and Track and operations;

•

the receipt of a business interruption insurance recovery related to flooding in southern Alberta and Saskatchewan in 2010, included in Other;

•

lower relocation expenses related to CP’s structural cost initiatives in 2011, included in Track and operations; and

•

higher land sales.

Canadian Pacific — 2012 MD&A — Q2

10. OTHER INCOME STATEMENT ITEMS

Other Income and Charges

Other income and charges was an expense of $19 million in the second quarter of 2012 and $32 million in the first six months of 2012, compared to income of $5 million and $6 million respectively in the same periods of 2011.

These expenses are primarily due to the incurrence of advisory fees of $13 million that are related to shareholder matters in 2012. In the second quarter of 2011, a gain was recognized for the sale of long-term floating rate notes.

Net Interest Expense

Net interest expense was $69 million in the second quarter of 2012, an increase of $6 million, or 10% from $63 million in the same period of 2011 and was $138 million for the first six months of 2012, an increase of $11 million, or 9% from $127 million in the same period of 2011. These increases were primarily due to new debt issuances in 2011 as well as the unfavourable impact in the change in FX rates. This was partially offset by the retirement of debt securities in 2011.

Income Taxes

Income tax expense was $48 million in the second quarter of 2012, an increase of $3 million, or 7%, from $45 million in the same period of 2011. This increase was primarily due to the change in the province of Ontario’s corporate income tax rate. Income tax expense was $98 million for the first six months of 2012, and increase of $41 million, or 72%, from $57 million in the same period of 2011. This increase was primarily due to higher earnings in 2012 and the change in the province of Ontario’s corporate income tax rate.

The effective income tax rate for the second quarter and first six months of 2012 was 31.8% and 28.6% respectively, compared with an effective tax rate of 26.0% in the same periods of 2011. These differences in comparative tax rates are primarily due to the impact of the change in the province of Ontario’s corporate income tax rate. As a result of these changes, the Company recorded an income tax expense of $11 million in the quarter, based on its deferred income tax balances as at December 31, 2011.

We expect an annual effective income tax rate in 2012 between 25% and 27%, excluding the impact of the province of Ontario’s corporate income tax rate change, which is based on certain estimates and assumptions for the year, discussed further in Section 20, Business Risks.

11. QUARTERLY FINANCIAL DATA


For the quarter ended	2012				2011								2010
(in millions, except per share data)	Jun. 30		Mar. 31		Dec. 31		Sept. 30		Jun. 30		Mar. 31		Dec. 31		Sept. 30
Total revenue	$	1,366	$	1,376	$	1,408	$	1,341	$	1,265	$	1,163	$	1,294	$	1,286
Operating income		239		274		303		324		231		109