AT CANADIAN PACIFIC, OUR STORY BOILS DOWN to ONE WORD: CHANGE. Deep, Fundamental, Rapid Change

CHANGE CANADIAN PACIFIC 2012 ANNUAL REPORT AT CANADIAN PACIFIC, OUR STORY BOILS DOWN TO ONE WORD: CHANGE. Deep, fundamental, rapid change. Positive change. We’re changing how we look at things. We’re changing how we do things. Most important, we now see change as an ongoing process. Change as something that drives continuous improvement. Change as something that creates opportunity. We’re already making progress, driving change where our customers and shareholders want to see it most: In our service and our results. 2012 ANNUAL REPORT 1 FINANCIAL HIGHLIGHTS Financial summary $ in millions, except per share data, or unless otherwise indicated 2012 2011 2010 Financial results Revenues $÷5,695 $÷5,177 $÷4,981 Operating income, excluding significant items (1)(2) 1,309 967 1,116 Operating income 949 967 1,116 Income, excluding significant items (1)(2) 753 538 651 Net income 484 570 651 Diluted earnings per share, excluding significant items (1)(2) 4.34 3.15 3.85 Diluted earnings per share 2.79 3.34 3.85 Dividend declared per share 1.3500 1.1700 1.0575 Additions to properties 1,148 1,104 726 Financial position Total assets 14,727 14,110 13,676 Long-term debt, including current portion 4,690 4,745 4,315 Shareholders’ equity 5,097 4,649 4,824 Financial ratios (%) Operating ratio 83.3 81.3 77.6 Operating ratio, excluding significant items (1)(2) 77.0 81.3 77.6 Debt-to-total capitalization 47.9 50.7 47.2 (1) These earnings measures have no standardized meanings prescribed by U.S. GAAP and, therefore, are unlikely to be comparable to similar measures of other companies. These earnings measures are described further and reconciled to the nearest comparable GAAP measure in Section 15 Non-GAAP Measures of our Management’s Discussion and Analysis included within this Annual Report. Reconciliations of operating income, excluding significant items, operating ratio, excluding significant items, income, excluding significant items, diluted EPS, excluding significant items, and free cash to operating income, operating ratio, net income, diluted EPS and GAAP cash position, respectively, are provided. (2) Significant items in 2012 were: an impairment of the Powder River Basin and another investment of $185 million ($111 million after tax), an impairment charge of certain locomotives of $80 million ($59 million after tax), a labour restructuring charge of $53 million ($39 million after tax), management transition costs of $42 million ($29 million after tax), advisory fees related to shareholder matters of $27 million ($20 million after tax) and the $11 million impact of the increase in the Ontario corporate income tax rate. Significant items in 2011 were: advisory fees related to shareholder matters of $6 million ($4 million after tax) and the $37 million income tax benefit from the resolution of certain income tax matters. There were no significant items in 2010. Significant items are discussed further in Section 15 Non-GAAP Measures of our Management’s Discussion and Analysis included within this Annual Report. 2 2012 ANNUAL REPORT A MESSAGE FROM CEO E. HUNTER HARRISON E. HUNTER HARRISON Chief Executive Officer DEAR SHAREHOLDERS: I was brought to CP to drive change. The company had a tough first half of the year with the proxy contest, but since I got here in July, I’ve been very pleased with the progress we’ve made. In fact, I have never been in a company where people were more ready and willing to change. I’m very grateful to the CP Board for this opportunity. Shareholders wanted change—well, they got the right guy. Change is never easy. It’s hard to move away from O We are relearning how to railroad—how to manage the way you’ve always done things, even if you see our yards, design and run our trains and more, the need to change. But my sense is that here at CP, which already has enabled us to launch a new people were ready for change. This is an iconic railroad transcontinental intermodal service that not only is with a proud tradition. There are great people here, and faster and more reliable, but also lowers our costs. they are tired of being in last place. So on day one, they O We’re strengthening our partnership with our unions, were ready to go to work. making fundamental changes to our agreements that will serve both CP and its union members in And that’s what we did. In the first six months I’ve been the long term. In the last two months of 2012, we CEO, we’ve already gotten a lot done: reached five-year agreements, a record duration, O We’ve closed four out of five of our hump yards with The United Steelworkers, the Canadian Pacific and are looking very closely at our network and Police Association, the International Brotherhood of other rail yards to reduce costs, improve velocity and Electrical Workers and our Maintenance of Way open up opportunities to monetize large tracts of workers—four long-term agreements in one year is unneeded land. an extraordinary accomplishment. We also reached an arbitrated agreement with the Teamsters O We have attacked bureaucracy and streamlined our representing our locomotive engineers, conductors organization, evaluating every function to make sure and traffic controllers. we have the right people, and the right number of people, in the right places to do the job. One example: These are just a few examples. The key is, people are We streamlined and reconfigured customer service beginning to see change in a new light. It’s an ongoing to be closer to the customer. process, and it’s not going to end. In fact it’s just beginning. 2012 ANNUAL REPORT 3 CANADIAN PACIFIC 2012 REVENUE ACTIVE CARS ONLINE +10% -20% TERMINAL DWELL TIMES AVERAGE TRAIN SPEED -12% +15% EARLY RESULTS Our numbers are better already. And as we make more and more progress, we’ll Full-year 2012 revenues were up 10 per cent over 2011. have a better, lower-cost product to sell, which will We reduced our operating ratio, excluding significant open new opportunities for us out in the marketplace. items, by 430 basis points to 77.0 per cent. We gener- We will pursue growth, but not for growth’s sake. It ated free cash flow of $93 million. Across the network, will be controlled, thoughtful, profitable growth. we’ve increased average train velocity by 15 per cent and reduced dwell time by another 12 per cent, which THANK YOU I’m very pleased with our progress. enabled us to reduce our fleet by over 450 locomotives I am thankful to our customers for working with us to and more than 5,400 cars by year end. Mostly through drive change, and I’m very grateful to our Board for attrition, we have reduced our workforce, employees giving me this opportunity. and contractors by 1,800 positions since July 2012. And to our employees: Thank you for your hard work WE’VE SURPRISED SOME PEOPLE My first six and faith in the plan. A big part of my role is to teach, months at CP have surprised a whole lot of people and your eagerness to learn has been extremely around here. Starting with me. I’ve been surprised at gratifying. It’s your energy and enthusiasm that make the willingness to change. I expected some push-back, me so confident that we’re going to reach or surpass which would not have been unusual, but there’s been all our goals. next to none. The investment community has been surprised at how quickly the results—and returns— I know we can do this. You’re not going to want to have come. And most important, our employees have miss this train. been surprised at how much they’ve been able to accomplish in so short a time. Many I think are Sincerely, amazed to see what they’re capable of achieving. There’s nothing that motivates more than a little success. WORKING THE MODEL In 2013, we will keep E. Hunter Harrison pushing forward. Our people will continue to learn, Chief Executive Officer improve and look for new opportunities to get better. Canadian Pacific 4 2012 ANNUAL REPORT CHAIRMAN’S LETTER TO SHAREHOLDERS PAUL G. HAGGIS Chairman of the Board DEAR FELLOW SHAREHOLDERS: I want to thank those who served on the previous Board with such dedication. We appreciate your service, and The first half of 2012 was an unsettled time for CP, its we are mindful of the responsibilities that come with the Board of Directors, investors, employees and customers. torch you have passed to us. We wish you the best. Proxy contests are painful and often emotional events; however, they serve to remind us of our duty to you, our I also wish to express the Board’s deep sense of loss shareholders. The proxy contest in the beginning of the at the passing in early 2013 of longtime Director Roger year was no different and your message was clear. Phillips, and our gratitude for Mr. Phillips’ many contribu- You wanted change. tions to CP success during his 11 years of service. I was honoured to join the Board of Directors at last I am very proud to serve as chairman of such a year’s Annual General Meeting and shortly thereafter distinguished group of directors. It is a great honour become your new chairman. to help guide Canadian Pacific, an industry icon with a place among Canadian history’s greatest companies. With the proxy contest now behind us, we are moving The Board and I are confident that CP is well on its forward under the leadership of E.

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