CP

Business Context and Reporting Period

Company: Canadian Pacific Railway Limited (CPR)

Filing Type: Form 6-K (Report of Foreign Issuer)

Reporting Period: Third Quarter and Nine Months ended September 30, 2004

Filing Date: October 29, 2004

CPR operates a transcontinental railway network of approximately 14,000 miles serving Canada and the U.S. Northeast and Midwest. The company reported continued strong business growth, with volumes increasing in six of seven business lines. Management highlighted successful track maintenance on the western corridor and the implementation of a new fuel surcharge program to mitigate rising oil prices.

Key Financial Metrics

Note: YTD 2003 Operating Income excludes a $215.1 million special charge for restructuring and asset impairment.

Material Changes vs. Prior Period

• Net Income Surge: Q3 2004 net income increased 93% year-over-year. This was primarily driven by a $73 million after-tax foreign exchange (FX) gain on long-term debt, compared to a $4 million FX loss in Q3 2003.
• Core Earnings Growth: Excluding FX gains/losses on debt, Q3 income increased 9% to $104 million. YTD core income increased 13% to $245 million.
• Revenue Drivers: Total revenue rose 9.4% in Q3 and 6.8% YTD. Intermodal revenue grew 11.1% YTD, and coal revenue grew 18.2% YTD. Grain revenue declined in Q3 due to a late harvest but increased YTD.
• Expense Increases: Operating expenses rose 10% in Q3 and 6.2% YTD. Increases were driven by higher freight volumes, fuel prices (up 29% in Q3), and a return to normal performance-based incentive compensation.
• FX Impact: A stronger Canadian dollar reduced YTD revenues by $98 million and operating income by $22 million.

Guidance, Outlook, and Risks

• Outlook: CPR expects continued strong freight volumes for the remainder of 2004, including a near-normal grain crop shipment. Diluted EPS (excluding FX and specified items) is projected to grow 5% to 10% in 2004 compared to restated 2003 earnings of $2.07.
• Assumptions: Guidance assumes oil prices averaging US$50/barrel and an exchange rate of $1.29 CAD/USD in Q4 2004.
• Capital Spending: Projected capital spending for 2004 is between $680 million and $700 million, primarily for track projects and locomotive acquisitions.
• Risks and Contingencies:
  • Environmental: Ongoing investigation of contamination in Minnesota; costs cannot be reasonably estimated at this time.
  • Labor: Collective agreements with several unions (TCRC, BMWE, CAW, IBEW) are expiring or in negotiation. An Agreement in Principle was reached with TCRC in October 2004.
  • Regulatory: Rate dispute with major coal customer Elk Valley Coal Corporation referred to arbitration.
  • Market: Volatility in fuel prices and foreign exchange rates remains a key risk.

Investor Verification Checklist

• FX Sensitivity: Verify the impact of the Canadian dollar's strength on future earnings, as a significant portion of debt is USD-denominated while a larger portion of revenue is USD-denominated.
• Non-GAAP Reconciliation: Review the reconciliation of GAAP Net Income to "Income before FX on LTD and other specified items" to understand the volatility of the FX gains on debt.
• Restructuring Progress: Monitor the execution of the 820-job reduction plan (171 eliminated YTD 2004) and associated cost savings.
• Union Negotiations: Track the ratification of the Agreement in Principle with the Teamsters Canada Rail Conference and outcomes of other expiring contracts.
• Environmental Liability: Watch for updates on the Minnesota contamination site, as a charge to income may be recorded once remediation costs are estimable.