CP

Business Context and Reporting Period

Company: Canadian Pacific Railway Limited (CPR)

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

Reporting Period: Second Quarter ended June 30, 2003 (Year-to-Date results also included)

Date Filed: July 23, 2003

Overview: CPR is a transcontinental carrier operating in Canada and the U.S. The second quarter showed business growth in freight volumes, but net income was significantly reduced by a special restructuring charge, high fuel prices, and a stronger Canadian dollar.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Q2 net income dropped 83% to $28.9 million from $168.7 million in Q2 2002. This was primarily driven by a one-time special charge of $228.5 million ($150.1 million after tax).
• Revenue Stability: Freight revenues remained relatively flat at $874.8 million (up 0.2% from prior year), despite a 5.8% increase in Revenue Ton-Miles (RTM). This indicates a decline in revenue per RTM due to foreign exchange impacts.
• Cost Pressures: Operating expenses (excluding the special charge) rose 2.8% to $723.4 million. Fuel expenses increased 16.2% ($14.7 million) due to high crude prices. Materials expenses rose 15.8% due to higher maintenance costs.
• Foreign Exchange Impact: The stronger Canadian dollar reduced U.S. dollar-denominated revenues by $40 million in Q2, though it provided a $31 million favorable impact on U.S. dollar-denominated expenses.
• Commodity Mix: Intermodal revenues surged 11.2% ($24 million) and Sulphur/Fertilizer revenues grew 5.3% ($11.1 million). These gains were offset by declines in Grain (-9.4%), Forest Products (-5.1%), and Industrial Products (-4.8%).

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management anticipates a rebound in bulk commodities later in the year. To prepare, CPR is aggressively maintaining tracks and improving train productivity by replacing intermodal cars with double-stack units and expanding high-capacity locomotives. Assuming stable fuel prices and exchange rates, the company expects results for the balance of the year to be in line with the second half of 2002.

Special Charge and Restructuring

A special charge of $228.5 million was recorded in Q2 2003, comprising:

• Labour Restructuring: $105.5 million accrual to eliminate 820 job positions by the end of 2005.
• Asset Impairment: $116.1 million write-down of the Northeastern U.S. network (Delaware and Hudson Railway) to fair value.
• Other: $6.9 million write-off of non-beneficial assets.

Risks and Contingencies

• Market Conditions: Sustained high fuel prices and a strong Canadian dollar continue to pressure margins.
• Restructuring Execution: Ongoing payments for termination benefits are expected to continue until 2009.
• Environmental Liabilities: A provision of $104.5 million exists for environmental remediation programs.
• Forward-Looking Statements: Actual results may differ materially due to risks described in the annual report, including economic conditions and regulatory changes.

Investor Verification Checklist

• Special Charge Details: Verify the specific components of the $228.5 million charge and the timeline for the 820 job eliminations.
• Fuel Hedging: Assess the company's exposure to future fuel price volatility given the 16% increase in fuel costs.
• Foreign Exchange Sensitivity: Review the impact of the Canadian dollar on future revenue recognition, as a significant portion of revenue is U.S. dollar-denominated.
• Intermodal Growth: Confirm the sustainability of the 11% growth in intermodal revenues driven by new business with ocean container shipping companies.
• Debt Structure: Note the issuance of $350 million in Medium-Term Notes in July 2003 and the associated interest rate swaps.