CP

Business Context and Reporting Period

Company: Canadian Pacific Railway Limited (CPR)

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

Reporting Period: First Quarter ended March 31, 2005

Filing Date: April 28, 2005

CPR operates a transcontinental railway network of approximately 14,000 miles serving Canada and the U.S. Northeast and Midwest. The company reported exceptional performance in Q1 2005, driven by record freight volumes, increased rates (particularly in metallurgical coal), and improved operational fluidity.

Key Financial Metrics

Note: Operating expenses increased 8.4% to $835.4 million, primarily due to higher fuel prices and business growth. Excluding fuel price impacts, operating expenses rose only 4%.

Material Changes vs. Prior Period

• Revenue Growth: Driven by a 14.8% increase in freight revenue. Coal revenue surged 43.6% and Grain revenue rose 22.7% due to higher rates and volumes.
• Coal Contract Adjustment: CPR reached a five-year agreement with Elk Valley Coal Partnership (EVC), retroactive to April 1, 2004. This resulted in a $17 million revenue adjustment in Q1 2005 for higher rates applicable to prior periods.
• Foreign Exchange Impact: A stronger Canadian dollar reduced reported revenues by approximately $29 million. However, foreign exchange losses on long-term debt decreased significantly from $13.3 million in Q1 2004 to $3.1 million in Q1 2005.
• Volume Trends: Total Revenue Ton-Miles (RTM) increased 4.2% to a record 30,720 million. Total carloads decreased slightly by 1.4% due to the loss of a low-margin coal customer, offset by higher average train weights and lengths.
• Cost Pressures: Fuel expenses rose 34.9% to $134.5 million due to higher crude oil prices (WTI average $46.05/bbl vs $33.62/bbl in 2004). Compensation and benefits increased 7.2% due to inflation and incentive compensation.

Guidance, Outlook, and Risks

2005 Outlook

• Revenue: Expected to grow 12% to 14% (upgraded from previous 6-8% guidance) due to higher coal rates and fuel surcharges.
• Earnings: Diluted EPS (excluding FX on long-term debt) expected between $3.15 and $3.25.
• Capital Investment: Projected at $900 million to $920 million, including a $160 million capacity expansion in the Western Corridor.
• Free Cash Flow: Expected to be $50 million to $100 million after dividends.

Management Commentary

CEO Rob Ritchie highlighted "exceptional" performance, citing improved yield, operating leverage, and productivity. The company has secured multi-year contracts with 96% of its unionized workforce in Canada, ensuring labor stability.

Risks and Contingencies

• Capacity Constraints: High demand has created capacity challenges, prompting a $160 million track expansion project to increase capacity by 400 cars/day by Q4 2005.
• Environmental Liabilities: A $90.9 million charge was recorded in Q4 2004 for environmental remediation in Minnesota. Total environmental accruals stood at $172.4 million as of March 31, 2005.
• Foreign Exchange: Continued volatility in the CAD/USD exchange rate impacts reported earnings, though hedging strategies are in place.
• Regulatory: Draft legislation in Canada regarding the Canada Transportation Act could impact running rights and competitive connection rates.

Investor Verification Checklist

• Coal Contract Sustainability: Verify the long-term impact of the EVC agreement on future revenue stability and margins.
• Fuel Hedging Effectiveness: Assess the adequacy of fuel surcharges and hedging programs (covering ~35% of remaining 2005 purchases) against volatile oil prices.
• Capital Expenditure Execution: Monitor the progress and cost of the $160 million Western Corridor expansion and its ability to alleviate capacity bottlenecks.
• Foreign Exchange Sensitivity: Review the impact of a strengthening Canadian dollar on U.S. dollar-denominated revenues and debt obligations.
• Environmental Remediation Costs: Track potential changes in the $172.4 million environmental liability as new information regarding the Minnesota site becomes available.