##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION  FORM 40-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934ORx
    
    ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003    CANADIAN PACIFIC RAILWAY LIMITED (Commission File No. 1-01342)
 CANADIAN PACIFIC RAILWAY COMPANY (Commission File No. 1-15272)  (Exact name of Registrant as specified in its charter)
 CANADA
    
    4011
    
    98-0355078(Canadian Pacific Railway Limited)
98-0001377
(Canadian Pacific Railway Company)(Province or other jurisdiction of
incorporation or organization)
    
    (Primary Standard Industrial ClassificationCode
Number)
    
    (I.R.S. Employer Identification Number)
 Suite 500, Gulf Canada Square, 401-9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4 (403) 319-7000
 (Address and telephone number of Registrants principal executive offices)
 CT Corporation System, 111-8th Avenue, New York, New York 10011, (212) 894-8940(Name, address (including zip code) and telephone number (including area code)
of Agent for Service of Canadian Pacific Railway Limited in the United States) The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street
Wilmington, Delaware 19801, (302) 658-7581(Name, address (including zip code) and telephone number (including area code)
of Agent for Service of Canadian Pacific Railway Company in the United States) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Shares of
Canadian Pacific Railway Limited
    
    New York Stock ExchangePerpetual 4% Consolidated Debenture Stock
of Canadian Pacific Railway Company
    
    New York Stock Exchange
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None




---



TABLE OF CONTENTS  PRIOR FILINGS MODIFIED AND SUPERSEDEDCONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSISDISCLOSURE CONTROLS AND PROCEDURESCHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTINGCODE OF BUSINESS ETHICSCODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERSCORPORATE GOVERNANCE GUIDELINESCOMMITTEE TERMS OF REFERENCEDIRECTOR INDEPENDENCEEXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORSAUDIT COMMITTEE FINANCIAL EXPERTSFINANCIAL LITERACY OF AUDIT COMMITTEE MEMBERSSERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEESPRINCIPAL ACCOUNTING FEES AND SERVICES - INDEPENDENT AUDITORSPRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY INDEPENDENT AUDITORSOFF-BALANCE SHEET ARRANGEMENTSTABLE OF CONTRACTUAL COMMITMENTSUNDERTAKING AND CONSENT TO SERVICE OF PROCESSSIGNATURESITEM 2 CORPORATE STRUCTUREITEM 3 GENERAL DEVELOPMENT OF THE BUSINESSITEM 4 NARRATIVE DESCRIPTION OF THE BUSINESSITEM 5 SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATIONITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSISITEM 7 MARKET FOR SECURITIESITEM 8 DIRECTORS AND OFFICERSITEM 9 ADDITIONAL INFORMATIONEx-1.(a)Ex-1.(b)Ex-1.(c)    Table of Contents  For annual reports, indicate by check mark the information filed with this form: x
    
    Annual information form
    x
    
    Audited annual financial statements
 Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report. At December 31, 2003,
158,656,763 Common Shares of Canadian Pacific Railway Limited were
issued and outstanding. At December 31, 2003, 347,170,009 Ordinary Shares of
Canadian Pacific Railway Company were issued and outstanding. Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the Exchange Act). If Yes is marked, indicate the file number assigned to
the Registrant in connection with such Rule. YES
    ______
    
    NO
    x
 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES
    x
    
    NO
    ______
 2




---



##### Table of Contents



PRIOR FILINGS MODIFIED AND SUPERSEDED The Registrants Annual Report on Form 40-F for the year ended December
31, 2003, at the time of filing with the Securities and Exchange Commission,
modifies and supersedes all prior documents filed pursuant to Sections 13, 14
and 15(d) of the Exchange Act for purposes of any offers or sales of any
securities after the date of such filing pursuant to any Registration Statement
under the Securities Act of 1933 of either Registrant which incorporates by
reference such Annual Report, including without limitation the following: Form
S-8 No. 333-13846 (Canadian Pacific Railway Limited); and Form S-8 No.
333-13962 (Canadian Pacific Railway Limited). The documents (or portions
thereof) identified under the heading Documents Filed as Part of This Report
below as forming part of this Form 40-F are incorporated by reference into the
Registration Statement on Form F-9 No. 333-14014 (Canadian Pacific Railway
Company) as exhibits thereto. 
 CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS AND
MANAGEMENTS DISCUSSION AND ANALYSIS A.      Audited Annual Financial Statements For consolidated audited financial statements, including the report of the
auditors with respect thereto, see pages 31 through 74 of the Registrants 2003
Annual Report incorporated by reference and included herein. For a
reconciliation of important differences between Canadian and United States
generally accepted accounting principles, see Note 25  Supplementary Data of
the Notes to Consolidated Financial Statements on pages 66 through 74 of such
2003 Annual Report. B.      Managements Discussion and Analysis For managements discussion and analysis, see pages 1 through 30 of the
Registrants 2003 Annual Report incorporated by reference and included herein. For the purposes of this Annual Report on Form 40-F, only pages 1 through
74 of the Registrants 2003 Annual Report referred to above shall be deemed
filed, and the balance of such 2003 Annual Report, except as it may be
otherwise specifically incorporated by reference in the Registrants Annual
Information Form, shall be deemed not filed with the Securities and Exchange
Commission as part of this Annual Report on Form 40-F under the Exchange Act. 
 DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2003, an evaluation was carried out under the
supervision of and with the participation of the Registrants management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Registrants disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
design and operation of these disclosure controls and procedures were effective
as of December 31, 2003. 
 CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING During the period covered by this Annual Report on Form 40-F no changes
occurred in the Registrants internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Registrants internal control over financial reporting. 3




---



##### Table of Contents



CODE OF BUSINESS ETHICS The Registrants revised their general Code of Business Ethics in 2003, in
part to update and clarify certain provisions and also to ensure that it was in
compliance with the new corporate governance standards of the New York Stock
Exchange (NYSE Standards). The revised Code, approved by the board of
Canadian Pacific Railway Limited (CPRL) in December 2003, applies to all
directors, officers and employees, both unionized and non-unionized, of the
Registrants and their subsidiaries in Canada, the U.S. and elsewhere, and forms
part of the terms and conditions of employment of all such individuals.
Contractors engaged on behalf of the Registrants or their subsidiaries must
undertake, as a condition of their engagement, to adhere to principles and
standards of business conduct consistent with those set forth in the revised
Code. The revised Code is available on the Registrants web site
at www.cpr.ca
and in print to any shareholder who requests it. All amendments to the revised
Code, and all waivers of the revised Code with respect to any director or
executive officer of the Registrants, will be posted on the Registrants web
site and provided in print to any shareholder who requests them. 
 CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS The Registrants have adopted a Code of Ethics for Chief Executive Officer
and Senior Financial Officers. This code applies to the Registrants President
and Chief Executive Officer, the Executive Vice-President and Chief Financial
Officer and the Vice-President and Comptroller. It is available on the
Registrants web site at www.cpr.ca and in print to any shareholder who
requests it. All amendments to the code, and all waivers of the code with
respect to any of the officers covered by it, will be posted on the
Registrants web site and provided in print to any shareholder who requests
them. 
 CORPORATE GOVERNANCE GUIDELINES The Registrants have adopted corporate governance guidelines regarding
such matters as, but not limited to: director qualification standards and
responsibilities; access by directors to management and independent advisors;
director compensation; director orientation and continuing education;
management succession; and annual performance evaluations of the board. The
guidelines are available on the Registrants web site at www.cpr.ca and in
print to any shareholder who requests them. 
 COMMITTEE TERMS OF REFERENCE The terms of reference of each of the following committees of the
Registrants are available on the Registrants web site at www.cpr.ca and in
print to any shareholder who requests them: the Audit, Finance and Risk
Management Committee; the Corporate Governance and Nominating Committee; and
the Management Resources and Compensation Committee. 
 DIRECTOR INDEPENDENCE The boards of the Registrants have adopted the criteria for director
independence and unrelatedness: (a) prescribed by the Sarbanes-Oxley Act of
2002, Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1) promulgated
thereunder, for members of public company audit committees; and (b) set forth
in the NYSE Standards and the Corporate Governance Guidelines of the Toronto
Stock Exchange, as proposed to be amended in April and November 2002 (TSX
Guidelines), in respect of public company directors. The boards also
conducted a comprehensive assessment of each of their members as against these
criteria and determined that all current directors, except R.J. Ritchie, have
no material relationship with the Registrants and are independent and
unrelated. Mr. Ritchie is not independent or unrelated by virtue of the fact
that he is the President and Chief Executive Officer of the Registrants. 4




---



##### Table of Contents



EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS The Corporate Governance and Nominating Committees of the boards of the
Registrants are comprised of the same directors, being all the non-management
directors on the boards. The Corporate Governance and Nominating Committees of
the Registrant meet prior to every meeting of the Registrants boards. They
are chaired by Mr. J.E. Newall, who is also Chairman of the boards of the
Registrants. Interested parties may communicate directly with Mr. Newall by
writing to him at the following address, and all communications received at
this address will be forwarded to him: Office of the Corporate Secretary
Canadian Pacific Railway
Suite 2000, 401 - 9th Avenue, S.W.
Calgary, Alberta
Canada
T2P 4Z4 
 AUDIT COMMITTEE FINANCIAL EXPERTS The following individuals comprise the entire membership of the
Registrants Audit, Finance and Risk Management Committees (Audit
Committees), which have been established in accordance with Section
3(a)(58)(A) of the Exchange Act: Stephen E. Bachand
            John E. Cleghorn
            Roger Phillips
            Michael W. Wright Each of the aforementioned directors has been determined by the boards of
the Registrants to meet the audit committee financial expert criteria
prescribed by the Securities and Exchange Commission and has been designated as
an audit committee financial expert for the Audit Committees of the boards of
both Registrants. Each of the aforementioned directors has also been
determined by the boards of the Registrants to be independent within the
criteria referred to above under the subheading Director Independence. 
 FINANCIAL LITERACY OF AUDIT COMMITTEE MEMBERS The boards of the Registrants have determined that all members of the
Audit Committees have accounting or related financial management expertise
within the meaning of the NYSE Standards and accounting or related financial
expertise within the meaning of the TSX Guidelines. The boards have also
adopted the definition of financial literacy contained in the practice notes
of the TSX Guidelines and has determined that all members of the Audit
Committees are financially literate within that definition. 
 SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES Two members of the Registrants Audit Committees, J.E. Cleghorn and R.
Phillips, each serve on a total of four public company audit committees. The
boards of the Registrants do not limit the number of public company audit
committees on which the members of the Audit Committees serve. The boards of the Registrants have determined that the service of Messrs.
Cleghorn and Phillips on more than three public company audit committees does
not impair their ability to effectively serve on the Audit Committees of the
Registrants, for the following reasons: 5




---



##### Table of Contents




    
    Two of the public company audit committees on which they serve are
the Audit Committees of the Registrants. As Canadian Pacific Railway
Company is a wholly-owned subsidiary of Canadian Pacific Railway
Limited, and the latter company carries on no business operations and
has no assets or liabilities of more than nominal value beyond its 100%
shareholding in Canadian Pacific Railway Company, the workload of the
Audit Committees is essentially equivalent to the workload of one
public company audit committee;
    
    Two of the public companies on whose audit committees Mr. Cleghorn
serves have a holding company/operating company relationship similar to
that between the Registrants. Consequently, the workload involved in
such audit committees is essentially equivalent to the workload of one
public company audit committee; and
    
    Messrs. Cleghorn and Phillips are both retired chief executive
officers of large public companies and qualify, and have been
designated as, audit committee financial experts for the Registrants.
As a result, they no longer have any day-to-day executive or managerial
responsibilities and, in addition, bring to their roles on the Audit
Committees of the Registrants considerable business experience and a
highly-focused and effective approach to audit-related matters. 
 PRINCIPAL ACCOUNTING FEES AND SERVICES  INDEPENDENT AUDITORS Fees payable to the Registrants independent auditor,
PricewaterhouseCoopers, LLP for the years ended December 31, 2003, and December
31, 2002, totaled $1,501,000 and $2,447,000, respectively, as detailed in the
following table: Year ended December 31, 2003
    
    Year ended December 31, 2002Audit Fees
    
    $
    855,000
    
    
    $
    885,000Audit Related Fees
    
    $
    329,000
    
    
    $
    245,000Tax Fees
    
    $
    310,000
    
    
    $
    589,000All Other Fees
    
    $
    7,000
    
    
    $
    728,000TOTAL
    
    $
    1,501,000
    
    
    $
    2,447,000
 The nature of the services provided by PricewaterhouseCoopers LLP under each of
the categories indicated in the table is described below. Audit Fees Audit fees were for professional services rendered by PricewaterhouseCoopers
LLP for the audit of the Registrants annual financial statements and services
provided in connection with statutory and regulatory filings or engagements. Audit-Related Fees Audit-related fees were for assurance and related services reasonably related
to the performance of the audit or review of the annual statements and are not
reported under Audit Fees above. These services consisted of: special attest
services as required by various government entities; accounting consultations
and special audits in connection with acquisitions; the audit of financial
statements of certain subsidiaries and of various pension and benefits plans of
the Registrants; the audit of fuel indices; assistance with prospectus filings;
and assistance with preparations for compliance with section 404 of the
Sarbanes-Oxley Act of 2002. Tax Fees Tax fees were for tax compliance, tax advice and tax planning professional
services. These services consisted of: tax compliance including the review of
tax returns; assistance with questions regarding tax audits, the preparation of 6




---



##### Table of Contents



employee tax returns under the Registrants expatriate tax services program and
assistance in completing routine tax schedules and calculations; tax planning
and advisory services relating to common forms of domestic and international
taxation (i.e. income tax, capital tax, goods and services tax, and valued
added tax); and, in 2002, assistance with tax filings in connection with the
reorganization of the Registrants former parent company, Canadian Pacific
Limited. All Other Fees Fees disclosed under this category were for products and services other than
those described under Audit Fees, Audit-Related Fees and Tax Fees above.
In 2003, these services consisted of assistance in reviewing an agreement and
proposed transaction, and in 2002 of: assistance with insurance claims;
consultation on computer systems for human resources, freight handling,
management reporting and budgeting; financial information systems design and
implementation services, which services were completed before July 30, 2002,
and assistance with financial forecasting for a proposed joint venture. 
 PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITORS The Audit Committees pre-approve all audit services to be provided to the
Registrants by their independent auditors. The Audit Committees policy
regarding the pre-approval of non-audit services to be provided to the
Registrants by their independent auditors is that all such services shall be
pre-approved by the Audit Committees or by the Chairman of the Audit
Committees, who must report all such pre-approvals to the Audit Committees at
their next meeting following the granting thereof. Non-audit services that are
prohibited to be provided to the Registrants by their independent auditors may
not be pre-approved. In addition, prior to the granting of any pre-approval,
the Audit Committees or their Chairman, as the case may be, must be satisfied
that the performance of the services in question will not compromise the
independence of the independent auditors. 
 OFF-BALANCE SHEET ARRANGEMENTS A description of the Registrants off-balance sheet arrangements is set
forth on page 19 of the Registrants 2003 Annual Report incorporated by
reference and included herein. 
 TABLE OF CONTRACTUAL COMMITMENTS The table setting forth the Registrants contractual commitments is set
forth on page 20 of the Registrants 2003 Annual Report incorporated by
reference and included herein. 7




---



##### Table of Contents



UNDERTAKING AND CONSENT TO SERVICE OF PROCESS A.      Undertaking Each Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities registered pursuant to Form 40-F; the securities in
relation to which the obligation to file an annual report on Form 40-F arises;
or transactions in said securities. B.      Consent to Service of Process A Form F-X signed by Canadian Pacific Railway Limited and its agent for
service of process was filed with the Commission together with Canadian Pacific
Railway Limiteds Annual Report on Form 40-F for the fiscal year ended December
31, 2000. A Form F-X signed by Canadian Pacific Railway Company and its agent
for service of process was filed with the Commission together with Canadian
Pacific Railway Companys Annual Report on Form 40-F for the fiscal year ended
December 31, 1992. 
 SIGNATURES Pursuant to the requirements of the Exchange Act, each Registrant
certifies that it meets all of the requirements for filing on Form 40-F and has
duly caused this Annual Report on Form 40-F to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Calgary, Province of
Alberta, Canada. CANADIAN PACIFIC RAILWAY LIMITED
CANADIAN PACIFIC RAILWAY COMPANY
(Registrants)
Signed: Robert V. Horte
Name: Robert V. Horte
Title: Corporate Secretary
Date: March 16, 2004 8




---



##### Table of Contents



DOCUMENTS FILED AS PART OF THIS REPORT  1.
    
    Annual Information Form of the Registrants for the year ended December
31, 2003.2.
    
    Annual Report of the Registrants for the year ended December 31, 2003,
including Managements Discussion and Analysis and Audited Consolidated
Financial Statements of the Registrants as of December 31, 2003 and for
each of the three years then ended1. EXHIBITS  A.
    
    Consent of PricewaterhouseCoopers, Independent Accountants.B.
    
    Certifications by the Chief Executive Officer and Chief Financial Officer
of the Registrants pursuant to Rule 13a-14(a) of the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.C.
    
    Certifications by the Chief Executive Officer and Chief Financial Officer
of the Registrants pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.       1
    
    For the purposes of this Annual Report on Form 40-F, only pages 1 through 74
of the Registrants 2003 Annual Report referred to above shall be deemed filed,
and the balance of such 2003 Annual Report, except as it may be otherwise
specifically incorporated by reference in the Registrants Annual Information
Form, shall be deemed not filed with the Securities and Exchange Commission as
part of this Annual Report on Form 40-F under the Exchange Act. 9




---



##### Table of Contents



(ANNUAL INFORMATION FORM)                   (COVER PAGE)




---



##### Table of Contents



TABLE OF CONTENTS  ITEM 1
    
    COVER PAGEITEM 2
    
    CORPORATE STRUCTUREITEM 3
    
    GENERAL DEVELOPMENT OF THE BUSINESSITEM 4
    
    NARRATIVE DESCRIPTION OF THE BUSINESSITEM 5
    
    SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATIONITEM 6
    
    MANAGEMENT'S DISCUSSION AND ANALYSISITEM 7
    
    MARKET FOR SECURITIESITEM 8
    
    DIRECTORS AND OFFICERSITEM 9
    
    ADDITIONAL INFORMATION
     
    
    In this Annual Information Form (AIF), all dollar amounts are in Canadian dollars unless otherwise noted.
    
    Portions of the AIF are disclosed in the Annual Report to Shareholders for the year ended December 31, 2003 and
are incorporated by reference into the AIF.




---



##### Table of Contents



ITEM 2   CORPORATE STRUCTURE  Canadian Pacific Railway Limited Canadian Pacific Railway Limited (the Company or CPR) was incorporated on
June 22, 2001, as 3913732 Canada Inc. pursuant to the Canada Business
Corporations Act (the CBCA). On July 20, 2001, CPR amended its Articles of
Incorporation to change its name to Canadian Pacific Railway Limited. On
October 1, 2001, Canadian Pacific Limited (CPL) completed an arrangement
(the Arrangement) whereby it distributed to its common shareholders all of
the shares of newly-formed corporations holding the assets of four of CPLs
five primary operating divisions. The Arrangement was effected as an
arrangement pursuant to section 192 of the CBCA. On September 26, 2001, the
Arrangement was approved by the shareholders of CPL and Canadian Pacific
Railway Company (CPRC), previously a wholly-owned subsidiary of CPL, was
transferred to CPR effective October 1, 2001. In this Annual Information Form,
unless the context requires otherwise, CPR and the Company refers to
Canadian Pacific Railway Limited and, where applicable, its subsidiaries,
including CPRC. CPRs registered office, executive offices and principal place of business are
located at Suite 500, 401  9th Avenue S.W., Calgary, Alberta T2P 4Z4. 2




---



##### Table of Contents



ITEM 2   CORPORATE STRUCTURE  Principal Subsidiaries The table below sets out the Companys principal subsidiaries, including the
jurisdiction of incorporation and the percentage of voting and non-voting
securities currently owned directly or indirectly by the Company: Percentage ofnon-votingsecuritiesbeneficially owned,Percentage of
    
    or over whichvoting securities
    
    control orIncorporated under
    
    held directly or
    
    direction isPrincipal Subsidiary
    
    the laws of
    
    indirectly
    
    exercisedCanadian Pacific Railway Company
    
    Canada
    
    
    100
    %
    
    Not applicable.Soo Line Corporation
    
    Minnesota
    
    
    100
    %
    
    Not applicable.Soo Line Railroad Company(1)
    
    Minnesota
    
    
    100
    %
    
    Not applicable.Delaware and Hudson Railway
Company, Inc.(1)
    
    Delaware
    
    
    100
    %
    
    Not applicable.
     (1)
    
    Soo Line Railroad Company and Delaware and Hudson Railway Company, Inc. are wholly-owned subsidiaries
of Soo Line Corporation. 3




---



##### Table of Contents



ITEM 3   GENERAL DEVELOPMENT OF THE BUSINESS  Significant Acquisition Pursuant to the Arrangement, CPRC became a wholly-owned subsidiary of CPR
effective October 1, 2001. Development of CPR CPRC was incorporated by Letters Patent in 1881 pursuant to an Act of the
Parliament of Canada. CPRC is one of Canadas oldest corporations and was North
Americas first transcontinental railway. From its inception over 120 years
ago, CPRC has developed into a fully-integrated and technologically-advanced
Class 1 railway (a railroad earning revenues of US$258.5 million annually)
providing rail and intermodal freight transportation services over a
13,850-mile network serving the principal business centres of Canada, the U.S.
Midwest and the U.S. Northeast. Of the total mileage operated by CPR, approximately 6,900 miles are located in
western Canada, 2,200 miles in eastern Canada, 3,250 miles in the U.S. Midwest
and 1,500 miles in the U.S. Northeast. CPR owns 9,550 miles of track and an
additional 4,300 miles of track are jointly owned, leased or operated under
trackage rights. CPRs business is based on funnelling traffic from network feeders and
connectors, carrying railway traffic to and from the main rail lines, onto a
4,700-mile high-density, high-quality railway network. CPR has extended its
network reach by establishing alliances and connections with other major Class
1 railways in North America, which allows CPR to provide competitive product
offerings and access to markets across North America and, via the Port of
Montreal, Québec, and the Port of Vancouver, British Columbia, to markets in
Europe and the Pacific Rim, respectively. CPRs network accesses the U.S. market directly through two wholly-owned
subsidiaries: Soo Line Railroad Company (Soo Line), a Class 1 railway
operating in the U.S. Midwest; and Delaware and Hudson Railway Company, Inc.
(D&H), which operates between eastern Canada and major U.S. Northeast markets
including New York City, New York; Philadelphia, Pennsylvania; and Washington,
D.C. Strategy CPRs goals are to become the preferred business partner for rail-based
transportation services in North America and to be at the forefront of the
industry in operating profitability and return on capital employed. Its
principal strategies to accomplish these goals include maximizing the strengths
of its North American railway franchise by operating a low-cost scheduled
railway, developing new products and services in cooperation with customers and
partners, and extending the reach of the franchise through marketing and
operating partnerships and alliances with other railroads and transport
companies in North America. CPRs overall marketing and sales activities
within each business group are focused on targeted growth, product efficiency
and maximizing value from existing assets. Recent History Since 1997, CPR has focused on franchise renewal, increasing network
efficiency, asset maintenance efficiency and asset utilization, train
operations productivity and labour productivity. The following table
summarizes the impact of these strategies on a number of industry recognized
performance indicators:  4




---



##### Table of Contents



ITEM 3   GENERAL DEVELOPMENT OF THE BUSINESS  Year ended December 31Performance Indicators
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Traffic density(GTMs(1) per mile of road operated, before track
on which CPR has haulage rights (thousands))
    
    
    15,884
    
    
    
    15,107
    
    
    
    15,326
    
    
    
    15,183
    
    
    
    13,453Employee
productivity(GTMs per average active employee (thousands))
    
    
    13,640
    
    
    
    13,005
    
    
    
    12,535
    
    
    
    11,798
    
    
    
    10,080Fuel
efficiency(U.S. gallons of fuel per 1,000 GTMs)
    
    
    1.25
    
    
    
    1.24
    
    
    
    1.25
    
    
    
    1.29
    
    
    
    1.37Locomotive
utilization(GTMs per active locomotive per day (thousands))
    
    
    659
    
    
    
    673
    
    
    
    681
    
    
    
    652
    
    
    
    578Total operating expenses per GTM (cents)*
    
    
    1.33
    
    
    
    1.34
    
    
    
    1.34
    
    
    
    1.33
    
    
    
    1.42Average train weights (tons)
    
    
    5,492
    
    
    
    5,473
    
    
    
    5,580
    
    
    
    5,418
    
    
    
    5,127Annual return on capital employed (after taxes)(%)(3)
    
    
    7.3
    
    
    
    9.1
    
    
    
    8.7
    
    
    
    9.5
    
    
    
    9.1Operating income ($ millions)*(2)
    
    
    740.6
    
    
    
    856.5
    
    
    
    841.0
    
    
    
    845.2
    
    
    
    762.3Operating ratio (%)*
    
    
    79.8
    
    
    
    76.6
    
    
    
    77.3
    
    
    
    76.9
    
    
    
    78.2
 *Excludes other specified items.    (1)
    
    Gross Ton-Miles (GTM) of freight measure the movement of total train
weight over one mile in a year. The total train weight is comprised of
the weight of the freight cars, their contents and locomotives being
returned to terminals.(2)
    
    For reconciliation to GAAP operating income see Income Statement Data
table in Item 5.(3)
    
    Return on capital employed (after taxes) is calculated as income, before
other specified items and FX on LTD, less interest expense, divided by
average net-debt-plus-equity, and multiplied by one minus CPRCs
normalized tax rate for each respective period. Network Efficiency CPR continues to increase the capacity of its core franchise through
infrastructure-sharing and joint-service programs with other railways,
strategic capital investment programs, and operating plan strategies. Combined
with the continued improvement of CPRs locomotive fleet, these strategies
enable CPR to achieve more predictable and fluid train operations between major
terminals. CPR has expanded its physical network with the following infrastructure-sharing
and joint-service programs:  
    
    CPR-CSX Transportation, Inc. (CSX) track connection at Detroit,
Michigan reduces transit times and improves consistency of service
between eastern Canada and the U.S. Midwest;
    
    CPR-Union Pacific Corporation (Union Pacific) provides joint service
from western Canada to the U.S. Pacific-Northwest, California and
Arizona and to Texas/Mexico and Kansas/Missouri; and
    
    CPR-Norfolk Southern Corporation joint intermodal service between the
Port of New York/New Jersey and eastern Canada reduces transit times
for import-export shippers. CPR constructed a new passing siding at
Clarks Summit, Pennsylvania and granted Norfolk Southern Railway
Company (NS) trackage rights between Sunbury, Pennsylvania and
Mechanicville, New York in order to increase traffic and improve
freight service to upstate New York, northern Pennsylvania and New
England. 5




---



##### Table of Contents



ITEM 3   GENERAL DEVELOPMENT OF THE BUSINESS  In 2002 and 2003, CPR spent approximately $25 million to extend the length of
16 rail sidings throughout northern and eastern Ontario in order to increase
operating efficiency and reduce costs. A siding is a limited length of track
parallel to the main line and linked to it at both ends by switches, enabling
trains running in either direction to pass each other. Longer sidings permit
the use of longer and fewer trains. It also permits fewer locomotives to be
used to move the same amount of freight in a given rail corridor. CPR has
identified other corridor bottlenecks on its network and a plan is in place to
provide appropriate capacity in order to increase train density and fluidity on
all its major routes. In 2003, CPR sold a lower-density 12.6-km (7.8-mile) rail line in northern New
Brunswick known as the Edmunston Spur to Canadian National Railway (CN). This
line runs between Grand Falls and Cyr Junction, near St. Leonard, New
Brunswick. CPR also sold a 32.5-mile rail line that runs from Madison to
Watertown, Wisconsin to the Wisconsin & Southern Railroad. Franchise Renewal Franchise renewal is an integral part of CPRs multi-year capital program. From
2001 to 2003 the Company has invested approximately $1.9 billion in its core
assets. CPR continually refines its investment program in order to generally
keep annual average capital spending at approximately 18% of revenues while
also increasing funding of network maintenance programs to ensure its plant,
property, and equipment assets are well maintained. Through its franchise
renewal program, CPR continues to focus its capital spending on those assets
that improve its capacity and productivity and the reliability of its services. CPRs annual program to modernize and upgrade its core strategic assets
typically includes track and facilities (including rail yards and intermodal
terminals); locomotives; information technology; and freight cars and other
equipment investments. Over the three-year period from 2001 to 2003, CPR
invested approximately $1.2 billion in track and facilities, about $250 million
in locomotives, and approximately $446 million in information technology,
growth initiatives, freight cars and other equipment. Locomotive Fleet Modernization CPR has upgraded its locomotive fleet with the acquisition of high-adhesion
alternating current (AC) locomotives, which are more fuel efficient and
reliable and have superior haulage capacity relative to standard direct current
(DC) locomotives. CPRs locomotive fleet now includes 507 AC locomotives,
representing approximately 47% of CPRs road-freight locomotive fleet, and
handling about 65% of CPRs workload. This investment has improved CPRs
service reliability and has produced cost savings in fuel, equipment rents and
maintenance. It has also allowed CPR to remove from service 147 older DC
locomotives in the last three years and enabled CPR to more efficiently utilize
its repair and maintenance facilities. Railcar Fleet Modernization Starting in 1998, and continuing through 2003, CPR undertook a freight-car
modernization program to fully leverage its rail network and locomotive fleet.
The programs general aim included the following objectives:  1.
    
    increase the productivity and standardization of each car fleet;2.
    
    secure lower lease costs by reducing CPRs reliance on short-term
leasing; and3.
    
    improve customer satisfaction through the introduction of
higher-capacity cars. 6




---



##### Table of Contents



ITEM 3   GENERAL DEVELOPMENT OF THE BUSINESS  In 2003, CPR introduced its Intermodal Fleet Renewal (IFR) initiative in
order to increase the density of its intermodal trains and allow CPR to move
more containers with fewer trains. The plan of the IFR is to bring on 5,500
new double-stack cars in 2003 and 2004 that will be a mix of both 53- and
40-foot equipment. Freight cars owned and long-term leased 2003
    
    2002
    
    2001Covered
Hoppers(1)
    
    
    25,100
    
    
    
    23,200
    
    
    
    23,800Open Tops
    
    
    4,600
    
    
    
    5,500
    
    
    
    4,000Box Cars
    
    
    7,000
    
    
    
    7,800
    
    
    
    7,900Gondolas
    
    
    2,500
    
    
    
    2,500
    
    
    
    2,500Flats
    
    
    2,700
    
    
    
    2,000
    
    
    
    1,400Intermodal
    
    
    2,600
    
    
    
    3,100
    
    
    
    3,500Automotive
    
    
    3,100
    
    
    
    3,500
    
    
    
    3,300Total
    
    
    47,600
    
    
    
    47,600
    
    
    
    46,400
 (1)
    
    includes 9,000 government cars. Strengthening Business Fundamentals Yield Management CPR believes that its customers, many of whom compete in global markets, demand
competitively priced transportation service. In order to offer competitive
prices to its customers, CPR has redesigned its train operations and terminal
processes and is continually working at increasing productivity through
cost-reduction programs and improving asset utilization through initiatives
aimed at targeted growth, product efficiency and maximizing value from existing
resources. CPR has a Price and Yield management team to standardize price- and
yield- business processes across the Company. Train Operations Productivity In 1999, CPR introduced a new operating plan to increase productivity, improve
asset utilization and enhance service quality for customers. This means CPR is
running longer, heavier trains more consistently to make connections and meet
delivery commitments for less cost. In December of 2003, CPR became the first railway in North America to operate
intermodal freight trains with mid-train remote-control (Locotrol) locomotives.
These remote-control units enable CPR to run intermodal trains approaching
three kilometres in length through the winter. CPR extended the area of its
Locotrol operation to encompass Moose Jaw, Saskatchewan to Toronto, Ontario and
extended the use of Locotrol from exclusively bulk train operation to
intermodal and mixed-manifest trains. Asset Maintenance Efficiency CPR has improved the efficiency of its repair facilities primarily through
outsourcing arrangements and by reducing the costs of maintenance. CPR has
improved the reliability of its locomotive fleet by entering into warranty
service agreements with suppliers pursuant to which suppliers have made strict
performance commitments. In the second quarter of 2001, CPR entered into an agreement with Alstom Canada
Inc. for the lease and operation of CPRs Ogden maintenance and repair shop in
Calgary, CPRs primary rebuilding and heavy-repair facility. In May 2002, CPR closed its Frog Shop in Lethbridge, Alberta. The shop produced
second-hand frogs (a track component that allows trains to cross from one
adjacent track to another) for use on CPRs network. 7




---



##### Table of Contents



ITEM 3   GENERAL DEVELOPMENT OF THE BUSINESS  In January 2003, coinciding with the purchase of 46 new AC locomotives, CPR
announced an expansion of its warranty service agreements in eastern Canada,
pursuant to which diesel locomotive manufacturers manage the ongoing servicing
of CPR locomotives using CPR employees. As a result, approximately 70% of CPRs
locomotive fleet is covered by service agreements containing strict performance
commitments. Information Technology As a 24-hour-a-day, 7-day-a-week business, CPR relies heavily on its computer
systems to schedule all components of its operations. Computer applications
map out complex interconnections of freight cars, locomotives, facilities,
track and train crews to meet more than 10,000 individual customer service
commitments every day. CPR uses intricate automated traffic-forecasting
systems, determines car routings and yard workloads using bypass and circuitry
analysis software, and generates time-distance diagrams to examine track
capacity. CPR has substantially completed the implementation of a suite of new operating
systems, collectively referred to as Service Excellence. This investment in
information technology has assisted CPR in becoming a scheduled railway
operation, by helping increase the productivity of CPRs asset base and
improving customer service. The final step in the Service Excellence program
is the implementation of the TYES software program in 2004. The TYES
application is a rail-yard management system that manages shipment connections
from train-to-train. CPR is currently investing in a new application called TRIEX that will improve
the efficiency and customer-service capabilities in its intermodal business.
CPR is developing TRIEX in co-operation with a U.S.-based software firm. The
Company expects TRIEX will be installed in early 2005. CPR is also updating
its train-control system by moving it to a more current technological platform,
thereby extending the life of this critical system by many years in line with
the overall strategy of optimizing assets. In late 2003, a transfer of assets to IBM Canada Ltd. was part of a seven-year,
$200-million agreement reached with IBM to operate and enhance CPRs computer
infrastructure. CPR expects that this arrangement will reduce its costs over
time and allow remaining information technology staff to focus on applications
that improve efficiency and service. Low-Cost Scheduled Railway  Simplification of Processes CPR invested $3.3 billion in track infrastructure, terminals, rolling stock and
information technology from 1997 through 2000 and a further $1.9 billion
between 2001 and 2003 to support the implementation of its scheduled railway
operating philosophy. CPR believes improving its scheduled railway operations
will further increase productivity, improve asset utilization and enhance
service quality. This will be accomplished by continuing to refine the
operating plan, making strategic capital investments aimed at reducing or
eliminating existing train length and weight limitations while increasing
traffic density and asset velocity, and entering into additional co-production
initiatives with other Class 1 railway companies to more effectively utilize
available networks. Integrated Operating Plan In May 1999, CPR launched its scheduled railway Integrated Operating Plan
(IOP). Under the IOP, trains are scheduled to run consistently and at times
agreed upon by CPR and the customer, thereby ensuring connections at
intermediate terminals are made and delivery commitments are met. A plan is
established for each rail car covering its entire trip from point of origin to
final destination. Cars with similar destinations are consolidated into blocks,
thus reducing delays at intermediate locations by simplifying processes for
employees, eliminating the duplication of work and helping to ensure fluid rail
yards and terminals. These efficiencies help reduce transit times for shipments
throughout CPRs network and increase car availability for customers. Since the
implementation of the IOP, CPR has improved on-time performance of its premium
intermodal train services and has increased terminal performance for its
customers while delivering a significant reduction in the cost base of its
operations. CPR now operates a scheduled railway and strives to deliver high service
quality to its customers and achieve a high level of efficiency through
improved asset utilization. CPR is committed to further pursuing methods to
improve the scheduling of trains with other railways and to develop systems
designed to share advanced information, thereby improving service. In 2003,
CPRs approach to scheduled-railway operations won the Franz Edelman Award for
Achievement in Operations Research and the Management Sciences. 8




---



##### Table of Contents



ITEM 3   GENERAL DEVELOPMENT OF THE BUSINESS  Labour Productivity and Efficiency CPR continually takes steps to increase the effectiveness of its organizational
structure in order to increase its productivity and efficiency. Since 1996, the
Company has centralized its management team to improve communication and
decision-making, simplified the organizations management structure, and
increased the responsibility given to management personnel. CPR regularly
reviews its organizational processes, workforce needs and related
organizational costs, thereby improving the productivity and efficiency of its
workforce while reducing expenses. For example, CPR eliminated approximately
1,900 permanent positions in 2000 (representing approximately 10% of its
workforce), including positions in management, administration, maintenance
shops, train operations and track maintenance. In 2001, CPR launched further cost-reduction initiatives, including the
integration of the St. Lawrence & Hudson Railway Company Limited (previously a
CPR subsidiary operating in eastern Canada), which have resulted in the
elimination of approximately 800 positions. In addition, approximately 600
positions were transferred to service suppliers, who were able to improve
utilization of CPR facilities through access to a larger customer base. During 2002, CPR began new restructuring initiatives to reduce costs by
eliminating an additional 85 positions. In the second quarter of 2003, CPR
began a productivity program that will eliminate 820 positions by the end of
2005 through consolidation of administrative functions, applications of new
information technology to improve the productivity of administrative functions
and yard operations, and improvements in car and locomotive maintenance
efficiency. The Company eliminated 360 positions under this new program by the
end of 2003. Since January 1, 1996, CPR has reduced its total workforce by 30%. In order to stimulate and reward employee participation in CPRs efficiency
initiatives, CPR has implemented a number of incentive-based compensation
programs designed to allow eligible employees, both unionized and
non-unionized, to share in the savings they help generate for CPR. North American Railway Franchise CPR believes it is well positioned to achieve its goals because of its network
and assets, its emphasis on customer service and its team of dedicated
employees.  Network and Assets The competitive strengths of CPRs network and assets
include the following:
    
    CPR offers access to U.S. markets through 11 major interchanges and strong alliances with other Class 1 railways;
    
    CPR handles the largest volume of intermodal containers through the Port of Montreal, a major North American gateway for
European trade;
    
    CPR has competitive access to new, state-of-the-art facilities at the Port of Vancouver, a major shipping gateway to and
from Pacific Rim markets;
    
    CPR offers the shortest rail route from the Port of Vancouver to the Chicago, Illinois rail hub;
    
    CPR has made significant investments in efficient AC locomotives; and
    
    CPR has invested strategically in new computer operating systems, enabling CPR to operate more effectively and efficiently
for the benefit of its customers while further enhancing its scheduled-railway operations.Customer-Oriented Initiatives CPR believes that its emphasis on customer
service has differentiated CPR from its competitors and has allowed its
customers to compete effectively in their respective markets, while
permitting CPR to retain and enhance its customer base. Some of CPRs
customer-oriented initiatives are as follows:
    
    CPR has extended its rail lines directly to the new facilities of some of its key customers;
    
    CPR has introduced services and acquired assets that are custom-designed for certain of its key customers; 9




---



##### Table of Contents



ITEM 3   GENERAL DEVELOPMENT OF THE BUSINESS   
    
    CPRs service quality has helped to motivate several of its significant
intermodal customers to locate large distribution centres adjacent to CPRs
intermodal terminals (for example, Sears, Canadian Tire and Consolidated
Fastfrate); and
    
    CPR has achieved a strong market position across a diversified base of
customers and products through its cross-functional approach.Dedicated Employees CPR considers its team of employees to be its most
valued asset. Through results-sharing programs, CPRs employees have
financial incentives to help CPR attain its goals. Extending Franchise Reach CPR aims to continue to increase revenue through initiatives designed to extend
its business beyond the physical railway network, thereby providing the
flexibility needed to capture market share from its competitors. CPR plans to
extend its franchise reach by creating new markets and by concentrating on
providing new products, expanded truck-rail transfer facilities and improved,
value-added service through customer-relationship management. New Product Offerings CPR works with its customers to develop and introduce new products into the
marketplace. For example, CPR introduced its Trans-Pacific initiative, a
highly-efficient, freight-transportation service between the Port of Vancouver
and Chicago for import-export intermodal containers. By working with the Port
of Vancouver and the shipping lines to establish Vancouver, British Columbia as
the preferred port for North America-bound deliveries from the Pacific Rim, CPR
has created a competitive route for the movement of containers into the Chicago
market. CPR continues to secure long-term agreements with customers in this
corridor and has signed agreements with OOCL, Cosco, China Shipping, NYK,
Columbus Lines and Lykes Lines Limited LLC, which are among, or are affiliated
with, the worlds largest container shipping companies. Expanded Truck-Rail Transfer Facilities CPR has also extended its franchise reach through the use of truck-rail
transfer facilities, which it uses to gain competitive access to key resource
production areas not directly served by the CPR network. This service will be
provided through its logistics and supply chain division called Canadian
Pacific Logistics Solutions (CPLS), which is further described below in the
business categories. Customer Relationship Management The customer service team, located in Winnipeg, Manitoba; Calgary, Alberta; and
Minneapolis, Minnesota, aims to provide value to customers through the use of
technology, a formalized cross-functional approach to problem solving and the
development of new opportunities for customers. CPRs customer service group
also includes a damage-prevention team, which works with customers to ensure
proper loading techniques are employed, enabling shipments to arrive in good
condition. CPR has put in place a customer relationship management (CRM) program
directed at understanding and anticipating the needs of its current and
potential customers. This program has better positioned CPR to:  
    
    understand customer needs and expectations;
    
    deliver the expected product quality;
    
    work with customers to generate new product ideas;
    
    manage and improve the overall customer experience with CPR; and
    
    continuously improve CPRs performance. CPR will continue to build on this success through strengthened customer
relationships and an increased focus on sustainable growth opportunities. 10




---



##### Table of Contents



ITEM 3   GENERAL DEVELOPMENT OF THE BUSINESS  Railway Partnerships and Alliances In order for certain customers to transport their goods from their desired
points of origin to their desired final destination points, goods may have to
travel on more than one railway. Transfers of goods from railway to railway can
cause delays and service interruptions. CPRs rail network connects to other
North American rail carriers and in partnership continues to co-develop
processes and products designed to provide seamless and efficient scheduled
train service to these customers. Recent Class 1 railway initiatives include:  
    
    a joint CPR-Union Pacific service from western Canada to the U.S. Pacific-Northwest, California and Arizona via Kingsgate,
British Columbia;
    
    a joint CPR-Union Pacific service from western Canada to the Texas/Mexico and Kansas/Missouri markets via Minneapolis;
    
    a joint CPR-NS intermodal service between the Port of New York/New Jersey and eastern Canada;
    
    CPR-NS trackage-rights agreement to handle NS traffic over CPRs D&H lines in the U.S. Northeast; and
    
    a joint CPR-Union Pacific service from eastern Canada to the U.S. Gulf Coast and Mexico. In addition, CPR also works with smaller (short-line or non-Class 1) railways
to develop partnerships that benefit both parties. 11




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  Network and Right of Way CPRs network, shown in the map below, extends from the Port of Vancouver in
Canadas west to the Port of Montreal in Canadas east and to the industrial
centres of Chicago; New York City, New York; Newark, New Jersey; Buffalo, New
York; Philadelphia and Washington, D.C. in the U.S. (CPR NETWORK MAP) The CPR network consists of four primary corridors: the Western Corridor, the
Southern Corridor, the Central Corridor and the Eastern Corridor. Each of these
corridors is complemented by a number of collector and feeder lines. The Western Corridor: Vancouver-Moose Jaw Overview The Western Corridor links Vancouver with Moose Jaw, which is the
western-Canadian terminus of CPRs Southern and Central corridors. This
corridor provides the shortest rail route for most bulk products transported
from western Canada to the Port of Vancouver. It is also an important part of
CPRs highly competitive service routes between Vancouver and the U.S. Midwest
and between Vancouver and the major population centres in central and eastern
Canada. Products The Western Corridor is CPRs primary route for bulk and
resource-products traffic from western Canada destined to the Port of Vancouver
for export. Significant volumes of import-export intermodal containers and
domestic general merchandise traffic are also handled over the Western
Corridor. At its busiest location, the Western Corridor handles an average of
approximately 33 trains per day. Feeder Lines The Western Corridor is supported by two significant feeder
lines, being the Coal Route, which connects the Western Corridor to coal
producing centres in southeastern British Columbia and the Calgary-Edmonton
Corridor which provides rail access to central Albertas petrochemical
industries, natural resources markets and Edmonton, Alberta. Connections CPRs Western Corridor connects with Union Pacific at Kingsgate.
This route forms part of the Pacific Can-Am Corridor, which provides direct
rail service to locations in California. The Western Corridor also connects
with the Burlington Northern Santa Fe Railway (BNSF) at Coutts, Alberta and
New Westminster, British Columbia, and with BC Rail at North Vancouver, British
Columbia. 12




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  Yards and Repair Facilities Rail operations on the Western Corridor are
supported by major rail yards at Vancouver, Calgary, Edmonton and Moose Jaw. In
addition, CPR has significant intermodal terminals at Vancouver, Calgary and
Edmonton, as well as locomotive and rail car repair facilities at Vancouver,
Calgary and Moose Jaw. The Southern Corridor: Moose Jaw-Chicago Overview CPRs Southern Corridor connects with the Western Corridor at Moose
Jaw and runs directly through Milwaukee, Wisconsin and the twin cities of
Minneapolis and St. Paul, Minnesota, and south to Chicago providing a direct,
single carrier route between western Canada and major population centres in the
U.S. Midwest. Products Predominant markets served on the Southern Corridor include
import-export intermodal containers handled at the Port of Vancouver and
Canadian fertilizers, chemicals, grain, automobiles and U.S. agricultural
products. At its busiest location, the Southern Corridor handles an average of
approximately 19 trains per day, excluding passenger and commuter trains. Feeder Lines A significant feeder line connecting Glenwood, Minnesota and
Winnipeg supports the Southern Corridor. This line is both a gathering network
for U.S. grain as well as a route for Canadian fertilizers destined to the U.S. CPR has operating rights over the BNSF line between Minneapolis and the twin
ports of Duluth, Minnesota and Superior, Wisconsin. This line provides an
outlet for grain from U.S. Midwest origins to the grain terminals located at
Duluth and Superior. Through a combination of operating rights and owned lines, CPR provides service
from Chicago to Louisville, Kentucky. In addition to general merchandise
traffic, a significant amount of coal traffic from southern Indiana coalmines
is handled on this line. Connections The Southern Corridor connects with all major railways at
Chicago. Outside of Chicago, there are major connections with BNSF at
Minneapolis and at Minot, North Dakota; with Union Pacific at St. Paul; and
with CSX and NS at Louisville. The Southern Corridor is also linked to several
short-line railways primarily serving grain-producing areas in the U.S. Yards and Repair Facilities Rail operations on the Southern Corridor are
supported by major rail yards located at Chicago, St. Paul and Glenwood. At
Chicago, CPR has a 49% ownership interest in the Indiana Harbor Belt Railway
Company, a switching railway serving the Greater Chicago and northwest Indiana
areas. CPR has two significant intermodal terminals at Chicago and one at
Minneapolis. In addition, CPR has a major locomotive repair facility at St.
Paul and car repair facilities at St. Paul and Chicago. The Central Corridor: Moose Jaw-Toronto Overview The Central Corridor extends from Moose Jaw, through Winnipeg, and
then to its eastern terminus at Toronto. The Central Corridor is complemented
by a secondary route, leased and operated by Ottawa Valley Railway, which
connects Sudbury, Ontario and Smiths Falls, Ontario and expedites the movement
of CPR traffic between Montreal and western Canada. This corridor offers
shippers direct rail service from Toronto and Montreal to Calgary and Vancouver
via the Western Corridor  a key element of CPRs transcontinental intermodal
and other competitive services. Products Major traffic categories on the Central Corridor include Canadian
grain, industrial products, intermodal containers, automobiles and general
merchandise. The Central Corridor is critical to CPRs fast-growing intermodal
business and it also provides access to the Port of Thunder Bay, Ontario,
Canadas primary Great Lakes bulk terminal. At its busiest location, the
Central Corridor handles an average of approximately 20 trains per day. Feeder Lines The Central Corridor is supported by a significant feeder line
connecting Edmonton with Winnipeg through Saskatoon, Saskatchewan. This is an
important Canadian grain and fertilizer collector. As noted above, the line
connecting Winnipeg with the Southern Corridor at Glenwood is both a gathering
network for U.S. grain as well as a route for Canadian fertilizers destined to
the U.S. Connections The Central Corridor connects with BNSF at Emerson, Manitoba, as
well as a number of short-line railways. 13




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  Yards and Repair Facilities CPRs rail operations on the Central Corridor are
supported by major rail yards at Thunder Bay, Ontario; Winnipeg; and Toronto.
The intermodal facility in the northern Toronto suburb of Vaughan is the
largest intermodal facility in the Canada. CPR also operates intermodal
terminals at Saskatoon and Regina, Saskatchewan; Thunder Bay; and Winnipeg. CPR has significant locomotive repair facilities in Winnipeg and Toronto, and
has car-repair facilities at Winnipeg, Thunder Bay and Toronto. The Eastern Corridor Overview The Eastern Corridor provides CPR with an important link between the
major population centres of eastern Canada, the U.S. Midwest and the U.S.
Northeast. The Montreal-Chicago Corridor supports CPRs leading market
position at the Port of Montreal by providing one of the shortest rail routes
for European cargo destined to the U.S. Midwest. The Montreal-Chicago Corridor
consists of a CPR-owned and maintained route between Montreal, Quebec and
Detroit coupled with a long-term rail car haulage contract with CSX that links
Detroit with the CPR-owned infrastructure at Chicago. Products The predominant products handled by CPR over the Eastern Corridor
are import-export intermodal containers, automobiles, industrial products and
motor carrier trailers on CPRs roll-on/roll-off Expressway service. At its
busiest location, the Eastern Corridor handles an average of approximately 20
trains per day, excluding passenger and commuter trains. Feeder Lines The Eastern Corridor connects with a number of important feeder
lines. The route between Sunbury, Pennsylvania and Montreal, in combination
with trackage rights over other railways, provides CPR with direct access to
New York City; Albany, New York; Philadelphia; Newark; and Washington, D.C. The
line between Guelph Junction, Ontario and Binghamton, New York, including
trackage rights over NS lines, links the southern Ontario industrial region
with key U.S. connecting rail carriers at Buffalo, and with the Montreal to
Sunbury line at Binghamton. Connections The Eastern Corridor connects with all major railways at
Chicago. Major connections with NS are also located at Detroit, Buffalo;
Allentown, Pennsylvania and Harrisburg, Pennsylvania. Major connections with
CSX are also located at Detroit, Buffalo, Albany and Philadelphia. Yards and Repair Facilities In addition to yards and terminals already
mentioned above at Toronto and Chicago, CPRs rail operations on the Eastern
Corridor are supported by major rail yards at Montreal and Binghamton.
Intermodal facilities are located at Montreal, Detroit, and Windsor, Ontario.
There is also a second intermodal facility in Toronto dedicated to serving the
Eastern Corridor. Expressway terminals are located at Montreal, Toronto,
Windsor and Detroit. In addition to repair facilities mentioned above at Toronto and Chicago, CPR
has a locomotive-repair facility and a car-repair facility located at Montreal. Other On June 18, 2003 CPR announced the restructuring of the D&H. CPR will
restructure its northeastern U.S. operations to create a more cost-effective
and flexible railway network and has begun discussions with a number of
interested parties about ways to generate higher traffic volumes and greater
earnings. Right of Way CPRs rail network is standard gauge, which is used by all of the major
railways in Canada, the U.S. and Mexico. Continuous welded rail is used on over
96% of CPRs mainline. Virtually all of the network and primary feeder trackage
is 100-pound rail or heavier, suitable for movements of 286,000-pound cars, the
North American rail industrys preferred car size. CPR uses different train control systems on different portions of its owned
track, depending on the volume of rail traffic. Centralized traffic control
(CTC) signals are used to authorize the movement of trains where traffic is
heaviest. Approximately 3,450 miles of the network are controlled with CTC
signals. Where rail traffic is lightest, train movements are directed by written
instructions transmitted electronically and by radio from rail traffic
controllers to train crews. In areas of intermediate traffic density, CPR uses
an automatic block signalling system (ABS) in conjunction with the written
instructions from rail traffic controllers. Approximately 700 miles of the
network have ABS in place. 14




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  Rolling Stock The following table summarizes the locomotive fleet owned or leased by CPR,
including the age distribution of the locomotive fleet: Number of Locomotives
(owned and leased) Road FreightAge in Years
    
    AC
    
    DC
    
    Road Switcher
    
    Yard Switcher
    
    Total0-5
    
    
    323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3236-10
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18411-15
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    6716-20
    
    
    
    
    
    
    55
    
    
    
    94
    
    
    
    8
    
    
    
    157Over 20
    
    
    
    
    
    
    464
    
    
    
    170
    
    
    
    257
    
    
    
    891Totals
    
    
    507
    
    
    
    586
    
    
    
    264
    
    
    
    265
    
    
    
    1,622
 In addition to its locomotive fleet, CPR owns or leases approximately 47,600
freight cars, of which approximately 20,700 cars are owned. Long-term leases on
approximately 2,900 cars are scheduled to expire during 2004, and the leases on
approximately 6,900 additional cars are scheduled to expire before the end of
2007. The above freight car count also includes 9,000 hopper cars owned by
federal or provincial government agencies. Business Categories CPR provides the shortest rail route for most bulk products transported from
western Canada to the Port of Vancouver. CPR also provides highly competitive
service routes between Vancouver and the U.S. Midwest and between Vancouver and
the major population centres in central and eastern Canada. The CPR network
provides a strategic link between the Port of Montreal and the U.S. Midwest.
CPR also serves the major eastern population centres of Montreal, Toronto,
Newark, New York City, Buffalo, Philadelphia and Washington, D.C. CPR serves a
wide range of customers, with no single customer accounting for more than 10%
of total freight revenue. The mix of products CPR transports has changed significantly over the past six
years. The following table shows the comparison of the percentage of CPRs
total freight revenue that it has derived from each of its major lines of
business in 2003 versus 1998. CPRs business balance has changed as the needs
of its customers have changed and the intermodal market has grown: Business Category
    
    2003
    
    1998Bulk
    
    
    43
    %
    
    
    50
    %Merchandise
    
    
    30
    %
    
    
    30
    %Intermodal
    
    
    27
    %
    
    
    20
    %
 15




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  Freight Revenues The following table summarizes CPRs freight revenues since 2001. Fiscal 2003
    
    
    
    
    
    Fiscal 2002
    
    
    
    
    
    Fiscal 2001Growth
    
    
    
    
    
    Growth
    
    
    
    
    
    GrowthRate
    
    
    
    
    
    Rate
    
    
    
    
    
    Rateas Compared
    
    
    
    
    
    as Compared
    
    
    
    
    
    as ComparedFiscal
    
    to Fiscal
    
    Fiscal
    
    to Fiscal
    
    Fiscal
    
    to FiscalBusiness Category
    
    2003
    
    2002
    
    2002
    
    2001
    
    2001
    
    2000(in $ millions, except percentages)BulkGrain
    
    
    644
    
    
    
    2.1
    %
    
    
    631
    
    
    
    (15.8
    )%
    
    
    749
    
    
    
    (0.8
    )%Coal, sulphur and
fertilizer
    
    
    862
    
    
    
    2.1
    %
    
    
    844
    
    
    
    (1.3
    )%
    
    
    855
    
    
    
    5.0
    %Total bulk
    
    
    1,506
    
    
    
    2.1
    %
    
    
    1,475
    
    
    
    (8.0
    )%
    
    
    1,604
    
    
    
    2.2
    %MerchandiseAutomotive
    
    
    304
    
    
    
    (8.7
    )%
    
    
    333
    
    
    
    9.5
    %
    
    
    304
    
    
    
    (0.3
    )%Forest products
    
    
    329
    
    
    
    (8.6
    )%
    
    
    360
    
    
    
    1.7
    %
    
    
    354
    
    
    
    (3.3
    )%Industrial products
    
    
    400
    
    
    
    (5.2
    )%
    
    
    422
    
    
    
    (2.0
    )%
    
    
    431
    
    
    
    (1.6
    )%Total merchandise
    
    
    1,033
    
    
    
    (7.4
    )%
    
    
    1,115
    
    
    
    2.4
    %
    
    
    1,089
    
    
    
    (1.8
    )%Intermodal
    
    
    940
    
    
    
    6.6
    %
    
    
    882
    
    
    
    9.7
    %
    
    
    804
    
    
    
    2.8
    %Total freight revenues
    
    
    3,479
    
    
    
    0.2
    %
    
    
    3,472
    
    
    
    (0.7
    )%
    
    
    3,497
    
    
    
    1.1
    %
 Bulk CPRs bulk business, comprised of grain, coal, sulphur and fertilizers,
represented approximately 43% of total freight revenues in 2003. CPR provides
bulk transportation services along the shortest routes from major production
areas in British Columbia, Alberta and Saskatchewan to the Port of Vancouver. Grain CPRs grain business comprised approximately 18% of total freight revenues in
2003. Canadian grain traffic consists of both grain (primarily wheat, barley
and canola) and grain products grown or processed largely in western Canada and
moved by rail to both domestic markets within North America and various export
markets. Canadian grain intended for export is shipped primarily via the ports
of Vancouver; Thunder Bay, and Prince Rupert, British Columbia. Continued use of MaxTrax, CPRs order-fulfillment system for Canadian grain,
allows CPRs grain shippers to pre-order the railcars they need, and has
improved the planning and efficiency of grain movement, resulting in improved
asset utilization and a reduced fleet size. CPRs total revenues on Canadian grain shipments to Vancouver (for export) and
to Thunder Bay (for export or domestic consumption) are subject to a revenue
formula by virtue of amendments to the Canada Transportation Act (the CTA),
which came into effect on August 1, 2000. The revenue formula for CPR,
specified in the legislation, is adjusted in each crop year to take into
account changes in the volume of grain shipped, the average length of haul and
the prices of railway input factors. CPR ships grain from North Dakota, South Dakota and Minnesota primarily to
mills located near populated U.S. centres and destined for various export ports
including the U.S. Pacific Northwest, the twin ports of Duluth/Superior and the
Gulf of Mexico. 16




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  Coal CPRs coal businesses represented approximately 13% of total freight revenues
in 2003. In Canada, CPR transports metallurgical coal from mines in
southeastern British Columbia to port terminals for export to world markets,
particularly the Pacific Rim. The mines located on CPRs lines, some of the
most efficient in North America, produce high-quality coal and have long-life
reserves. The U.S. coal business handled by CPR consists mainly of thermal coal
and petroleum coke, transported mainly within the Midwest U.S. Sulphur and Fertilizers Sulphur and fertilizers business represented approximately 12% of total freight
revenues in 2003. Sulphur Sulphur is a by-product of the oil and gas industry that is used in the
production of sulphuric acid, which is used in the production of phosphate
fertilizers. CPR provides rail transportation services from the key production
facilities in Canada to the U.S. and offshore markets  mainly China, Brazil,
Australia, Mexico and South Africa  via the Port of Vancouver. Fertilizers The two main segments of the fertilizer business are potash and chemical
fertilizers. CPRs potash business moves primarily from Saskatchewan to
markets in the U.S. and offshore countries through the ports of Vancouver and
Portland, Oregon. Chemical fertilizers are transported to Canadian and
northern U.S. markets from key production areas in the Canadian Prairie
provinces. Traffic is also received from U.S. railroads serving the
southeastern U.S. phosphate fertilizer producers. CPR has long-term,
inflation-protected contracts with most of its major fertilizer customers. Merchandise CPRs merchandise business represented approximately 30% of total freight
revenues in 2003. Merchandise freight consists of finished vehicles and
automotive parts, and forest and industrial products. Automotive CPRs automotive business represented approximately 9% of total freight
revenues in 2003. CPR transports vehicles to and from several automotive plants
in Ontario. Automotive business consists of the transportation of domestic and
import vehicles, automotive parts and agricultural equipment from North
American assembly plants and the Port of Vancouver to destinations in the
Canadian and U.S. marketplace. Forest Products CPRs forest products business represented approximately 9% of total freight
revenues in 2003, transporting a variety of forest products including wood
pulp, lumber, newsprint, paper, panel board and fibreboard. CPR mainly moves
wood pulp from British Columbia and eastern Canada, lumber from British
Columbia and newsprint from eastern Canada, primarily destined for the U.S. Industrial Products CPRs industrial products business represented approximately 12% of freight
revenues in 2003. The industrial products business line includes many input
commodities, such as chemicals, plastics, aggregates, metals, steel and scrap
and energy-related products. CPR transports chemicals such as glycol, styrene,
methanol and ethanol to destinations within the domestic North American market
and to export markets in the Pacific Rim. 17




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  Intermodal CPRs intermodal business accounted for approximately 27% of CPRs total
freight revenues in fiscal 2003. This business line, which generally consists
of high-value, time-sensitive shipments, has grown significantly in recent
years. CPR also believes that the intermodal business has attractive, long-term
growth prospects. To enhance competitiveness and prepare for continued growth,
CPR has increased capacity at its intermodal terminals in Vancouver, Calgary,
Chicago, Toronto and Montreal. Import/Export Intermodal The international segment handles mainly containers of consumer goods between
the ports of Vancouver, Montreal, New York and Philadelphia and inland Canadian
and U.S. destinations. North American Intermodal North American intermodal traffic, transporting mainly retail goods, moves
between Toronto, Montreal, Chicago and several western Canadian cities. CPR has
entered into co-location initiatives, under which major retailers have built
regional distribution facilities adjacent to certain CPR intermodal terminals. Expressway CPRs expressway provides high-quality intermodal services in the short-haul
market. Expressway works in partnership with the trucking industry by carrying
standard, non-reinforced trailers between major urban centres. A number of
major motor carriers serving the automotive, resource, food and retail sectors
use Expressway. Canadian Pacific Logistics Solutions Canadian Pacific Logistics Solutions (CPLS) is a newly formed division of CPR
which provides consulting services, logistics management, operations support
and transloading (the transfer of a shipment from one mode of transportation to
another). Other Business CPR earns additional revenues through the sale or lease of its assets. These
arrangements include infrastructure and operating agreements with
government-sponsored commuter rail authorities, the sale of CPRs rights to lay
fibre-optic cable along its track right-of-way and contracts with passenger
service operators. CPR also operates the Royal Canadian Pacific, a luxury
train composed of CPRs historic business car fleet. Safety CPRs Safety and Health Management Committee, established in 1996, provides
ongoing focus, leadership, commitment and support for efforts to improve the
safety of CPRs operations, and the safety and health of all CPR employees.
The Companys safety management process, called the Safety Framework, involves
more than 1,000 employees in planning and implementing safety-related
activities. This safety management process, combined with a planning process
that encompasses all operational functions, ensures a continuous and consistent
focus on safety. In 2003, U.S. Federal Railroad Administration (FRA) personal injuries per
200,000 employee hours (100 employee years) were 3.1, down approximately 14%
from 2002 and down 30% since 1999. FRA reportable train accidents per million
train miles were 1.8, the same as in 2002, and are down approximately 14% since
1999. Competition CPRs primary competitors for freight transportation in Canada and the U.S.
include other railways and trucking companies. In Canada and the U.S., CPR is
subject to competition for freight traffic from other Class 1 railways,
particularly BNSF, CN, NS, CSX and Union Pacific. Competition is based mainly
on price, service and accessibility to markets. Competition with the trucking
industry is generally focused on freight rates, flexibility of service and
transit time performance. 18




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  In 2002, CPR became the first railway in North America to be approved under a
new Canada Border Services Agency program to streamline clearance at the border
for imports from the U.S. Under the Customs Self-Assessment (CSA) program,
goods and shippers approved as low risk have a virtual fast lane into Canada on
CPR. Eligible goods include finished vehicles, parts for vehicles, food
products and other common items frequently imported from the U.S. The CSA program reduces the cost of compliance with Canadas import
regulations. Under the program, approved importers can file monthly summary
customs reports on their shipments instead of a report on each shipment.
Approved importers also benefit from improved efficiencies, as their goods can
be delivered directly to their facilities without stopping for inspection at
the border or waiting for customs clearance. CPR benefits from improved freight
car velocity, as shipments for customers approved under CSA can move more
easily across the U.S. border. Most recently, CPR and the Canadian and U.S. customs agencies signed a
declaration of principles to further enhance security at the Canada-U.S. border
and to ensure secure rail access to the U.S. The joint government-industry
initiative to enhance the security of U.S.-bound rail shipments ensures trade
continues to flow between the two countries. These discussions were part of
the larger process of implementing the Smart Border Declaration adopted by
Canada and the U.S. in December 2001. CPR also secured accreditation under U.S. Customs and Border Protection
(C&BP) Customs-Trade Partnership Against Terrorism (C-TPAT) program. C-TPAT
is a joint government-business initiative designed to build cooperative
relationships that strengthen overall supply chain and border security. CPR and customs officials are working to implement the measures outlined in the
declaration of principles. Labour Relations As at December 31, 2003, approximately 78% of CPRs workforce is unionized,
with approximately 81% of CPRs workforce located in Canada. Unionized
employees are represented by a total of 37 bargaining agents. Seven bargaining
agents represent CPR employees in Canada and the remaining 30 represent
employees in CPRs U.S. operations. Labour Relations  Canada Agreements are currently in place with four of the seven bargaining units in
Canada. Of the collective agreements currently in effect, two expire at the
end of 2004, the Canadian Auto Workers (CAW) and the International
Brotherhood of Electrical Workers (IBEW), and two expire at the end of 2005,
the Rail Canada Traffic Controllers (RCTC) and the Canadian Pacific Police
Association (CPPA). Collective agreements with freight car and locomotive repair employees
(represented by the CAW) and signal maintenance employees (represented by the
IBEW) provide for wage increases of 2% annually in 2001, 2002 and 2003 and 3%
in 2004 and contain improvements to health plans, pension and life insurance
benefits, as well as work-rule changes designed to increase flexibility and
reduce costs. In June 2003, members of the CPPA ratified a three-year agreement. In August
2003, the RCTC also ratified a three-year agreement. Both agreements are in
effect until the end of 2005 and allow for wage increases for 2003, 2004 and
2005 of 2%, 3% and 2%, respectively. They include benefit plan, pension and
work-rule changes designed to contain costs and maximize value for employees. Train crew employees have elected the Teamsters Canada Rail Conference as their
bargaining agent, replacing the Canadian Council of Railway Operating Unions
(CCROU). CPRs collective agreement with the CCROU expired on December 31,
2002, however, negotiations had been suspended pending the outcome of the
representational vote by union members. CPR expects to begin negotiating a
collective agreement in 2004. A three-year collective agreement was ratified in January 2004 by members of
the United Steel Workers of America (USWA). The agreement with the USWA,
which represents clerical employees of CPR, extends to the end of 2006. Negotiations with the Brotherhood of Maintenance of Way Employees (BMWE) have
been delayed due to an attempt by another union to represent the BMWE
membership. At this time, management is unable to predict when bargaining may
resume with the union, which represents employees who maintain CPRs track. 19




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  Labour Relations  U.S. CPR is party to collective agreements with 30 bargaining units in the U.S.
This includes 16 bargaining units representing employees of CPRs Soo Line and
14 bargaining units representing employees of CPRs D&H. In the U.S., Class 1
railroads negotiate collectively on a national basis, which impacts the
duration of the negotiating process with CPRs Soo Line. At the national
level, the bargaining units for the track maintainers, trainmen, yardmasters,
boilermakers, locomotive engineers, clerks, and signalmen have ratified
agreements that extend until the end of 2004. Although Soo Line does not
participate at the national level, the parties traditionally incorporate many
of the nationally negotiated terms into their settlements. As many of the
national agreements were just finalized in the latter part of 2003, Soo Line
negotiations are now progressing. The D&H is not a Class 1 railroad and
therefore negotiates contracts independent of national negotiations. Soo Line Fifteen of the 16 collective agreements applicable to Soo Line employees
expired at the end of 1999. The collective agreement with the track
maintenance workers (BMWE) extends to the end of 2004. At December 31, 2003,
Section VI notices indicating the intent to begin bargaining had been received
from all of the remaining bargaining units. Negotiations continue with the
bargaining units representing locomotive engineers, trainmen, yardmasters,
clerks and signalmen. The bargaining unit representing train dispatchers is
currently in mediation. Negotiations with the remaining bargaining units are
being held in abeyance pending the resolution of national settlements. D&H At December 31, 2003, D&H had agreements in effect with four of its 14
bargaining units. Agreements with six of the bargaining units expired on
January 1, 2003. Section VI notices have already been received from five of
these six bargaining units. There are four agreements that expired at the end
of 2001 and negotiations are ongoing with these bargaining units. This includes
the bargaining unit for the carmen that is currently in mediation. The four
remaining agreements with the trainmen, track maintainers, yardmasters and
police extend to the end of 2004. Environmental Protection CPR is governed by legislation and regulations in Canada and the U.S. relating
to waste and wastewater management, storage tanks, contaminated sites, spill
reporting and emergency response, environmental assessment, and other
environmental matters. CPR has implemented and trained its employees in environmental protection
policies and procedures and has improved its environmental infrastructure by
upgrading diesel fuel storage and dispensing areas, wastewater treatment plants
and waste storage areas. CPR also has procedures in place to minimize the
impact of its operations on ecologically sensitive areas, such as fish habitat
and national parks. CPR continues to focus on preventing spills and other
incidents that may have a negative impact on the environment. As a precaution,
CPR has established a Strategic Emergency Response Contractor network and has
located spill equipment kits across Canada and the U.S. to ensure a rapid and
efficient response to environmental incidents. The Company established the
contractor network in the U.S. Midwest and the network has been able to respond
within three hours to incidents anywhere on the 3,200 miles of track in the
region. The Company has set this response time as the target for CPRs entire
system. In addition, CPR regularly updates and tests its emergency
preparedness and response plans to ensure rapid and effective action. CPR undertakes environmental compliance audits or inspections of its operations
to monitor environmental performance against federal, provincial, state and
municipal regulations and against CPRs own environmental policies. In 2000,
CPRs environmental audit program was benchmarked by an external consultant
against the programs of Fortune 500 corporations from the automotive, utility
and chemical industries. The consultant assessed CPRs programs, including
documentation, to be superior in relation to the documentation and programs
instituted by a number of other corporations in the Fortune 500 group. Site investigation and characterization are ongoing at a U.S. location where
environmental contamination has been identified at sites formerly leased to
third parties by Soo Line. Soo Line is participating in the State of
Minnesotas voluntary investigation and clean up program and the site is the
subject of ongoing fieldwork that is being undertaken in conjunction with the
appropriate State authorities, to determine the extent and magnitude of the
contamination and the appropriate remediation plan. 20




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  At this time, the investigative fieldwork has not been completed, the extent
and magnitude of the contamination have not yet been determined and no
remediation action plan has been developed. Soo Line has initiated civil
litigation against its former lessees and expects to ultimately recover a
substantial portion of its investigative and clean-up costs. In 1995, CPR recorded a provision of $144 million, before tax, to cover
anticipated expenditures on environmental remediation programs. The Company
re-evaluated its environmental liability needs in 1999 and as a result it
increased expected remediation costs by $50 million before tax. Other smaller
adjustments to the environmental remediation program and related accruals are
made by the Company annually, or as required, based on ongoing changes to, and
analysis of, the remediation program and related costs. CPR spent approximately $38 million in 2003 for environmental management. Of
this amount, $15 million was spent on ongoing operations, including $2.4
million for the disposal of derailment wastes, $3 million was related to
capital program upgrades and $20 million was spent under remediation programs. CPR became a Responsible Care® partner of the Canadian Chemical Producers
Association in 1998. Responsible Care® is a chemical industry initiative that
involves a public commitment to continually improve the industrys
environmental, health and safety performance. CPR successfully completed its
first Responsible Care® verification in June 2002 and was granted Responsible
Care® practice-in-place status. CPR also became a partner of the American Chemistry Council in 1999. As such,
CPR is required to undergo verification every three years of its commitment to
continuously improve its environmental, health and safety performance and
community outreach efforts. The American Chemistry Council recently made
verification mandatory for all member and partner companies. CPR is scheduled
to be verified for the first time in the U.S. by 2006. Regulation and Other Issues CPRs rail operations in Canada are subject to regulation of service, rate
setting, network rationalization and safety by the CTA, the Railway Safety Act
(RSA) and certain other statutes. The Companys U.S. rail operations are
subject to regulations administered by the U.S. Surface Transportation Board
(STB) and the FRA. Canadian Regulation CPRs economic activities, including matters relating to rates, level of
service obligations and line discontinuance, are subject to the provisions of
the CTA. The CTA contains shipper rate and service protections, including final-offer
arbitration, competitive line rates, and compulsory interswitching (which
allows a shipper to request a railway to move its traffic to the nearest
competitive interchange point with another railway within a 30-kilometre radius
for a regulated fee). However, to gain recourse to certain of these
protections, shippers must establish that they would suffer substantial
commercial harm if the relief sought were not granted. These shipper
protections also extend to western grain transportation. In 2000, the Minister of Transport (the Minister) initiated a review of the
CTA to assess whether it provides Canadians with an efficient, flexible and
affordable transportation system. The report of the panel appointed by the
Minister to conduct the review was released on July 18, 2001. The report
acknowledged there is a significant level of competition within the Canadian
transportation industry, railways are entitled to adequate financial returns,
and railways have improved their productivity and returned productivity
improvements to customers. In addition, the panel recognized that the freight
rail system works well for the vast majority of users in most markets. On February 25, 2003, the federal government introduced a bill with
miscellaneous changes to the CTA. The bill did not become legislation. It is
not known whether the federal government will reintroduce the proposed changes
in the current or any future Parliament. During 2002, Ferroequus Railway Company Limited (Ferroequus), a company with
no railway equipment or infrastructure, applied to the Canadian Transportation
Agency (the Agency) to obtain running rights over the tracks of CN from a
CN/CPR 21




---



##### Table of Contents



ITEM 4   NARRATIVE DESCRIPTION OF THE BUSINESS  interchange at Camrose, Alberta, to Prince Rupert, British Columbia, for the
movement of grain shipments originating on CPRs railway lines. Following a
public hearing, the Agency dismissed the application on the basis that it was
not in the public interest. Ferroequus appeal of the Agencys decision was
dismissed by the Federal Court of Appeal. Pursuant to the CTA, CPR and CN are subject to prescribed limits on revenue
from transporting western Canadian grain. Penalties may be imposed if these
limits are exceeded. In 2003, the Agency determined that CPR and CN revenues
for the movement of grain in western Canada did not exceed their limits for the
2002 - 2003 crop year. Canadas federally-regulated railways are also subject to the RSA, which
governs safety and operational aspects of the industry, as well as the Canadian
Transportation Accident Investigation and Safety Board Act. The RSA was amended
in 1999, providing new regulation-making powers to Transport Canada.
Significant new regulations have been proposed, including regulations relating
to rail safety management systems, crossing standards, whistle bans and the
prevention of unauthorized access to railway rights-of-way. The regulations
respecting rail safety management systems were implemented in 2001. The
remaining regulations took effect in 2003. CPR is also subject to legislation
relating to the environment and the transportation of hazardous materials.
Amendments to the Transportation of Dangerous Goods regulations were enacted in
August 2002. U.S. Regulation There have been efforts in recent years to re-regulate certain aspects of the
U.S. rail industry previously deregulated under the Staggers Rail Act of 1980.
The rail industry opposes such re-regulation. The STB regulates a variety of railway matters, including service levels,
certain freight car rental payments, certain rail traffic rates, the terms
under which railways may gain access to each others facilities and traffic,
mergers or acquisitions of railways and the abandonment, sale, and
discontinuance of operations on rail lines. In June 2001, the STB issued new regulations governing mergers and
consolidation of Class 1 railways in the U.S. CPR believes these new
regulations require applicants to demonstrate that a proposed transaction would
be in the public interest and would enhance competition where necessary to
offset any negative effects. The FRA governs all safety-related aspects of railway operations within the
U.S. and, therefore, has jurisdiction over CPR operations conducted within the
U.S. State and local regulatory agencies may also exercise jurisdiction over
certain safety and operational matters of local significance. Insurance CPR maintains insurance policies to protect its operations. CPRs insurance
policies include, but are not limited to, liability insurance covering its
railway operations, directors and officers liability insurance, automobile
insurance and property insurance. The latter includes business interruption
loss in the event of catastrophic damage to CPRs infrastructure. Only CPRs
property coverage excludes terrorism, except for any relief provided by the
U.S. Terrorism Risk Insurance Act. CPR believes that it has adequate insurance
in place to protect the Company from known and unknown liabilities. Related-party Transactions In 2003, CPR provided no rail services to related parties. CPR entered into agreements with former affiliate CP Ships Ltd. (CP Ships), a
related party of CPR prior to completion of the Arrangement, for the
transportation of CP Ships container rail traffic through the Port of
Montreal. The agreements provide for the use of CPR rail services for all of CP
Ships container rail traffic on specified routes to and from certain cities in
Canada and the U.S. The agreements with CP Ships were to expire on January 31,
2004. However, the parties have entered into a new long-term agreement
extending the arrangement to 2014. The terms of the new agreement do not
differ materially from those contained in the agreements entered into prior to
the completion of the Arrangement. CPR has entered into an agreement with former affiliate Fording Inc.
(Fording), a related party of CPR prior to completion of the Arrangement, for
the transportation of all of the coal processed at Fordings mines in British
Columbia to the Port of Vancouver. The initial term of the Fording agreement
expires on March 31, 2005. 22




---



##### Table of Contents



ITEM 5   SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION  The following table presents selected financial and operating information for
CPR for the years ended December 31, 1999 through 2003 for income statement
data and December 31, 2000 through 2003 for all other financial and operating
information presented. 2003
    
    2002
    
    2001
    
    2000
    
    1999(in millions, except per share data)INCOME STATEMENT DATA:Revenues
    
    $
    3,660.7
    
    
    $
    3,665.6
    
    
    $
    3,698.6
    
    
    $
    3,655.1
    
    
    $
    3,496.4Operating expenses, before other
specified items(1)(2)
    
    
    2,920.1
    
    
    
    2,809.1
    
    
    
    2,857.6
    
    
    
    2,809.9
    
    
    
    2,734.1Operating income, before loss on
transfer of assets to outsourcing firm
and special charge for labour
restructuring and asset impairment in
2003, spin-off related and incentive
compensation charges in 2001(1), and
restructuring, environmental and Y2K
charges in 1999(2)
    
    
    740.6
    
    
    
    856.5
    
    
    
    841.0
    
    
    
    845.2
    
    
    
    762.3Other charges, before foreign exchange
gains and losses on long-term debt (FX
on LTD) and bridge financing fees
related to spin-off(1)
    
    
    33.5
    
    
    
    21.8
    
    
    
    26.4
    
    
    
    21.0
    
    
    
    21.8Interest expense
    
    
    218.7
    
    
    
    242.2
    
    
    
    209.6
    
    
    
    167.0
    
    
    
    136.6Income tax expense, before FX on LTD,
income tax recovery and income tax on
other specified items(1)(2)(3)
    
    
    152.2
    
    
    
    185.2
    
    
    
    224.7
    
    
    
    247.1
    
    
    
    235.4Income,
before other specified items and FX on LTD(1)(2)
    
    $
    336.2
    
    
    $
    407.3
    
    
    $
    380.3
    
    
    $
    410.1
    
    
    $
    368.5FX on LTD(3) (net of tax)
    
    
    224.4
    
    
    
    16.7
    
    
    
    (48.2
    )
    
    
    (39.2
    )
    
    
    37.5Other specified items:Loss on transfer of assets to
outsourcing firm
    
    
    (28.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring, asset impairment and/or
environmental charges
    
    
    (228.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (472.2
    )Y2K charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28.4
    )Spin-off related and incentive
compensation charges
    
    
    
    
    
    
    
    
    
    
    (24.5
    )
    
    
    
    
    
    
    Bridge financing fees related to spin-off
    
    
    
    
    
    
    
    
    
    
    (17.2
    )
    
    
    
    
    
    
    Revaluation of future income taxes
    
    
    59.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax rate change effect on future income
tax liability
    
    
    (52.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax recovery
    
    
    
    
    
    
    72.0
    
    
    
    64.0
    
    
    
    131.7
    
    
    
    Income tax on other specified items
    
    
    88.9
    
    
    
    
    
    
    
    18.1
    
    
    
    
    
    
    
    199.1Net income(3)
    
    $
    398.7
    
    
    $
    496.0
    
    
    $
    372.5
    
    
    $
    502.6
    
    
    $
    104.5Basic earnings per share, before other
specified items and FX on LTD(1)(2)(3)
    
    $
    2.12
    
    
    $
    2.57
    
    
    $
    2.40
    
    
    $
    2.59
    
    
    $
    2.33Diluted earnings per share, before other
specified items and FX on LTD(1)(2)(3)
    
    $
    2.11
    
    
    $
    2.56
    
    
    $
    2.39
    
    
    $
    2.58
    
    
    $
    2.32Basic earnings per share(3)
    
    $
    2.51
    
    
    $
    3.13
    
    
    $
    2.35
    
    
    $
    3.18
    
    
    $
    0.66Diluted earnings per share(3)
    
    $
    2.51
    
    
    $
    3.11
    
    
    $
    2.34
    
    
    $
    3.17
    
    
    $
    0.66
 23




---



##### Table of Contents



ITEM 5   SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION  2003
    
    2002
    
    2001
    
    2000(in millions, except per share data)BALANCE SHEET DATA:Total assets(3)
    
    $
    9,957.1
    
    
    $
    9,660.8
    
    
    $
    9,661.1
    
    
    $
    8,658.2Long-term debt, before current portion
    
    $
    3,348.9
    
    
    $
    2,922.1
    
    
    $
    3,709.0
    
    
    $
    2,276.3Shareholders equity
    
    $
    3,675.2
    
    
    $
    3,386.4
    
    
    $
    2,972.4
    
    
    $
    3,435.6FINANCIAL RATIOS:Operating ratio, before other
specified items(1)
    
    
    79.8
    %
    
    
    76.6
    %
    
    
    77.3
    %
    
    
    76.9
    %Annual return on capital employed
(after taxes), before other specified
items and FX on LTD(4)
    
    
    7.3
    %
    
    
    9.1
    %
    
    
    8.7
    %
    
    
    9.5
    %Net-debt to net-debt-plus-equity(5)
    
    
    46.8
    %
    
    
    47.3
    %
    
    
    51.8
    %
    
    
    39.1
    %OPERATING DATA:GTMs (millions)
    
    
    219,961
    
    
    
    209,596
    
    
    
    212,928
    
    
    
    211,946Average train weights (tons)
    
    
    5,492
    
    
    
    5,473
    
    
    
    5,580
    
    
    
    5,418U.S. gallons of fuel per thousand GTMs
    
    
    1.25
    
    
    
    1.24
    
    
    
    1.25
    
    
    
    1.29Average number of active employees
    
    
    16,126
    
    
    
    16,116
    
    
    
    16,987
    
    
    
    17,965
   Notes:(1)
    
    Excludes other specified items which are described under the heading
Other Specified Items in the Managements Discussion and Analysis
incorporated by reference into Item 6 of this Annual Information Form. It
should be noted that CPRs operating results, before FX on LTD and other
specified items, as described in this AIF, have no standardized meanings
prescribed by Canadian generally accepted accounting principles (GAAP)
and, therefore, are unlikely to be comparable to similar measures
presented by other companies. In recent prior disclosure documents, CPR
has referred to certain items excluded from non-GAAP earnings measures as
non-recurring items. However, in this AIF and accompanying documents,
items (other than FX on LTD) excluded from non-GAAP earnings measures have
been identified as other specified items in compliance with Revised
Canadian Securities Administrators (CSA) Staff Notice 52-306, as it is
not possible to conclude that an item or items similar to one or more of
those so designated will not occur within the next two years.(2)
    
    Excludes other specified items in 1999 of $472.2 million ($284.4 million
after tax) in restructuring and environmental charges and $28.4 million
($17.1 million after tax) in charges related to Y2K remediation work.(3)
    
    Restated. Effective January 1, 2002, CPR was required to adopt
retroactively, with restatement, the new Canadian Institute of Chartered
Accountants accounting standard for the treatment of FX on LTD.(4)
    
    Return on capital employed (after taxes) is calculated as income, before
other specified items and FX on LTD, less interest expense, divided by
average net-debt-plus-equity, and multiplied by one minus CPRCs
normalized tax rate for each respective period.(5)
    
    Net-debt to net-debt-plus-equity has been calculated by dividing total
debt (being long-term debt, including long-term debt maturing within one
year, plus advances from affiliates) by total capitalization (being total
debt plus total shareholders equity). Reference is made to the factors affecting the comparability of the foregoing
financial data under the headings Summary of significant accounting policies,
New accounting policies and Future accounting changes in Notes 1, 2 and 3,
respectively, in the Notes to Consolidated Financial Statements included in
the Companys 2003 Annual Report. 24




---



##### Table of Contents



ITEM 5   SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION  Declared Dividends and Dividend Policy Quarterly dividends of $0.1275 per Common Share were declared by the Board of
Directors and were payable: on January 28, 2002, April 29, 2002, July 29, 2002,
and October 28, 2002, to holders record on December 27, 2001, March 27, 2002,
June 27, 2002 and September 27, 2002, respectively; and on January 27, 2003,
April 28, 2003, July 28, 2003, and October 27, 2003 to holders of record on
December 27, 2002, March 28, 2003, June 27, 2003, and September 26, 2003,
respectively. In addition, a dividend of $0.1275 was declared on December 10,
2003, payable on January 26, 2004, to holders of record on December 24, 2003.
The aforementioned dividend payable on January 28, 2002, was declared by the
Board of Directors on December 4, 2001, and was the first dividend declared
following the initial listing of CPRs Common Shares on the Toronto and New
York stock exchanges in October 2001. The Board of Directors will give consideration on a quarterly basis to the
payment of future dividends. The amount of any future quarterly dividends will
be determined based on a number of factors that may include the results of
operations, financial condition, cash requirements and future prospects of the
Company. The Company is, however, under no obligation to declare dividends and
the declaration of dividends is wholly within the Board of Directors
discretion. Further, the Board of Directors may cease declaring dividends or
may declare dividends in amounts that are different from those previously
declared. Finally, restrictions in the credit or financing agreements entered
into by the Company or the provisions of applicable law may preclude the
payment of dividends in certain circumstances. 25




---



##### Table of Contents



ITEM 6   MANAGEMENTS DISCUSSION AND ANALYSIS  Reference is made to the section entitled Managements Discussion and
Analysis set out on pages 1 to 30 of the Companys 2003 Annual Report and to
the quarterly financial data set out on page 16 thereof, which are incorporated
by reference in this Annual Information Form. 26




---



##### Table of Contents



ITEM 7   MARKET FOR SECURITIES  Stock Exchange Listings The common shares of CPR are listed on the Toronto Stock Exchange and the New
York Stock Exchange under the symbol CP. 27




---



##### Table of Contents



ITEM 8   DIRECTORS AND OFFICERS  The following are the names and municipalities of residence of the directors
and officers of the Company, their positions and principal occupations within
the past five years, the period during which each director has served as
director of the Company, and the date on which each directors term of office
expires. Directors Year of annual meetingPosition held and principal occupation within
    
    at which term of officeName and municipality of residence
    
    the preceding five years(1)
    
    expires (Director since)S.E. Bachand(2)(3)(5)
Ponte Vedra Beach, Florida
    
    Former President and Chief Executive
Officer, Canadian Tire Corporation, Limited
(hard goods retailer specializing in
automotive, sports and leisure and home
products)
    
    2004
(2001)J.E. Cleghorn,
O.C., F.C.A.(2)(3)(6)
Toronto, Ontario
    
    Chairman, SNC-Lavalin Group Inc.,
(international engineering and construction
firm)
    
    2004
(2001)T.W. Faithfull(3)(4)(6)
Richmond, Surrey, England
    
    Retired President and Chief Executive Officer
Shell Canada Limited (oil and gas company)
    
    2004
(2003)J. Lamarre(3)(4)(6)
Montreal, Québec
    
    President and Chief Executive Officer,
SNC-Lavalin Group Inc. (international
engineering and construction firm)
    
    2004
(2001)J.E. Newall, O.C.(3)
Calgary, Alberta
    
    Chairman, Canadian Pacific Railway Limited,
and NOVA Chemicals Corporation (chemicals
company producing styrenics and olefins and
polyolefin products)
    
    2004
(2001)Dr. J.R. Nininger(3)(4)(5)
Ottawa, Ontario
    
    Retired President and Chief Executive
Officer, The Conference Board of Canada
(private not-for-profit research group)
    
    2004
(2001)M. Paquin(3)(4)
Montreal, Québec
    
    President and Chief Executive Officer,
Logistec Corporation (international
stevedoring company)
    
    2004
(2001)M.E.J. Phelps, O.C.(3)(4)(5)
West Vancouver, British Columbia
    
    Chairman, Dornoch Capital Inc. (private
investment company)
    
    2004
(2001)R. Phillips, O.C.(2)(3)(6)
Regina, Saskatchewan
    
    Retired President and Chief Executive
Officer, IPSCO Inc. (steel manufacturing
company)
    
    2004
(2001)R.J. Ritchie
Calgary, Alberta
    
    President and Chief Executive Officer,
Canadian Pacific Railway Limited
    
    2004
(2001)The Rt. Hon.
The Viscount Weir(3)(4)(6)
Ayrshire, Scotland
    
    Chairman, CP Ships Inc. (an international
shipping company)
    
    2004
(2001)M.W. Wright(2)(3)(5)
Longboat Key, Florida
    
    Retired Chairman of the Board and Chief
Executive Officer, SUPERVALU INC. (food
distributor and grocery retailer)
    
    2004
(2001)
 28




---



##### Table of Contents



ITEM 8   DIRECTORS AND OFFICERS   Notes:(1)
    
    S.E. Bachand was President and Chief Executive Officer of Canadian Tire
Corporation, Limited from March 1993 to August 2000. He was also a
director of Krystal Bond Inc. when it was cease traded on April 12, 2002,
for failure to file financial statements, and it has since ceased to
operate as a going concern. J.E. Cleghorn was Chairman and Chief Executive
Officer of the Royal Bank of Canada from January 1995 to July 2001. Dr.
J.R. Nininger was President and Chief Executive Officer of The Conference
Board of Canada from September 1978 to August 2001. M.E.J. Phelps was
Chairman and Chief Executive Officer of Westcoast Energy Inc. from June
1988 until March 2002. R. Phillips was President and Chief Executive
Officer of IPSCO Inc. from 1982 until December 2001. R.J. Ritchie became
President of Canadian Pacific Railway Company in July 1995 and continues
to hold that position. Lord Weir was Chairman, Balfour Beatty plc from
1999 to May 2003. M.W. Wright was Chairman and Chief Executive Officer of
SUPERVALU INC. from June 1981 until June 2001 and Chairman until June
2002.(2)
    
    Member of the Audit, Finance and Risk Management Committee.(3)
    
    Member of the Corporate Governance and Nominating Committee.(4)
    
    Member of the Environmental and Safety Committee.(5)
    
    Member of the Management Resources and Compensation Committee.(6)
    
    Member of the Pension Trust Fund Committee. Senior Officers Principal occupation within theName and municipality of residence
    
    Position held
    
    preceding five yearsJ.E. Newall, O.C.
Calgary, Alberta
    
    Chairman
    
    Chairman, NOVA Chemicals
Corporation; Chief Executive
Officer, NOVA Corporation
(chemicals company producing
styrenics, olefins and
polyolefin products)R.J. Ritchie
Calgary, Alberta
    
    President and Chief
Executive Officer
    
    President and CEO, Canadian
Pacific Railway CompanyM.T. Waites
Municipal District of Rockyview, Alberta
    
    Executive Vice-
President and Chief
Financial Officer
    
    Executive Vice-President and
Chief Financial Officer; Chief
Executive Officer, U.S.
Network, Canadian Pacific
Railway Company; Executive
Vice-President and Chief
Financial Officer, Canadian
Pacific Railway Company; Vice-President and
Comptroller, Canadian Pacific
Railway CompanyF.J. Green
Calgary, Alberta
    
    Executive
Vice-President,
Operations and
Marketing
    
    Executive Vice-President,
Operations and Marketing,
Canadian Pacific Railway
Company; Senior
Vice-President, Marketing,
Canadian Pacific Railway
Company; Vice-President, Yield
& Asset Performance, Canadian
Pacific Railway Company;
Vice-President, Marketing,
Canadian Pacific Railway
Company; Vice-President,
Resource Products Group,
Canadian Pacific Railway
CompanyW.P. Bell
Calgary, Alberta
    
    Vice-President,
Investor Relations
    
    Vice-President, Investor
Relations, Canadian Pacific
Railway Company;
Vice-President, E-Business,
Canadian Pacific Railway
Company; Vice-President,
Logistics Systems, Canadian
Pacific Railway CompanyP. Clark
Calgary, Alberta
    
    Vice-President,
Communications and
Public Affairs
    
    Vice-President, Communications
and Public Affairs, Canadian
Pacific Railway Company
 29




---



##### Table of Contents



ITEM 8   DIRECTORS AND OFFICERS  Principal occupation within theName and municipality of residence
    
    Position held
    
    preceding five yearsJ.J. Doolan
Municipal District of Rockyview, Alberta
    
    Vice-President and
Treasurer
    
    Vice-President and Treasurer,
Canadian Pacific Railway
Company; Assistant Treasurer,
Canadian Pacific Railway
Company; President, River
Ridge Financial Management
Ltd.(financial consulting and
management company); General
Manager, Treasury, PanCanadian
Petroleum Limited; Treasurer,
PanCanadian Petroleum LimitedB.W. Grassby
Calgary, Alberta
    
    Vice-President and
Comptroller
    
    Vice-President and
Comptroller, Canadian Pacific
Railway Company;
Vice-President, Finance and
Secretary, Controller and
Assistant Secretary, CAE
Electronics Ltd. (hi-tech
electronics company)P.A. Guthrie
Municipal District of Rockyview, Alberta
    
    Vice-President, Law
    
    Vice-President, Law, Canadian
Pacific Railway Company;
Assistant Vice-President Legal
Services and General Counsel,
Canadian Pacific Railway
Company; Chief Regulatory
Counsel, Canadian Pacific
Railway CompanyR.V. Horte
Calgary, Alberta
    
    Corporate Secretary
    
    Corporate Secretary, Canadian
Pacific Railway Company;
Senior Assistant Corporate
Secretary, Canadian Pacific
Railway Limited and Canadian
Pacific Railway Company;
Assistant Corporate Secretary,
Canadian Pacific Railway
Limited and Canadian Pacific
Railway CompanyG.A. Feigel
Calgary, Alberta
    
    Assistant Corporate
Secretary
    
    Assistant Corporate Secretary,
Canadian Pacific Railway
Company; Assistant Corporate
Secretary, Canadian Pacific
LimitedC.A. Connolly
Municipal District of Rockyview, Alberta
    
    Assistant Treasurer
    
    Assistant Treasurer, Capital
Markets, Canadian Pacific
Railway Company; Director of
Capital Markets, Treasury,
Canadian Pacific Railway
Company; Director of Finance,
Information Services, Canadian
Pacific Railway Company;
Executive Assistant to the
President & Chief Executive
Officer, Canadian Pacific
Railway Company
 Shareholdings of Directors and Officers As at December 31, 2003, the directors and senior officers, as a group,
beneficially owned, either directly or indirectly, or exercised control or
direction over a total of 154,493 Common Shares of CPR, representing 0.10% of
the outstanding Common Shares as of that date. 30




---



##### Table of Contents



ITEM 9   ADDITIONAL INFORMATION  When the securities of the Company are in the course of a distribution pursuant
to a short-form prospectus, or a preliminary short-form prospectus has been
filed in respect of a distribution of its securities, copies of the following
documents may be obtained upon request from the Corporate Secretary, Canadian
Pacific Railway Limited, Suite 2000, 401-9th Avenue SW, Calgary, Alberta, T2P
4Z4:  (i)
    
    this Annual Information Form, together with one copy
of any document, or the pertinent pages of any document,
incorporated by reference in this Annual Information Form,(ii)
    
    the Companys comparative financial statements for
its most recently completed financial year for which financial
statements have been filed, together with the accompanying
report of the auditor and a copy of the most recent interim
financial statements of the Company that have been filed, if
any, for any period after the end of its most recently completed
financial year,(iii)
    
    the Companys information circular in respect of its
most recent annual meeting of shareholders that involved the
election of directors; and(iv)
    
    any other documents that are incorporated by
reference into the preliminary short-form prospectus or the
short-form prospectus that are not required to be provided under
paragraphs (i), (ii) or (iii). At any other time, copies of any other documents referred to in paragraphs (i),
(ii) and (iii) above may be obtained upon request from the Corporate Secretary.
A person who is not a security holder of the Company may be required to pay a
reasonable charge for such copies. Additional information, including directors and officers remuneration and
indebtedness, principal holders of the Companys securities, options to
purchase securities and interests of insiders in material transactions, where
applicable, is contained in the Companys information circular for its most
recent annual meeting of shareholders that involved the election of directors.
Additional information is provided in the Companys comparative financial
statements for its most recently completed financial year. 31




---



##### Table of Contents



(CPR LETTERHEAD AND LOGO)




---



##### Table of Contents



(CPR ANNUAL REPORT)




---



##### Table of Contents



01
    
    business profile and strategy
    
    
    19
    
    
    contractual commitments02
    
    highlights summary
    
    
    20
    
    
    foreign exchange03
    
    operating results
    
    
    21
    
    
    future trends, commitments03
    
    non-gaap earnings
    
    
    
    
    
    and risks07
    
    volumes
    
    
    26
    
    
    critical accounting estimates08
    
    revenues
    
    
    29
    
    
    systems, procedures and controls10
    
    performance indicators
    
    
    30
    
    
    forward-looking information12
    
    operating expenses, before other
    
    
    31
    
    
    management's responsibilityspecified items
    
    
    
    
    
    for financial reporting13
    
    other income statement items
    
    
    32
    
    
    auditors' report14
    
    fourth-quarter summary
    
    
    33
    
    
    consolidated financial statements16
    
    changes in accounting policy
    
    
    37
    
    
    notes to consolidated16
    
    liquidity and capital resources
    
    
    
    
    
    financial statements18
    
    balance sheet
    
    
    73
    
    
    five-year summary19
    
    financial instruments
    
    
    74
    
    
    shareholder information19
    
    off-balance sheet arrangements




---



##### Table of Contents



(CPR TRAIN)




---



##### Table of Contents



(TRAINS AND CITIES)




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    01
    managements discussion and analysis February 19, 2004  This Managements Discussion and Analysis
(MD&A) supplements the consolidated
financial statements and related notes for
the year ended December 31, 2003. Except
where otherwise indicated, all financial
information reflected herein is expressed in
Canadian dollars. business profile and strategy BUSINESS PROFILE
 containers that can be handled by train,
ship and truck, and in domestic containers
and trailers that can move by train and
truck. STRATEGY  ADDITIONAL INFORMATION




---



##### Table of Contents



PG
    02
    |
    2003 Canadian Pacific Railway Annual Report
    highlights summary For the year ended December 31 (in millions, except per share data)
    
    2003
    
    
    2002
    
    
    2001Revenues
    
    $
    3,660.7
    
    
    $
    3,665.6
    
    
    $
    3,698.6Operating expenses
    
    
    2,920.1
    
    
    
    2,809.1
    
    
    
    2,857.6Operating income, before the following:
    
    
    740.6
    
    
    
    856.5
    
    
    
    841.0Special charge for labour restructuring and asset impairment
    
    
    228.5
    
    
    
    
    
    
    
    Loss on transfer of assets to outsourcing firm
    
    
    28.9
    
    
    
    
    
    
    
    Spin-off related and incentive compensation charges
    
    
    
    
    
    
    
    
    
    
    24.5Operating income
    
    
    483.2
    
    
    
    856.5
    
    
    
    816.5Other charges
    
    
    33.5
    
    
    
    21.8
    
    
    
    26.4Foreign exchange (gains) losses on long-term debt (FX on LTD)
    
    
    (209.5
    )
    
    
    (13.4
    )
    
    
    58.2Bridge financing fees related to spin-off
    
    
    
    
    
    
    
    
    
    
    17.2Interest expense
    
    
    218.7
    
    
    
    242.2
    
    
    
    209.6Income tax expense
    
    
    41.8
    
    
    
    109.9
    
    
    
    132.6Net income
    
    $
    398.7
    
    
    $
    496.0
    
    
    $
    372.5Basic earnings per share
    
    $
    2.51
    
    
    $
    3.13
    
    
    $
    2.35Diluted earnings per share
    
    $
    2.51
    
    
    $
    3.11
    
    
    $
    2.34Total assets
    
    $
    9,957.1
    
    
    $
    9,660.8
    
    
    $
    9,661.1Total long-term financial liabilities
    
    $
    5,327.3
    
    
    $
    4,776.6
    
    
    $
    5,522.3




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    03
    operating results  CPRs net income for the year ended December
31, 2003, was $398.7 million, down $97.3
million from $496.0 million in 2002, and up
$26.2 million from $372.5 million in 2001.
When compared to 2002, net income in 2003
benefited from higher foreign exchange gains
on long-term debt (LTD) as the Canadian
dollar strengthened relative to the U.S.
dollar (FX) but declined due to the net
effect of FX on U.S. dollar-denominated
revenues and expenses, a special charge
(the special charge) taken in the second
quarter of 2003 and a loss on the transfer
of assets in the fourth quarter of 2003
(discussed further in the Non-GAAP
Earnings section, under the subheading
Other Specified Items). Net income in 2002
increased over 2001 due to higher foreign
exchange gains on long-term debt and a
decrease in operating expenses as a result
of cost-cutting initiatives. Operating income in 2003 was $483.2 million,
down $373.3 million from $856.5 million in
2002, and a decrease of $333.3 million from
$816.5 million in 2001. Most of the decline
in 2003, compared to 2002, was due to the
net effect of FX on U.S. dollar-denominated
revenues and expenses, the special charge
and the loss on transfer of assets,
described above. Operating income was also
negatively affected by lower grain volumes
in the first half of 2003 due to drought on
the Canadian prairies, higher fuel prices
and increased costs as a result of service
disruptions in the first quarter of 2003
caused by severe winter weather conditions
and derailments. CPRs operating income in
2002 increased over 2001 due mainly to costs
included in 2001 expenses related to CPRs
spin-off from Canadian Pacific Limited
(CPL). Diluted earnings per share (EPS) in 2003
were $2.51, decreasing $0.60 from $3.11 in
2002, and improving $0.17 from $2.34 in
2001. Diluted EPS is calculated by dividing
net income by the weighted average number
of shares outstanding, adjusted for
outstanding stock options.
 Fluctuations in the value of the Canadian
dollar affect CPRs results because U.S.
dollar-denominated revenues and expenses are
translated into Canadian dollars. A stronger
Canadian dollar reduces U.S.
dollar-denominated revenues and expenses. It
also reduces operating income because a
higher percentage of revenues than expenses
is generated in U.S. dollars. However, this
negative impact is largely offset by a
reduction in the cost of long-term debt
denominated in U.S. dollars. CPR has
arranged a significant portion of its
long-term debt in U.S. dollars as a currency
hedge. The Canadian dollar appreciated more than 11%
in 2003, with the average annual foreign
exchange rate for converting U.S. dollars to
Canadian dollars increasing to $0.7099 in
2003 from $0.6368 in 2002. This reduced
revenues in 2003 by approximately $192
million and operating expenses by
approximately $137 million. The Canadian
dollars gain reduced operating income in
2003 by $55 million and after-tax income
before FX on LTD and other specified items
by $22 million. non-gaap earnings CPR presents non-GAAP operating earnings to
provide a basis for evaluating underlying
earnings trends that can be compared with
results in the prior periods. Non-GAAP
earnings exclude foreign currency
translation effects on long-term debt as
well as other specified items that are not
among CPRs normal ongoing revenues and
operating expenses. The impact of volatile,
short-term rate fluctuations on
foreign-denominated debt is only realized
when long-term debt matures or is settled. A
reconciliation of income, before FX on LTD
and other specified items, to net income as
presented in the financial statements is
detailed in the table on page 5. It should be noted that CPRs operating
results, before FX on LTD and other
specified items, as described in this MD&A,
have no standardized meanings prescribed by




---



##### Table of Contents



PG
    04
    |
    2003 Canadian Pacific Railway Annual Report
     Canadian generally accepted accounting
principles (GAAP) and, therefore, are
unlikely to be comparable to similar
measures presented by other companies. In
recent disclosure documents, CPR has
referred to certain items excluded from
non-GAAP earnings measures as
non-recurring items. However, in this
MD&A and accompanying documents, items
(other than FX on LTD) excluded from
non-GAAP earnings measures have been
identified as other specified items in
compliance with Revised Canadian Securities
Administrators (CSA) Staff Notice 52-306,
as it is not possible to conclude that an
item or items similar to one or more of
those so designated will not occur within
the next two years.
 NON-GAAP RESULTS
   NON-GAAP PERFORMANCE INDICATORS For the year ended December 31
    
    2003
    
    2002
    
    2001Operating
ratio, before other specified items (1)
    
    
    79.8
    %
    
    
    76.6
    %
    
    
    77.3
    %Basic EPS,
before FX on LTD and other specified items (1)
    
    $
    2.12
    
    
    $
    2.57
    
    
    $
    2.40Diluted EPS,
before FX on LTD and other specified items (1)
    
    $
    2.11
    
    
    $
    2.56
    
    
    $
    2.39
 (1)




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    05
    summarized statement of consolidated income  For the year ended December 31 (in millions)
    
    2003
    
    
    2002
    
    
    2001Revenues
    
    $
    3,660.7
    
    
    $
    3,665.6
    
    
    $
    3,698.6Operating expenses, before other specified items (1)
    
    
    2,920.1
    
    
    
    2,809.1
    
    
    
    2,857.6Operating income, before other specified items (1)
    
    
    740.6
    
    
    
    856.5
    
    
    
    841.0Other charges
    
    
    33.5
    
    
    
    21.8
    
    
    
    26.4Interest expense
    
    
    218.7
    
    
    
    242.2
    
    
    
    209.6Income tax expense, before income tax on FX on LTD
and other specified items (1)
    
    
    152.2
    
    
    
    185.2
    
    
    
    224.7Income, before FX on LTD and other specified items (1)
    
    
    336.2
    
    
    
    407.3
    
    
    
    380.3Foreign exchange gains (losses) on long-term debtFX on LTD  gain (loss)
    
    
    209.5
    
    
    
    13.4
    
    
    
    (58.2
    )Income tax on FX on LTD
    
    
    14.9
    
    
    
    3.3
    
    
    
    10.0FX on LTD (net of tax)
    
    
    224.4
    
    
    
    16.7
    
    
    
    (48.2
    )Other specified itemsSpecial charge for labour restructuring and asset impairment
    
    
    (228.5
    )
    
    
    
    
    
    
    Loss on transfer of assets to outsourcing firm
    
    
    (28.9
    )
    
    
    
    
    
    
    Income tax on special charges
    
    
    88.9
    
    
    
    
    
    
    
    Special charge and loss on transfer of assets (net of tax)
    
    
    (168.5
    )
    
    
    
    
    
    
    Spin-off related and incentive compensation charges
    
    
    
    
    
    
    
    
    
    
    (41.7
    )Income tax on spin-off related and incentive compensation charges
    
    
    
    
    
    
    
    
    
    
    18.1Spin-off related and incentive compensation charges (net of tax)
    
    
    
    
    
    
    
    
    
    
    (23.6
    )Revaluation of future income taxes
    
    
    59.3
    
    
    
    
    
    
    
    Effect of increase in tax rates
    
    
    (52.7
    )
    
    
    
    
    
    
    Income tax recovery
    
    
    
    
    
    
    72.0
    
    
    
    64.0Net income
    
    $
    398.7
    
    
    $
    496.0
    
    
    $
    372.5
 (1)
  Operating income, before other specified
items, was $740.6 million in 2003, a
decrease of $115.9 million from $856.5
million in 2002, and a decline of $100.4
million from $841.0 million in 2001. Most of
the decline in 2003 from 2002 was due to the
effect of FX on U.S. dollar-denominated
revenues and expenses, severe winter weather
conditions, derailments and higher fuel
prices.
 Operating income in 2002 increased from
2001 due to cost containment measures
and growth in several business sectors. Diluted EPS, before FX on LTD and other
specified items, was $2.11 in 2003, a
decline of $0.45 from $2.56 in 2002, and a
decrease of $0.28 from $2.39 in 2001.
Diluted EPS,




---



##### Table of Contents



PG
    06
    |
    2003 Canadian Pacific Railway Annual Report
     before FX on LTD and other specified items,
is calculated by dividing income, before FX
on LTD and other specified items, by the
weighted average number of shares
outstanding, adjusted for outstanding stock
options. The Companys operating ratios, before other
specified items, in 2003, 2002 and 2001 were
79.8 %, 76.6 % and 77.3 %, respectively. The
operating ratio, before other specified
items, is calculated by dividing total
operating expenses, before other specified
items, by total revenues. The operating
ratio demonstrates the percentage of
revenues used to operate the railway. A
lower number indicates higher efficiency
and, therefore, higher profitability. FOREIGN EXCHANGE GAINS (LOSSES) ON LONG-TERM DEBT  Foreign exchange gains on long-term debt
were $209.5 million in 2003, an increase of
$196.1 million from $13.4 million in 2002.
Foreign exchange gains increased $267.7
million in 2003 from a loss of $58.2
million in 2001. The change was due to the
effect of FX, net of hedging, on U.S.
dollar-denominated long-term debt. OTHER SPECIFIED ITEMS  Other specified items in 2003 included the
special charge of $150.1 million after tax
($228.5 million before tax) to recognize
the cost of a productivity program to
eliminate 820 job positions by the end of
2005 and to reflect the fair market value
of certain under-performing assets.
 In the fourth quarter of 2003, CPR
transferred assets to IBM Canada Ltd. as
part of a seven-year, $200-million
agreement reached with IBM to operate and
enhance CPRs computing infrastructure. The
arrangement will reduce CPRs costs over
time and allow remaining information
technology staff to focus on applications
that improve efficiency and service. The
Company recognized a loss of $18.4 million
($28.9 million before tax) on the transfer
of these assets. This loss is included in
other specified items in 2003. In December 2003, the Government of Ontario
repealed previously announced future income
tax rate reductions. The Companys future
income taxes, which were previously based
on these reduced rates, have been adjusted
upwards by $52.7 million to reflect the
change. CPR recognized a $64-million decrease in
future income tax expense in 2001 as a
result of similar future corporate tax rate
reductions instituted by various provincial
governments in 2001 and a reduction in the
apportioned provincial tax rate caused by
the amalgamation on January 1, 2001, of
Canadian Pacific Railway Company and its
Canadian subsidiary, St. Lawrence & Hudson
Railway Company Limited (StL&H). Following a revaluation in 2003 of various
other components that determine its future
income tax liability, the Company reduced
the estimate of its future income tax
liability by $59.3 million. In 2002, there was one other specified item
of $72 million resulting from a favourable
income tax ruling relating to prior years. In 2001, CPR incurred expenses of $23.6
million after tax ($41.7 million before
tax), including legal costs, incentive
compensation charges and bridge financing
fees, related to its spin-off from parent
company CPL.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    07
    volumes  Higher freight volumes result in increases
in revenues and certain variable expenses
such as fuel and crew costs. A 4% increase
in carloads and 6% increase in revenue
ton-miles (RTM) in 2003 were largely
responsible for a 6% increase in freight
revenues, excluding the effect of FX, and
related variable expenses, compared with
2002. RTMs were 114,599 million in 2003, up 6,910
million, or 6%, from 107,689 million in
2002, and up 3,977 million, or 4%, from
 110,622 million in 2001. RTMs are
defined as the movement of a
revenue-producing ton of freight one mile. CPR handled 2,539.2 thousand carloads in
2003, increasing 91.9 thousand, or 4%, in
2003 from 2,447.3 thousand in 2002, and
increasing 116.3 thousand, or 5%, from
2,422.9 thousand in 2001. Carloads are
comprised of revenue-generating shipments
of containers, trailers and loaded freight
cars.
   For the year ended December 31
    
    2003
    
    
    2002
    
    
    2001Carloads (in thousands)Grain
    
    
    308.7
    
    
    
    291.1
    
    
    
    342.8Coal
    
    
    359.6
    
    
    
    351.8
    
    
    
    379.2Sulphur and fertilizers
    
    
    189.0
    
    
    
    174.4
    
    
    
    170.0Forest products
    
    
    164.2
    
    
    
    174.2
    
    
    
    171.6Industrial products
    
    
    263.4
    
    
    
    271.9
    
    
    
    276.2Intermodal
    
    
    1,077.1
    
    
    
    1,005.8
    
    
    
    916.9Automotive
    
    
    177.2
    
    
    
    178.1
    
    
    
    166.2Total carloads
    
    
    2,539.2
    
    
    
    2,447.3
    
    
    
    2,422.9Revenue ton-miles (in millions)Grain
    
    
    23,040
    
    
    
    20,808
    
    
    
    24,785Coal
    
    
    22,155
    
    
    
    21,904
    
    
    
    24,229Sulphur and fertilizers
    
    
    18,186
    
    
    
    15,737
    
    
    
    14,941Forest products
    
    
    10,789
    
    
    
    11,014
    
    
    
    10,684Industrial products
    
    
    13,229
    
    
    
    12,801
    
    
    
    13,033Intermodal
    
    
    24,636
    
    
    
    22,493
    
    
    
    20,347Automotive
    
    
    2,564
    
    
    
    2,932
    
    
    
    2,603Total revenue ton-miles
    
    
    114,599
    
    
    
    107,689
    
    
    
    110,622




---



##### Table of Contents



PG
    08
    |
    2003 Canadian Pacific Railway Annual Report
    revenues  The Companys revenues are derived
primarily from the transportation of
freight. Other revenues are generated
mainly from leasing of CPR track and other
assets, container storage and terminal
services fees, switching fees, land sales
and income from business partnerships. Total revenues, which consist of
freight and other revenues, were
$3,660.7 million in 2003, decreasing
 $4.9 million from $3,665.6 million in 2002,
and declining $37.9 million from $3,698.6
million in 2001. Strong volume growth was
achieved in 2003, compared to 2002. However,
corresponding growth in freight revenues was
significantly offset by a negative impact of
approximately $192 million from FX on U.S.
dollar-denominated revenues.
   For the year ended December 31 (in millions)
    
    2003
    
    
    2002
    
    
    2001Grain
    
    $
    644.4
    
    
    $
    631.4
    
    
    $
    749.3Coal
    
    
    444.0
    
    
    
    442.5
    
    
    
    474.1Sulphur and fertilizers
    
    
    417.4
    
    
    
    401.3
    
    
    
    380.7Forest products
    
    
    328.8
    
    
    
    360.3
    
    
    
    354.4Industrial products
    
    
    400.4
    
    
    
    422.1
    
    
    
    430.7Intermodal
    
    
    940.1
    
    
    
    881.9
    
    
    
    803.6Automotive
    
    
    304.2
    
    
    
    332.4
    
    
    
    303.9Total freight revenues
    
    $
    3,479.3
    
    
    $
    3,471.9
    
    
    $
    3,496.7Other revenues
    
    
    181.4
    
    
    
    193.7
    
    
    
    201.9Total revenues
    
    $
    3,660.7
    
    
    $
    3,665.6
    
    
    $
    3,698.6
  FREIGHT REVENUES
 Grain




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    09
     year. This growth was partially offset by a
reduction in revenues as a result of the
effect of FX, the effects of the drought on
revenues in the first half of 2003 and the
repercussions in the first quarter of 2003
of a labour disruption at the Port of
Vancouver that was resolved in the fourth
quarter of 2002. Revenues in 2002 were
substantially lower than in 2001 due to
drought conditions and the labour
disruption at the Port of Vancouver. Coal  Sulphur and Fertilizers
 Forest Products  Industrial Products  Intermodal




---



##### Table of Contents



PG
    10
    |
    2003 Canadian Pacific Railway Annual Report
     international business grew due mainly to
increased volumes at the Port of Vancouver.
Growth in the domestic intermodal market was
due largely to the success of CPRs
co-location initiative, under which major
retailers have built regional distribution
facilities adjacent to certain CPR
intermodal terminals. In 2002, intermodal
revenues grew relative to 2001 mainly as a
result of higher traffic volumes in the
domestic segment, and strong revenue growth
in the international segment. Automotive
 Canada and the northeastern U.S. in the
third quarter, and a decline in consumer
demand. Automotive revenues in 2002 were
higher than in 2001 due to increased demand
for vehicles. Other Revenues
   performance indicators For the year ended December 31
    
    2003
    
    
    2002
    (1)
    
    2001
    (1)Productivity indicatorsGross ton-miles (GTM) of freight (millions)
    
    
    219,961
    
    
    
    209,596
    
    
    
    212,928Train-miles (thousands)
    
    
    40,053
    
    
    
    38,299
    
    
    
    38,162Average train weights (tons)
    
    
    5,492
    
    
    
    5,473
    
    
    
    5,580Efficiency and other indicatorsU.S. gallons of fuel per 1,000 GTMs
    
    
    1.25
    
    
    
    1.24
    
    
    
    1.25Average number of active employees
    
    
    16,126
    
    
    
    16,116
    
    
    
    16,987Miles of road operated at end of period
    
    
    13,848
    
    
    
    13,874
    
    
    
    13,893Freight revenue per RTM (cents)
    
    
    3.04
    
    
    
    3.22
    
    
    
    3.16Safety indicatorsFRA personal injuries per 200,000 employee-hours
    
    
    3.1
    
    
    
    3.6
    
    
    
    3.9FRA train accidents per million train-miles
    
    
    1.8
    
    
    
    1.8
    
    
    
    2.0
 (1)




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    11
     PRODUCTIVITY INDICATORS   
    
    GTMs of freight measure the movement of total train weight over one
mile in a year. The total train weight is comprised of the weight of
the freight cars, their contents and locomotives being returned to
terminals.  
    
    Train-miles measure the distance traveled between terminals or
stations in a year.  
    
    Average train weight is the average total weight of all trains
operated in a year, calculated by dividing GTMs by train-miles. Fluctuations in these indicators normally
drive corresponding fluctuations in
certain variable costs such as fuel and
crew costs. EFFICIENCY AND OTHER INDICATORS 
    
    U.S. gallons of fuel per 1,000 GTMs is the total fuel consumed in
freight and yard operations for every 1,000 GTMs traveled. This metric
is calculated by dividing the total amount of fuel issued to CPR
locomotives, excluding commuter and non-freight activities, by the
total freight-related GTMs. The result indicates how efficiently the
Company is using fuel. Despite improved efficiencies, this indicator
remained relatively constant in 2003, compared to 2002, as a result of
harsh operating conditions in the first quarter of 2003. Improvements
in 2002 over 2001 were due mainly to the acquisition of new
fuel-efficient locomotives.
    
    Miles of road operated is the total length of all rail lines over
which CPR operates, excluding track on which it has haulage rights. An
increase in GTMs without a corresponding increase in miles of road
operated indicates higher efficiency.
    
    Average number of active employees is the average number of
actively employed workers for the year. The number of actively employed
workers includes employees who are taking vacation and statutory
holidays and other forms of short-term paid leave,
 and excludes individuals who have a continuing employment
relationship with CPR but are not currently working. This indicator is
calculated by adding the monthly average employee counts and dividing
this total by 12. CPRs average number of active employees was flat
in 2003, compared with 2002, as reductions made under restructuring
initiatives were offset by hiring to handle business growth. The
average number of employees decreased in 2002 from 2001 due primarily
to earlier restructuring initiatives.
    
    Freight revenue per RTM is the amount of freight revenue earned for
every RTM moved, calculated by dividing the total freight revenue by
the total RTMs in a year. This indicator decreased in 2003, compared to
2002, due mainly to changes in the mix of commodities moved and the
effect of FX, partially offset by an increase in rates. An improvement
in 2002 over 2001 also was a result of changes in the commodity mix. SAFETY INDICATORS   
    
    Federal Railroad Administration (FRA) personal injuries per
200,000 employee-hours is the number of personal injuries, multiplied
by 200,000 and divided by total employee-hours. Personal injuries are
defined as injuries that require employees to lose time away from work,
modify their normal duties or obtain medical treatment beyond minor
first aid. Employee-hours are the total hours worked, excluding
vacation and sick time, by all employees, excluding contractors.
    
    FRA train accidents per million train-miles is calculated as the
number of train accidents, multiplied by 1,000,000 and divided by total
train-miles. Train accidents included in this metric are those that
meet the FRA reporting threshold of US$6,700. A decrease in the above measures
reflects an improvement in safety.




---



##### Table of Contents



PG
    12
    |
    2003 Canadian Pacific Railway Annual Report
    operating expenses, before other specified items  Operating expenses, before other specified
items, were $2,920.1 million in 2003,
increasing $111.0 million from $2,809.1
million in 2002, and increasing $62.5
million from $2,857.6 million in 2001. In
2003, FX had a favourable impact of
approximately $137 million on operating
expenses, which was offset by inflation,
higher
 depreciation and fuel prices, increases
due to higher costs associated with larger
freight volumes, and service disruptions
in the first quarter of 2003 caused by
severe winter weather conditions and
derailments. Expenses in 2002 decreased
from 2001 due to productivity improvement
measures in 2002.
   2003
    
    2002
    
    2001(in millions)
    
    Expense
    
    
    % of revenue
    
    
    Expense
    
    
    % of revenue
    
    
    Expense
    
    
    % of revenueCompensation and benefits
    
    $
    1,152.6
    
    
    
    31.5
    %
    
    $
    1,131.1
    
    
    
    30.9
    %
    
    $
    1,122.1
    
    
    
    30.3
    %Fuel
    
    
    393.3
    
    
    
    10.8
    
    
    
    357.5
    
    
    
    9.7
    
    
    
    403.0
    
    
    
    10.9Materials
    
    
    176.8
    
    
    
    4.8
    
    
    
    165.7
    
    
    
    4.5
    
    
    
    180.9
    
    
    
    4.9Equipment rents
    
    
    238.2
    
    
    
    6.5
    
    
    
    255.0
    
    
    
    7.0
    
    
    
    272.1
    
    
    
    7.4Depreciation and amortization
    
    
    381.5
    
    
    
    10.4
    
    
    
    348.4
    
    
    
    9.5
    
    
    
    334.4
    
    
    
    9.1Purchased services and other
    
    
    577.7
    
    
    
    15.8
    
    
    
    551.4
    
    
    
    15.0
    
    
    
    545.1
    
    
    
    14.7Total
    
    $
    2,920.1
    
    
    
    79.8
    %
    
    $
    2,809.1
    
    
    
    76.6
    %
    
    $
    2,857.6
    
    
    
    77.3
    %
  COMPENSATION AND BENEFITS  FUEL
 of FX) from $357.5 million in 2002, and a
decrease of $9.7
million from $403.0 million in 2001. Fuel
expense in 2003 was higher than in 2002 as
a result of significantly higher fuel
prices and greater consumption associated
with increased freight volumes and severe
winter operating conditions. These
increases were partially offset by CPRs
fuel-hedging program and the positive
effect of FX. Fuel expense in 2002 declined
from 2001 as a result of lower fuel prices
in 2002, a successful hedging program and
gains in fuel efficiency. MATERIALS, PURCHASED SERVICES AND OTHER




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    13
     increasing $28.5 million from $726.0 million
in 2001. Expenses increased in 2003 over
2002 due to higher insurance premiums,
derailment costs, volume-related expenses
and favourable adjustments made in 2002.
Costs in 2002 declined from 2001 as
increased insurance and other expenses were
more than offset by initiative savings and
lower locomotive maintenance expenses. EQUIPMENT RENTS  DEPRECIATION AND AMORTIZATION
 other income statement items OTHER CHARGES  INTEREST EXPENSE  INCOME TAXES  In December 2003, the Government of Ontario
repealed previously announced future income
tax rate reductions. The Companys future
income tax liability, which was previously
based on these reduced rates, has been




---



##### Table of Contents



PG
    14
    |
    2003 Canadian Pacific Railway Annual Report
     increased by $52.7 million to reflect the
change. This adjustment is also discussed
in the section Non-GAAP Earnings, under
the subheading Other Specified Items. Following a revaluation in 2003 of various
components used to determine its future
income tax liability, the Company reduced the estimate of its future income
tax liability by $59.3 million. This
adjustment is also discussed in the
section Non-GAAP Earnings, under the
subheading Other Specified Items. In 2002, the Company reported an income tax
recovery of approximately $72.0 million
stemming from a favourable tax decision by
the Federal Court of Appeal. This decision
resulted in an effective tax rate of 18%,
compared with a normalized income tax rate
of approximately 31%. CPR recognized a $64-million decrease in
future income tax expense in 2001 as a
result of future corporate tax rate
reductions instituted by various provincial
governments in 2001 and a reduction in the
apportioned provincial tax rate caused by
the amalgamation on January 1, 2001, of
Canadian Pacific Railway Company and its
Canadian subsidiary, StL&H. This resulted in
an effective tax rate of 26% for 2001,
compared to a normalized rate for the year
of approximately 37%. fourth-quarter summary NON-GAAP EARNINGS  OPERATING RESULTS
 increase was due mainly to FX on LTD of
$44.3 million in 2003  a rise of $38.2
million over FX on LTD of $6.1 million in
2002. Operating income for the three-month period
ended December 31, 2003, was $196.8 million
in 2003, a decrease of $41.2 million from
$238.0 million in the same period of 2002.
The decrease was mainly attributable to a
loss of $18.4 million ($28.9 million before
tax) on assets transferred to IBM Canada
Ltd. under an outsourcing agreement. Diluted EPS were $1.10 in the fourth
quarter of 2003, an increase of $0.31,
compared with $0.79 in the same period of
2002. REVENUES




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    15
     $9 million, excluding the effect of FX)
from $108.7 million in 2002 as the effect
of FX more than offset increased volumes.
Sulphur and fertilizers revenues were
unchanged (increased $7 million, excluding
the effect of FX) in the fourth quarter at
$98.5 million as a result of high sulphur
rates and a strong export potash market in
2003, offset by the effect of FX. EXPENSES
 with volume growth were offset by the effect
of FX. Equipment rents expense was $54.6
million in the fourth quarter of 2003,
down $7.8 million (increased $1 million,
excluding the effect of FX) from $62.4
million in 2002, as increased rentals to
accommodate higher volumes and lower
receipts for CPR freight car use were more
than offset by FX and the capitalization of
rents associated with a variable-interest
entity (refer to Note 2 of the Notes to
Consolidated Financial Statements) in 2003. Also affecting operating income in the
fourth quarter of 2003 was a loss of $18.4
million ($28.9 million before tax) on the
transfer of computing infrastructure assets
to IBM Canada Ltd., discussed under the
subheading Other Specified Items on page
6. OTHER INCOME STATEMENT ITEMS




---



##### Table of Contents



PG
    16
    |
    2003 Canadian Pacific Railway Annual Report
    QUARTERLY FINANCIAL DATA For the quarter ended(in millions, except per share data) (unaudited)
    
    Dec. 31
    
    
    Sept. 30
    
    
    June 30
    
    
    March 312003Total revenue
    
    $
    963.5
    
    
    $
    904.3
    
    
    $
    914.1
    
    
    $
    878.8Operating income
    
    $
    196.8
    
    
    $
    207.6
    
    
    $
    (39.0
    )
    
    $
    117.8Net income
    
    $
    175.2
    
    
    $
    93.9
    
    
    $
    27.7
    
    
    $
    101.9Basic earnings per share
    
    $
    1.11
    
    
    $
    0.59
    
    
    $
    0.17
    
    
    $
    0.64Diluted earnings per share
    
    $
    1.10
    
    
    $
    0.59
    
    
    $
    0.17
    
    
    $
    0.642002Total revenue
    
    $
    950.4
    
    
    $
    917.3
    
    
    $
    922.5
    
    
    $
    875.4Operating income
    
    $
    238.0
    
    
    $
    223.6
    
    
    $
    219.0
    
    
    $
    175.9Net income
    
    $
    125.6
    
    
    $
    65.3
    
    
    $
    168.7
    
    
    $
    136.4Basic earnings per share
    
    $
    0.79
    
    
    $
    0.41
    
    
    $
    1.06
    
    
    $
    0.86Diluted earnings per share
    
    $
    0.79
    
    
    $
    0.41
    
    
    $
    1.06
    
    
    $
    0.86
  QUARTERLY TRENDS Volumes of and, therefore, revenues from
certain goods are stronger during different
periods of the year. Revenues are strongest
in the fourth quarter primarily as a result
of the movement of grain after the harvest
and the transportation of consumer goods.
First-quarter revenues can be lower due
mainly to winter weather conditions and
reduced transportation of consumer goods.
Second-and third-quarter revenues
improve as fertilizer volumes are highest
during the second quarter and demand for
construction-related goods is highest in
the third quarter. Operating income is also affected by
seasonal fluctuations. Operating income is
typically lowest in the first quarter due to
higher operating costs as a result of winter
weather. The special charge in the second quarter of
2003 and the loss on transfer of assets in
the fourth quarter of 2003 also affected
operating and net income. The special charge
and the loss on transfer of assets are
discussed in the section Non-GAAP Earnings
under the subheading Other Specified
Items.
 Net income is influenced by seasonal
fluctuations, including weather-related
costs, as well as the other specified items
discussed in the section Non-GAAP Earnings
under the subheading Other Specified
Items. changes in accounting policy Changes in accounting policy are discussed
in detail in Note 2 of the Notes to
Consolidated Financial Statements for the
year ended December 31, 2003, under the
heading New Accounting Policies.
Discussion of potential or forthcoming
changes in accounting policies is also
included in Note 3 under the heading Future
Accounting Changes. liquidity and capital resources CPR believes that adequate amounts of cash
and cash equivalents are available in both
the short term and the long term to provide
for ongoing operations and planned growth.
CPR is not aware of any trends or expected
fluctuations in its liquidity that would
create any




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    17
     deficiencies. The following discussion
of operating, investing and financing
activities describes CPRs indicators
of liquidity and capital resources. OPERATING ACTIVITIES  Cash payments in 2003 related to severance
under all restructuring initiatives,
discussed in this MD&A under the subheading
Restructuring, and CPRs environmental
remediation program, described in this MD&A
under the
subheading Critical Accounting Estimates,
amounted to $107.0 million, compared with
$119.3 million in 2002 and $132.4 million
in 2001. The total accrued restructuring
and environmental liability at December 31,
2003, was $462.2 million, of which $117.1
million is included in current liabilities. There are no specific or unusual
requirements relating to CPRs working
capital. In addition, there are no unusual
restrictions on any subsidiarys ability to
transfer funds to CPR. INVESTING ACTIVITIES
 Capital spending in 2004 is projected to be
$670 million to $710 million for track
projects and locomotive and freight car
acquisitions. CPR expects to finance
locomotives with new debt. Other capital
spending will be financed with cash from
operations. FINANCING ACTIVITIES  CPR completed two unsecured debt offerings
in 2003  5.75% US$250 million issued
March 2003, maturing March 2033, and 4.9%
$350 million issued July 2003, maturing
June 2010. The former was to refinance
CPRs 6.875% US$250-million Notes that
matured in April 2003. The latter was to
take advantage of the low interest rate
environment and provide funds for general
operating purposes. During 2003, CPR entered into
cross-currency, fixed-to-floating interest
rate swap agreements concurrent with the
issuance of its $350-million Medium Term
Notes, due June 2010, which resulted in $105
million of fixed-rate debt being exchanged
for US$77.3 million of floating-rate U.S.
dollar-denominated debt. The Company also
entered into fixed-to-floating interest rate
swap agreements totalling US$150 million,
which will convert a portion of its
US$400-million 6.25% Notes to floating-rate
debt. In December 2003, CPR signed a letter of
intent to acquire approximately US$68.4
million of equipment in September and
October 2004.




---



##### Table of Contents



PG
    18
    |
    2003 Canadian Pacific Railway Annual Report
     At the end of 2003, CPRs net-debt to
net-debt-plus-equity ratio improved to 46.8%, compared with 47.3% and 51.8% at
December 31, 2002 and 2001, respectively.
Net debt is the sum of long-term debt,
long-term debt maturing within one year and
short-term borrowing, less cash and
short-term investments. This is divided by
the sum of net debt plus total
shareholders equity as presented on CPRs
Balance Sheet. Management is committed to maintaining its
net-debt to net-debt-plus-equity ratio at
an acceptable level and will continue to
seek lower-cost term financing so that the
Company retains solid investment-grade
credit. CPR has available, as sources of financing,
credit facilities of up to $505 million.
CPR believes it can raise capital in excess
of these amounts, if required, while
maintaining its credit quality in
international debt markets. CPRs unsecured
long-term debt securities are rated Baa2,
BBB and BBB by Moodys Investors
Service, Inc., Standard and Poors
Corporation and Dominion Bond Rating
Service, respectively. FREE CASH  DIVIDENDS PER SHARE
 and September 26, 2003, respectively. In
addition, a dividend of $0.1275 was
declared on December 10, 2003, payable on
January 26, 2004, to holders of record on
December 24, 2003. The Board of Directors
will give consideration on a quarterly
basis to the payment of future dividends.
The amount of any future quarterly
dividends will be determined based on a
number of factors that may include the
results of operations,
financial condition, cash requirements and
future prospects of the Company. The
Company is, however, under no obligation to
declare dividends and the declaration of
dividends is wholly within the Board of
Directors discretion. Further, the Board
of Directors may cease declaring dividends
or may declare dividends in amounts that
are different from those previously
declared. Finally, restrictions in the
credit or financing agreements entered into
by the Company or the provisions of
applicable law may preclude the payment of
dividends in certain circumstances. balance sheet Assets totalled $9,957.1 million at December
31, 2003, compared with $9,660.8 million at
December 31, 2002, and $9,661.1 million at
the end of 2001. The increase in assets in
2003, compared to 2002, was due mainly to
capital additions for locomotives and track
replacement programs, and a larger pension
asset from additional funding during 2003.
The decline in 2002, compared to 2001, was a
result of a decrease in cash held in
temporary investments, mostly offset by
certain capital additions. CPRs combined short-term and long-term
liabilities were $6,281.9 million at
December 31, 2003, compared with total
liabilities of $6,274.4 million and $6,688.7
million at December 31, 2002 and 2001,
respectively. The changes in liabilities
year over year were due mainly to increases
or decreases in long-term debt, as discussed
in the section Liquidity and Capital
Resources under the subheading Financing
Activities.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    19
     At December 31, 2003, the Companys Balance
Sheet reflected $3,675.2 million in equity,
compared with equity balances of $3,386.4
million and $2,972.4 million at December
31, 2002 and 2001, respectively. The
increase in equity was due mainly to CPRs
growth in retained income in 2002 and 2003. SHARE CAPITAL
The Companys Articles of Incorporation
authorize for issuance an unlimited number
of Common Shares and an unlimited number of
First Preferred Shares and Second Preferred
Shares. At December 31, 2003, 158.7 million
Common Shares and no Preferred Shares had
been issued. financial instruments The Companys policy is to not utilize
derivative financial and commodity
instruments for trading or speculative
purposes. CPRs policy with respect to
hedging of risk exposure is to selectively
reduce volatility associated with interest
rates, foreign exchange fluctuations and
fluctuations in the price of diesel fuel. A
portion of the U.S. dollar-denominated
long-term debt has been designated as a
hedge of the net investment in
self-sustaining foreign subsidiaries.
Unrealized foreign exchange gains and losses
on a portion of the U.S. dollar-denominated
long-term debt are offset against foreign
exchange gains and losses arising from
translation of self-sustaining foreign
subsidiaries accounts. off-balance sheet arrangements The Company has entered into one
off-balance sheet arrangement as part of
its normal course of business.
 SALE OF ACCOUNTS RECEIVABLE
CPR sold a portion of its accounts
receivable to a financing institution in
order to raise funds through the
monetization of receivables. At December 31,
2003, the receivables sold amounted to $132
million under a securitization program that
involves the non-recourse sale of accounts
receivable on a revolving basis. Cash
proceeds on this revolving arrangement
affecting receivables were $120 million,
with $12 million having been held back as a
reserve to be released to the Company upon
termination of the agreement. The Company uses this arrangement as a
cost-efficient secondary source of financing
its operations. Charges related to this
agreement, included in Other Charges on
CPRs Statement of Consolidated Income,
amounted to $4.1 million in 2003, compared
with $3.5 million in 2002 and $5.7 million
in 2001. The program is subject to standard reporting
and credit-rating requirements and includes
provisions such as the revolving transfer of
receivables satisfying certain
pre-established criteria such as an
acceptable credit standing. Failure to
comply with these provisions would trigger
termination of the program. In the event the
program is terminated prior to maturity, CPR
expects to have sufficient liquidity
remaining in its revolving credit facility
to meet its payment obligations. The
securitization program will expire in August
2004. The Company intends to renew or
replace the program upon its expiration. contractual commitments The following table indicates CPRs known
contractual obligations and commitments to
make future payments for contracts such as
debt, capital lease arrangements and
commercial commitments:




---



##### Table of Contents



PG
    20
    |
    2003 Canadian Pacific Railway Annual Report
    CONTRACTUAL COMMITMENTS Payments due by periodAt December 31, 2003 (in millions)
    
    Total
    
    < 1 year
    
    1  3 years
    
    3  5 years
    
    > 5 yearsLong-term debt
    
    $
    2,995.8
    
    
    $
    9.5
    
    
    $
    279.8
    
    
    $
    189.3
    
    
    $
    2,517.2Capital lease obligations
    
    
    367.0
    
    
    
    4.4
    
    
    
    12.2
    
    
    
    17.6
    
    
    
    332.8Operating lease obligations (1)
    
    
    461.0
    
    
    
    113.4
    
    
    
    178.7
    
    
    
    98.0
    
    
    
    70.9Supplier purchase obligations
    
    
    760.6
    
    
    
    135.9
    
    
    
    154.7
    
    
    
    139.1
    
    
    
    330.9Other long-term liabilities reflected
on the Companys Balance Sheet (2)
    
    
    900.1
    
    
    
    150.3
    
    
    
    236.1
    
    
    
    195.7
    
    
    
    318.0Total contractual obligations
    
    $
    5,484.5
    
    
    $
    413.5
    
    
    $
    861.5
    
    
    $
    639.7
    
    
    $
    3,569.8
 (1) CPR has guaranteed residual values on certain leased equipment with a
maximum exposure of $118.4 million primarily in 2006 and beyond. Management
estimates that CPR will have no net payments under these residual guarantees
and, as such, has not included any amounts with respect to these guaranteed
residual values in the minimum payments shown above. (2) Includes expected cash payments for restructuring, environmental
remediation, post-retirement benefits and workers compensation benefits.
Projected payments for post-retirement benefits and workers compensation
benefits include the anticipated payments for years 2004 to 2013.  foreign exchange The Company is exposed to foreign exchange
fluctuations in the U.S. dollar. A stronger
Canadian dollar reduces U.S.
dollar-denominated revenues and expenses.
Operating income is also reduced because a
higher percentage of revenues than expenses
is generated in U.S. dollars. The Company
has arranged a significant portion of its
long-term debt in U.S. dollars as a hedge
against a stronger Canadian dollar, as the
negative impact on operating income is
largely offset by a reduction in U.S.
dollar-denominated interest cost. During 2003, the Canadian dollar
strengthened by more than 11 % year over
year against the U.S. dollar. The impact of
this foreign exchange rate fluctuation on
the Companys financial
results is reflected in the Statement of
Consolidated Income and the Consolidated
Balance Sheet. FOREIGN EXCHANGE EFFECT ON INCOME STATEMENT
The Company has U.S. dollar-denominated
revenues and expenses in both its Canadian
and foreign subsidiaries. Foreign currency
revenues and expenses are translated at the
exchange rate in effect on the dates of the
related transactions, with all gains and
losses included immediately in income. On
average, a one-cent change in the Canadian
dollar affects operating income by
approximately $3.0 million.
 FOREIGN EXCHANGE EFFECT ON BALANCE SHEET
U.S. dollar-denominated Balance Sheet
accounts of the Canadian operations are
translated into Canadian dollars at the
year-end exchange rate for monetary items
such as working capital, long-term debt and
cash, and at historical exchange rates for
non-monetary items. Unrealized gains and losses arising from the
translation of the monetary items are
included in income immediately as Other
Charges, and as Foreign Exchange Gains
(Losses) on Long-term Debt for U.S.
dollar-denominated long-term debt. TRANSLATION OF FOREIGN SUBSIDIARIES
The accounts of the Companys foreign
subsidiaries are translated into Canadian
dollars using the year-end exchange rate
for assets and liabilities and the average
exchange rates in effect during the year
for revenues and expenses. Unrealized
foreign exchange gains and losses arising
from translation of foreign subsidiaries
accounts are included as a separate
component of Shareholders Equity on the
Consolidated Balance Sheet. The Company has
designated a portion of its U.S.
dollar-denominated long-term debt as a
hedge against its net investment in
self-sustaining subsidiaries. As such,
gains and losses on translation of foreign
subsidiaries partially offset the foreign
exchange gains and losses on long-term debt
held in Canada.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    21
    business risks and critical accounting estimates  FUTURE TRENDS, COMMITMENTS AND RISKS
In 2004, CPR will continue its focus on
revenue growth and cost reduction as well
as improved utilization of its asset base.
Targeted initiatives and price
improvements are expected to drive revenue
growth, including growth from value-added
services provided by Canadian Pacific
Logistics Solutions, CPRs logistics and
supply chain division. CPR anticipates
continued gains in bulk commodities,
assuming global demand remains strong. Continuing cost-containment programs are
vital to CPR achieving its financial
performance targets. Cost-reduction
initiatives announced during the second
quarter of 2003 resulted in the elimination
of 360 job positions through consolidation
and rationalization of administrative
functions, redesign of yard processes and
more efficient maintenance of freight car
and locomotive fleets. CPR plans to
eliminate an additional 330 positions in
2004. CPR will continue to selectively hire
in specific areas of the business as
required by growth or changes in traffic
patterns. Improved asset utilization is expected to
result from further railcar modernization
and from recent investments in information
technology. Overall, the rail industry is
continuing to leverage information
technology to facilitate its dealings with
suppliers and shippers. CPRs ongoing
strategy is to apply information technology
to improve its competitive position. CPR remains committed to maintaining its
current high level of plant quality and
renewing its franchise. At December 31,
2003, CPR had committed to future
multi-year capital expenditures amounting
to $493.9 million, which are expected to be
financed by cash generated from operations. CPR has a substantial investment in fixed
plant and equipment, and has limited
flexibility to adjust output levels and
expenditures in response to short-term
declines in traffic, potentially
resulting in a cyclical
 adverse impact on future earnings levels.
However, CPR actively manages its
processes and resources to control
variable costs, increase efficiency and
mitigate the negative effects of declines
in freight traffic. Infrastructure capacity is an increasing
business risk for CPR, especially in
western Canada and the U.S., due largely to
significant increases in traffic volumes in
a number of business segments. Capacity
could be strained in certain corridors
where shipping peaks occur in a number of
business segments at the same time. To
address this risk, CPR continues to
increase the capacity of its core franchise
through infrastructure sharing and joint
service programs with other railways,
operating plan strategies, and strategic
capital investment programs. CPRs traffic volumes and revenues are
largely dependent upon the health and growth
of the North American and global economies,
exchange rates, and other factors affecting
the volume and patterns of international
trade. CPRs future grain transportation
revenues may be negatively affected if there
is a recurrence of drought conditions that
existed in its grain collection areas in
2001 and 2002. CPR will attempt to mitigate
the effects of any downward pressure on
transportation revenues primarily through
cost-containment measures. Oil prices, which increased during the
latter half of 2002, escalated further in
early 2003 and remain an uncertainty due
to such matters as low inventories and
political unrest and ongoing military
conflict in the Middle East. CPR will
continue to mitigate increases in fuel
prices through its fuel-hedging programs
and fuel-efficiency initiatives. CPR works closely with Canadian and U.S.
officials as well as other railways to
ensure the safe and secure movement of
goods between Canada and the U.S. In 2003,
several new regulatory security frameworks
were initiated as a result of the terrorist
attacks in the U.S. in 2001. CPR is fully
automated with both Canada Border




---



##### Table of Contents



PG
    22
    |
    2003 Canadian Pacific Railway Annual Report
     Services Agency (CBSA) and U.S. Customs
and Border Protection (C&BP) and provides
cargo information electronically well in
advance of border arrival. Under the joint
Declaration of Principles signed in April
2003, CPR committed to work with CBSA and
C&BP to install sophisticated
cargo-screening systems designed to scan
U.S.-bound rail shipments at five of CPRs
border crossings. Four of these systems,
called the Vehicle and Cargo Inspection
System, are now fully operational. The
remaining installation is expected to be
completed in 2005. This joint
government-industry initiative was the
culmination of several months of discussion
and is expected to enhance the security of
U.S.-bound rail shipments while helping
ensure uninterrupted access to the U.S.
market for CPR customers. CPR is a certified carrier with C&BPs
Customs-Trade Partnership Against
Terrorism (C-TPAT) and CBSAs Partners
in Protection (PIP) programs. C-TPAT and
PIP are partnership programs of government
and business that seek to strengthen
overall supply chain and border security.
CPR is also an approved carrier under
CBSAs Customs Self-Assessment program. CPR reached a negotiated contract
settlement with members of the Rail
Canada Traffic Controllers union
following a seven-week strike during the
summer of 2003. The striking traffic
controllers, who manage the movement of
trains across CPRs network in Canada,
were replaced by non-unionized employees
and rail traffic was unaffected by the
strike. The new three-year contract
extends to the end of 2005. Train crew employees have elected the
Teamsters Canada Rail Conference as their
bargaining agent, replacing the Canadian
Council of Railway Operating Unions
(CCROU). CPRs collective agreement with
the CCROU expired on December 31, 2002,
however, negotiations had been suspended
pending the outcome of the representational
vote by union members. CPR expects to begin
negotiating a collective agreement in 2004.
 A three-year collective agreement was
ratified in January 2004 by members of the
United Steel Workers of America
(USWA). The agreement with the USWA,
which represents clerical employees of
CPR, extends to the end of 2006. Negotiations with the Brotherhood of
Maintenance of Way Employees (BMWE) have
been delayed due to an attempt by another
union to represent the BMWE membership. At
this time, management is unable to predict
when bargaining may resume with the union,
which represents employees who maintain
CPRs track. A final decision was made in the U.S.
Department of Commerce anti-dumping and
countervailing duty cases with respect to
Canadian grain. A previous ruling on
Canadian durum was overturned and the duty
on durum was removed. The U.S. re-filed its
complaint against the Government of Canada
and the Canadian Wheat Board (CWB) at the
World Trade Organization (WTO). In
February 2004, the WTO found that CWB is
operating within international trading rules
but was critical of some aspects of Canadian
grain transportation regulation, including
the legislated cap on revenues that can be
charged and earned by Canadian railways for
the carriage of western Canadian grain. The Province of British Columbia announced
on November 25, 2003, its intention to sell
most of the freight operations of BC Rail
to Canadian National Railway Company. The
sale of BC Rail, which serves northern
British Columbia, requires approval of the
Competition Bureau. CPR is taking steps to
protect its market position and presence in
northern British Columbia and does not
expect a material adverse impact on the
Company should the sale be completed. A seven-year, $200-million agreement reached
with IBM Canada Ltd. in December 2003 to
operate and enhance CPRs computing
infrastructure included a transfer of CPRs
existing computing assets to IBM. The
arrangement will reduce CPRs costs over
time and allow remaining information
technology staff to focus on applications
that improve efficiency and service.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    23
     The Company is investigating environmental
contamination at a property in the U.S. that
had been leased by CPR to third parties and
is still owned by the Company. The cost of
remediation at this site cannot be
reasonably estimated at this time and may be
material. The Company believes that the
environmental condition was substantially
caused by the former lessees and not by the
Company. The Company has filed a claim
against the former lessees seeking to
recover all or substantially all of the
costs of remediation.
 FINANCIAL COMMITMENTS
In addition to the financial commitments of
the Company mentioned previously under the
headings Off-Balance Sheet
Arrangements and Contractual
Commitments, the Company is party to
certain other financial commitments
discussed below.
   Certain Other Financial Commitments Amount of commitment per periodAt December 31, 2003 (in millions)
    
    Total
    
    < 1 year
    
    1  3 years
    
    3  5 years
    
    > 5 yearsLetters of credit
    
    $
    314.1
    
    
    $
    314.1
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital commitments (1)
    
    
    493.9
    
    
    
    209.3
    
    
    
    47.9
    
    
    
    58.6
    
    
    
    178.1Surety bonds
    
    
    25.0
    
    
    
    25.0
    
    
    
    
    
    
    
    
    
    
    
    Offset financial liability
    
    
    150.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150.5Interest rate swaps and bond forward
on long-term debt  unrealized gain
    
    
    (10.2
    )
    
    
    (10.2
    )
    
    
    
    
    
    
    
    
    
    
    Crude oil futures  unrealized gain
    
    
    (26.8
    )
    
    
    (17.0
    )
    
    
    (8.6
    )
    
    
    (1.2
    )
    
    
    Total commitments
    
    $
    946.5
    
    
    $
    521.2
    
    
    $
    39.3
    
    
    $
    57.4
    
    
    $
    328.6
   Letters of Credit and Surety Bonds
Letters of credit and surety bonds are
obtained mainly to provide security to
third parties as part of agreements. The
Company is liable for these contract
amounts in the case of non-performance
under third-party agreements. As a result,
CPRs available line of credit is adjusted
for the contract amounts currently
included within the revolving credit
facility. Capital Commitments
The Company is obligated to make various
capital purchases for track programs,
locomotive acquisitions and overhauls, and
freight car and land purchases. At
December 31, 2003, CPR had multi-year
capital commitments of $493.9 million,
mainly for locomotive overhaul agreements,
in the form of signed contracts or letters
of intent. Payments for these commitments
are due in 2004 through 2016.
 Offset Financial Liability
The Company entered into a bank loan in 2003
to finance the acquisition of certain
equipment. At December 31, 2003, the loan
had a balance of $154.5 million, which was
offset by a financial asset of $150.5
million with the same financial institution.
The remainder is included in Long-term
Debt on CPRs Consolidated Balance Sheet. Interest Rate Swaps
The Company enters into interest rate
hedging transactions to manage exposure to
fluctuations in interest rates, to hedge
against increases in interest rates in
anticipation of future debt
issuances, and to convert a portion of its
fixed-rate long-term debt to
floating-interest-rate debt. The Company
uses interest rate swaps, bond forwards and
treasury locks as part of its interest rate
risk management strategy.




---



##### Table of Contents



PG
    24
    |
    2003 Canadian Pacific Railway Annual Report
     The Company enters into interest rate swaps
to convert fixed-rate debt to floating-rate
debt. At December 31, 2003, CPR had entered
into six separate swaps on which it pays an
average floating rate that fluctuates
quarterly based on the London Interbank
Offered Rate (LIBOR). The swaps will expire
in 2010 and 2011. The Company uses bond forwards and treasury
locks to fix the benchmark interest rate of
future debt issuances. The Company entered
into six treasury lock transactions,
expiring March 2004, for a future debt
issuance totalling US$124 million, with an
average term of 14.5 years. The unrealized gain shown above was
calculated based on the fair value of the
swaps or locks at December 31, 2003. Swap,
currency and basis spread curves from
Reuters.com were utilized to establish the
fair market value of the swaps. Values may
vary marginally due to either the terms of
the contract or because of minor variations
in the time of day when the data was
collected. In 2003, interest expense was reduced by
$5.2 million due to the above-mentioned
interest rate swaps. At December 31, 2003,
Other Assets and Deferred Charges on the
Consolidated Balance Sheet included a
$21.7-million loss from an interest rate
lock settled in July 2003 on $200 million of
long-term debt. This loss is being amortized
over seven years, which is the life of the
debt. Interest Expense on the Statement of
Consolidated Income included $1.6 million
for amortization of this loss. No unrealized
gains or losses have been included in the
Statement of Consolidated Income or the
Consolidated Balance Sheet. Crude Oil Futures
CPR sells and purchases crude oil futures
to hedge its exposure against the
possibility of fuel price increases. The
Companys exposure is represented by the
unrealized gains or losses on these
futures. The unrealized gain shown in the Certain
Other Financial Commitments table was
calculated based on the fair value of the
futures, which was the market settle price
of West Texas Intermediate (WTI) on the New
York Mercantile Exchange (NYMEX) at
December 31, 2003. Fair market value of
collars is included in the calculation
 of the unrealized gain or loss if the
weighted average future settle price is
greater than the ceiling price or less than
the floor
price of the collars. At December 31, 2003,
the price of WTI was greater than the
ceiling price of the collars. As a result,
the gains associated with the collars have
been included in the unrealized gain. No
unrealized gains or losses have been
included in the Statement of Consolidated
Income or the Consolidated Balance Sheet. In 2003, fuel expense was reduced by $28.3
million as a result of gains and losses
arising from settled futures and collars. Pension Plan Deficit
The deficit of the Companys defined benefit
pension plans declined to $753.7 million at
December 31, 2003, from $863.5 million at
December 31, 2002. The Company complies with
the applicable funding requirements, which
are federally regulated. A plan surplus or
deficit is calculated as the difference
between an actuarially estimated future
obligation for pension payments and the fair
market value of the assets available to pay
this liability. The pension obligation is
discounted using a discount rate that is a
blended interest rate of high-quality
corporate bonds. The discount rate is one of
the factors that can influence a plans
deficit. Other factors include the actual
return earned on the assets and rates used,
based on managements best estimates, for
future salary increases and inflation. For
example, every 1.0 percentage point the
actual discount rate varies above (or below)
the estimated discount rate can cause the
deficit to decrease (or increase) by
approximately $590 million. Similarly, every
1.0 percentage point the actual return on
assets varies above (or below) the estimated
return for the year can cause the deficit to
decrease (or increase) by approximately $60
million. There would eventually be
significant increases to funding and pension
expense if current conditions persist. The Company made a voluntary extra pension
contribution of $300 million in December
2003 as a pre-payment of contributions
anticipated to be made in 2004 and 2005. The
remaining deficit will fluctuate according
to future market conditions and funding will
be revised as necessary to reflect such
fluctuations. The Company will




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    25
     continue to make contributions towards this
deficit that, as a minimum, meet
requirements as prescribed by the Pension
Benefits Standards Act. CPR estimates that
it will be required to contribute $122
million in 2004. The last actuarial valuation of CPRs main
pension plan was completed as at January 1,
2002. The Company is currently undergoing
an updated actuarial valuation of this plan
as at January 1, 2004, which will be
completed by June 2004. The Company took
into account the estimated impact of this
valuation, along with other factors, in
deriving the expected funding contribution
of $122 million in 2004. While a similar
level of contribution is expected for 2005,
the actual amount
required to be contributed will depend on
CPRs actual experience in 2004 with such
variables as investment returns, interest
rate fluctuations and demographic changes. SPECIAL CHARGE
In the second quarter of 2003, CPR recorded
a special charge in the amount of $228
million to recognize the cost of a
productivity program to eliminate 820 job
positions by the end of 2005 and to reflect
the fair market value of certain
under-performing assets. The special charge included: $105 million
to accrue for labour liabilities resulting
from a company-wide productivity-driven
job-reduction initiative and the future
rental payments for leased space no longer
being used by the Company as a result of
downsizing; a $116-million write-down to
fair value of the assets of CPRs
northeastern U.S. subsidiary, Delaware and
Hudson Railway Company, Inc. (D&H),
including a $22-million accrual for the
impact of labour restructuring; and a
write-off totalling $7 million related to
two non-beneficial investments  the assets
of a supply chain management subsidiary and
an investment in an industry-wide
procurement entity. The second-quarter charge of $105 million
consisted of $103 million for the
elimination of 820 job positions, including
370 in 2003, 330 in 2004 and 120 in 2005, as
well as $2 million for the future rental
payments for a property that has ceased to
be used by CPR as a result of staff
 reduction initiatives. Payments of
termination benefits and property rents
are expected to occur until 2009. CPR
eliminated 360 positions by the end of
2003, with elimination of the remaining
10 positions for the year delayed until
the end of 2005. Productivity improvements stemming from
eliminating the 820 job positions are
expected to reduce compensation and
benefits expense by approximately $38
million in 2004, $53 million in 2005 and
$56 million in future years. The job
reductions contributed $10 million in
savings by the end of 2003, slightly less
than the $11 million in projected savings
as timing of certain reductions was
delayed. Cash payments, including restructuring
costs for the D&H, are expected to be $45
million in 2004, $19 million in 2005, $17
million in 2006 and a total of $28 million
in the remaining years to 2009. CPR expects
to fund these payments from general
operations. The special charge included a $94-million
write-down of D&H assets to more accurately
reflect the current fair value of its
operations. This asset impairment charge
will be followed by a restructuring of the
D&H to improve its economic performance. A write-off of CPRs investments in two
under-performing assets amounted to $7
million. Administrative costs will be
reduced following CPRs absorption of its
supply chain management subsidiary. RESTRUCTURING
CPRs restructuring liabilities at
December 31, 2003, included labour
liabilities related to job reductions
planned for 2003 to 2005 that are
discussed above under the subheading
Special Charge. The liabilities also included residual
payments to protected employees for previous
restructuring plans that are substantially
complete. These payments are expected to
continue in decreasing amounts until 2025
and will be funded from CPRs general
operations.




---



##### Table of Contents



PG
    26
    |
    2003 Canadian Pacific Railway Annual Report
     At December 31, 2003, CPRs labour
liabilities, including those recorded as
part of the special charge discussed above,
totalled $358 million, compared with $310
million at December 31, 2002. Payments in
2003 relating to these liabilities were $78
million, compared with $95 million in the
same period of 2002. Also included in the restructuring
liabilities are accruals for costs
associated with the rental of properties no
longer being used by the Company. Cash
payments for these liabilities are
anticipated to be $3 million in 2004, and
$0.3 million annually thereafter until 2009.
At December 31, 2003, total restructuring
liabilities, including the accrual recorded
as part of the special charge in the second
quarter of 2003, were $367 million, compared
with $326 million at December 31, 2002.
Payments made in 2003 relating to these
items were $86.8 million, compared with
$99.3 million in 2002. CRITICAL ACCOUNTING ESTIMATES
To prepare financial statements that conform
with Canadian GAAP, management is required
to make estimates and assumptions that
affect the reported amounts of assets and
liabilities, the disclosure of contingent
assets and liabilities at the date of the
financial statements, and the reported
amounts of revenues and expenses during the
reporting period. Using the most current
information available, management reviews
its estimates on an ongoing basis, including
those related to environmental liabilities,
pensions and other benefits, property, plant
and equipment, future income taxes and legal
and personal injury liabilities. The development, selection and disclosure
of these estimates, as well as this MD&A,
have been reviewed by the Board of
Directors Audit, Finance and Risk
Management Committee, which is comprised
entirely of independent directors. ENVIRONMENTAL LIABILITIES
Management estimates the probable costs to
be incurred in the remediation of property
sites contaminated by past railway use.
Sites are screened and classified according
to
 typical activities and scale of operations
conducted, and remediation strategies are
developed for each property based on the
nature and extent of the contamination as
well as the location of the property and
surrounding areas that may be adversely
affected by the presence of contaminants.
Management also considers available
technologies, treatment and disposal
facilities and the acceptability of
site-specific plans based on the local
regulatory environment. Site-specific plans
range from containment and risk management
of the contaminants through to the removal
and treatment of the contaminants and
affected soils and ground water. The details
of the estimates reflect the environmental
liability at each property. CPR is committed
to fully meeting its regulatory and legal
obligations with respect to environmental
matters. In 1995, following several years of
environmental investigations by CPR at
various properties across Canada and the
U.S., the Company recorded a before-tax
environmental provision of $144 million
for 10 years of a program to manage
environmental liabilities from historical
operations. This provision was increased
by $50 million in 1999, at which time the
net amount accrued, after payments, was
$164 million. At December 31, 2003, the accrual for
environmental remediation amounted to $95
million, of which the long-term portion
amounting to $70 million was included in
deferred liabilities and the short-term
portion amounting to $25 million was
included in accrued liabilities. Total
payments in 2003 were $20 million. The U.S.
dollar-denominated portion of the liability
was affected by FX, resulting in a decrease
in environmental liabilities of $6 million
in 2003. Costs incurred under CPRs
environmental remediation program are
charged against the accrual. PENSIONS AND OTHER BENEFITS
The Company has defined benefit and defined
contribution pension plans. Other benefits
include post-retirement medical and life
insurance for pensioners, and
post-employment workers compensation
benefits. Workers compensation benefits are
included in the Legal and Personal Injury
Liabilities section of this MD&A.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    27
     Pension and post-retirement benefits
expenses (excluding workers compensation
benefits) are included in Compensation
and Benefits in CPRs Statement of
Consolidated Income. For the year ended
December 31, 2003,
pension expense was $12.5 million,
consisting of defined benefit pension
expense of $9.5 million plus defined
contribution pension expense (equal to
contributions) of $3.0 million.
Post-retirement benefits expense in 2003
was $32.0 million, resulting in combined
pension and post-retirement benefits
expenses of $44.5 million for the year. On the December 31, 2003, Consolidated
Balance Sheet, the provision for prepaid
pension costs and other benefits (excluding
workers compensation benefits) accruals
totalled $562.2 million. Other Assets and
Deferred Charges include prepaid pension
costs of $693.9 million offset by accrued
pension costs of $3.8 million and
post-retirement benefits accruals of $127.9
million included in Deferred Liabilities. PROPERTY, PLANT AND EQUIPMENT
CPR follows the group depreciation
method and depreciates the cost of
properties, net of salvage, on a
straight-line basis over the estimated
useful life of the property group. CPR undertakes regular depreciation studies
to establish the estimated useful life of
each property group. These studies
establish the weighted average estimated
useful life by property group, taking into
consideration current and historical
information about the asset lives.
Considerations include but are not limited
to: historical useful lives of similar
assets; historical incidence of early
retirements (e.g. as a result of train
accidents); anticipated future uses of
assets; and net salvage values at
retirement. Regulatory standards in Canada require
depreciation studies to be completed and
submitted for approval at least every seven
years. Standards in the U.S. require studies
to be completed and submitted for approval
every three years for equipment and every
six years for track.
 The estimated useful lives of properties
have a direct impact on the amount of
depreciation expense charged by the Company
and the amount of accumulated depreciation
recorded as a component of Net Properties
on the Consolidated Balance Sheet.
Depreciation expense relating to properties
amounted to $381.5 million in 2003. At
December 31, 2003, accumulated depreciation
was $4,300.4 million. Revisions to the estimated useful lives and
net salvage projections for properties
constitute a change in accounting estimate
and are dealt with prospectively by amending
depreciation rates. It is anticipated that
there will be changes in the weighted
average useful life and salvage estimate for
each property group as assets are acquired,
used and retired. Significant changes in
either the useful lives of properties or the
salvage assumptions could result in material
changes to depreciation expenses. CPR completed depreciation reviews of
certain properties in 2003 that resulted in
changes to the estimated useful lives and
salvage rates of certain assets. The impact
of these reviews resulted in a depreciation
expense increase of $9 million, compared
with 2002. FUTURE INCOME TAXES
Effective January 1, 2001, CPR adopted the
Canadian Institute of Chartered Accountants
(CICA) Section 3465 Income Taxes with
respect to the accounting of future income
taxes, which is based on the liability
method. This method focuses on a companys
balance sheet and the temporary differences
otherwise calculated from the comparison of
book versus tax values. It is assumed that
such temporary differences will be settled
in the future at the substantively enacted
tax rates. This valuation process determines
the future income tax assets and liabilities
at the balance sheet date. In determining its future income taxes, the
Company makes estimates and assumptions
regarding future tax matters, including
estimating the timing of the realization
and settlement of future income tax assets
(including the




---



##### Table of Contents



PG
    28
    |
    2003 Canadian Pacific Railway Annual Report
     benefit of tax losses) and liabilities. The
substantively enacted federal and provincial
future income tax rates may differ in each
future period. The timing and realization of
future income taxes at the balance sheet
date are determined with reference to
managements long-term income and capital
investment forecasts developed as part of
the Companys planning and budgeting
processes. Future income tax expense totalling $32.0
million was included in income taxes for
2003. At December 31, 2003, future income
tax liabilities of $1,307.2 million were
recorded as a long-term liability, comprised
largely of temporary differences related to
accounting for properties. Future income tax
benefits of $87.4 million realizable within
one year were recorded as a current asset.
The Company believes that its future income
tax provisions are adequate. As discussed in the section Other Income
Statement Items, under the subheading
Income Taxes, future income tax expense
and liability were adjusted by $52.7
million in 2003 to reflect the new
Government of Ontario income tax rates, and
by $59.3 million as a result of the
revaluation of several components of the
future income tax liability. With the passage of legislation to reduce
federal income tax rates by 7% over time,
CPR recorded in 2000 a $132-million
reduction of future income tax liability.
During 2001, CPR recorded a further
$45-million reduction of future income tax
liability on substantively enacted
reductions in provincial tax rates. LEGAL AND PERSONAL INJURY LIABILITIES
CPR and its subsidiaries are involved in
litigation in both Canada and the U.S.
related to their businesses. Management is
required to establish estimates of
potential liability arising from
incidents, claims and pending litigation,
including personal injury claims, certain
occupation-related claims and claims
relating to property damage.
 These estimates are determined on a
case-by-case basis. They are based on
CPRs assessment of the actual damages
incurred, current legal advice with
respect to the expected outcome of the
legal action, and actuarially determined
assessments with respect to settlements in
other similar cases. CPR employs
experienced claims adjusters who
investigate and assess the validity of
individual claims made against the Company
and estimate the damages incurred. A provision for incidents, claims or
litigation is recorded, based on the facts
and circumstances known at the time. CPR
accrues for likely claims when the facts of
an incident become known and investigation
results provide a reasonable basis for
estimating the liability. The lower end of
the range is accrued if the facts and
circumstances permit only a range of
reasonable estimates and no single amount in
that range is a better estimate than any
other. Additionally, for administrative
expediency, the Company keeps a general
provision for lesser-value injury cases.
Facts and circumstances related to asserted
claims can change, and a process is in place
to monitor accruals for changes in
accounting estimates. With respect to claims related to
occupational health and safety in the
provinces of Quebec, Ontario, Manitoba and
British Columbia, estimates administered
through the Workers Compensation Board
(WCB) are actuarially determined. In the
provinces of Saskatchewan and Alberta, CPR
is assessed for an annual WCB contribution.
As a result, this amount is not subject to
estimation by management. Railway employees in the U.S. are not
covered by a workers compensation program.
CPR manages workers compensation claims in
the U.S. using a case-by-case comprehensive
approach, rather than the statistical
estimate approach used by some Class 1
railways. Provisions for incidents, claims and
litigation charged to income are included in
Purchased Services and Other on CPRs
Statement of Consolidated Income and
amounted to $78.1 million in 2003.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    29
     Accruals for incidents, claims and
litigation, including WCB accruals, totalled
$161.8 million, net of insurance recoveries,
at December 31, 2003. The total accrual
includes: $103.3 million
in Deferred Liabilities and $100.1 million
in Accounts Payable and Accrued
Liabilities, offset by $33.7 million in
Other Assets and Deferred Charges and $7.9
million in Accounts Receivable. systems, procedures and controls Management is responsible for establishing
appropriate information systems,
procedures and controls to ensure that all
financial information disclosed
externally,
 including this MD&A, and used internally by
management is complete and reliable. These
procedures include a review of the financial
statements and associated information,
including this MD&A, by the Audit, Finance
and Risk Management Committee of the Board
of Directors. The Companys Chief Executive
Officer and Chief Financial Officer have a
process to evaluate the applicable systems,
procedures and controls and are satisfied
they are adequate for ensuring that complete
and reliable financial information is
produced.




---



##### Table of Contents



PG
    30
    |
    2003 Canadian Pacific Railway Annual Report
    forward-looking information  This MD&A contains certain forward-looking
statements within the meaning of the Private
Securities Litigation Reform Act of 1995
(United States) relating but not limited to
CPRs operations, anticipated financial
performance, business prospects and
strategies. Forward-looking information
typically contains statements with words
such as anticipate, believe, expect,
plan or similar words suggesting future
outcomes. Readers are cautioned to not place undue
reliance on forward-looking information
because it is possible that predictions,
forecasts, projections and other forms of
forward-looking information will not be
achieved by CPR. In addition, CPR
undertakes 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, CPRs forward-looking
information involves numerous assumptions,
inherent risks and uncertainties, including
but not limited to the following factors:
changes in business strategies; general
global economic and business conditions; the
availability and price of energy
commodities; the effects of competition and
pricing pressures; industry overcapacity;
shifts in market demands; changes in laws
and regulations, including environmental and
regulatory laws; potential increases in
maintenance and operating costs;
uncertainties of litigation; labour
disputes; 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; various
events that could disrupt operations,
including severe weather conditions; and
technological changes. The performance of the North American and
global economies remains uncertain. Grain
production and yield in Canada improved in
the most recent crop year, after a period of
significant drought-induced decline.
However, factors over which CPR has no
control, such as weather conditions and
insect populations, affect crop production
and yield in CPRs grain collection areas.
Fuel prices also remain uncertain, as they
are influenced by many factors,
 including worldwide oil demand,
international politics, and the ability of
major oil-producing countries to comply with
agreed-upon production quotas. The sustainability of recent increases in
the value of the Canadian dollar relative
to the U.S. dollar is unpredictable, as
the value of the Canadian dollar is
affected by a number of domestic and
international factors, including, among
other things, economic performance and
government monetary policy. There is also continuing uncertainty with
respect to security issues involving the
movement of goods in populous areas of the
U.S. and Canada and the protection of North
Americas rail infrastructure, including
the movement of goods across the
Canada-U.S. border. New rules governing railway mergers were
established by the U.S. Surface
Transportation Board (STB) in 2001. The
new rules have broadened the scope of
competition-enhancing conditions that the
STB may impose in connection with railway
mergers and will likely result in increased
scrutiny by the STB of proposed railway
mergers. In Canada, draft legislation prepared
following the federal governments 2001
review of the Canada Transportation Actdid
not proceed when Parliament terminated its
session in late 2003. The legislative review
did affirm the importance of market forces
in achieving a viable, sustainable rail
industry. Although there is no visible
indication that the government is focused on
amending transportation legislation, there
could be some measures advanced that could
affect the competitive capability and
commercial strategies of Canadian railways. In addition to the foregoing general
factors, there are more specific factors
that could cause actual results to differ
from those described in the forward-looking
statements contained in this MD&A. These
more specific factors are identified and
discussed elsewhere in this MD&A with the
particular forward-looking statement in
question.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    31
    managements responsibility for financial reporting  The information in this Annual Report is
the responsibility of management. The
consolidated financial statements have been
prepared by management in accordance with
Canadian generally accepted accounting
principles and include some amounts based
on managements best estimates and careful
judgment. Management maintains a system of internal
accounting controls to provide reasonable
assurance that assets are safeguarded and
that transactions are authorized, recorded
and reported properly. The internal audit
department reviews these accounting
controls on an ongoing basis and reports
its findings and recommendations to
management and the Audit, Finance and Risk
Management Committee of the Board of
Directors. The Board of Directors carries out its
responsibility for the consolidated
financial statements principally through its
Audit, Finance and Risk Management
Committee, consisting of four members, all
of whom are outside directors. This
Committee reviews the consolidated financial
statements with management and the
independent auditors prior to submission to
the Board for approval. It also reviews the
recommendations of both the independent and
internal auditors for improvements to
internal controls, as well as the actions of
management to implement such
recommendations.
    (-s- Michael T. Waites)MICHAEL T. WAITES
Executive Vice-President and Chief Financial Officer (-s- Robert J. Ritchie)ROBERT J. RITCHIE
President and Chief Executive Officer February 19, 2004




---



##### Table of Contents



PG
    32
    |
    2003 Canadian Pacific Railway Annual Report
    auditors report  TO THE SHAREHOLDERS OFCANADIAN PACIFIC RAILWAY LIMITED We have audited the consolidated balance
sheets of Canadian Pacific Railway Limited
as at December 31, 2003 and 2002, and the
consolidated statements of income, retained
income and cash flows for each of the three
years in the period ended December 31,
2003. These consolidated financial
statements are the responsibility of the
Companys management. Our responsibility is
to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with
generally accepted auditing standards in
Canada. Those standards require that we plan
and perform an audit to obtain reasonable
assurance
whether the financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence
supporting the amounts and disclosures in
the financial statements. An audit also
includes assessing the accounting principles
used and significant estimates made by
xmanagement, as well as evaluating the
overall financial statement presentation. In our opinion, these financial statements
present fairly, in all material respects,
the financial position of Canadian Pacific
Railway Limited as at December 31, 2003 and
2002, and the results of its operations and
its cash flows for each of the three years
in the period ended December 31, 2003, in
accordance with generally accepted
accounting principles in Canada. (PRICEWATERHOUSECOOPERS LLP SIGNATURE)PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta February 6, 2004
 COMMENTS BY AUDITORS FOR U.S. READERSON CANADA-U.S. REPORTING DIFFERENCE In the United States, reporting standards
for auditors require the addition of an
explanatory paragraph (following the
opinion paragraph) when there is a change
in accounting principles that has a
material effect on the comparability of the
Companys financial statements, such as the
changes described in Note 2 and 25 to the
consolidated financial statements. Our
report to the shareholders dated February
6, 2004, is expressed in accordance with
Canadian reporting standards, which do not
require a reference to such a change in
accounting principles in the Auditors
Report when the change is properly
accounted for and adequately disclosed in
the financial statements. (PRICEWATERHOUSECOOPERS LLP SIGNATURE)PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta February 6, 2004




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    33
    statement of consolidated income Year ended December 31 (in millions, except per share data)
    
    2003
    
    
    2002
    
    
    2001RevenuesFreight
    
    $
    3,479.3
    
    
    $
    3,471.9
    
    
    $
    3,496.7Other
    
    
    181.4
    
    
    
    193.7
    
    
    
    201.93,660.7
    
    
    
    3,665.6
    
    
    
    3,698.6Operating expensesCompensation and benefits
    
    
    1,152.6
    
    
    
    1,131.1
    
    
    
    1,122.1Fuel
    
    
    393.3
    
    
    
    357.5
    
    
    
    403.0Materials
    
    
    176.8
    
    
    
    165.7
    
    
    
    180.9Equipment rents
    
    
    238.2
    
    
    
    255.0
    
    
    
    272.1Depreciation and amortization
    
    
    381.5
    
    
    
    348.4
    
    
    
    334.4Purchased services and other
    
    
    577.7
    
    
    
    551.4
    
    
    
    545.12,920.1
    
    
    
    2,809.1
    
    
    
    2,857.6Operating income, before the following:
    
    
    740.6
    
    
    
    856.5
    
    
    
    841.0Special charge for labour restructuring and asset impairment (Note 4)
    
    
    228.5
    
    
    
    
    
    
    
    Loss on transfer of assets to outsourcing firm (Note 12)
    
    
    28.9
    
    
    
    
    
    
    
    Spin-off related, incentive compensation and unusual charges (Note 18)
    
    
    
    
    
    
    
    
    
    
    24.5Operating income
    
    
    483.2
    
    
    
    856.5
    
    
    
    816.5Other charges (Note 5)
    
    
    33.5
    
    
    
    21.8
    
    
    
    26.4Foreign exchange (gain) loss on long-term debt
    
    
    (209.5
    )
    
    
    (13.4
    )
    
    
    58.2Bridge financing fees related to spin-off (Note 18)
    
    
    
    
    
    
    
    
    
    
    17.2Interest expense (Note 6)
    
    
    218.7
    
    
    
    242.2
    
    
    
    209.6Income tax expense (Note 7)
    
    
    41.8
    
    
    
    109.9
    
    
    
    132.6Net income
    
    $
    398.7
    
    
    $
    496.0
    
    
    $
    372.5Basic earnings per share(Note 8)
    
    $
    2.51
    
    
    $
    3.13
    
    
    $
    2.35Diluted earnings per share(Note 8)
    
    $
    2.51
    
    
    $
    3.11
    
    
    $
    2.34
 See Notes to Consolidated Financial Statements.




---



##### Table of Contents



PG
    34
    |
    2003 Canadian Pacific Railway Annual Report
    consolidated balance sheet Year ended December 31 (in millions)
    
    2003
    
    
    2002AssetsCurrent assetsCash and short-term investments
    
    $
    134.7
    
    
    $
    284.9Accounts receivable (Note 9)
    
    
    395.7
    
    
    
    443.0Materials and supplies
    
    
    106.4
    
    
    
    108.9Future income taxes (Note 7)
    
    
    87.4
    
    
    
    72.5724.2
    
    
    
    909.3Investments (Note 11)
    
    
    105.6
    
    
    
    92.2Net properties (Note 12)
    
    
    8,220.0
    
    
    
    8,149.3Other assets and deferred charges (Note 13)
    
    
    907.3
    
    
    
    510.0Total assets
    
    $
    9,957.1
    
    
    $
    9,660.8Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    907.0
    
    
    $
    984.2Income and other taxes payable
    
    
    13.5
    
    
    
    92.6Dividends payable on Common Shares
    
    
    20.2
    
    
    
    20.2Long-term debt maturing within one year (Note 14)
    
    
    13.9
    
    
    
    400.8954.6
    
    
    
    1,497.8Deferred liabilities (Note 16)
    
    
    671.2
    
    
    
    654.4Long-term debt (Note 14)
    
    
    3,348.9
    
    
    
    2,922.1Future income taxes (Note 7)
    
    
    1,307.2
    
    
    
    1,200.1Shareholders equity(Note 18)Share capital
    
    
    1,118.1
    
    
    
    1,116.1Contributed surplus
    
    
    294.6
    
    
    
    291.1Foreign currency translation adjustments
    
    
    87.7
    
    
    
    122.3Retained income
    
    
    2,174.8
    
    
    
    1,856.93,675.2
    
    
    
    3,386.4Total liabilities and shareholders equity
    
    $
    9,957.1
    
    
    $
    9,660.8
  See Notes to Consolidated Financial Statements. -s- J.E. Newall
    
    -s- R. PhillipsApproved on behalf of the Board:
    
    J.E. Newall, Director
    
    R. Phillips, Director




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    35
    statement of consolidated cash flows Year ended December 31 (in millions)
    
    2003
    
    
    2002
    
    
    2001Operating activitiesNet income
    
    $
    398.7
    
    
    $
    496.0
    
    
    $
    372.5Add (deduct) items not affecting cashDepreciation and amortization
    
    
    381.5
    
    
    
    348.4
    
    
    
    334.4Future income taxes (Note 7)
    
    
    32.0
    
    
    
    99.0
    
    
    
    130.8Restructuring and impairment charge (Note 4)
    
    
    228.5
    
    
    
    
    
    
    
    Foreign exchange (gain) loss on long-term debt
    
    
    (209.5
    )
    
    
    (13.4
    )
    
    
    58.2Amortization of deferred charges (Note 5)
    
    
    20.3
    
    
    
    19.3
    
    
    
    26.7Other
    
    
    
    
    
    
    (0.8
    )
    
    
    (5.5
    )851.5
    
    
    
    948.5
    
    
    
    917.1Restructuring payments
    
    
    (107.0
    )
    
    
    (119.3
    )
    
    
    (132.4
    )Other operating activities, net (Note 19)
    
    
    (365.0
    )
    
    
    (45.0
    )
    
    
    (28.2
    )Change in non-cash working capital balances related to operations (Note 10)
    
    
    (53.6
    )
    
    
    
    
    
    
    2.0Cash provided by operating activities
    
    
    325.9
    
    
    
    784.2
    
    
    
    758.5Investing activitiesAdditions to properties (Note 12)
    
    
    (686.6
    )
    
    
    (558.5
    )
    
    
    (566.4
    )Other investments
    
    
    (21.9
    )
    
    
    4.0
    
    
    
    3.8Net costs from disposal of transportation properties
    
    
    (12.0
    )
    
    
    (17.2
    )
    
    
    (27.0
    )Cash used in investing activities
    
    
    (720.5
    )
    
    
    (571.7
    )
    
    
    (589.6
    )Financing activitiesDividends on Common Shares
    
    
    (80.8
    )
    
    
    (80.8
    )
    
    
    Net dividends paid to Canadian Pacific Limited
    
    
    
    
    
    
    
    
    
    
    (150.0
    )Return of capital to Canadian Pacific Limited
    
    
    
    
    
    
    
    
    
    
    (700.0
    )Issuance of Common Shares
    
    
    2.0
    
    
    
    2.0
    
    
    
    1.6Issuance of long-term debt
    
    
    699.8
    
    
    
    
    
    
    
    2,395.6Repayment of long-term debt
    
    
    (376.6
    )
    
    
    (405.7
    )
    
    
    (1,221.2
    )Equity contribution to former affiliates (Note 18)
    
    
    
    
    
    
    
    
    
    
    (8.3
    )Advances to former affiliates
    
    
    
    
    
    
    
    
    
    
    (50.0
    )Cash provided by (used in) financing activities
    
    
    244.4
    
    
    
    (484.5
    )
    
    
    267.7Cash position(Decrease) increase in net cash
    
    
    (150.2
    )
    
    
    (272.0
    )
    
    
    436.6Net cash at beginning of year
    
    
    284.9
    
    
    
    556.9
    
    
    
    120.3Net cash at end of year
    
    $
    134.7
    
    
    $
    284.9
    
    
    $
    556.9Net cash is defined as:Cash and short-term investments
    
    $
    134.7
    
    
    $
    284.9
    
    
    $
    556.9
 See Notes to Consolidated Financial Statements.




---



##### Table of Contents



PG
    36
    |
    2003 Canadian Pacific Railway Annual Report
    statement of consolidated retained income Year ended December 31 (in millions)
    
    2003
    
    
    2002
    
    
    2001Balance, January 1
    
    $
    1,856.9
    
    
    $
    1,441.7
    
    
    $
    1,239.4Net income for the year
    
    
    398.7
    
    
    
    496.0
    
    
    
    372.5DividendsCommon Shares
    
    
    (80.8
    )
    
    
    (80.8
    )
    
    
    (20.2
    )Ordinary Shares
    
    
    
    
    
    
    
    
    
    
    (150.0
    )Balance, December 31
    
    $
    2,174.8
    
    
    $
    1,856.9
    
    
    $
    1,441.7
 See Notes to Consolidated Financial Statements.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    37
     notes to consolidated financial statements
December 31, 20031. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation
These consolidated financial statements
include the accounts of Canadian Pacific
Railway Limited (CPRL) and all of its
subsidiaries (collectively referred to as
CPR, or the Company). These
consolidated financial statements have been
prepared in accordance with Canadian
generally accepted accounting principles
(GAAP). The Companys accounts have been
adjusted to reflect an accounting basis
that is more comparable with that employed
by other Class 1 railways in North America.
The railways principal subsidiaries
present unconsolidated financial statements
in accordance with generally accepted
accounting practices for railways as
prescribed in the regulations of the
Canadian Transportation Agency in Canada
and the Surface Transportation Board in the
United States. These consolidated financial statements are
expressed in Canadian dollars, except where
otherwise indicated. The preparation of
these financial statements in conformity
 with Canadian GAAP requires management to
make estimates and assumptions that affect
the reported amounts of revenues and
expenses during the period, the reported
amounts of assets and liabilities, and the
disclosure of contingent assets and
liabilities at the date of the financial
statements. On an ongoing basis, management
reviews its estimates, including those
related to environmental liabilities,
pensions and other benefits, depreciable
lives of properties, future income tax
assets and
liabilities as well as legal and personal
injury liabilities based upon currently
available information. Actual results could
differ from these estimates. Principal Subsidiaries
The following list sets out CPRLs principal
railway operating subsidiaries, including
the jurisdiction of incorporation and the
percentage of voting securities owned
directly or indirectly by CPRL as of the
date hereof.
   Percentage of voting securitiesPrincipal subsidiary
    
    Incorporated under the laws of
    
    held directly or indirectly by the CompanyCanadian Pacific Railway Company
    
    Canada
    
    
    100
    %Soo Line Railroad Company
    
    Minnesota
    
    
    100
    %Delaware and Hudson Railway Company, Inc.
    
    Delaware
    
    
    100
    %
  Variable-interest Entities
The Company consolidates variable-interest
entities (VIE) when it is the primary
beneficiary, as described in the Canadian
Institute of Chartered Accountants (CICA)
Accounting Guideline 15 Consolidation of
Variable-Interest Entities. At December 31,
2003, CPR was the primary beneficiary of one
VIE, which holds rail cars and meets the
criteria for consolidation (see Note 2).
 Revenue Recognition
Railway freight revenues are recognized
based on the percentage of completed
service method. Other revenue is recognized
as service is performed or contractual
obligations are met. Cash and Short-term Investments
Cash and short-term investments include
marketable investments that are readily
convertible to cash. Short-term investments
are stated at cost, which approximates
market value.




---



##### Table of Contents



PG
    38
    |
    2003 Canadian Pacific Railway Annual Report
     Foreign Currency Translation
Foreign currency assets and liabilities of
the Companys operations, other than
through foreign subsidiaries, are
translated into Canadian dollars at the
year-end exchange rate for monetary items
and at the historical exchange rates for
non-monetary items. Foreign currency
revenues and expenses are translated at the
exchange rate in effect on the dates of the
related transactions. All foreign currency
gains and losses are
included immediately in income. The accounts of the Companys foreign
subsidiaries are translated into Canadian
dollars using the year-end exchange rate
for assets and liabilities and the average
exchange rates in effect for the year for
revenues and expenses. Exchange gains and
losses arising from translation of foreign
subsidiaries accounts are included in Note
18 Shareholders Equity as foreign
currency translation adjustments. A portion
of the U.S. dollar-denominated long-term
debt has been designated as a hedge of the
net investment in self-sustaining foreign
subsidiaries. Unrealized foreign exchange
gains and losses on a portion of the U.S.
dollar-denominated long-term debt are
offset against foreign exchange gains and
losses arising from translation of
self-sustaining foreign subsidiaries
accounts. Pensions and Other Benefits
Pension costs are actuarially determined
using the projected-benefit method prorated
over the credited service periods of
employees. This method incorporates
managements best estimate of expected plan
investment performance, salary escalation
and retirement ages of employees.
Market-related values are used to calculate
the expected return on plan assets. The
discount rate used to determine the benefit
obligation is based on market interest rates
on high-quality corporate debt instruments
with matching cash flows. Unrecognized
actuarial gains and losses in excess of 10 %
of the greater of the benefit obligation and
the market-related value of plan assets are
amortized over the expected average
remaining service period of active employees
expected to receive benefits under the plan
(approximately 12 years). The transitional
asset and obligation arising from
implementing the CICA
 Accounting Standard Section 3461 Employee
Future Benefits effective January 1, 2000,
is being amortized over the expected
average remaining service period of active
employees who were expected to receive
benefits under the plan at January 1, 2000
(approximately 13 years). Benefits other than pensions, including
health care, workers compensation in
Canada and life insurance, are actuarially
determined and accrued on a basis similar
to pension costs. Materials and Supplies
Inventories of materials and supplies are
valued at the lower of average cost and
replacement value. Properties
Fixed asset additions and major renewals are
recorded at cost. The Company capitalizes
computer system development costs on major
new systems, including the related variable
indirect costs. In addition, CPR capitalizes
the cost of major overhauls and large
refurbishments. When depreciable property is
retired or otherwise disposed of in the
normal course of business, the
book value, less salvage, is charged to
accumulated depreciation. The Company will
review the carrying amounts of its
properties whenever changes in circumstances
indicate that such carrying amounts may not
be recoverable based on future undiscounted
cash flows. When assets are determined to be
impaired, recorded asset values will be
revised to the fair value and an impairment
loss will be recognized. Depreciation is calculated on the
straight-line basis at rates based on the
estimated service life, taking into
consideration the projected annual usage of
depreciable property, except for rail and
other track material in the U.S., which is
based directly on usage. Usage is based on
volumes of traffic. Assets to be disposed of would be presented
separately in the Balance Sheet. They would
be reported at the lower of the carrying
amount or fair value less costs to sell, and
would no longer be depreciated. At December
31, 2003, there were no material items to be
disposed of.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    39
     Equipment under capital lease is included in
Properties and depreciated over the period
of expected use.
 Estimated service life used for
principal categories of properties is as follows:
   Assets
    
    YearsDiesel locomotives
    
    
    28 to 32Freight cars
    
    
    23 to 47Ties
    
    
    35 to 45Rails  in first position
    
    
    21 to 30 in other than first position
    
    
    54Computer system development costs
    
    
    5 to 15
  Derivative Financial and Commodity Instruments
Derivative financial and commodity
instruments may be used from time to time by
the Company to manage its exposure to price
risks relating to foreign currency exchange
rates, interest rates and fuel prices. The
Companys policy is to not utilize
derivative financial and commodity
instruments for trading or speculative
purposes. The Company enters from time to time into
forward exchange contracts to hedge
anticipated sales in U.S. dollars, the
related accounts receivable as well as
future capital acquisitions. Foreign
exchange translation gains and losses on
foreign currency-denominated derivative
financial instruments used to hedge
anticipated U.S. dollar-denominated sales
are recognized as an adjustment of the
revenues when the sale is recorded. Those
used to hedge future capital acquisitions
are recognized as an adjustment of the
property amount when the acquisition is
recorded. The Company enters into interest rate swaps
to manage the risk related to interest rate
fluctuations. These swap agreements require
the periodic exchange of payments without
the exchange of the principal amount on
which the payments are based. Interest
expense on the debt is adjusted to include
the payments owing or receivable under the
interest rate swaps.
 The Company has a fuel-hedging program
under which CPR acquires future crude oil
contracts for a percentage of its diesel
fuel purchases to reduce the risk of price
volatility affecting future cash flows.
The gains or losses on the hedge contracts
are applied against the corresponding fuel
purchases in the period during which the
hedging contracts mature. Restructuring Accrual and Environmental Remediation
Restructuring liabilities are recorded at
their present value with the related
discount being amortized over the payment
period. Environmental remediation accruals
cover site-specific remediation programs.
Provisions for labour restructuring and
environmental remediation costs are recorded
in Deferred Liabilities except for the
current portion, which is recorded in
Accounts Payable and Accrued Liabilities. Income Taxes
The Company follows the liability method of
accounting for income taxes. Future income
tax assets and liabilities are determined
based on differences between the financial
reporting and tax basis of assets and
liabilities using substantively enacted tax
rates and laws that will be in effect when
the differences are expected to reverse. The
effect of a change in income tax rates on
future income tax assets and liabilities is
recognized in income in the period during
which the change occurs.




---



##### Table of Contents



PG
    40
    |
    2003 Canadian Pacific Railway Annual Report
     Earnings Per Share
Basic earnings per share are calculated
using the weighted average number of Common
Shares outstanding during the year. Diluted
earnings per share are calculated using the
treasury stock method for determining the
dilutive effect of options. Stock-based Compensation
In the fourth quarter of 2003, the Company
prospectively adopted the fair value-based
approach to accounting for stock-based
compensation applying to options issued for
years beginning in 2003. Compensation
expense is recognized for stock options over
their vesting period based on their
estimated fair values on the date of grants,
as determined by using the Black-Scholes
option-pricing model. Prior to 2003, no
compensation expense was recognized when the
exercise price equalled the market price at
the date when stock options were issued to
employees under the Companys authorized
stock-based compensation plans. The Company
provides pro forma basis net income and
earning per share information in Note 20
Stock-based Compensation for the fair
value of options granted between January 1,
2002, and December 31, 2002. Any consideration paid by employees on
exercise of stock options and the fair value
of the options is credited to share capital
when the option is exercised. Compensation
expense is also recognized for stock
appreciation rights (SAR), deferred share
units (DSU) and employee share purchase
plans by amortizing the cost over the
vesting period, with the liability for SARs
and DSUs marked-to-market until exercised. 2. NEW ACCOUNTING POLICIESVariable-interest Entities
Effective April 1, 2003, the Company early
adopted on a prospective basis the CICA
Accounting Guideline 15 Consolidation of
Variable-Interest Entities. The guideline
requires the primary beneficiary of a VIE to
consolidate the VIE when the majority equity
owner has not provided the VIE with
sufficient funding through equity to allow
it to finance its activities without relying
on financial support from other parties with
an interest
 in the VIE. The primary beneficiary is the
enterprise that will absorb or receive the
majority of the VIEs expected losses,
expected residual returns, or both. CPR is
the primary beneficiary of one VIE, which
holds rail cars and meets the criteria for
consolidation. The impact of consolidating
the VIE on April 1, 2003, was an increase in
net properties of $193.5 million and an
increase in long-term debt of $193.5
million. The effect on net income of
adopting this standard in 2003 was an
increase in net income of $23.8 million.
This included a $22.4-million foreign
exchange gain on long-term debt. Stock-based Compensation
In the fourth quarter of 2003, CPR adopted
the fair value-based approach of the CICAs
Handbook Section 3870 Stock-based
Compensation and Other Stock-based
Payments. The Company adopted the new
accounting rules effective January 1, 2003,
on a prospective basis for options issued
for years beginning in 2003. The
compensation expense related to options
issued after January 1, 2003, included in
Compensation and Benefits, was $3.5
million in 2003. Guarantees
In February 2003, the CICA adopted
Accounting Guideline 14 (AcG 14)
Disclosure of Guarantees. The guideline
requires disclosure of key information about
certain types of guarantee contracts that
require payments contingent on specified
types of
future events, and is effective for periods
beginning on or after January 1, 2003 (see
Note 22). Impairment of Long-lived Assets
In 2003, CPR adopted the CICAs Handbook
Section 3063 Impairment of Long-lived
Assetson a prospective basis. Previously,
if the carrying amount of an asset was not
recoverable, the asset was written down to
the related undiscounted cash flow value.
Under this new section, an impairment loss
on long-lived assets is recognized when the
carrying amount is not recoverable and
exceeds its fair value. An impairment loss
is the excess of the carrying amount over
the fair value and the fair value of the
asset becomes the new cost basis and is not
reversed




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    41
     if the fair value subsequently increases.
As a result of the new standard, the
special charge taken in the second quarter
of 2003 was $72.5 million greater than it
would have been under the old standard. Severance and Termination Benefits
In the second quarter of 2003, the Company
adopted on a prospective basis the CICA
Accounting Standard, Emerging Issues
Committee (EIC) 134 Accounting for
Severance and Termination Benefits. The
effect on net income of adopting this
standard was immaterial. The standard also
requires increased disclosure of severance
and termination benefit liabilities. Foreign Currency Translation
Effective January 1, 2002, the Company
adopted retroactively with restatement the
CICA accounting standard for the treatment
of foreign exchange gains and losses. The
result of this restatement was to reduce
opening retained income at January 1, 2000,
by $97.5 million, decrease other assets and
deferred charges at January 1, 2000, by
$120.0 million and decrease future income
taxes at January 1, 2000, by $22.5 million.
The restatement also reduced net income by
$29.7 million and $37.9 million and reduced
basic and fully diluted earnings per share
by 18 cents and 24 cents for the years ended
December 31, 2000 and 2001, respectively. Under the new standard, foreign exchange
gains and losses on long-term debt can no
longer be deferred and amortized to
income. As a result, long-term debt of
approximately CDN$2.1 billion denominated
in U.S. dollars is translated into
Canadian dollars using the period-end
exchange rate, with the effect of the
change from the previous period-end rate
reflected in income. Approximately CDN$0.6
billion of the long-term debt is
designated as a hedge of the net
investment in self-sustaining U.S.
subsidiaries. 3. FUTURE ACCOUNTING CHANGESHedging Transactions
In November 2001, the CICA issued
Accounting Guideline 13 (AcG 13)
Hedging Relationships, which will be
effective for years beginning on or after
 July 1, 2003. In April 2003, the CICA
approved certain revisions to AcG 13. The
guideline addresses the identification,
designation, documentation and effectiveness
of hedging transactions for the purpose of
applying hedge accounting. It also
establishes conditions for applying and
deals with the discontinuance of hedge
accounting and the required hedge
effectiveness testing. Any derivative financial instruments that
fail to meet the hedging criteria will be
accounted for in accordance with EIC-128
Accounting for Trading, Speculative or
Non-Hedging Derivative Financial
Instruments. These instruments will be
recorded on the Balance Sheet at fair value
and changes in fair value will be
recognized in income in the period in which
the change occurs. The effect on net income
of adopting this guideline is expected to
be immaterial. Asset Retirement Obligations
The CICA approved Handbook Section 3110
Asset Retirement Obligations to replace
the current guidance on future removal costs
included in the CICA Accounting Standard
3061 Property, Plant and Equipment. The
new standard is effective for years
beginning on or after January 1, 2004. It
requires recognition of a liability at its
fair value for any legal obligation
associated with the retirement of property,
plant and equipment when those obligations
result from the acquisition, construction,
development or normal operation of the
assets.
A corresponding asset retirement cost would
be added to the carrying amount of the
related asset and amortized to expense on a
systematic and rational basis. The standard
does not allow the Companys current
practice of recognizing removal costs in
excess of salvage proceeds over the life of
the asset when the removal costs are not
legal obligations. The effect of adopting
this standard on January 1, 2004, will be to
reduce retained earnings on January 1, 2004,
by $22.0 million and properties by $1.0
million, and increase deferred liabilities
by $31.0 million and future income tax
assets by $10.0 million. It will not have a
material impact on net income.




---



##### Table of Contents



PG
    42
    |
    2003 Canadian Pacific Railway Annual Report
     4.
SPECIAL CHARGE FOR LABOUR RESTRUCTURINGAND ASSET IMPAIRMENT
In the second quarter of 2003, CPR recorded
a special charge of $228.5 million for
restructuring and write-down of
unproductive assets. The special charge was
comprised of: $105.5 million to accrue for
labour liabilities resulting from a
company-wide productivity-driven job
reduction initiative; a $116.1-million
write-down to fair value, based on
estimated future discounted cash flows, of
the assets of CPRs northeastern U.S.
subsidiary, Delaware and Hudson Railway
Company, Inc. (D&H), arising from
management taking action to restructure its
interest in the D&H; and a total
$6.9-million write-down of two
non-beneficial investments  the assets in
a supply chain
 management subsidiary and an investment in
an industry-wide procurement entity. The
$105.5-million accrual includes $2.0 million
for future rental payments for leased space
no longer being used by the Company as a
result of downsizing. The $116.1-million
write-down includes a $21.8-million accrual
for the impact of labour restructuring (see
Note 12). The job reductions will be completed by the
end of 2005, however, ongoing payments of
termination benefits to certain employees
are expected to continue to 2009.
   5. OTHER CHARGES (in millions)
    
    2003
    
    
    2002
    
    
    2001Amortization of discount on accruals recorded at present value
    
    $
    20.3
    
    
    $
    19.3
    
    
    $
    26.7Other exchange losses (gains)
    
    
    0.4
    
    
    
    (1.6
    )
    
    
    (14.8
    )Charges on sale of accounts receivable (Note 9)
    
    
    4.1
    
    
    
    3.5
    
    
    
    5.7Other
    
    
    8.7
    
    
    
    0.6
    
    
    
    8.8Total other charges
    
    $
    33.5
    
    
    $
    21.8
    
    
    $
    26.4
  Included in Other above in 2002 are
charges related to the early redemption of
CPRs 8.85 % Debentures  specifically, a
call premium of $17.5 million (see Note 14)
and accelerated amortization of deferred
financing
 charges of $2.5 million, which are offset
by $27.0 million of interest income on an
income tax settlement related to prior
years (see Note 7).
   6. INTEREST EXPENSE (in millions)
    
    2003
    
    
    2002
    
    
    2001Interest expense
    
    $
    226.4
    
    
    $
    254.2
    
    
    $
    229.5Interest income
    
    
    (7.7
    )
    
    
    (12.0
    )
    
    
    (19.9
    )Total interest expense
    
    $
    218.7
    
    
    $
    242.2
    
    
    $
    209.6Cash interest payments
    
    $
    221.9
    
    
    $
    245.5
    
    
    $
    197.9
 No interest was paid to
former affiliates during 2003 (2002  $nil; 2001  $2.1
million).




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    43
    7. INCOME TAXES
The following is a summary of the major components of the Companys income tax
expense: (in millions)
    
    2003
    
    
    2002
    
    
    2001Canada (domestic)Current income tax expense
    
    $
    9.2
    
    
    $
    9.9
    
    
    $
    10.3Future income tax expenseOrigination and reversal of temporary differences
    
    
    114.2
    
    
    
    149.5
    
    
    
    139.6Effect of tax rate increases (reductions)
    
    
    52.6
    
    
    
    
    
    
    
    (64.0
    )Recognition of previously unrecorded tax losses
    
    
    (59.1
    )
    
    
    (8.8
    )
    
    
    Other
    
    
    (59.6
    )
    
    
    (81.0
    )
    
    
    (4.6
    )Total future income tax expense
    
    
    48.1
    
    
    
    59.7
    
    
    
    71.0Total income taxes (domestic)
    
    $
    57.3
    
    
    $
    69.6
    
    
    $
    81.3Other (foreign)Current income tax expense
    
    $
    0.6
    
    
    $
    1.0
    
    
    $
    (8.5
    )Future income tax expenseOrigination and reversal of temporary differences
    
    
    5.2
    
    
    
    54.8
    
    
    
    53.9Recognition of previously unrecorded tax losses
    
    
    (22.7
    )
    
    
    (15.5
    )
    
    
    Other
    
    
    1.4
    
    
    
    
    
    
    
    5.9Total future income tax expense
    
    
    (16.1
    )
    
    
    39.3
    
    
    
    59.8Total income taxes (foreign)
    
    $
    (15.5
    )
    
    $
    40.3
    
    
    $
    51.3TotalCurrent income tax expense
    
    $
    9.8
    
    
    $
    10.9
    
    
    $
    1.8Future income tax expense
    
    
    32.0
    
    
    
    99.0
    
    
    
    130.8Total income taxes (domestic and foreign)
    
    $
    41.8
    
    
    $
    109.9
    
    
    $
    132.6




---



##### Table of Contents



PG
    44
    |
    2003 Canadian Pacific Railway Annual Report
     The provision for future income taxes
arises from temporary differences in the
carrying values of assets and
liabilities for financial statement and
income tax
 purposes. The temporary differences comprising the future income tax assets
and liabilities are as follows:
   (in millions)
    
    2003
    
    
    2002Future income tax assetsRestructuring liability
    
    $
    158.2
    
    
    $
    145.6Amount related to tax losses carried forward
    
    
    286.2
    
    
    
    150.8Capital assets tax basis in excess of carrying value
    
    
    9.2
    
    
    
    Liabilities carrying value in excess of tax basis
    
    
    54.9
    
    
    
    142.9Future environmental remediation costs
    
    
    14.4
    
    
    
    18.7Other
    
    
    39.6
    
    
    
    77.1Total future income tax assets
    
    
    562.5
    
    
    
    535.1Future income tax liabilitiesCapital assets carrying value in excess of tax basis
    
    
    1,470.3
    
    
    
    1,494.0Prepaid expenses
    
    
    255.4
    
    
    
    118.0Other
    
    
    56.6
    
    
    
    50.7Total future income tax liabilities
    
    
    1,782.3
    
    
    
    1,662.7Total net future income tax liabilities
    
    
    1,219.8
    
    
    
    1,127.6Net current future income tax assets
    
    
    87.4
    
    
    
    72.5Net long-term future income tax liabilities
    
    $
    1,307.2
    
    
    $
    1,200.1
  The Companys consolidated effective
income tax rate differs from the expected
statutory tax rates. Expected
 income tax expense at statutory rates
is reconciled to income tax expense as
follows:
   (in millions)
    
    2003
    
    
    2002
    
    
    2001Expected income tax expense at Canadian statutory tax rates
    
    $
    166.7
    
    
    $
    227.3
    
    
    $
    190.9Increase (decrease) in taxes resulting from:Large corporations tax
    
    
    11.1
    
    
    
    10.0
    
    
    
    10.3Gains not subject to tax
    
    
    (50.5
    )
    
    
    (19.4
    )
    
    
    10.4Foreign tax rate differentials
    
    
    19.3
    
    
    
    3.7
    
    
    
    (10.4
    )Effect of tax rate increases (reductions)
    
    
    52.6
    
    
    
    
    
    
    
    (64.0
    )Recognition of previously unrecorded tax losses
    
    
    (81.8
    )
    
    
    (24.3
    )
    
    
    Other
    
    
    (75.6
    )
    
    
    (87.4
    )
    
    
    (4.6
    )Total income tax expense
    
    $
    41.8
    
    
    $
    109.9
    
    
    $
    132.6




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    45
     The Company has $488.0 million of capital
losses (2002  $800.0 million) available
indefinitely for Canadian tax purposes for
which no future income tax asset has been
recognized. In determining its future income taxes, the
Company makes estimates and assumptions
regarding future tax matters. During 2003,
the Company revalued various components of
its future income tax liability and reduced
the estimate of its future income tax
liability by $59.3 million. The Company
believes that its future income tax
provision is adequate. During 2002, as a result of a favourable
decision by the Federal Court of Appeal
(the Queen v. Canadian Pacific Limited
(legally renamed Canadian Pacific Railway
Company in 1996)), the Company reported a
recovery of income taxes of approximately
$72.0 million. 8. EARNINGS PER SHARE
At December 31, 2003, the number of shares
outstanding was 158.7 million (2002  158.5
million).
 Basic earnings per share have been
calculated using net income for the year
divided by the weighted average number of
CPRL shares outstanding during the year.
For the year ended December 31, 2001, the
weighted average number of shares was
calculated using the number of shares
issued as a result of the corporate
reorganization for the first nine months
of 2001 (see Note 18) and the actual
number of shares outstanding for the last
three months of the year. Diluted earnings per share have been
calculated using the treasury stock method,
which gives effect to the dilutive value of
outstanding options. At December 31, 2003,
there were 0.5 million replacement options
outstanding that had been exchanged after
the spin-off for Canadian Pacific Limited
(CPL) stock options held by CPL employees
(2002  0.7 million replacement options). In
2003, 1.6 million stock options were issued
to CPR employees (2002  1.6 million new
options; 2001  2.7 million new options). The number of shares used in the
earnings per share calculations is
reconciled as follows:
   (in millions)
    
    2003
    
    
    2002
    
    
    2001Weighted average shares outstanding
    
    
    158.5
    
    
    
    158.5
    
    
    
    158.3Dilutive effect of stock options
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.5Weighted average diluted shares outstanding
    
    
    159.1
    
    
    
    159.3
    
    
    
    158.8
 (in dollars)
    
    2003
    
    
    2002
    
    
    2001Basic earnings per share
    
    $
    2.51
    
    
    $
    3.13
    
    
    $
    2.35Diluted earnings per share
    
    $
    2.51
    
    
    $
    3.11
    
    
    $
    2.34




---



##### Table of Contents



PG
    46
    |
    2003 Canadian Pacific Railway Annual Report
     9. SALE OF ACCOUNTS RECEIVABLE
The Company has a securitization agreement
involving the non-recourse sale of
accounts receivable on a revolving basis,
which at December 31, 2003, amounted to
$132.0 million (2002  $132.0 million).
Cash proceeds on these receivables were
$120.0 million (2002  $120.0 million)
with $12.0 million (2002  $12.0 million)
having been held back as a reserve to be
released to the Company upon termination
of the agreement.
 Discounts on the revolving sales and program
fees of $4.1 million in 2003 (2002  $3.5
million; 2001  $5.7 million) were included
in the Income Statement as part of Other
Charges (see Note 5). The reserve is valued
on the Companys books at an amount equal to
the undiscounted expected future cash flows.
The Company acts as the collector of the
receivables but has no claim against the
proceeds of collection of the securitized
receivables.
   10. CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATED TO OPERATIONS (in millions)
    
    2003
    
    
    2002
    
    
    2001Source (use) of cash:Accounts receivable
    
    $
    47.3
    
    
    $
    21.1
    
    
    $
    31.2Materials and supplies
    
    
    2.5
    
    
    
    (6.6
    )
    
    
    28.7Accounts payable and accrued liabilities
    
    
    (77.2
    )
    
    
    (20.4
    )
    
    
    3.1Income and other taxes payable
    
    
    (79.1
    )
    
    
    (10.8
    )
    
    
    (54.7
    )Change in non-cash working capital
    
    
    (106.5
    )
    
    
    (16.7
    )
    
    
    8.3Exclude amounts reported elsewhere on the Statement
of Consolidated Cash Flows:Decrease (increase) in current portion of restructuring provisions
included in accounts payable and accrued liabilities
    
    
    13.3
    
    
    
    (4.4
    )
    
    
    (2.4
    )(Increase) decrease in accounts payable and accrued liabilities
resulting from additions to properties
    
    
    (12.4
    )
    
    
    7.4
    
    
    
    3.7Other changes in non-cash working capital balances (reclassification
to (from) long-term liabilities from (to) current liabilities)
    
    
    54.1
    
    
    
    13.7
    
    
    
    (7.6
    )Other changes in non-cash working capital balances (reclassification
(to) from long-term asset to (from) current assets)
    
    
    (2.1
    )
    
    
    
    
    
    
    Change in non-cash working capital balances related to operations
    
    $
    (53.6
    )
    
    $
    
    
    
    $
    2.0
 11. INVESTMENTS (in millions)
    
    2003
    
    
    2002Rail investments accounted for on an equity basis
    
    $
    77.6
    
    
    $
    61.2Other investments accounted for on a cost basis
    
    
    28.0
    
    
    
    31.0Total investments
    
    $
    105.6
    
    
    $
    92.2




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    47
    12. NET PROPERTIES Accumulated
    
    
    Net book(in millions)
    
    Cost
    
    
    depreciation
    
    
    value2003Track and roadway
    
    $
    7,388.7
    
    
    $
    2,382.1
    
    
    $
    5,006.6Buildings
    
    
    314.9
    
    
    
    110.1
    
    
    
    204.8Rolling stock
    
    
    3,277.6
    
    
    
    1,284.7
    
    
    
    1,992.9Other
    
    
    1,539.3
    
    
    
    523.6
    
    
    
    1,015.7Total net properties
    
    $
    12,520.5
    
    
    $
    4,300.5
    
    
    $
    8,220.02002Track and roadway
    
    $
    7,315.2
    
    
    $
    2,245.6
    
    
    $
    5,069.6Buildings
    
    
    348.1
    
    
    
    123.8
    
    
    
    224.3Rolling stock
    
    
    3,067.7
    
    
    
    1,277.5
    
    
    
    1,790.2Other
    
    
    1,590.0
    
    
    
    524.8
    
    
    
    1,065.2Total net properties
    
    $
    12,321.0
    
    
    $
    4,171.7
    
    
    $
    8,149.3
  At December 31, 2003, net properties
included $387.9 million (2002  $399.3
million) of assets held under capital
lease at cost and related accumulated
depreciation of $70.1 million (2002 
$57.8 million). During the year, capital assets were
acquired under the Companys capital program
at an aggregate cost of $699.0 million (2002  $551.1 million), none of which were
acquired by means of capital leases (2002 
$nil). At April 1, 2003, the Company
consolidated $193.5 million in net
properties of a VIE for which it is the
primary beneficiary (see Note 2). Cash
payments related to capital purchases were
$686.6 million in 2003 (2002  $558.5
million).
 At December 31, 2003, $12.4 million (2002 
$nil) remained in accounts payable related
to the above purchases. Included in the special charge recorded in
the second quarter of
2003 was a $116.1-million write-down to fair
market value of the assets of the D&H,
including a $21.8-million accrual for the
impact of labour restructuring. In the fourth quarter of 2003, CPR and IBM
Canada Ltd. (IBM) entered into a
seven-year agreement under which IBM will
operate and enhance the Companys computing
infrastructure. CPR incurred a loss of
$28.9 million on the transfer of computer
assets to IBM at the start of the
arrangement.
   13. OTHER ASSETS AND DEFERRED CHARGES (in millions)
    
    2003
    
    
    2002Prepaid pension costs
    
    $
    693.9
    
    
    $
    335.6Other
    
    
    213.4
    
    
    
    174.4Total other assets and deferred charges
    
    $
    907.3
    
    
    $
    510.0




---



##### Table of Contents



PG
    48
    |
    2003 Canadian Pacific Railway Annual Report
    14. LONG-TERM DEBT (in millions)
    
    Currency in which payable
    
    
    
    2003
    
    
    
    20026.250 % Notes due 2011
    
    
    US$
    
    
    $
    518.6
    
    
    $
    631.07.125 % Debentures due 2031
    
    
    US$
    
    
    
    453.8
    
    
    
    552.26.875 % Debentures due 2003
    
    
    US$
    
    
    
    
    
    
    
    394.49.450 % Debentures due 2021
    
    
    US$
    
    
    
    324.1
    
    
    
    394.45.750 % Debentures due 2033
    
    
    US$
    
    
    
    324.1
    
    
    
    7.20 % Medium Term Notes due 2005
    
    
    CDN$
    
    
    
    250.0
    
    
    
    250.04.90 % Medium Term Notes due 2010
    
    
    CDN$
    
    
    
    350.0
    
    
    
    6.91 % Secured Equipment Notes due 2005  2024
    
    
    CDN$
    
    
    
    235.0
    
    
    
    235.07.49 % Equipment Trust Certificates due 2005  2021
    
    
    US$
    
    
    
    155.6
    
    
    
    189.3Secured Equipment Loan due 2004  2007
    
    
    US$
    
    
    
    168.6
    
    
    
    Secured Equipment Loan due 2004  2015
    
    
    CDN$
    
    
    
    158.4
    
    
    
    160.6Obligations under capital leases due 2004  2022 (6.85 %  7.65 %)
    
    
    US$
    
    
    
    365.6
    
    
    
    448.4Obligations under capital leases due 2006 (7.88 %  10.93 %)
    
    
    CDN$
    
    
    
    1.4
    
    
    
    1.8Bank loan payable on demand due 2010
    
    
    CDN$
    
    
    
    4.0
    
    
    
    Other
    
    
    US$
    
    
    
    0.6
    
    
    
    1.03,309.8
    
    
    
    3,258.1Perpetual 4 % Consolidated Debenture Stock
    
    
    US$
    
    
    
    40.2
    
    
    
    50.5Perpetual 4 % Consolidated Debenture Stock
    
    
    GBP£
    
    
    
    12.8
    
    
    
    14.33,362.8
    
    
    
    3,322.9Less: Long-term debt maturing within one year
    
    
    
    
    
    
    13.9
    
    
    
    400.8$
    3,348.9
    
    
    $
    2,922.1
  At December 31, 2003, long-term debt
denominated in U.S. dollars was
CDN$2,351.2 million (2002  CDN$2,661.2
million). Interest on each of the following
instruments is paid semi-annually: 6.250 %
Notes and 7.125 % and 6.875 % Debentures on
April 15 and October 15 of each year; 9.450
% Debentures on February 1 and August 1 of
each year. The final interest payment and
principal repayment for the 6.875 %
Debentures occurred on April 15, 2003. All
of these notes and debentures are unsecured
but carry a negative pledge.
 The 5.750 % Debentures are unsecured
but carry a
negative pledge. Interest is payable
semi-annually on March 15 and
September 15 of each year. CPRs 8.850 % Debentures were called in
June 2002. As a result of the early
redemption, CPR was required to pay a call
premium of $17.5 million and accelerate the
amortization of the related remaining
deferred financing charges of $2.5 million.
Both these items are included in Other
Charges (see Note 5). The 7.20 % Medium Term Notes due 2005 are
unsecured but carry a negative pledge.
Interest is paid semi-annually in arrears on
June 28 and December 28 of each year.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    49
     The 4.90 % Medium Term Notes due 2010 are
unsecured but carry a negative pledge.
Interest is paid semi-annually in arrears on
June 15 and December 15 of each year. The 6.91 % Secured Equipment Notes are full
recourse obligations of the Company secured
by a first charge on specific locomotive
units with a carrying value at December 31,
2003, of $261.8 million. The Company makes
semi-annual payments of interest in the
amount of $8.1 million on April 1 and
October 1 of each year, up to and including
October 1, 2004. Thereafter, the Company
will pay on April 1 and October 1 of each
year, commencing April 1, 2005, up to and
including October 1, 2024, equal blended
semi-annual payments of principal and
interest of $10.9 million. The 7.49 % Equipment Trust Certificates are
secured by specific locomotive units with a
carrying value at December 31, 2003, of
$178.7 million. Semi-annual interest
payments of US$4.5 million are made on
January 15 and July 15 of each year, up to
and including January 15, 2005. Thereafter,
semi-annual payments will vary in amount and
will be interest-only payments or blended
principal and interest payments. Final
payment of principal is due January 15,
2021. The Secured Equipment Loan due
2004  2007
is secured by specific units of rolling
stock with a carrying value at December 31,
2003, of $199.4 million. The interest rate
is floating and is calculated based on a
blend of one-month and three-month average
LIBOR plus a spread (2003  1.95 %). The
Company makes blended payments of interest
and principal quarterly on February 20, May
20, August 20 and November 20 of each year.
 The Secured Equipment Loan due 2004-2015 is
secured by specific locomotive units with a
carrying value at December 31, 2003, of
$211.7 million. The interest rate is
floating and is calculated based on a
six-month average CDOR (calculated based on
an average of Bankers Acceptance rates)
plus 53 basis points (2003  3.56 %; 2002 
3.13 %). The Company makes blended payments
of interest and principal semi-annually on February 1 and August 1 of each
year. The bank loan payable on demand matures in
the year 2010 and carries an interest rate
of 5.883 %. The amount of the loan at
December 31, 2003, was $154.5 million. The
Company has offset against this loan a
financial asset of $150.5 million with the
same financial institution. The Consolidated Debenture Stock, created
by an Act of Parliament of 1889,
constitutes a first charge upon and over
the whole of the undertaking, railways,
works, rolling stock, plant, property and
effects of the Company, with certain
exceptions. Annual maturities and sinking fund
requirements, excluding those pertaining to
capital leases, for each of the five years
following 2003 are (in millions): 2004 
$9.5; 2005  $263.7; 2006  $16.1; 2007 
$174.2; 2008  $15.1.




---



##### Table of Contents



PG
    50
    |
    2003 Canadian Pacific Railway Annual Report
    At December 31, 2003, capital lease obligations included in long-term debt were
as follows: (in millions)
    
    Year
    
    Capital leasesMinimum lease payments in:
    
    
    2004
    
    
    $
    30.62005
    
    
    
    30.62006
    
    
    
    32.12007
    
    
    
    33.32008
    
    
    
    33.3Thereafter
    
    
    
    515.0Total minimum lease payments
    
    
    
    
    
    
    674.9Less: Imputed interest
    
    
    
    
    
    
    307.9Present value of minimum lease payments
    
    
    
    
    
    
    367.0Less: Current portion
    
    
    
    
    
    
    4.4Long-term portion of capital lease obligations
    
    
    
    
    
    $
    362.6
  The carrying value of the assets securing
the capital lease obligations at December
31, 2003, was $317.8 million. 15. FINANCIAL INSTRUMENTS Forward Foreign Currency Exchange Contracts
 Commodity Contracts
Exposure to fluctuations in fuel prices
has been managed by selling or purchasing
crude oil futures. At December 31, 2003,
the Company had entered into
 futures contracts, which are accounted for
as cash flow hedges, to purchase
approximately 2,951,000 barrels (2002 
5,116,000 barrels) over the years 2004 to
2008 at average annual prices ranging from
US$24.65 to US$20.83 per barrel (2002 
US$22.20 to US$20.83 over the years 2003 to
2007). At December 31, 2003, the unrealized
gain on crude oil futures was CDN$26.8
million (2002  CDN$26.3 million). Interest Rate Contracts
At December 31, 2003, the Company had
outstanding cross-currency interest rate
swap agreements, accounted for as a hedge,
for a nominal amount of CDN$105.0 million,
which converts a portion of its
fixed-interest-rate liability into a
variable-rate liability for the 4.90 %
Medium Term Notes. At December 31, 2003, the
unrealized gain on these cross-currency
interest rate swap agreements was CDN$2.2
million (2002  $nil).




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    51
    The following table discloses the terms of the swap agreements at December 31,
2003: Expiration
    
    June 15, 2010Principal swapped (paying CDN$ millions)
    
    $
    105.0Principal swapped (receiving US$ millions)
    
    $
    77.3Fixed receiving rate
    
    
    4.90
    %Variable
paying rate (1)
    
    
    1.7
    %(1) Based on U.S. three-month LIBOR.
  At December 31, 2003, the Company had
outstanding interest rate swap agreements,
accounted for as a hedge, for a nominal
amount of US$150.0 million, which converts a
portion of its fixed-interest-rate liability
into a variable-rate liability for the 6.250
% Notes. At December 31, 2003,
 the unrealized gain on these
interest rate swap agreements was
CDN$8.4 million (2002  $nil). The following table discloses the terms
of the swap agreements at December 31,
2003:
   Expiration
    
    October 15, 2011Notional amount of principal (in CDN$ millions)
    
    $
    194.5Fixed receiving rate
    
    
    6.250
    %Variable
paying rate (1)
    
    
    2.4
    %(1) Based on U.S. three-month
LIBOR.
  The Company is also party to agreements that
have established the borrowing rate on
US$124.0 million of long-term debt, expected
to be issued in the first three months of
2004. Unrealized losses on this arrangement,
which is accounted for as a cash flow hedge,
are CDN$0.4 million at December 31, 2003,
and are expected to be amortized over the
life of the issue. During 2003, the Company recorded a
CDN$23.3-million loss paid to settle
interest rate locks on CDN$200.0 million of
long-term debt. The interest rate locks
were accounted for as a cash flow hedge and
are being amortized over the seven-year
life of the issue. At December 31, 2002, the Company had
outstanding interest rate swap agreements,
accounted for as a hedge,
 for a nominal amount of CDN$40.8 million.
These interest rate swap agreements expired
on November 3, 2003. Credit Risk Management
The Company is exposed to credit losses in
the event of non-performance by
counterparties to financial instruments.
However, the Company does not anticipate
such non-performance as dealings have been
with counterparties of high credit quality.
In addition, the Company believes there are
no significant concentrations of credit
risk. Interest Rate Exposure and Fair Values
The Companys exposure to interest rate
risk along with the total carrying amounts
and fair values of its financial
instruments is summarized in the following
table:




---



##### Table of Contents



PG
    52
    |
    2003 Canadian Pacific Railway Annual Report
    Fixed interest rate maturing inAt floating
    
    
    
    
    
    
    2005
    
    
    2009
    
    
    Total carrying(in millions)
    
    interest rates
    
    
    2004
    
    
    to 2008
    
    
    and after
    
    
    value
    
    
    Fair valueFinancial
assetsCash and short-term investments 2003
    
    $
    134.7
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    134.7
    
    
    $
    134.7Cash and short-term investments 2002
    
    $
    284.9
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    284.9
    
    
    $
    284.9Financial
liabilities6.250 % Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518.6
    
    
    
    518.6
    
    
    
    557.97.125 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453.8
    
    
    
    453.8
    
    
    
    540.39.450 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324.1
    
    
    
    324.1
    
    
    
    442.35.750 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324.1
    
    
    
    324.1
    
    
    
    303.17.20% Medium Term Notes due 2005
    
    
    
    
    
    
    
    
    
    
    250.0
    
    
    
    
    
    
    
    250.0
    
    
    
    264.84.90% Medium Term Notes due 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350.0
    
    
    
    350.0
    
    
    
    349.36.91% Secured Equipment Notes
    
    
    
    
    
    
    
    
    
    
    25.3
    
    
    
    209.7
    
    
    
    235.0
    
    
    
    264.77.49% Equipment Trust Certificates
    
    
    
    
    
    
    
    
    
    
    12.5
    
    
    
    143.1
    
    
    
    155.6
    
    
    
    215.5Secured Equipment Loan due 2007
    
    
    168.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168.6
    
    
    
    168.6Secured Equipment Loan due 2015
    
    
    158.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158.4
    
    
    
    158.44 % Consolidated Debenture Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53.0
    
    
    
    53.0
    
    
    
    42.6Obligations under capital leases
    
    
    
    
    
    
    4.4
    
    
    
    29.8
    
    
    
    332.8
    
    
    
    367.0
    
    
    
    452.8Bank loan payable on demand
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    
    
    
    
    4.0
    
    
    
    4.0Other
    
    
    
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    
    
    
    
    0.6
    
    
    
    0.6Crude oil futures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26.8Interest rate swaps
    
    
    299.5
    
    
    
    
    
    
    
    
    
    
    
    (299.5
    )
    
    
    
    
    
    
    10.6Interest rate locks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Total financial liabilities 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,362.8
    
    
    $
    3,801.9Total financial liabilities 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,322.9
    
    
    $
    3,787.6
  The Company has determined the estimated
fair values of its financial instruments
based on appropriate valuation
methodologies. However, considerable
judgment is necessary to develop these
estimates. Accordingly, the estimates
presented herein are not necessarily
indicative of what the Company could realize
in a current market exchange. The use of
different assumptions or methodologies may
have a material effect on the estimated fair
value amounts. The following methods and assumptions were
used to estimate the fair value of each
class of financial instrument:
 
    
    Short-term financial assets and
liabilities are valued at their carrying
amounts as presented in the Balance Sheet,
which are reasonable estimates of fair value
due to the relatively short period to
maturity of these instruments.
    
    The fair value of publicly traded
long-term debt is determined based on market
prices at December 31, 2003.
The fair value of other long-term debt is
estimated based on rates currently
available to the Company for long-term
borrowings, with terms and conditions
similar to those borrowings in place at the
Balance Sheet date.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    53
     
    
    The fair value of derivative instruments
is estimated as the unrealized gain or loss
calculated based on market prices or rates
at December 31, 2003, which generally
 reflects the estimated amounts the Company
would receive or pay to terminate the
contracts at the Balance Sheet date.
   16. DEFERRED LIABILITIES (in millions)
    
    2003
    
    
    2002Provision for restructuring and environmental remediation (Note 17)
    
    $
    462.2
    
    
    $
    441.8Deferred workers compensation
    
    
    181.3
    
    
    
    179.1Accrued employee benefits
    
    
    127.6
    
    
    
    115.8Fibre optics rights-of-way deferred revenue
    
    
    54.7
    
    
    
    61.0Other
    
    
    48.2
    
    
    
    75.9874.0
    
    
    
    873.6Less: Amount payable/realizable within one year
    
    
    202.8
    
    
    
    219.2Total deferred liabilities
    
    $
    671.2
    
    
    $
    654.4
  Fibre optics rights-of-way deferred
revenue is being amortized to income on
a straight-line basis over the related
lease terms. 17. RESTRUCTURING ACCRUAL
AND ENVIRONMENTAL REMEDIATION
At December 31, 2003, the provision for
restructuring and environmental
remediation was $462.2 million (2002 
$441.8 million). The provision was
primarily for labour liabilities for
restructuring plans, including those
 discussed in Note 4 Special Charge for
Labour Restructuring and Asset
Impairment. Payments are expected to
continue in diminishing amounts until
2025. The environmental remediation
liability includes the cost of a
multi-year soil remediation program. Set out below is a reconciliation of
CPRs liabilities associated with its
restructuring and environmental
remediation programs:
   Foreign
    
    
    ClosingOpening balance
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    exchange
    
    
    balance(in millions)
    
    Jan. 1, 2003
    
    
    Accrued
    
    
    Payments
    
    
    of discount
    
    
    impact
    
    
    Dec. 31, 2003Labour liability for terminations
and severances
    
    $
    313.0
    
    
    
    126.5
    
    
    
    (78.4
    )
    
    
    12.5
    
    
    
    (15.4
    )
    
    $
    358.2Other non-labour liabilities for exit plans
    
    
    13.3
    
    
    
    1.9
    
    
    
    (8.4
    )
    
    
    0.5
    
    
    
    1.9
    
    
    
    9.2Total restructuring liability
    
    
    326.3
    
    
    
    128.4
    
    
    
    (86.8
    )
    
    
    13.0
    
    
    
    (13.5
    )
    
    
    367.4Environmental remediation program
    
    
    115.5
    
    
    
    5.5
    
    
    
    (20.2
    )
    
    
    
    
    
    
    (6.0
    )
    
    
    94.8Total restructuring and environmental
remediation liability
    
    $
    441.8
    
    
    
    133.9
    
    
    
    (107.0
    )
    
    
    13.0
    
    
    
    (19.5
    )
    
    $
    462.2




---



##### Table of Contents

'

PG
    54
    |
    2003 Canadian Pacific Railway Annual Report
    Foreign
    
    
    ClosingOpening balance
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    exchange
    
    
    balance(in millions)
    
    Jan.1, 2002
    
    
    Accrued
    
    
    Payments
    
    
    of discount
    
    
    impact
    
    
    Dec. 31, 2002Total restructuring and environmental
remediation liability
    
    $
    551.0
    
    
    
    (0.8
    )
    
    
    (119.3
    )
    
    
    11.6
    
    
    
    (0.7
    )
    
    $
    441.8
  During 2002, CPR began new restructuring
initiatives to reduce costs by eliminating
85 positions, mostly in administrative
areas. These initiatives required the
provision be increased by $6.8 million.
This change was offset by a net reduction
of $3.9 million of previously accrued
initiatives due to net experience gains
and by an additional $2.3 million in
present-value discount due to a delay in
expected payments.  18. SHAREHOLDERS
EQUITYReorganization
For the periods prior to October 1, 2001,
Canadian Pacific Railway Company (CPRC)
was a wholly owned subsidiary of CPL. On
October 1, 2001, as part of a corporate
Plan of Arrangement, CPL distributed its
interests in CPRC to a newly created,
publicly held company, CPRL. As a result,
CPRC is now a wholly owned subsidiary of
CPRL. As CPRL, CPRC and CPRCs subsidiaries
(collectively referred to as CPR, the
Company or Canadian Pacific Railway)
were under the control of CPL, the
transaction was accounted for in a manner
similar to a pooling-of-interests, and the
historical financial information of CPRC
became the historical financial information
of newly formed CPRL.
 At December 31, 2001, CPR had recorded
charges of $24.5 million due to the
spin-off and related incentive
compensation and $17.2 million in a
spin-off related bridge financing fee. During 2001, as part of the corporate
reorganization, CPRL Common Shares were
issued at a ratio of 1:2 for each CPL share
outstanding. There were 158.3 million CPRL
shares outstanding on October 5, 2001, the
date on which former shareholders of CPL
became shareholders of CPRL. The CPRC
Ordinary Shares outstanding at the time of
reorganization are now wholly owned by
CPRL. Authorized and Issued Share Capital
The Companys Articles of Incorporation
authorize for issuance an unlimited
number of Common Shares and an unlimited
number of First Preferred Shares and
Second Preferred Shares. At December 31,
2003, no Preferred Shares had been
issued. An analysis of Common Share balances is as follows:
   2003
    
    2002(in millions)
    
    Number
    
    Amount
    
    Number
    
    AmountBalance, January 1
    
    
    158.5
    
    
    $
    1,116.1
    
    
    
    158.4
    
    
    $
    1,114.1Common Shares issued under stock option plans
    
    
    0.2
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    2.0Balance, December 31
    
    
    158.7
    
    
    $
    1,118.1
    
    
    
    158.5
    
    
    $
    1,116.1




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    55
     Contributed Surplus
During 2003, the Company recorded $3.5
million in stock compensation expense to
contributed surplus (see Note 2). During 2001, the Company paid net capital
contributions totalling $8.3 million to
former affiliates.
 Foreign Currency Translation Adjustments
Included in equity are the following
cumulative foreign currency translation
adjustments:
   (in millions)
    
    2003
    
    
    2002Balance, January 1
    
    $
    122.3
    
    
    $
    125.5Change in foreign currency translation rates on foreign subsidiaries
    
    
    (188.9
    )
    
    
    (8.3
    )Other
    
    
    
    
    
    
    (3.2
    )Balance, December 31, before designated hedge
    
    $
    (66.6
    )
    
    $
    114.0Designated hedge, net of tax
    
    
    154.3
    
    
    
    8.3Balance, December 31, including designated hedge
    
    $
    87.7
    
    
    $
    122.3
  For the year ended December 31, 2003, the
Company recorded future income taxes of
$34.6 million on the designated hedge
(2002  $nil). 19. PENSIONS AND OTHER BENEFITS
Pensions and Other Benefits, Excluding
Post-employment Restructuring Benefits
The Company has both defined benefit
(DB) and defined contribution
(DC) pension plans. The DB plans provide for pensions based
principally on years of service and
compensation rates near retirement. Annual
employer contributions to the DB plans,
which are
 actuarially determined, are made on the
basis of not less than the minimum
amounts required by federal or
provincial pension supervisory
authorities. Other benefits include post-retirement
health and life insurance for pensioners,
and post-employment workers compensation
benefits, which are based on
Company-specific claims. At December 31, the net benefit expense
(credit) for DB pension plans and other
benefits included the following
components:
   Pensions
    
    Other benefits(in millions)
    
    2003
    
    
    2002
    
    
    2003
    
    
    2002Current service cost (benefits earned by employees in the year)
    
    $
    64.4
    
    
    $
    61.7
    
    
    $
    15.3
    
    
    $
    14.6Interest cost on benefit obligation
    
    
    395.0
    
    
    
    387.1
    
    
    
    26.7
    
    
    
    25.6Expected return on pension fund assets
    
    
    (448.6
    )
    
    
    (450.0
    )
    
    
    
    
    
    
    Amortization of:Transitional (asset) obligation
    
    
    (15.6
    )
    
    
    (15.6
    )
    
    
    13.4
    
    
    
    13.4Prior year service cost
    
    
    9.8
    
    
    
    11.8
    
    
    
    
    
    
    
    Net actuarial loss (gain)
    
    
    4.2
    
    
    
    0.3
    
    
    
    (2.3
    )
    
    
    0.8Net benefit expense (credit)
    
    $
    9.2
    
    
    $
    (4.7
    )
    
    $
    53.1
    
    
    $
    54.4




---



##### Table of Contents



PG
    56
    |
    2003 Canadian Pacific Railway Annual Report
    Information about the Companys DB pension plans and other benefits, in
aggregate, is as follows: Pensions
    
    Other benefits(in millions)
    
    2003
    
    2002
    
    2003
    
    2002Change in benefit obligation:Benefit obligation at January 1
    
    $
    5,993.1
    
    
    $
    5,844.5
    
    
    $
    423.8
    
    
    $
    379.2Current service cost
    
    
    64.4
    
    
    
    61.7
    
    
    
    15.3
    
    
    
    14.6Interest cost
    
    
    395.0
    
    
    
    387.1
    
    
    
    26.7
    
    
    
    25.6Employee contributions
    
    
    47.3
    
    
    
    46.4
    
    
    
    
    
    
    
    Benefits paid
    
    
    (361.5
    )
    
    
    (364.8
    )
    
    
    (32.7
    )
    
    
    (32.9
    )Foreign currency changes
    
    
    (30.9
    )
    
    
    (1.1
    )
    
    
    (16.9
    )
    
    
    (0.4
    )Plan amendments
    
    
    14.2
    
    
    
    (4.5
    )
    
    
    (2.6
    )
    
    
    (5.1
    )Inclusion of provincial Workers Compensation Board account
    
    
    
    
    
    
    
    
    
    
    17.2
    
    
    
    Actuarial loss
    
    
    403.7
    
    
    
    23.8
    
    
    
    19.6
    
    
    
    42.8Benefit obligation at December 31
    
    $
    6,525.3
    
    
    $
    5,993.1
    
    
    $
    450.4
    
    
    $
    423.8Change in fund assets:Fair value of fund assets at January 1
    
    $
    5,129.6
    
    
    $
    5,484.7
    
    
    $
    
    
    
    $
    Actual return on fund assets
    
    
    604.7
    
    
    
    (95.6
    )
    
    
    
    
    
    
    Employer contributions
    
    
    371.8
    
    
    
    59.9
    
    
    
    32.7
    
    
    
    32.9Employee contributions
    
    
    47.3
    
    
    
    46.4
    
    
    
    
    
    
    
    Benefits paid
    
    
    (361.5
    )
    
    
    (364.8
    )
    
    
    (32.7
    )
    
    
    (32.9
    )Inclusion of provincial Workers Compensation Board account
    
    
    
    
    
    
    
    
    
    
    17.2
    
    
    
    Foreign currency changes
    
    
    (20.3
    )
    
    
    (1.0
    )
    
    
    
    
    
    
    Fair value of fund assets at December 31
    
    $
    5,771.6
    
    
    $
    5,129.6
    
    
    $
    17.2
    
    
    $
    Funded status  plan deficit
    
    $
    (753.7
    )
    
    $
    (863.5
    )
    
    $
    (433.2
    )
    
    $
    (423.8
    )Unamortized prior service cost
    
    
    111.2
    
    
    
    107.8
    
    
    
    
    
    
    
    Unamortized net transitional (asset) obligation
    
    
    (145.1
    )
    
    
    (160.7
    )
    
    
    117.1
    
    
    
    133.1Unamortized experience losses:Deferred
investment losses due to use of market-related
value to determine pension expense
    
    
    358.0
    
    
    
    600.8
    
    
    
    
    
    
    
    Unamortized net actuarial loss
    
    
    1,119.7
    (1)
    
    
    641.8
    (1)
    
    
    89.5
    
    
    
    74.4Accrued benefit asset (liability) in the Consolidated Balance Sheet
    
    $
    690.1
    
    
    $
    326.2
    
    
    $
    (226.6
    )
    
    $
    (216.3
    )
 (1)
 The measurement date used to determine the plan assets and the accrued benefit
obligation is December 31. The most recent actuarial valuation for pension
funding purposes was performed at January 1, 2002.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    57
    Included in the benefit obligation and fair value of fund assets at year end
were the following amounts in respect of plans where the benefit obligation
exceeded the fund assets: Pensions
    
    Other benefits(in millions)
    
    2003
    
    2002
    
    2003
    
    2002Benefit obligation
    
    $
    (6,525.3
    )
    
    $
    (5,993.1
    )
    
    $
    (450.4
    )
    
    $
    (423.8
    )Fair value of fund assets
    
    
    5,771.6
    
    
    
    5,129.6
    
    
    
    17.2
    
    
    
    $
    (753.7
    )
    
    $
    (863.5
    )
    
    $
    (433.2
    )
    
    $
    (423.8
    )
 Actuarial assumptions used at December 31 were approximately: (percentage)
    
    2003
    
    2002
    
    2001Discount rate for plan obligation
    
    
    6.25
    
    
    
    6.75
    
    
    
    6.75Projected future salary increases
    
    
    3.00
    
    
    
    3.00
    
    
    
    3.00Expected rate of return on fund assets for the year ended December 31
    
    
    8.00
    
    
    
    8.00
    
    
    
    8.00Health care cost trend rate(1)
    
    
    9.00
    
    
    
    6.90
    
    
    
    7.50
 (1) The health care cost trend rate is projected to decrease by 0.5 % per year
to approximately 4.5 % per year. Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in the
assumed health care cost trend rate would have the following effects: One percentage
    
    One percentage(in millions)
    
    point increase
    
    point decreaseEffect on the total of service and interest costs(1)
    
    $
    (1.5
    )
    
    $
    1.7Effect on post-retirement benefit obligation(1)
    
    
    (14.9
    )
    
    
    15.9
 (1) Favourable (unfavourable). Plan Assets
The Companys pension plan asset allocation at December 31, 2003 and 2002, and
the current weighted average permissible range for each major asset class were
as follows: Current permissible
    
    Percentage of plan assets at December 31Asset allocation
    
    range
    
    
    2003
    
    
    2002Equity securities
    
    
    48  60
    %
    
    
    54.2
    %
    
    
    46.9
    %Debt securities
    
    
    36  44
    
    
    
    41.2
    
    
    
    47.8Real estate and other
    
    
    4  8
    
    
    
    4.6
    
    
    
    5.3Total
    
    
    
    
    
    
    100.0
    %
    
    
    100.0
    %




---



##### Table of Contents



PG
    58
    |
    2003 Canadian Pacific Railway Annual Report
     The Companys investment strategy is to
achieve a long-term (five- to 10-year
period) real rate of return of 5.5 %, net of
all fees and expenses. The Companys best
estimate of long-term inflation of 2.5 %
yields a long-term nominal target of 8.0 %,
net of all fees and expenses. In identifying
the above asset allocation ranges,
consideration was given to the long-term
nature of the underlying plan liabilities,
the solvency and going-concern financial
position of the plan, long-term return
expectations and the risks associated with
key asset classes as well as the
relationships of their returns with each
other, inflation and interest rates. When
advantageous and with due consideration,
derivative instruments may be utilized,
provided the total value of the underlying
asset represented by financial derivatives
is limited to 20 % of the market value of
the fund.
 An 8 % expected rate of return on the
market-related value of assets is being
used for 2004.At December 31, 2003, fund assets
consisted primarily of listed stocks and
bonds, including 285,000 CPRL Common
Shares (2002  760,000) at a market value
of $10.4 million (2002  $23.7 million)
and 6.91 % Secured Equipment Notes issued
by CPRL at par value of $1.4 million (2002
 $nil) and at market value of $1.5
million (2002  $nil).Cash Flows
Information about the actual and expected
cash flows from the pension and other
benefits plans is as follows:
   Employer contributions (in millions)
    
    Pension benefits
    
    Other benefits2002
    
    $
    59.9
    
    
    $
    32.92003
    
    
    371.8
    
    
    
    32.72004 (expected)
    
    
    122.0
    
    
    
    33.0
 Of the $371.8 million contributed in 2003, $71.8 million was needed to satisfy
minimum funding requirements, and an additional $300.0 million was contributed
at the Companys discretion and is included in Other Operating Activities,
Net, in the Statement of Consolidated Cash Flows. Expected benefit payments (in millions)
    
    Pension benefits
    
    Other benefits2004
    
    $
    369.0
    
    
    $
    33.22005
    
    
    376.9
    
    
    
    34.22006
    
    
    384.4
    
    
    
    35.22007
    
    
    398.7
    
    
    
    36.22008
    
    
    413.7
    
    
    
    37.42009  2013
    
    
    2,362.2
    
    
    
    218.9
  The above table reflects the total benefits
expected to be paid from the plans trusteed
assets or from the Companys assets,
including both the Companys share of the
benefit cost and the participants share of
the cost, which is funded by participant
contributions to the plans. Virtually
 all of the expected benefit payments with
respect to pension benefits will come from
the plans trusteed assets, while all of the
expected benefit payments with respect to
other benefits will be paid from the
Companys assets.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    59
     Defined Contribution Plan
Effective January 1, 2001, Canadian
non-unionized employees have the option to
participate in the DC plan. The DC plan
provides a pension based on total employee
and employer contributions plus investment
income earned on those contributions.
Employee contributions are based on a
percentage of salary. The Company matches
employee contributions to a maximum
percentage each year. In 2003, the net
expense of this plan, which generally equals
the employers required contribution, was
$3.1 million (2002  $2.6 million).
 Post-employment Restructuring Benefits
The Company accrues post-employment labour
liabilities as part of its restructuring
accruals (see Note 17). The labour portion
of the Companys accrued restructuring
liability was as follows:
   (in millions)
    
    2003
    
    2002Change in liability:Restructuring labour liability at January 1
    
    $
    239.7
    
    
    $
    306.4Plan adjustment
    
    
    124.0
    
    
    
    (1.1
    )Settlement gain
    
    
    
    
    
    
    Interest cost
    
    
    14.7
    
    
    
    18.1Benefits paid
    
    
    (68.4
    )
    
    
    (83.3
    )Foreign currency changes
    
    
    (12.7
    )
    
    
    (0.4
    )Restructuring labour liability at December 31
    
    
    297.3
    
    
    
    239.7Unfunded restructuring labour amount
    
    
    (297.3
    )
    
    
    (239.7
    )Unamortized net transitional amount
    
    
    (60.9
    )
    
    
    (73.3
    )Accrued restructuring labour liability in the Consolidated Balance Sheet
    
    $
    (358.2
    )
    
    $
    (313.0
    )
  20. STOCK-BASED COMPENSATION
At December 31, 2003, the Company had
several stock-based compensation plans,
including a stock option plan, tandem SARs,
a DSU plan, and an employee stock savings
plan. These plans resulted in a compensation
cost in 2003 of $15.8 million (2002  $7.4
million). In 2001, charges of $16.6 million for stock
compensation resulting from increases in
share values between the date the spin-off
was announced on February 12, 2001, and the
date the spin-off was completed on October
1, 2001, were included in the Statement of
Consolidated Income as part of Spin-off
Related, Incentive Compensation and Unusual
Charges.
 Replacement Options and SARs
Due to the reorganization of CPL, all CPL
employees who held CPL options at the date
of the spin-off received in exchange for
their CPL options fully-vested replacement
options and SARs in the spun-off companies,
according to the reorganization ratio used
for Common Shares. The exercise price of the
CPL options and SARs was allocated among the
replacement options and SARs of each of the
spun-off companies based on a formula using
the weighted average trading price of the
spun-off companies for their first 10 days
of trading.




---



##### Table of Contents



PG
    60
    |
    2003 Canadian Pacific Railway Annual Report
     By agreement between CPRL and its former
affiliates, the difference between the
strike price and the exercise price of SARs
of the former affiliates held by CPRL
employees is recognized as an expense by
CPRL. The difference between the strike
price and the exercise price of CPRL SARs
held by employees of the former affiliates
is recovered from the former affiliates. SARs are attached to 50 % of the options
and there is a one-to-one cancellation
ratio between those options and SARs. Stock Option Plans and SARs
Under the Companys stock option plans,
options are granted to eligible employees
and all Directors to purchase Common Shares
of the Company at a price equal to the
market value of the shares at the grant
date. In the fourth quarter of 2003, the
Company prospectively adopted the fair
value-based approach to accounting for
stock-based compensation for options issued
for years beginning in 2003. Beginning in
2003, compensation expense is recognized for
stock options over their vesting period
based on their estimated fair values on the
dates of grant, as determined by the
Black-Scholes option pricing model. Options
granted between January 1, 2002, and
December 31, 2002, are not recorded at fair
value and, as such, no compensation expense
was recorded in 2002 or 2003 for these
options. Additional fair value disclosure on
these options is included below as
Additional Fair Value Disclosure.
 Pursuant to the employee plan, options may
be exercised upon vesting, which is between
24 and 36 months after the grant date, and
will expire after 10 years. Some options
vest after 48 months, unless certain
performance targets are achieved, in which
case vesting is accelerated. These options
expire five years after the grant date. At December 31, 2003, there were
4,870,699 (2002  6,373,659) Common Shares
available for the granting of future
options under the stock option plans, out
of the 11,500,000 Common Shares currently
authorized. With the granting of options, employees may
be simultaneously granted SARs equivalent
to one-half the number of regular options
granted. A SAR entitles the holder to
receive payment of an amount equal to the
excess of the market value of a Common
Share at the exercise date of the SAR over
the related option exercise price. On an
ongoing basis, a liability for SARs is
accrued on the incremental change in the
market value of the underlying stock and
amortized to income over the vesting
period. SARs may be exercised no earlier
than two years and no later than 10 years
after the grant date. Where an option granted is a tandem award,
the holder can choose to exercise an
option or a SAR of equal intrinsic value. The following is a summary of the Companys
fixed stock option plan as of December 31:
   2003
    
    2002Weighted
    
    
    
    
    
    WeightedNumber of
    
    average
    
    Number of
    
    averageoptions
    
    exercise price
    
    options
    
    exercise priceOutstanding, January 1
    
    
    4,873,791
    
    
    $
    26.61
    
    
    
    3,607,622
    
    
    $
    23.99New options granted
    
    
    1,649,580
    
    
    
    31.48
    
    
    
    1,550,725
    
    
    
    30.65Exercised
    
    
    (150,077
    )
    
    
    13.45
    
    
    
    (139,101
    )
    
    
    13.50Forfeited/cancelled
    
    
    (144,210
    )
    
    
    27.69
    
    
    
    (145,455
    )
    
    
    22.19Expired
    
    
    (2,410
    )
    
    
    10.20
    
    
    
    
    
    
    
    Outstanding, December 31
    
    
    6,226,674
    
    
    $
    28.20
    
    
    
    4,873,791
    
    
    $
    26.61Options exercisable at December 31
    
    
    908,209
    
    
    $
    20.96
    
    
    
    827,426
    
    
    $
    16.31




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    61
    At December 31, 2003, the details of the stock options outstanding were as
follows: Options outstanding
    
    Options exercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    average years
    
    average
    
    Number of
    
    averageRange of exercise prices
    
    options
    
    to expiration
    
    exercise price
    
    options
    
    exercise price$  9.30  $  9.83
    
    
    33,627
    
    
    
    1
    
    
    $
    9.83
    
    
    
    33,627
    
    
    $
    9.83$10.49  $14.61
    
    
    360,575
    
    
    
    5
    
    
    $
    13.88
    
    
    
    360,575
    
    
    $
    13.88$15.61  $18.96
    
    
    157,657
    
    
    
    4
    
    
    $
    16.87
    
    
    
    157,657
    
    
    $
    16.87$27.62  $35.15
    
    
    5,674,815
    
    
    
    8
    
    
    $
    29.54
    
    
    
    356,350
    
    
    $
    30.996,226,674
    
    
    
    8
    
    
    $
    28.20
    
    
    
    908,209
    
    
    $
    20.96
  Deferred Share Unit Plan
The Company established the DSU plan as a
means to compensate and assist in attaining
share ownership targets set for certain key
employees and Directors. A DSU entitles the
holder to receive, upon redemption, a cash
payment equivalent to the market value of a
Common Share at the redemption date. DSUs
vest over various periods of up to 36 months
and are only redeemable for a specified
period after employment is terminated. Key employees may choose to receive DSUs in
lieu of cash payments for certain incentive
programs. In addition, when acquiring Common
Shares to meet share ownership targets, key
employees may be granted a matching number
of DSUs up to 33 % of the shares and DSUs
acquired during the first six months after
becoming eligible under the plan and,
thereafter, up to 25 %. Key employees have
five years to meet their ownership targets. An expense to income for DSUs is
recognized over the vesting period for
both the initial subscription price and
the change in value between reporting
periods. At December 31, 2003, there were
238,690 (2002  214,911) DSUs outstanding.
In 2003, 8,594 DSUs were redeemed.
 Employee Share Purchase Plan
In October 2001, the Company created an
employee share purchase plan whereby both
employee and Company contributions are used
to purchase shares on the open market for
employees. The Companys contributions are
expensed over the one-year vesting period. For those employees who enrolled in the
plan prior to December 31, 2001, the
Company contributed $1,000 (US$650) for
the first $1,000 contributed by the
employees. Under the plan, the Company
matches $1 for every $3 contributed by
employees at any time. All employees have the opportunity to
participate in the program to a maximum of
6 % of annual salary. At December 31, 2003, there were 9,072 (2002
 9,746) participants in the plan. The total
number of shares purchased in 2003 on behalf
of participants, including the Company
contribution, was 652,040 (2002  1,023,624)
shares. In 2003, the Companys contributions
totalled $6.7 million (2002  $11.3
million).




---



##### Table of Contents



PG
    62
    |
    2003 Canadian Pacific Railway Annual Report
     Additional Fair Value Disclosure
The issuance or exercise of stock options
authorized by CPRs stock compensation plan
between January 1, 2002, and December 31,
2002, does not result in a charge to income
when the exercise price equals the market
price of the stock on the grant date, while
an expense for SARs is recognized over the
vesting period on the incremental change in
the market value of the underlying stock
 between reporting periods. Had CPR used the
fair value method, the fair value of options
granted would have been amortized to
compensation expense over the vesting period
of the options. Under the fair value method,
CPRs pro forma basis net income and
earnings per share would have been as
follows:
   2003
    
    
    2002Net income (in millions)
    
    As reported
    
    $
    398.7
    
    
    $
    496.0Pro forma
    
    $
    396.7
    
    
    $
    492.9Basic earnings per share (in dollars)
    
    As reported
    
    $
    2.51
    
    
    $
    3.13Pro forma
    
    $
    2.50
    
    
    $
    3.11Diluted earnings per share (in dollars)
    
    As reported
    
    $
    2.51
    
    
    $
    3.11Pro forma
    
    $
    2.49
    
    
    $
    3.09
 Under the fair value method, the fair value of options at the grant date is
$9.5 million for options issued in 2003 and the pro forma value at the grant
date is $8.4 million for options issued in 2002. The weighted average fair
value assumptions were approximately: 2003
    
    
    2002Expected option life (years)
    
    
    4.41
    
    
    
    4.41Risk-free interest rate
    
    
    4.14
    %
    
    
    4.45
    %Expected stock price volatility
    
    
    30
    %
    
    
    30
    %Expected annual dividends per share
    
    $
    0.50
    
    
    $
    0.51Weighted average fair value of options granted during the year
    
    $
    8.49
    
    
    $
    7.88
  21. RELATED PARTY TRANSACTIONS
No rail services were provided to related
parties in 2003 and 2002. For the first
nine months of 2001, leading up to the date
of the spin-off, $328.2 million of rail
services were provided to affiliates. No
amounts were included in accounts
receivable at December 31, 2003 (2002 
$nil; 2001  $23.1 million) as a result of
these transactions.
 22. COMMITMENTS AND CONTINGENCIES
In the normal course of its operations, the
Company becomes involved in various legal
actions, including claims relating to
injuries and damage 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 December 31, 2003, 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.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    63
     The Company is investigating environmental
contamination at an owned property in the
U.S. that had been leased to third parties.
The costs of remediation at this site cannot
be reasonably estimated at this time but
could be material. The Company believes that
the environmental condition was
substantially caused by the former lessees
and not by the Company. The Company has
filed a claim against the former lessees
seeking to recover all or substantially all
of the costs of remediation. At December 31, 2003, the Company had
committed to future capital expenditures
amounting to $493.9 million for years 2004
to 2016. At December 31, 2003, the Company had a
committed unused line of credit of $504.6
million available for short-term and
long-term financing, repayable three years
after signing and prepayable at the
Companys option. The interest rate varies
based on bank prime, Bankers Acceptances
or the London InterBank Offered Rate. Minimum payments under operating leases
were estimated at $461.1 million in
aggregate, with annual payments in each
of the five years following 2003 of (in
millions): 2004  $113.4; 2005  $103.1;
2006  $75.6; 2007  $60.4; 2008  $37.6. Guarantees
In the normal course of operating the
railway, the Company enters into
contractual arrangements that involve
providing certain guarantees, which extend
over the term of the contracts. These
guarantees include, but are not limited
to:  
    
    Residual value guarantees on operating
lease commitments of $118.4 million at
December 31, 2003;
    
    guarantees to pay other parties in the
event of the occurrence of specified
events, including damage to equipment, in
relation to assets used in the operation
of the railway through operating leases,
rental agreements, easements, trackage and
interline agreements; and
 
    
    indemnifications of certain
tax-related payments incurred by
lessors and lenders. The maximum amount that could be payable
under these guarantees, excluding residual
value guarantees, cannot be reasonably
estimated due to the nature of certain of
these guarantees. All or a portion of
amounts paid under guarantees to pay other
parties in the event of the occurrence of
specified events could be recoverable from
other parties or through insurance. The
Company has accrued for all guarantees that
it expects to pay. At December 31, 2003,
these accruals amounted to $9.0 million. Indemnifications
Pursuant to a trust and custodial services
agreement between the Company and the
trustee of the Canadian Pacific Railway
Company Pension Trust Fund, the Company has
undertaken to indemnify and save harmless
the trustee, to the extent not paid by the
fund, from any and all taxes, claims,
liabilities, damages, costs and expenses
arising out of the performance of the
trustees obligations under the agreement,
except as a result of misconduct by the
trustee. The indemnity includes liabilities,
costs or expenses relating to any legal
reporting or notification obligations of the
trustee with respect to the defined
contribution option of the pension plans or
otherwise with respect to the assets of the
pension plans that are not part of the fund.
The indemnity survives the termination or
expiry of the agreement with respect to
claims, liabilities, etc., arising prior to
the termination or expiry. At December 31,
2003, the Company had not recorded a
liability associated with this
indemnification, as the Company does not
expect to make any payments pertaining to
it. 23. SEGMENTED INFORMATIONOperating Segment
The Company operates in only one operating
segment: rail transportation. The financial
information presented at this level is used
by management for decision making. No single customer accounts for more than
10% of the Companys revenue.




---



##### Table of Contents



PG
    64
    |
    2003 Canadian Pacific Railway Annual Report
    Geographic Information (in millions)
    
    Canada
    
    
    United States
    
    
    Total2003Revenues
    
    $
    2,683.9
    
    
    $
    976.8
    
    
    $
    3,660.7Net properties
    
    $
    6,653.0
    
    
    $
    1,567.0
    
    
    $
    8,220.02002Revenues
    
    $
    2,607.5
    
    
    $
    1,058.1
    
    
    $
    3,665.6Net properties
    
    $
    6,189.6
    
    
    $
    1,959.7
    
    
    $
    8,149.32001Revenues
    
    $
    2,665.6
    
    
    $
    1,033.0
    
    
    $
    3,698.6Net properties
    
    $
    5,992.6
    
    
    $
    1,942.9
    
    
    $
    7,935.5
 Consolidating Information  2003 Other
    
    
    Consolidating(in millions)
    
    Canada
    
    
    United States
    
    
    countries
    
    
    entries
    
    
    TotalRevenues
    
    $
    2,681.0
    
    
    $
    976.8
    
    
    $
    
    
    
    $
    2.9
    
    
    $
    3,660.7Operating expenses
    
    
    2,374.3
    
    
    
    943.4
    
    
    
    
    
    
    
    (140.2
    )
    
    
    3,177.5Operating income
    
    
    306.7
    
    
    
    33.4
    
    
    
    
    
    
    
    143.1
    
    
    
    483.2Interest and other charges
    
    
    225.9
    
    
    
    26.5
    
    
    
    (4.6
    )
    
    
    4.4
    
    
    
    252.2Foreign exchange (gain) loss on long-term debt
    
    
    (208.2
    )
    
    
    (31.5
    )
    
    
    52.6
    
    
    
    (22.4
    )
    
    
    (209.5
    )Income taxes
    
    
    (14.9
    )
    
    
    (15.7
    )
    
    
    0.1
    
    
    
    72.3
    
    
    
    41.8Net income (loss)
    
    $
    303.9
    
    
    $
    54.1
    
    
    $
    (48.1
    )
    
    $
    88.8
    
    
    $
    398.7Current assets
    
    $
    606.6
    
    
    $
    221.3
    
    
    $
    3.2
    
    
    $
    (106.9
    )
    
    $
    724.2Net properties
    
    
    5,105.1
    
    
    
    1,567.0
    
    
    
    
    
    
    
    1,547.9
    
    
    
    8,220.0Other long-term assets
    
    
    926.3
    
    
    
    91.8
    
    
    
    
    
    
    
    (5.2
    )
    
    
    1,012.9Total assets
    
    $
    6,638.0
    
    
    $
    1,880.1
    
    
    $
    3.2
    
    
    $
    1,435.8
    
    
    $
    9,957.1Current liabilities
    
    $
    756.7
    
    
    $
    304.1
    
    
    $
    (0.7
    )
    
    $
    (105.5
    )
    
    $
    954.6Long-term liabilities
    
    
    4,260.1
    
    
    
    609.2
    
    
    
    (1.1
    )
    
    
    459.1
    
    
    
    5,327.3Shareholders equity
    
    
    1,621.2
    
    
    
    966.8
    
    
    
    5.0
    
    
    
    1,082.2
    
    
    
    3,675.2Total liabilities and shareholders equity
    
    $
    6,638.0
    
    
    $
    1,880.1
    
    
    $
    3.2
    
    
    $
    1,435.8
    
    
    $
    9,957.1




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    65
    Consolidating Information  2002 Other
    
    
    Consolidating(in millions)
    
    Canada
    
    
    United States
    
    
    countries
    
    
    entries
    
    
    TotalRevenues
    
    $
    2,607.5
    
    
    $
    1,058.1
    
    
    $
    
    
    
    $
    
    
    
    $
    3,665.6Operating expenses
    
    
    2,078.8
    
    
    
    887.5
    
    
    
    
    
    
    
    (157.2
    )
    
    
    2,809.1Operating income
    
    
    528.7
    
    
    
    170.6
    
    
    
    
    
    
    
    157.2
    
    
    
    856.5Interest and other charges
    
    
    240.7
    
    
    
    29.8
    
    
    
    (6.5
    )
    
    
    
    
    
    
    264.0Foreign exchange (gain) loss on long-term debt
    
    
    (15.5
    )
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    (13.4
    )Income taxes
    
    
    18.3
    
    
    
    42.3
    
    
    
    0.2
    
    
    
    49.1
    
    
    
    109.9Net income
    
    $
    285.2
    
    
    $
    98.5
    
    
    $
    4.2
    
    
    $
    108.1
    
    
    $
    496.0Current assets
    
    $
    663.1
    
    
    $
    310.2
    
    
    $
    2.0
    
    
    $
    (66.0
    )
    
    $
    909.3Net properties
    
    
    4,991.8
    
    
    
    1,959.7
    
    
    
    
    
    
    
    1,197.8
    
    
    
    8,149.3Other long-term assets
    
    
    520.0
    
    
    
    82.1
    
    
    
    0.1
    
    
    
    
    
    
    
    602.2Total assets
    
    $
    6,174.9
    
    
    $
    2,352.0
    
    
    $
    2.1
    
    
    $
    1,131.8
    
    
    $
    9,660.8Current liabilities
    
    $
    1,242.0
    
    
    $
    325.1
    
    
    $
    (0.6
    )
    
    $
    (68.7
    )
    
    $
    1,497.8Long-term liabilities
    
    
    3,835.0
    
    
    
    734.3
    
    
    
    (1.3
    )
    
    
    208.6
    
    
    
    4,776.6Shareholders equity
    
    
    1,097.9
    
    
    
    1,292.6
    
    
    
    4.0
    
    
    
    991.9
    
    
    
    3,386.4Total liabilities and shareholders equity
    
    $
    6,174.9
    
    
    $
    2,352.0
    
    
    $
    2.1
    
    
    $
    1,131.8
    
    
    $
    9,660.8




---



##### Table of Contents



PG
    66
    |
    2003 Canadian Pacific Railway Annual Report
    Consolidating Information  2001 Other
    
    
    Consolidating(in millions)
    
    Canada
    
    
    United States
    
    
    countries
    
    
    entries
    
    
    TotalRevenues
    
    $
    2,665.1
    
    
    $
    1,033.0
    
    
    $
    
    
    
    $
    0.5
    
    
    $
    3,698.6Operating expenses
    
    
    2,191.2
    
    
    
    870.5
    
    
    
    
    
    
    
    (179.6
    )
    
    
    2,882.1Operating income
    
    
    473.9
    
    
    
    162.5
    
    
    
    
    
    
    
    180.1
    
    
    
    816.5Interest and other charges
    
    
    248.3
    
    
    
    38.5
    
    
    
    (33.6
    )
    
    
    
    
    
    
    253.2Foreign exchange loss on long-term debt
    
    
    58.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58.2Income taxes
    
    
    58.0
    
    
    
    50.8
    
    
    
    0.5
    
    
    
    23.3
    
    
    
    132.6Net income
    
    $
    109.4
    
    
    $
    73.2
    
    
    $
    33.1
    
    
    $
    156.8
    
    
    $
    372.5Current assets
    
    $
    956.1
    
    
    $
    310.6
    
    
    $
    3.1
    
    
    $
    (54.3
    )
    
    $
    1,215.5Net properties
    
    
    4,958.3
    
    
    
    1,942.9
    
    
    
    
    
    
    
    1,034.3
    
    
    
    7,935.5Other long-term assets
    
    
    486.2
    
    
    
    23.9
    
    
    
    
    
    
    
    
    
    
    
    510.1Total assets
    
    $
    6,400.6
    
    
    $
    2,277.4
    
    
    $
    3.1
    
    
    $
    980.0
    
    
    $
    9,661.1Current liabilities
    
    $
    930.4
    
    
    $
    292.8
    
    
    $
    0.1
    
    
    $
    (56.9
    )
    
    $
    1,166.4Long-term liabilities
    
    
    4,634.3
    
    
    
    735.5
    
    
    
    (0.5
    )
    
    
    153.0
    
    
    
    5,522.3Shareholders equity
    
    
    835.9
    
    
    
    1,249.1
    
    
    
    3.5
    
    
    
    883.9
    
    
    
    2,972.4Total liabilities and shareholders equity
    
    $
    6,400.6
    
    
    $
    2,277.4
    
    
    $
    3.1
    
    
    $
    980.0
    
    
    $
    9,661.1
  The Condensed Income Statement and Balance
Sheet for the Canadian operations have been
prepared in accordance with the Uniform
Classification of Accounts issued by the
Canadian Transportation Agency in Canada.
The changes required to
consolidate the Canadian operations are
identified above as consolidating entries
with the exception of amounts adjusting
current assets and liabilities, which are
eliminations of inter-company balances
between countries. 24. RECLASSIFICATION
Certain prior years figures have been
reclassified to conform with the
presentation adopted for 2003.
 25. SUPPLEMENTARY DATAReconciliation of Canadian and
United States Generally Accepted
Accounting Principles
The consolidated financial statements of the
Company have been prepared in accordance
with GAAP in Canada. The material
differences between Canadian and U.S. GAAP
relating to measurement and recognition are
explained below, along with their effect on
the Companys Statement of Consolidated
Income and Balance Sheet. Certain additional
disclosures as required under U.S. GAAP have
not been provided, as permitted by the
Securities and Exchange Commission.




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    67
     Accounting for Derivative Instruments and Hedging
Effective July 1, 2003, the CICA Accounting
Guideline No.13 Hedging Relationships
(AcG-13) harmonizes the documentation
standards for financial instruments and
hedging with U.S. GAAP for fiscal years
beginning on or after July 1, 2003. Under
Canadian GAAP, derivative instruments are
not recorded on the balance sheet at fair
value and gains or losses are included in
the income statement when the hedged
transaction occurs. Under U.S. GAAP,
derivative instruments are recognized on the
balance sheet at fair value. Gains and
losses on derivatives meeting hedge
accounting requirements are deferred and
recognized when the hedged transaction
occurs. The ineffective portion of a hedging
derivative is immediately recognized in
income. Changes in the fair value of
derivatives, which are designated and
qualify as cash flow hedges, are recorded as
a component of accumulated other
comprehensive income. Changes in the fair
values of derivatives, which are designated
and qualify as fair value hedges, are
recorded in income along with adjustments to
the hedged item. Prior to January 1, 2001, under FASB
Statement No. 52 Foreign Currency
Translation (FASB 52) for U.S. reporting
purposes, forward foreign exchange contracts
associated with anticipated future
transactions that do not constitute firm
commitments are recognized in the financial
statements at fair value, with any resulting
gains or losses immediately reflected in
income. Under Canadian GAAP, certain of
these forward foreign exchange contracts
qualify as hedges for accounting purposes.
Consequently, the fair value of these
unsettled contracts is not reflected in the
financial statements and realized gains or
losses are only recognized at the time of
completion of the hedged transactions.
 Pensions and Post-retirement Benefits
The CICA Section 3461 Employee Future
Benefits requires amortization of net
actuarial gains and losses only if the
unamortized portion of these gains and
losses exceeds 10% of the greater of the
benefit obligation and the market-related
value of the plan assets (the corridor).
This harmonizes the Canadian GAAP treatment
with FASB Statement No. 87 Employers
Accounting for Pensions (FASB 87) and
FASB Statement No. 106 Employers
Accounting for Post-retirement Benefits
Other Than Pensions (FASB 106).
Previously, all actuarial gains and losses
were amortized under Canadian GAAP. Upon transition to the CICA Section 3461
effective January 1, 2000, all unamortized
gains and losses, including prior service
costs, were accumulated into a net
transitional asset, which is being
amortized to income over approximately 12
years. This created a difference compared
with U.S. GAAP in 2003, 2002 and 2001,
under which prior service costs continued
to be amortized over the expected average
remaining service period and all other net
gains accumulated prior to January 1,
2000, fell within the corridor. Post-employment Benefits
Post-employment benefits are covered by the
CICA recommendations for accounting for
employee future benefits. Consistent with
accounting for post-retirement benefits,
the new policy requires amortization of
actuarial gains and losses only if they
fall outside of the corridor. Under FASB
Statement No. 112 Employers Accounting
for Post-employment Benefits (FASB 112),
such gains and losses are included
immediately in income. Termination and Severance Benefits
Termination and severance benefits are also
covered by the CICA Section 3461. Upon
transition to this accounting policy
effective January 1, 2000, a net
transitional asset was created and is being
amortized to income. Under U.S. GAAP, the
expected benefits were not accrued and are
expensed when paid.




---



##### Table of Contents



PG
    68
    |
    2003 Canadian Pacific Railway Annual Report
     Stock-based Compensation
Under FASB Interpretation No. 44 Accounting
for Certain Transactions Involving Stock
Compensation (FIN 44), a compensation
expense must be recorded if the intrinsic
value of stock options is not exactly the
same immediately before and after an equity
restructuring. As a result of the CPL
corporate reorganization (see Note 18), CPL
underwent an equity restructuring, which
resulted in replacement options in new CPRL
stock having a different intrinsic value
after the restructuring than prior to it.
Canadian GAAP does not require
the revaluation of these options. The
Company adopted on a prospective basis
effective January 2003 the CICA Section 3870
Stock-based Compensation and Other
Stock-based Payments, which requires
companies to account for stock options at
their fair value. Concurrently, the Company
elected to adopt the fair value option under
FASB Statement No. 123 Accounting for
Stock-based Compensation (FASB 123). Internal Use Software
Under the American Institute of Certified
Public Accountants Statement of Position No.
98-1 Accounting for the costs of computer
software developed or obtained for internal
use, certain costs, including preliminary
project phase costs, are required to be
expensed as incurred. These costs are
capitalized under Canadian GAAP. Capitalization of Interest
The Company expenses interest related to
capital projects undertaken during the
year. FASB Statement No. 34
Capitalization of Interest Cost (FASB
34) requires these interest costs to be
capitalized. Income Taxes
Effective January 1, 2000, the Company
adopted retroactively without restatement
the CICA Section 3465 Future Income Taxes.
This policy, which requires the use of the
liability method, is effectively identical
to FASB Statement No. 109 Accounting for
Income Taxes (FASB 109), thus eliminating
prior-year differences. Canadian GAAP
requires the use of substantively enacted
tax rates for the calculation of future
income taxes, whereas under FASB 109, only
enacted tax rates can be used. In the period
2000 to 2002, reduced income tax
 rates were substantively enacted in Canada, for which, under U.S. GAAP, the
benefit could not be recognized until the
rate changes were enacted. In 2003, the
tax rates in Canada were enacted,
eliminating any tax rate difference
between Canada and the U.S. Comprehensive Income
FASB Statement No. 130 Reporting
Comprehensive Income (FASB 130) requires
disclosure of the change in equity from
transactions and other events related to
non-owner sources during the period.
Canadian GAAP does not require similar
disclosure. In 2003, other comprehensive
income arose from foreign currency
translation on the net investment in
self-sustaining foreign subsidiaries,
foreign currency translation related to
long-term debt designated as a hedge of the
net investment in self-sustaining foreign
subsidiaries, minimum pension liability and
derivative instrument adjustments. In 2002
and 2001, other comprehensive income arose
from foreign currency translation, foreign
currency translation related to long-term
debt designated as a hedge of the net
investment in self-sustaining foreign
subsidiaries, minimum pension liability
and derivative instrument adjustments. Assets Purchased Through Conditional Sales Agreement
The Company acquired rail cars through lease
agreements, which included conditional sales
agreements and a put option to sell the
assets to a third party in the future. Under
Canadian GAAP prior to 2003, this
transaction met the accounting guidelines
for an operating lease and had been
accounted for as such. Under U.S. GAAP, FASB
Statement No. 13 Accounting for Leases
(FASB 13) states that conditional sales
agreements must be accounted for as capital
leases. Effective April 1, 2003, the Company early
adopted on a prospective basis the CICA
Accounting Guideline 15 Consolidation of
Variable-Interest Entities (AcG-15),
which harmonizes with FASB Interpretation
No. 46 Consolidation of Variable-Interest
Entities  an Interpretation of ARB No. 51
(FIN 46). Under AcG-15, when the majority
equity owner of a VIE holds an equity
ownership representing less than 10% of the
total assets of the VIE, the primary
beneficiary of the VIE is required




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    69
     to consolidate the VIE. The Company has one
VIE, which holds rail cars previously
acquired through a conditional sales
agreement, of which it is the primary
beneficiary and meets the criteria for
consolidation. There is no difference in
treatment between U.S. GAAP and Canadian
GAAP after April 1, 2003. Impairment or Disposal of Long-lived Assets
On January 1, 2002, the Company adopted
FASB Statement No. 144 Accounting for the
Impairment or Disposal of Long-lived
Assets (FASB 144). FASB 144 supersedes
FASB Statement No. 121 Accounting for the
Impairment of Long-lived Assets to be
Disposed of (FASB 121). FASB 144 applies
to all long-lived assets and, consequently,
amends Accounting Principles Board Opinion
No. 30 Reporting Results of Operations
Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events
and Transactions. The CICA Section 3063
Impairment of Long-lived Assets, which is
effective for fiscal years beginning on or
after April 1, 2003, will harmonize the
Canadian treatment with the FASB standard.
The Company prospectively adopted the CICA
Section 3063 in 2003. There is no
difference in treatment between U.S. GAAP
and Canadian GAAP for 2003. Additional Minimum Pension Liability
In accordance with FASB Statement No. 87
Employers Accounting for Pensions (FASB
87), the Company recorded an additional
minimum pension liability for underfunded
plans representing the excess of unfunded
accumulated benefit obligation over
previously recorded
pension cost liabilities. The increase in
liabilities is charged directly to
shareholders equity, net of related
deferred income taxes. Under Canadian GAAP,
there is no requirement to set up a minimum
pension liability based on an annual
funding test. Guarantees
In December 2002, FASB issued Financial
Interpretation No. 45 Guarantors
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of
FASB Statements No. 5, 57 and 107 (FIN
45). FIN 45
 requires that, effective for years
beginning after September 15, 2002, a
guarantor recognizes at the inception of a
guarantee a liability for the fair value of
the obligations it has undertaken in
issuing the guarantee. In February 2003,
the Company adopted the CICA Accounting
Guideline 14 Disclosure of Guarantees
(AcG 14), which is consistent with the
U.S. standard, except that FIN 45 also
requires recognition of a liability for the
fair value of the obligation assumed at the
inception of the arrangement for guarantees
issued or modified after December 31, 2002.
The Company has recorded all material
guarantees at fair market value. Offsetting Contracts
FASB Financial Interpretation No. 39
Offsetting of Amounts Relating to Certain
Contracts (FIN 39) does not allow netting
of assets and liabilities among three
parties. In 2003, the Company and one of its
subsidiaries entered into a contract with a
financial institution. Under Canadian GAAP,
offsetting amounts with the same party and
with a legal right to offset are set off
against each other. Asset Retirement Obligations
In June 2001, FASB issued Statement No. 143
Accounting for Asset Retirement
Obligations (FASB 143), which requires
that an asset retirement obligation be
recognized as a liability, measured at fair
value, in the period in which the obligation
is incurred if a reasonable estimate of fair
value can be made. The associated asset
retirement costs are capitalized as part of
the carrying amount of the long-lived asset
and amortized to expense over the assets
useful life. FASB 143 is effective for
fiscal years beginning after June 15, 2002.
The Company adopted FASB 143 under U.S.
GAAP, which had an effect of $22.0 million
(net of tax) on net income. The CICA Section
3110 Asset Retirement Obligations, which
is effective for fiscal years beginning on
or after January 1, 2004, will harmonize
with FASB 143. Statement of Cash Flows
There are no material differences in the
Statement of Consolidated Cash Flows under
U.S. GAAP, except that there is no
subtotal under Cash from Operations.




---



##### Table of Contents



PG
    70
    |
    2003 Canadian Pacific Railway Annual Report
    Comparative Income Statement  (in millions)
    
    2003
    
    
    2002
    
    
    2001Net income  Canadian GAAP
    
    $
    398.7
    
    
    $
    496.0
    
    
    $
    372.5Increased (decreased) by:Pension costs
    
    
    (44.2
    )
    
    
    (44.8
    )
    
    
    (37.6
    )Post-retirement benefits
    
    
    8.6
    
    
    
    8.3
    
    
    
    7.9Post-employment benefits
    
    
    (6.2
    )
    
    
    (0.5
    )
    
    
    5.8Termination and severance benefits
    
    
    (10.3
    )
    
    
    (14.7
    )
    
    
    (11.7
    )Internal use software
    
    
    (5.5
    )
    
    
    (6.4
    )
    
    
    (12.0
    )Conditional sales agreements
    
    
    0.8
    
    
    
    (1.1
    )
    
    
    Asset retirement obligation
    
    
    (13.0
    )
    
    
    
    
    
    
    Stock-based compensation
    
    
    (4.2
    )
    
    
    (6.2
    )
    
    
    (9.0
    )Gain on ineffective portion of hedges
    
    
    25.4
    
    
    
    
    
    
    
    Capitalized interest
    
    
    1.5
    
    
    
    2.2
    
    
    
    3.6Future (deferred) income tax recovery on the above items
    
    
    20.2
    
    
    
    22.8
    
    
    
    18.9Substantively enacted tax rate adjustment
    
    
    
    
    
    
    
    
    
    
    131.7Income, before cumulative catch-up adjustment  U.S. GAAP
    
    
    371.8
    
    
    
    455.6
    
    
    
    470.1Cumulative catch-up adjustment on adoption of FASB 133, net of tax
    
    
    
    
    
    
    
    
    
    
    9.6Cumulative catch-up adjustment on adoption of FASB 143, net of tax
    
    
    (15.0
    )
    
    
    
    
    
    
    Net income  U.S. GAAP
    
    $
    356.8
    
    
    $
    455.6
    
    
    $
    479.7Other comprehensive income:Unrealized foreign exchange (loss) gain on net investment
in self-sustaining U.S. subsidiaries
    
    
    (188.9
    )
    
    
    (8.3
    )
    
    
    44.1Unrealized foreign exchange gain on designated net investment hedge
    
    
    147.2
    
    
    
    8.3
    
    
    
    Other changes in foreign currency translation adjustment
    
    
    
    
    
    
    (3.2
    )
    
    
    (2.9
    )Minimum pension liability adjustment
    
    
    (177.7
    )
    
    
    (394.0
    )
    
    
    (10.7
    )Change in fair value of derivative instruments
    
    
    13.6
    
    
    
    25.9
    
    
    
    (25.0
    )Gain on derivative instruments realized in net income
    
    
    (4.2
    )
    
    
    
    
    
    
    Future (deferred) income tax recovery (expense) on the above items
    
    
    55.4
    
    
    
    149.0
    
    
    
    (1.8
    )Comprehensive income
    
    $
    202.2
    
    
    $
    233.3
    
    
    $
    483.4Earnings per share  U.S. GAAPBasic earnings per share
    
    $
    2.25
    
    
    $
    2.87
    
    
    $
    3.03Diluted earnings per share
    
    $
    2.24
    
    
    $
    2.86
    
    
    $
    3.01Basic earnings per share, before cumulative catch-up adjustments
    
    $
    2.34
    
    
    $
    2.87
    
    
    $
    2.97Diluted earnings per share, before cumulative catch-up adjustments
    
    $
    2.34
    
    
    $
    2.86
    
    
    $
    2.96




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    71
    A summary of operating income resulting from Canadian and U.S. GAAP differences
is as follows: (in millions)
    
    2003
    
    
    2002
    
    
    2001Operating incomeCanadian GAAP
    
    $
    483.2
    
    
    $
    856.5
    
    
    $
    816.5U.S. GAAP
    
    $
    417.1
    
    
    $
    795.8
    
    
    $
    759.9




---



##### Table of Contents



PG
    72
    |
    2003 Canadian Pacific Railway Annual Report
    Balance Sheet  (in millions)
    
    2003
    
    
    2002AssetsLong-term assetsPropertiesCapitalized interest
    
    $
    149.2
    
    
    $
    147.6Internal use software
    
    
    (44.4
    )
    
    
    (38.9
    )Assets purchased through conditional sales agreements
    
    
    
    
    
    
    207.8Asset retirement obligation
    
    
    (1.0
    )
    
    
    Other assets and deferred chargesPension
    
    
    (213.2
    )
    
    
    (169.0
    )Minimum pension liability adjustment
    
    
    (262.7
    )
    
    
    (2.7
    )Long-term receivable
    
    
    150.5
    
    
    
    Total assets
    
    $
    (221.6
    )
    
    $
    144.8Liabilities and shareholders equityLong-term liabilitiesDeferred liabilitiesTermination
and severance benefits
    
    $
    (45.7
    )
    
    $
    (56.0
    )Post-retirement benefit liability
    
    
    61.1
    
    
    
    69.7Post-employment benefit liability
    
    
    18.8
    
    
    
    12.6Minimum pension liability adjustment
    
    
    326.8
    
    
    
    409.1Derivative instruments
    
    
    (37.0
    )
    
    
    (0.9
    )Asset retirement obligation
    
    
    31.0
    
    
    
    Long-term debtMarked-to-market hedged portion of debt
    
    
    8.4
    
    
    
    Assets purchased through conditional sales agreements
    
    
    
    
    
    
    208.9Bank loan
    
    
    150.5
    
    
    
    Future income tax liability
    
    
    (227.3
    )
    
    
    (148.1
    )Total liabilities
    
    
    286.6
    
    
    
    495.3Shareholders equityShare capitalStock-based compensation
    
    
    7.2
    
    
    
    4.3Contributed surplusStock-based compensation
    
    
    12.2
    
    
    
    10.9Foreign currency translation adjustments
    
    
    (87.7
    )
    
    
    (122.3
    )Retained income
    
    
    (107.7
    )
    
    
    (65.8
    )Accumulated other comprehensive incomeForeign currency translation adjustments
    
    
    25.9
    
    
    
    67.6Minimum pension liability adjustment
    
    
    (364.5
    )
    
    
    (246.7
    )Derivative instruments (FASB 133)
    
    
    6.4
    
    
    
    1.5Total liabilities and shareholders equity
    
    $
    (221.6
    )
    
    $
    144.8




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    73
    five-year summary (in millions)
    
    2003
    
    
    2002
    
    
    
    2001
    (1)
    
    
    2000
    (1)
    
    
    1999
    (1)Income statementRevenuesFreightGrain
    
    $
    644.4
    
    
    $
    631.4
    
    
    $
    749.3
    
    
    $
    755.2
    
    
    $
    687.5Coal
    
    
    444.0
    
    
    
    442.5
    
    
    
    474.1
    
    
    
    387.8
    
    
    
    391.6Sulphur and fertilizers
    
    
    417.4
    
    
    
    401.3
    
    
    
    380.7
    
    
    
    425.8
    
    
    
    419.6Forest products
    
    
    328.8
    
    
    
    360.3
    
    
    
    354.4
    
    
    
    365.9
    
    
    
    361.2Industrial products
    
    
    400.4
    
    
    
    422.1
    
    
    
    430.7
    
    
    
    438.1
    
    
    
    433.0Intermodal
    
    
    940.1
    
    
    
    881.9
    
    
    
    803.6
    
    
    
    781.9
    
    
    
    751.8Automotive
    
    
    304.2
    
    
    
    332.4
    
    
    
    303.9
    
    
    
    305.4
    
    
    
    278.93,479.3
    
    
    
    3,471.9
    
    
    
    3,496.7
    
    
    
    3,460.1
    
    
    
    3,323.6Other (2) (4)
    
    
    181.4
    
    
    
    193.7
    
    
    
    201.9
    
    
    
    195.0
    
    
    
    172.8Total revenues (2) (4)
    
    
    3,660.7
    
    
    
    3,665.6
    
    
    
    3,698.6
    
    
    
    3,655.1
    
    
    
    3,496.4Operating expensesCompensation and benefits
    
    
    1,152.6
    
    
    
    1,131.1
    
    
    
    1,122.1
    
    
    
    1,147.8
    
    
    
    1,173.2Fuel
    
    
    393.3
    
    
    
    357.5
    
    
    
    403.0
    
    
    
    409.7
    
    
    
    279.2Materials
    
    
    176.8
    
    
    
    165.7
    
    
    
    180.9
    
    
    
    213.3
    
    
    
    199.4Equipment rents
    
    
    238.2
    
    
    
    255.0
    
    
    
    272.1
    
    
    
    266.7
    
    
    
    269.7Depreciation
    
    
    381.5
    
    
    
    348.4
    
    
    
    334.4
    
    
    
    304.7
    
    
    
    292.5Purchased services and other
    
    
    577.7
    
    
    
    551.4
    
    
    
    545.1
    
    
    
    467.7
    
    
    
    520.1Total operating expenses, before other specified items (2) (4)
    
    
    2,920.1
    
    
    
    2,809.1
    
    
    
    2,857.6
    
    
    
    2,809.9
    
    
    
    2,734.1Operating income, before other specified items (2) (4)
    
    
    740.6
    
    
    
    856.5
    
    
    
    841.0
    
    
    
    845.2
    
    
    
    762.3Other charges, before foreign exchange gains and losses
on long-term debt and other specified items (2) (3) (4)
    
    
    33.5
    
    
    
    21.8
    
    
    
    26.4
    
    
    
    21.0
    
    
    
    21.8Interest expense
    
    
    218.7
    
    
    
    242.2
    
    
    
    209.6
    
    
    
    167.0
    
    
    
    136.6Income tax expense, before foreign exchange gains
and losses on long-term debt and income tax on
other specified items (2) (3) (4)
    
    
    152.2
    
    
    
    185.2
    
    
    
    224.7
    
    
    
    247.1
    
    
    
    235.4Income, before foreign exchange gains and losses on
long-term debt and other specified items (2) (3) (4)
    
    $
    336.2
    
    
    $
    407.3
    
    
    $
    380.3
    
    
    $
    410.1
    
    
    $
    368.5Foreign exchange gain (loss) on long-term debt
(net of income tax) (3)
    
    
    224.4
    
    
    
    16.7
    
    
    
    (48.2
    )
    
    
    (39.2
    )
    
    
    37.5Other specified items (net of income tax) (2)
    
    
    (161.9
    )
    
    
    72.0
    
    
    
    40.4
    
    
    
    131.7
    
    
    
    (301.5
    )Net income
    
    $
    398.7
    
    
    $
    496.0
    
    
    $
    372.5
    
    
    $
    502.6
    
    
    $
    104.5




---



##### Table of Contents



PG
    74
    |
    2003 Canadian Pacific Railway Annual Report
    (1) Restated. Effective January 1, 2002, CPR adopted retroactively with
restatement the Canadian Institute of Chartered Accountants new accounting
standard for the treatment of foreign exchange gains and losses on long-term
debt. (2)
 (3)
 (4)
 shareholder information COMMON SHARE MARKET PRICES
 2003
    
    2002Toronto Stock Exchange (Canadian dollars)
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst quarter
    
    
    33.49
    
    
    
    27.98
    
    
    
    34.64
    
    
    
    29.80Second quarter
    
    
    33.58
    
    
    
    29.78
    
    
    
    37.75
    
    
    
    31.70Third quarter
    
    
    34.70
    
    
    
    30.20
    
    
    
    37.98
    
    
    
    28.26Fourth quarter
    
    
    38.65
    
    
    
    31.92
    
    
    
    33.75
    
    
    
    26.93Year
    
    
    38.65
    
    
    
    27.98
    
    
    
    37.98
    
    
    
    26.93
 New York Stock Exchange (U.S. dollars)
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst quarter
    
    
    21.68
    
    
    
    18.98
    
    
    
    22.42
    
    
    
    18.67Second quarter
    
    
    24.37
    
    
    
    20.99
    
    
    
    24.60
    
    
    
    19.99Third quarter
    
    
    25.11
    
    
    
    21.96
    
    
    
    24.99
    
    
    
    17.85Fourth quarter
    
    
    29.25
    
    
    
    23.74
    
    
    
    21.50
    
    
    
    17.06Year
    
    
    29.25
    
    
    
    18.98
    
    
    
    24.99
    
    
    
    17.06Number of registered shareholders at year end
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,375Market prices at year endToronto Stock Exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    CDN$
    36.58New York Stock Exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    US$
    28.15




---



##### Table of Contents



2003 Canadian Pacific Railway Annual Report
    |
    PG
    75
     SHAREHOLDER ADMINISTRATION Common Shares
 Computershare Trust Company of Canada,
with transfer facilities in Montreal,
Toronto, Calgary and Vancouver, serves as
transfer agent and registrar for the
Common Shares in Canada. Computershare
Trust Company of New York serves as
co-transfer agent and co-registrar for the
Common Shares in New York. For information concerning dividends, lost
share certificates and estate transfers or
for a change in share registration or
address, please contact the transfer agent
and registrar at 1-800-564-6253 or (514)
982-7555, or by e-mail at
service@computershare.com, or write to: Computershare Trust Company of
CanadaSuite 700, 1500
University StreetMontreal,
Quebec Canada H3A 3S8 4 % CONSOLIDATED DEBENTURE STOCK   for stock denominated in U.S. currency  The Bank of
New York at (212) 815-5346, or by
e-mail at vmack@bankofny.com;andfor stock denominated in pounds sterling  BNY Trust Company of Canada at (416)
933-8504, or by e-mail at
mredway@bankofny.com. MARKET FOR SECURITIES  TRADING SYMBOL
 DUPLICATE ANNUAL REPORTS  DIRECT DEPOSIT OF DIVIDENDS  CORPORATE GOVERNANCE  A detailed description of CPRs approach
to corporate governance is contained in
its Management Proxy Circular issued in
connection with the 2004 Annual Meeting
of Shareholders.






---



##### Table of Contents



PG
    76
    |
    2003 Canadian Pacific Railway Annual Report
     GOVERNANCE LISTING STANDARDS  PRESIDENT AND CHIEF EXECUTIVE OFFICER CERTIFICATION REGARDING COMPLIANCE WITH NYSE LISTING STANDARDS
 by Canadian Pacific Railway Limited and
Canadian Pacific Railway Company of the
NYSEs Listing Standards, at the time and
in the format required by the NYSE. In
addition, the certifications of the
President and Chief Executive Officer and
the Executive Vice-President and Chief
Financial Officer of each of Canadian
Pacific Railway Limited and Canadian
Pacific Railway Company required by Section
302 of the Sarbanes-Oxley Act of 2002and
the rules promulgated by the Securities and
Exchange Commission (SEC) thereunder,
have been filed with the SEC as an exhibit
to the Annual Report of Canadian Pacific
Railway Limited and Canadian Pacific
Railway Company on Form 40-F.




---



##### Table of Contents



DIRECTORS & COMMITTEES
Stephen E. Bachand(1) (2) (4)
Former President and Chief Executive Officer
Canadian Tire Corporation, Limited
Ponte Vedra Beach, Florida John E. Cleghorn, O.C., F.C.A.(1) (2) (5)
Chairman
SNC-Lavalin Group Inc.
Toronto, Ontario Tim W. Faithfull(2) (3) (5)
Retired President and Chief Executive Officer
Shell Canada Limited
Richmond, Surrey, England Jacques Lamarre(2) (3) (5)
President and Chief Executive Officer
SNC-Lavalin Group Inc.
Montreal, Quebec James E. Newall, O.C.(2)
Chairman
Canadian Pacific Railway Limited, and
NOVA Chemicals Corporation
Calgary, Alberta Dr. James R. Nininger(2) (3) (4)
Retired President and Chief Executive Officer
The Conference Board of Canada
Ottawa, Ontario Madeleine Paquin(2) (3)
President and Chief Executive Officer
Logistec Corporation
Montreal, Quebec Michael E.J. Phelps, O.C.(2) (3) (4)
Chairman
Dornoch Capital Inc.
West Vancouver, British Columbia Roger Phillips, O.C.(1) (2) (5)
Retired President and Chief Executive Officer
IPSCO Inc.
Regina, Saskatchewan Robert J. Ritchie
President and Chief Executive Officer
Canadian Pacific Railway Limited
Calgary, Alberta The Rt. Hon., The Viscount Weir(2) (3) (5)
Chairman
CP Ships Limited
Ayrshire, Scotland Michael W. Wright(1) (2) (4)
Retired Chairman of the Board
SUPERVALU INC.
Longboat Key, Florida
 SENIOR OFFICERS OF THE COMPANY
James E. Newall, O.C.
Chairman of the Board
Calgary, Alberta Robert J. Ritchie(6)
President and Chief Executive Officer
Calgary, Alberta Edwin V. Dodge(6)*
Executive Vice-President and Chief Operating Officer
Calgary, Alberta Fred Green(6)
Executive Vice-President, Operations and Marketing
Calgary, Alberta Michael T. Waites(6)
Executive Vice-President and Chief Financial Officer;
Chief Executive Officer, U.S. Network
Municipal District of Rockyview, Alberta Allen H. Borak(6)
Vice-President, Information Services
Calgary, Alberta Paul Clark(6)
Vice-President, Communications and Public Affairs
Calgary, Alberta Paul A. Guthrie(6)
Vice-President, Law
Municipal District of Rockyview, Alberta R. Andrew Shields(6)
Vice-President, Human Resources and Industrial Relations
Calgary, Alberta Marcella M. Szel(6)
Vice-President, Marketing and Sales  Bulk
Calgary, Alberta W. Paul Bell
Vice-President, Investor Relations
Calgary, Alberta J. Joseph Doolan
Vice-President and Treasurer
Municipal District of Rockyview, Alberta Brian Grassby
Vice-President and Comptroller
Calgary, Alberta Robert V. Horte
Corporate Secretary
Calgary, Alberta (1) Audit, Finance and Risk Management Committee
(2) Corporate Governance and Nominating Committee
(3) Environmental and Safety Committee
(4) Management Resources and Compensation Committee
(5) Pension Trust Fund Committee
(6) Management Executive Committee of Canadian Pacific Railway
* Will retire from the Company on March 1, 2004




---



##### Table of Contents



(MAP)




---



##### Table of Contents



(THREE MAPS)




---



##### Table of Contents



(BACK COVER)