##### 






Exhibit 1

MANAGEMENTS DISCUSSION AND ANALYSIS
OF

FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


The following managements discussion and
analysis of CP Ships financial condition and results
of operations for the three months ended
31st March 2002 and for the years ended
31st December 2001, 2000 and 1999 should be read
in conjunction with the Consolidated Financial Statements,
including the related notes thereto contained elsewhere in this
document.

The Consolidated Financial Statements have
been prepared in accordance with Canadian GAAP which differ
in certain respects from U.S. GAAP. For a discussion of the
principal differences between Canadian GAAP and
U.S. GAAP as they affect CP Ships, see Note 22 to
the Annual Financial Statements. Some of the information
contained in this managements discussion and analysis,
including information with respect to CP Ships plans
and strategy for its business and related financing, includes
forward-looking statements that involve risks and
uncertainties.

Overview

CP Ships

CP Ships is one of the worlds leading
container shipping companies, offering its customers
door-to-door as well as port-to-port containerized services for
the international transportation of a broad range of industrial
and consumer goods, including raw materials, semi-manufactured
and finished goods. CP Ships operates a fleet of
78 ships in 24 trade lanes focusing on four principal
markets which it serves with six well-recognized brands: Canada
Maritime, Cast, Contship Containerlines, ANZDL, Lykes Lines and
TMM Lines. In 2001, CP Ships transported over
1.8 million twenty-foot equivalent units, or
teu, on behalf of more than 30,000 customers.
Teu is the standard unit of measurement used in the container
shipping industry. Based on standing capacity of its fleet in
teu, CP Ships ranks as the eleventh largest carrier in the
world, giving it economies of scale that are only otherwise
available to global carriers. In 2001, CP Ships had revenue
of $2.65 billion, and earnings before interest, taxes,
depreciation and amortization (EBITDA) of
$213 million, before exceptional charges of
$36 million related to the Spin-off (defined below) and the
restructuring of organization and offices.

Spin-off from Canadian Pacific
Limited

On 1st October 2001,
CP Ships former parent, Canadian Pacific Limited
(Canadian Pacific), reorganized and divided into
five separate publicly listed companies (the
Spin-off). As a result, CP Ships became an
independent publicly listed company on
3rd October 2001. In connection with the
Spin-off, Canadian Pacifics interest-free short-term loans
to CP Ships were repaid in full from borrowings under a new
$175 million revolving credit facility arranged by
CP Ships.

Prior to the Spin-off, CP Ships engaged in
transactions with Canadian Pacific and certain of its former
subsidiaries, including Canadian Pacific Railway. Pursuant to an
agreement which extends through 2014, CP Ships has
contracted to use Canadian Pacific Railway for all of its
container rail traffic on specific routes through
CP Ships terminals in Montreal. CP Ships
believes that, although its agreement with Canadian Pacific
Railway was originally entered into when Canadian Pacific
Railway was a related party, the agreement was entered into on
substantially the same terms and conditions as would be the case
in an arms length transaction. Furthermore, it considers
that the other transactions with, and services provided by,
Canadian Pacific and its subsidiaries were either entered into
on arms length terms or were not material to
CP Ships results of operations.

Revenue

CP Ships derives revenue primarily from the
international transportation of containerized cargo. On
door-to-door moves, revenue covers the transportation from
inland point of origin to the export port, terminal charges at
the port of loading, ocean transit, terminal charges at the port
of discharge and delivery to inland destination, or the
appropriate combination of charges for other moves, such as
port-to-port, door-to-port or port-to-door,




36



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depending on the contract with the customer.
Other revenue is derived from related services such as terminal
operations and services ancillary to the container shipping
business.


Components of Expenses

Container shipping operations expenses include
the cost of the provision and operation of ships, marine fuel,
insurance, ship port calls, terminals and stevedoring, ocean and
inland transportation of loaded containers, ocean and inland
transportation and storage of empty containers, the provision
and maintenance of the container fleet and brokerage fees paid
to freight forwarders. General and administrative expenses
comprise the cost of CP Ships administrative
organization in each country in which its commercial and
operations activities are provided by its own offices, together
with the cost of using third party agents in other countries.
CP Ships own offices expenses include commercial,
operational and support staff costs, office rents,
telecommunications and information systems costs.

The global scale of CP Ships allows it to
utilize its fleet and other assets more efficiently, realize
economies of scale and manage its overhead more effectively
thereby achieving cost savings attributable to ships and
schedules, terminals and stevedoring, container fleet, inland
transport and administration. These cost saving initiatives have
contributed to an 11% reduction in cost per teu from $1,422
in 1996 to $1,271 in 2001. Cost per teu is total cost, excluding
gains and losses on disposal of capital assets and currency
exchange and after deducting slot charter revenue, divided by
volume in teu.

EBITDA

EBITDA is used by CP Ships as a measure of
its operating performance and ability to meet working capital,
capital expenditure and debt service requirements.

Strategic Transactions

One of CP Ships key strategies is to
pursue acquisitions that enable it to grow and achieve further
economies of scale. During the period under review,
CP Ships successfully completed three transactions.

In January 1999, CP Ships formed the
Americana Ships joint venture with Transportación Maritima
Mexicana SA de CV (TMMsa). This
50/50 joint venture created what CP Ships considers
was a strong regional competitor in the U.S. Gulf, Mexico,
Central and South American trade lanes. Americana Ships combined
CP Ships services and brands in this region,
principally Lykes Lines, with TMM Lines, the container
shipping business of TMMsa. Effective
1st January 2000, CP Ships acquired
TMMsas remaining 50% interest in the Americana Ships
joint venture.

In August 2000, CP Ships purchased
Christensen Canadian African Lines (CCAL), which
provided services between Montreal and the U.S. East Coast
and South Africa, in order to strengthen the position of Lykes
Lines in the South Africa trade lane. CCAL now operates under
the Lykes Lines brand.

The Americana Ships joint venture was accounted
for using proportional consolidation during 1999. Its
acquisition and that of CCAL have been accounted for using the
purchase method and, accordingly, the results of operations of
Americana Ships and CCAL have been included in the Consolidated
Financial Statements from their respective dates of purchase.

Ship Replacement Program

CP Ships is currently mid-way through an
$800 million ship replacement program, which commenced in
2000, to replace a number of its chartered ships with
23 owned ships. As at 31st March 2002,
$402 million had been invested under the program and a
further $391 million was committed. Twelve used ships have
been delivered, 10 new ships are under construction at
shipyards in Asia and CP Ships is committed to purchase one
further used ship. Once the program is completed, which is
expected to be in mid-2003, the number of owned ships in
CP Ships fleet will have nearly doubled compared to
mid-2000. At the end of the program, the overall number of ships
in the fleet will have fallen slightly, due to restructuring and
rationalization of services, mainly in




37



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TransAtlantic and Australasian trade lanes.
However, total standing capacity will have increased by
approximately 7% due to larger ships replacing smaller
ships.


CP Ships believes that it can reduce its
costs over the medium to long-term by owning ships rather than
chartering them. In addition, the higher proportion of owned
ships in its fleet will reduce CP Ships exposure to
volatility in operating costs from the charter market and
should, therefore, improve the stability of its long-term
results. Furthermore, CP Ships is building ships with
particular characteristics for its trade lanes, such as
ice-strengthened ships for the services through the Montreal
Gateway and ships with a high carrying capacity for refrigerated
containers for the Australasia market. These ships may not be
otherwise readily available on the charter market.

Once the ship replacement program is completed,
CP Ships capital expenditure on ships is expected to
fall significantly.

Cyclicality

Historically, the financial performance of the
international container shipping industry has been cyclical,
principally due to differences between the rate of growth of
demand for container shipping services and the rate of growth in
containership supply. Demand is influenced by global and
regional economic conditions, currency exchange rates and other
factors, which are often difficult to predict. Capacity is a
function of the number of ships in the world fleet, their
employment, delivery of new ships and scrapping of older ships.
Changes in the levels of demand and supply can significantly
affect freight rates, globally or in individual markets or trade
lanes. Changes in demand and supply balance in one market can
impact on, or be affected by, the demand and supply balance in
other markets due to ship redeployment.

Seasonality

CP Ships business is seasonal due to
holidays (such as for consumer goods), crop cycles (for
agricultural products) and other factors. Although peak shipping
periods differ in some of the markets in which CP Ships
operates, historically revenue and operating income have
generally been lower during the first quarter.

Quarterly Financial Information

($ millions, unaudited)


|                       |  |                    |     |              |  |               |     |          |  |           |     |              |  |               |     |          |  |           |     |  |  |  |     |  |  |  |     |  |  |  |     |  |  |  |     | 
|---------------------- |  | ------------------ | --- | ------------ |  | ------------- | --- | -------- |  | --------- | --- | ------------ |  | ------------- | --- | -------- |  | --------- | --- |  |  |  | --- |  |  |  | --- |  |  |  | --- |  |  |  | --- | 
|                       |  |                   
|                       |  | Three months ended
|                       |  |                   
|                       |  | 31stMarch          |     | 31stDecember |  | 30thSeptember |     | 30thJune |  | 31stMarch |     | 31stDecember |  | 30thSeptember |     | 30thJune |  | 31stMarch
|                       |  | 2002               |     | 2001         |  | 2001          |     | 2001     |  | 2001      |     | 2000         |  | 2000          |     | 2000     |  | 2000     
|                       |  |                    |     |              |  |               |     |          |  |           |     |              |  |               |     |          |  |          
|Total revenue          |  |                    | 578 |              |  |               | 669 |          |  |           | 663 |              |  |               | 675 |          |  |           | 639 |  |  |  | 686 |  |  |  | 685 |  |  |  | 658 |  |  |  | 616 | 
|Total expenses         |  |                    | 584 |              |  |               | 634 |          |  |           | 629 |              |  |               | 636 |          |  |           | 608 |  |  |  | 639 |  |  |  | 639 |  |  |  | 613 |  |  |  | 590 | 
|Total operating income |  |                    | (6  | )            |  |               | 35  | (1)      |  |           | 34  | (1)          |  |               | 39  |          |  |           | 31  |  |  |  | 47  |  |  |  | 46  |  |  |  | 45  |  |  |  | 26  | 
|EBITDA                 |  |                    | 14  |              |  |               | 58  | (1)      |  |           | 53  | (1)          |  |               | 55  |          |  |           | 47  |  |  |  | 69  |  |  |  | 59  |  |  |  | 57  |  |  |  | 39  | 




|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Before an exceptional charge of $37 million
    in the three months ended 30th September 2001
    and an exceptional credit of $1 million in the three months
    ended 31st December 2001.




38



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Consolidated Results of Operations

($ millions except per share amounts, in
$)


|                                                   |                                    |                    |       |                         |  |      |      |      |   |      |       |       |  |  |       |       |   |  |       |       |  
|-------------------------------------------------- | ---------------------------------- | ------------------ | ----- | ----------------------- |  | ---- | ---- | ---- | - | ---- | ----- | ----- |  |  | ----- | ----- | - |  | ----- | ----- | -
|                                                   |                                    |                    |       |                         |  |      |      |     
|                                                   |                                    | Three months ended |       |                        
|                                                   |                                    | 31stMarch          |       | Year ended 31stDecember
|                                                   |                                    |                    |       |                        
|                                                   |                                    | 2002               |       | 2001                    |  | 2001 |      | 2000 |   | 1999
|                                                   |                                    |                    |       |                         |  |      |      |      |   |     
|                                                   |                                    | (unaudited)        |       | (unaudited)             |  |      |      |      |   |     
|Volume (in teu 000s, unaudited)                    |                                    |                    | 436   |                         |  |      | 437  |      |   |      | 1,842 |       |  |  | 1,833 |       |   |  | 1,373 |      
|                                                   |                                    |                    |       |                         |  |      |      |      |   |      |       |       |  |  |       |       |   |  |       |      
|Revenue                                            |                                    |                    | 578   |                         |  |      | 639  |      |   |      | 2,646 |       |  |  | 2,645 |       |   |  | 1,878 |      
|Expenses                                           |                                    |                    |       |                         |  |      |      |      |   |      |       |       |  |  |       |       |   |  |       |      
|                                                   | Container shipping operations      |                    |       | 474                     |  |      |      | 501  |   |      |       | 2,068 |  |  |       | 2,037 |   |  |       | 1,458 |  
|                                                   | General and administrative         |                    |       | 89                      |  |      |      | 93   |   |      |       | 363   |  |  |       | 381   |   |  |       | 281   |  
|                                                   | Depreciation                       |                    |       | 20                      |  |      |      | 16   |   |      |       | 74    |  |  |       | 60    |   |  |       | 47    |  
|                                                   | Currency exchange loss (gain)      |                    |       | 1                       |  |      |      | (2   | ) |      |       | 2     |  |  |       | 5     |   |  |       | 4     |  
|                                                   | Gain on disposal of capital assets |                    |       |                        |  |      |      |     |   |      |       |      |  |  |       | (2    | ) |  |       | (1    | )
|                                                   | Total expenses                     |                    |       | 584                     |  |      |      | 608  |   |      |       | 2,507 |  |  |       | 2,481 |   |  |       | 1,789 |  
|Operating (loss) income before exceptional charges |                                    |                    | (6    | )                       |  |      | 31   |      |   |      | 139   |       |  |  | 164   |       |   |  | 89    |      
|Exceptional charges                                |                                    |                    |      |                         |  |      |     |      |   |      | (36   | )     |  |  |      |       |   |  |      |      
|                                                   |                                    |                    |       |                         |  |      |      |      |   |      |       |       |  |  |       |       |   |  |       |      
|Operating (loss) income                            |                                    |                    | (6    | )                       |  |      | 31   |      |   |      | 103   |       |  |  | 164   |       |   |  | 89    |      
|Net interest (expense)/income                      |                                    |                    | (3    | )                       |  |      |     |      |   |      |      |       |  |  | 1     |       |   |  | (4    | )    
|Income tax expense                                 |                                    |                    | (2    | )                       |  |      | (2   | )    |   |      | (12   | )     |  |  | (12   | )     |   |  | (11   | )    
|Minority interest                                  |                                    |                    |      |                         |  |      |     |      |   |      | 1     |       |  |  |      |       |   |  | 1     |      
|Goodwill charges, net of tax                       |                                    |                    |      |                         |  |      | (4   | )    |   |      | (16   | )     |  |  | (18   | )     |   |  | (15   | )    
|                                                   |                                    |                    |       |                         |  |      |      |      |   |      |       |       |  |  |       |       |   |  |       |      
|Net (loss) income                                  |                                    |                    | (11   | )                       |  |      | 25   |      |   |      | 76    |       |  |  | 135   |       |   |  | 60    |      
|                                                   |                                    |                    |       |                         |  |      |      |      |   |      |       |       |  |  |       |       |   |  |       |      
|(Loss) earnings per Common Share 
    basic(1)    |                                    |                    | (0.14 | )                       |  |      | 0.32 |      |   |      | 0.92  |       |  |  | 1.68  |       |   |  | 0.76  |      
|EBITDA(2)(unaudited)                               |                                    |                    | 14    |                         |  |      | 47   |      |   |      | 213   | (3)   |  |  | 224   |       |   |  | 136   |      




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings per Common Share is calculated after
    deduction of dividends on preference shares held by a former
    affiliate in the years ended 31st December 2001
    and 2000 of $3 million and $2 million, respectively.
    Following the Spin-off, such preference shares are no longer
    outstanding. Basic earnings per Common Share has been calculated
    using net income available to common shareholders divided by
    79.3 million shares for the year ended
    31st December 2001 and 80 million shares
    for the three months ended 31st March 2002. For
    periods prior to 1st October 2001 (including the
    three months ended 31st March 2001), basic
    earnings per Common Share has been restated using
    79.1 million shares, which was the number of Common Shares
    outstanding immediately after the Spin-off.                                                                                                             
|(2) | EBITDA is not a substitute for operating income,
    net income or cash flow from operating activities as determined
    in accordance with generally accepted accounting principles.
    EBITDA is presented as additional information because
    CP Ships believes that it is widely used in the container
    shipping industry as a measure to evaluate a companys
    operating performance and is a useful indicator of
    CP Ships ability to meet its working capital, capital
    expenditures and debt service requirements. Because EBITDA is
    not calculated identically by all companies, the presentations
    here may not be comparable to other similarly titled measures of
    other companies. CP Ships discretionary use of funds
    depicted by EBITDA may be limited by working capital, capital
    expenditure and debt service requirements and by restrictions
    related to legal requirements, commitments and uncertainties.
|(3) | Before exceptional charges of $36 million
    relating to the Spin-off and restructuring charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Revenue

For the three months ended
31st March 2002, CP Ships had revenue of
$578 million, down 10% from $639 million for the same
period in 2001. Volume in the first quarter of 2002 at 436,000
teu was flat compared with the same period in 2001, but
CP Ships average freight rates for the ocean and
terminal element of container movements (freight
rates) were 13% lower. Market conditions continued to
deteriorate in 2002 in most trade lanes due to slower growth in
demand for global container services and significant additions
to industry containership capacity.

Revenue of $2.65 billion for the year ended
31st December 2001 was flat compared with 2000.
Volume of 1.84 million teu in 2001 was slightly higher than
in 2000, with volume growth from new Asian services offset by
reduced volume in the TransAtlantic market. Average freight
rates in 2001 improved by 1% compared to 2000, but declined
sequentially in the second, third and fourth quarters of 2001,
reversing the trend in 2000. A slowdown in world and
particularly U.S. economic growth led to slower container
trade growth. Slower growth was accompanied by an increase in
world containership capacity of 12% in 2001, most of it directly
into Asian trade lanes but with repercussions in many other
trade lanes as carriers redeployed surplus ships.




39



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Revenue of $2.65 billion in 2000 was up 41%
from $1.88 billion in 1999. This resulted from a 34%
increase in volume from 1.37 million teu in 1999 to
1.83 million teu due to the acquisition by CP Ships of
the remaining 50% interest in the Americana Ships joint venture.
The average freight rate in 2000 increased by 7% reflecting a
more balanced global supply of containership capacity and
container trade demand compared to 1999. Excluding the effects
of the Americana Ships transaction, volume for 2000 was 7%
higher than in 1999.

Expenses

|                              |  |                    |     |                         |  |      |     |      |  |      |       |  |  |  |       |  |  |  |       | 
|----------------------------- |  | ------------------ | --- | ----------------------- |  | ---- | --- | ---- |  | ---- | ----- |  |  |  | ----- |  |  |  | ----- | 
|                              |  |                    |     |                         |  |      |     |     
|                              |  | Three months ended |     |                        
|                              |  | 31stMarch          |     | Year ended 31stDecember
|                              |  |                    |     |                        
|                              |  | 2002               |     | 2001                    |  | 2001 |     | 2000 |  | 1999
|($ millions)                  |  |                    |     |                         |  |      |     |      |  |     
|                              |  | (unaudited)        |     | (unaudited)             |  |      |     |      |  |     
|Container shipping operations |  |                    | 474 |                         |  |      | 501 |      |  |      | 2,068 |  |  |  | 2,037 |  |  |  | 1,458 | 
|General and administrative    |  |                    | 89  |                         |  |      | 93  |      |  |      | 363   |  |  |  | 381   |  |  |  | 281   | 
|Depreciation                  |  |                    | 20  |                         |  |      | 16  |      |  |      | 74    |  |  |  | 60    |  |  |  | 47    | 
|Other                         |  |                    | 1   |                         |  |      | (2  | )    |  |      | 2     |  |  |  | 3     |  |  |  | 3     | 
|                              |  |                    |     |                         |  |      |     |      |  |      |       |  |  |  |       |  |  |  |       | 
|Total expenses                |  |                    | 584 |                         |  |      | 608 |      |  |      | 2,507 |  |  |  | 2,481 |  |  |  | 1,789 | 
|                              |  |                    |     |                         |  |      |     |      |  |      |       |  |  |  |       |  |  |  |       | 

In the three months ended
31st March 2002, total expenses declined 4% to
$584 million, from $608 million in the corresponding
period of 2001 partly due to cost cutting initiatives. These
initiatives included the renewal, during the first quarter of
2002, of charter agreements for 13 ships at significantly lower
rates, which is expected to reduce costs by nearly
$25 million in 2002.

Total expenses increased by 1% in 2001 to
$2.51 billion from $2.48 billion in 2000. Container
shipping operations expenses increased to $2.07 billion in
2001 from $2.04 billion in 2000 with the implementation of
new services, notably in the Asia-Europe trade lanes. The costs
associated with such implementation were, however, partly offset
by lower marine fuel costs and initiatives under the cost
reduction program. General and administrative expenses declined
from $381 million to $363 million due to effective
cost control measures and reduced cash bonus payments as a
result of lower operating income. An increase in depreciation in
2001 from $60 million to $74 million reflected capital
investment in ships under the ship replacement program. Cost per
teu increased by 0.5% to $1,271 in 2001 from $1,265 in 2000,
primarily due to the effects of lower TransAtlantic volume and
the start-up of new services in the Asian market.

In 2001, approximately 50% of total expenses were
fixed including ship network costs, container fleet costs and
general and administrative costs. However, although categorized
as fixed expenses, CP Ships regularly adjusts its ship
network and container fleet in response to changes in business
demand. The remaining 50% were variable costs including inland
transport, terminal and empty container positioning costs.

In 2000, total expenses increased by 38.7% to
$2.48 billion compared with $1.79 billion in 1999, due
to CP Ships purchase of the remaining 50% interest in
the Americana Ships joint venture, cost increases associated
with volume growth in the existing businesses and a 59% increase
in marine fuel prices.

Operating Income (Loss)

For the three months ended
31st March 2002, CP Ships recorded an
operating loss of $6 million compared to an operating
profit of $31 million in the corresponding period in 2001.
The operating loss was attributable to the deterioration in
market conditions discussed above, which resulted in a change
from a small profit to significant operating loss in the Asian
market, a reduction in operating income in the TransAtlantic
market and a change from a small profit to a small operating
loss in the Australasian market.

In 2001, operating income of $139 million
before exceptional charges was down $25 million from
$164 million in 2000. Stronger performance in the Latin
American market and improved results in the Australasian market
were offset by lower operating income in the TransAtlantic
market and operating losses in the Asian market.




40



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In 2000, operating income improved 84% to
$164 million from $89 million in 1999. The increase
was due to the acquisition of the remaining 50% interest in the
Americana Ships joint venture together with general improvements
in market conditions in the TransAtlantic, Asian and Latin
American markets, offset by lower operating income in the
Australasian market.

EBITDA

EBITDA for the three months ended
31st March 2002 was $14 million, down 70%
from $47 million in the first quarter of 2001. EBITDA in
2001 was $213 million before exceptional charges of
$36 million, down $11 million from $224 million
in 2000. EBITDA increased by 64% in 2000 from $136 million
in 1999.

Net Interest

For the three months ended
31st March 2002, net interest expense was
$3 million. For the corresponding period in 2001 there was
no net interest expense. The expense in the first quarter of
2002 was due to the refinancing of interest free borrowings from
Canadian Pacific, CP Ships former parent, with bank
debt under CP Ships $175 million revolving
credit facility (the $175 Million Facility) at
market rates following the Spin-off.

For the year ended 31st December
2001, there was no net interest expense or income as interest
expense primarily incurred under the $175 Million Facility
was fully offset by interest income earned on cash balances. In
2000, CP Ships had net interest income of $1 million
compared with a net interest expense of $4 million in 1999.
The expense in 1999 was due mainly to capital leases.

Income Tax

Income tax expense of $2 million in the
first quarter of 2002 was unchanged compared to the same period
in 2001 despite the operating loss. This is attributable to the
fact that the tax charge is more fixed and less dependent on
profit levels since 1st January 2001 due mostly
to the application of the UK tonnage tax regime within
CP Ships. See  Taxation  UK
Tonnage Tax. Income tax expense in 2001 at
$12 million was the same as in 2000. Due to the fall in
income before tax to $103 million in 2001 from
$165 million in 2000, CP Ships effective tax
rate was 11.7% in 2001 compared to 7.3% in 2000. Despite
significantly higher income before tax in 2000 compared to 1999,
income tax expense increased by only $1 million due partly
to utilization of tax losses and other allowances in 2000.
Therefore, the effective income tax rate declined from 12.9% to
7.3%.

Goodwill Charges

Following changes in Canadian GAAP with effect
from 1st January 2002, goodwill is no longer
amortized but is instead subject to annual impairment tests.
This change benefited net income by $4 million in the three
months ended 31st March 2002 compared to the
same period in 2001. See  New Canadian
Accounting Pronouncements.

Amortization of goodwill was $16 million for
2001, down $2 million compared to the previous year due to
a portion of goodwill being fully written down in 2000. In 2000,
amortization of goodwill was $18 million, an increase of
$3 million compared to 1999 due to the additional goodwill
that resulted from the acquisition in 2000 of TMMsas
remaining 50% interest in the Americana Ships joint venture.

Exceptional Charges

Exceptional charges in 2001 were
$36 million. Of this amount, $17 million related to
the Spin-off, including $7 million for professional fees
and other expenses and $10 million for the conversion of
CP Ships cash-based long-term incentive plan into
restricted stock awards. The remaining $19 million related
to the restructuring of organization and offices, mostly in
North America and Europe, in order to improve efficiency, reduce
costs and strengthen competitive positioning.




41



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Net Income (Loss)

CP Ships reported a net loss of
$11 million for the first quarter of 2002 compared to net
income of $25 million for the same period in 2001. Net
income for the year ended 31st December 2001 was
$76 million ($112 million excluding exceptional
charges), compared to $135 million in 2000 and
$60 million in 1999.

For the first quarter of 2002, the basic loss per
Common Share was $0.14 compared with basic earnings per Common
Share of $0.32 in the same period in 2001. Basic earnings per
Common Share in 2001 was $0.92 ($1.37 excluding exceptional
charges), compared to $1.68 in 2000 and $0.76 in 1999.

Dividends

On 16th April 2002, the Board of
Directors of CP Ships declared a dividend for the first
quarter of 2002 of $0.04 per Common Share, which was paid on
15th May 2002.

On 24th January 2002, the Board
of Directors declared a dividend for the fourth quarter of 2001
of $0.04 per Common Share, which was paid on
22nd February 2002.

Dividends of $3 million in 2001 and
$2 million in 2000 were paid on preference shares
outstanding from mid-2000 to mid-2001 held by a former
affiliate. Following the Spin-off, such preference shares are no
longer outstanding.

Results of Operations by Market

TransAtlantic Market

|                                |  |                    |     |                         |  |      |     |      |  |      |       |  |  |  |       |  |  |  |     | 
|------------------------------- |  | ------------------ | --- | ----------------------- |  | ---- | --- | ---- |  | ---- | ----- |  |  |  | ----- |  |  |  | --- | 
|                                |  |                    |     |                         |  |      |     |     
|                                |  | Three months ended |     |                        
|                                |  | 31stMarch          |     | Year ended 31stDecember
|                                |  |                    |     |                        
|                                |  | 2002               |     | 2001                    |  | 2001 |     | 2000 |  | 1999
|($ millions)                    |  |                    |     |                         |  |      |     |      |  |     
|                                |  | (unaudited)        |     | (unaudited)             |  |      |     |      |  |     
|Volume (in teu 000s, unaudited) |  |                    | 222 |                         |  |      | 237 |      |  |      | 942   |  |  |  | 1,033 |  |  |  | 732 | 
|                                |  |                    |     |                         |  |      |     |      |  |      |       |  |  |  |       |  |  |  |     | 
|Revenue                         |  |                    | 288 |                         |  |      | 335 |      |  |      | 1,323 |  |  |  | 1,406 |  |  |  | 977 | 
|Expenses                        |  |                    | 280 |                         |  |      | 317 |      |  |      | 1,244 |  |  |  | 1,317 |  |  |  | 936 | 
|                                |  |                    |     |                         |  |      |     |      |  |      |       |  |  |  |       |  |  |  |     | 
|Operating income                |  |                    | 8   |                         |  |      | 18  |      |  |      | 79    |  |  |  | 89    |  |  |  | 41  | 
|                                |  |                    |     |                         |  |      |     |      |  |      |       |  |  |  |       |  |  |  |     | 

Operating income decreased by $10 million to
$8 million for the three months ended
31st March 2002 compared with the same period in
2001. Average freight rates were 14% lower and volume was down
6%. Slow economic growth in Europe, continued strength of the
U.S. dollar, and increased competition led to lower volume
and freight rates in the weaker export legs from North America.
Overall, the effect of reduced volume and average freight rates
were partly offset by lower ship network and other operating
costs.

In 2001, operating income of $79 million
declined by $10 million compared to 2000. Average freight
rates were 3% higher than in 2000 but volume was 9% lower due to
a decline in total trade volume in the TransAtlantic market as a
result of weak economic conditions and increased competition in
the Mediterranean trade lanes. In 2001, four chartered ships
were replaced with owned ships in the Gulf-North Europe trade
lane thereby reducing ship network costs. Services in the
US/Canada via Montreal-Mediterranean trade lane were also
restructured with improved service.

In 2000, operating income increased by 117% to
$89 million compared to $41 million in 1999. Total
volume in 2000 increased by 41% compared to 1999, reflecting the
full ownership of Americana Ships which accounted for an
increase in volume of 35%. The underlying increase in volume
from trade growth and expanded operations was 6%. Average
freight rates rose by 8% compared to 1999 due to strong European
exports driven by the improving U.S. economy, growth in
Mexico and a weak euro throughout 2000.




42



---



##### 






Australasian Market

|                                |  |                    |     |                         |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 
|------------------------------- |  | ------------------ | --- | ----------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- |  |  |  | --- | 
|                                |  |                    |     |                         |  |      |     |     
|                                |  | Three months ended |     |                        
|                                |  | 31stMarch          |     | Year ended 31stDecember
|                                |  |                    |     |                        
|                                |  | 2002               |     | 2001                    |  | 2001 |     | 2000 |  | 1999
|($ millions)                    |  |                    |     |                         |  |      |     |      |  |     
|                                |  | (unaudited)        |     | (unaudited)             |  |      |     |      |  |     
|Volume (in teu 000s, unaudited) |  |                    | 77  |                         |  |      | 80  |      |  |      | 348 |  |  |  | 356 |  |  |  | 340 | 
|                                |  |                    |     |                         |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 
|Revenue                         |  |                    | 120 |                         |  |      | 131 |      |  |      | 549 |  |  |  | 574 |  |  |  | 547 | 
|Expenses                        |  |                    | 123 |                         |  |      | 128 |      |  |      | 520 |  |  |  | 551 |  |  |  | 511 | 
|                                |  |                    |     |                         |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 
|Operating (loss) income         |  |                    | (3  | )                       |  |      | 3   |      |  |      | 29  |  |  |  | 23  |  |  |  | 36  | 
|                                |  |                    |     |                         |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 

CP Ships incurred an operating loss of
$3 million in the first quarter of 2002 compared to a
$3 million profit in the corresponding period in 2001. The
loss is mainly attributable to a 10% decrease in average freight
rates due to increased competition from indirect services via
Asian ports and in the US West Coast-Australasia trade lane.
Volume was 4% lower than in the first quarter of 2001.

Operating income of $29 million for the year
ended 31st December 2001 improved by
$6 million compared to 2000. Lower operating costs in 2001
offset weaker volume, which was down 3% due to continuing
decreases in imports into Australasia. Average freight rates for
2001 were stable compared to 2000. In March 2001, CP Ships
formed a joint service in the US West Coast-Australasia trade
lane with three other carriers. The new arrangement reduced ship
operating costs and improved port coverage, port call frequency
and transit times.

In 2000, operating income was $23 million, a
decrease of $13 million compared to 1999. A steady fall in
southbound freight rates due to excess trade lane capacity,
Australasian currency weakness reducing average revenue
northbound and increased ship charter costs led to a significant
deterioration in operating results in the US West
Coast-Australasia trade lane.

Latin American Market

|                                |  |                    |    |                         |  |      |    |      |  |      |     |  |  |  |     |  |  |  |     |  
|------------------------------- |  | ------------------ | -- | ----------------------- |  | ---- | -- | ---- |  | ---- | --- |  |  |  | --- |  |  |  | --- | -
|                                |  |                    |    |                         |  |      |    |     
|                                |  | Three months ended |    |                        
|                                |  | 31stMarch          |    | Year ended 31stDecember
|                                |  |                    |    |                        
|                                |  | 2002               |    | 2001                    |  | 2001 |    | 2000 |  | 1999
|($ millions)                    |  |                    |    |                         |  |      |    |      |  |     
|                                |  | (unaudited)        |    | (unaudited)             |  |      |    |      |  |     
|Volume (in teu 000s, unaudited) |  |                    | 33 |                         |  |      | 41 |      |  |      | 162 |  |  |  | 177 |  |  |  | 117 |  
|                                |  |                    |    |                         |  |      |    |      |  |      |     |  |  |  |     |  |  |  |     |  
|Revenue                         |  |                    | 50 |                         |  |      | 60 |      |  |      | 244 |  |  |  | 242 |  |  |  | 137 |  
|Expenses                        |  |                    | 44 |                         |  |      | 56 |      |  |      | 216 |  |  |  | 224 |  |  |  | 141 |  
|                                |  |                    |    |                         |  |      |    |      |  |      |     |  |  |  |     |  |  |  |     |  
|Operating income (loss)         |  |                    | 6  |                         |  |      | 4  |      |  |      | 28  |  |  |  | 18  |  |  |  | (4  | )
|                                |  |                    |    |                         |  |      |    |      |  |      |     |  |  |  |     |  |  |  |     |  

Operating income of $6 million in the first
quarter of 2002 was $2 million higher than in the
corresponding period in 2001. Significantly lower ship network
costs due to the replacement of chartered ships with owned ships
and charter renewals at lower rates, and other operating
efficiencies, offset a 13% reduction in average freight rates
compared to the first quarter 2001. Volume in the Latin American
market during the first quarter of 2002 declined by
18% compared to the first quarter of 2001, or by 5% after
an adjustment for the reclassification of the West Coast North
America-West Coast South America service which was integrated in
2001 with the Asia-Americas services and, therefore, is now
included in the Asian market. Increased carryings in two smaller
services, one of which started in 2001, offset a decline in
import volume to Argentina.

In 2001, operating income increased by 56% to
$28 million from $18 million in 2000 due mainly to a
6% increase in average freight rates. Total volume
decreased by 8%, but after the adjustment increased by 4%
due to strong exports from Brazil and the introduction of a new
service between the Mediterranean and East Coast South America.
In the second quarter of 2001, three chartered ships were added
in order to expand the Gulf-Caribbean service. Operating costs
in 2001 were reduced by replacing chartered ships with three
owned 2100 teu ships in the Gulf-East Coast South America
trade lane, and by renewing charters at lower rates.




43



---



##### 






For the year ended 31st December
2000, operating income improved to $18 million compared to
an operating loss of $4 million in 1999 due to stability in
the South American economies and rationalization of capacity in
many trade lanes, which led to 18% higher average freight rates.
Volume in 2000 increased by 51% compared with 1999,
reflecting the acquisition of the remaining 50% interest in the
Americana Ships joint venture.

Asian Market

|                                |  |                    |     |                         |  |      |    |      |  |      |     |   |  |  |     |  |  |  |     | 
|------------------------------- |  | ------------------ | --- | ----------------------- |  | ---- | -- | ---- |  | ---- | --- | - |  |  | --- |  |  |  | --- | 
|                                |  |                    |     |                         |  |      |    |     
|                                |  | Three months ended |     |                        
|                                |  | 31stMarch          |     | Year ended 31stDecember
|                                |  |                    |     |                        
|                                |  | 2002               |     | 2001                    |  | 2001 |    | 2000 |  | 1999
|($ millions)                    |  |                    |     |                         |  |      |    |      |  |     
|                                |  | (unaudited)        |     | (unaudited)             |  |      |    |      |  |     
|Volume (in teu 000s, unaudited) |  |                    | 95  |                         |  |      | 62 |      |  |      | 331 |   |  |  | 216 |  |  |  | 110 | 
|                                |  |                    |     |                         |  |      |    |      |  |      |     |   |  |  |     |  |  |  |     | 
|Revenue                         |  |                    | 103 |                         |  |      | 88 |      |  |      | 435 |   |  |  | 337 |  |  |  | 154 | 
|Expenses                        |  |                    | 122 |                         |  |      | 87 |      |  |      | 448 |   |  |  | 317 |  |  |  | 149 | 
|                                |  |                    |     |                         |  |      |    |      |  |      |     |   |  |  |     |  |  |  |     | 
|Operating (loss) income         |  |                    | (19 | )                       |  |      | 1  |      |  |      | (13 | ) |  |  | 20  |  |  |  | 5   | 
|                                |  |                    |     |                         |  |      |    |      |  |      |     |   |  |  |     |  |  |  |     | 

In the first quarter of 2002, continuing losses
in the Asia-Europe and Europe-India trades due to competitive
pressure from excess trade lane capacity led to an operating
loss of $19 million compared to a profit of $1 million
in the same period in 2001. In the Asia-Europe service, the
temporary removal of capacity by some carriers, the
strengthening of volume later in the quarter, as well as trade
initiatives to increase freight rates, slowed the rate of
decline of freight rate, although market conditions remained
difficult. In the Europe-India service, freight rates continued
to fall during the quarter.

An operating loss of $13 million in 2001
compared to a $20 million operating income in 2000. Volume
increased by more than 50% with a consequent increase in
operating costs as the scope of the Asian businesses was
expanded significantly. More adverse market conditions due to
excess capacity affected to varying degrees all three trades:
India, Asia-Americas and, particularly, the start-up Asia-Europe
trade. In March 2001, CP Ships entered the Asia-Europe
trade by way of slot charters on three related services. During
the first six months of 2001, four owned 3300 teu ships were
introduced into a restructured Asia-Americas trade lane. In
September 2001, a new service was started as a slot charter
between Asia, South Africa and East Coast South America. During
the fourth quarter of 2001, a chartered ship was withdrawn from
one of the Asia-Americas services in response to lower demand.

Operating income for 2000 was $20 million,
an increase of $15 million compared to 1999. This increase
was principally due to increased freight rates together with a
near doubling in volume following the acquisition of the
remaining 50% interest in the Americana Ships joint venture,
expansion of the Asia-West Coast Americas trade lanes and the
start-up of new services from US East Coast-India and South East
Asia-India/ Arabian Gulf trade lanes. Volume growth in the
existing businesses was 5% for the same period. The increase in
expenses to $317 million in 2000 from $149 million in
1999 was due to the increased scope and scale of the business.

Other Markets and Activities

|                                |  |                    |  |                         |  |      |  |      |  |     
|------------------------------- |  | ------------------ |  | ----------------------- |  | ---- |  | ---- |  | ----
|                                |  |                    |  |                         |  |      |  |     
|                                |  | Three months ended |  |                        
|                                |  | 31stMarch          |  | Year ended 31stDecember
|                                |  |                    |  |                        
|                                |  | 2002               |  | 2001                    |  | 2001 |  | 2000 |  | 1999
|($ millions)                    |  |                    |  |                         |  |      |  |      |  |     
|                                |  | (unaudited)        |  | (unaudited)             |  |      |  |      |  |     
|Volume (in teu 000s, unaudited) |  | 9                  |  | 17                      |  | 59   |  | 51   |  | 74  
|                                |  |                    |  |                         |  |      |  |      |  |     
|Revenue                         |  | 17                 |  | 25                      |  | 95   |  | 86   |  | 63  
|Expenses                        |  | 15                 |  | 20                      |  | 79   |  | 72   |  | 52  
|                                |  |                    |  |                         |  |      |  |      |  |     
|Operating income                |  | 2                  |  | 5                       |  | 16   |  | 14   |  | 11  
|                                |  |                    |  |                         |  |      |  |      |  |     




44



---



##### 






For the three months ended
31st March 2002, operating income was down
$3 million to $2 million compared to the corresponding
period in 2001. The decrease was due to lower income from
chartering out fewer surplus ships and lower volume in the
Africa service.

Operating income increased by $2 million to
$16 million in 2001 from $14 million in 2000. A 16%
increase in volume contributed to improved results in the North
America-South Africa trade lane, and results for break-bulk
services improved due to lower costs. Income from
CP Ships Montreal Gateway terminals declined due to
lower TransAtlantic volume. In 2001, increased income was earned
from chartering out ships that were temporarily surplus.

Operating income in 2000 increased by
$3 million from $11 million in 1999. Volume fell 32%
compared to 1999 due to the sale early in 2000 of Compania
Trasatlantica Espanola SA, which was part of the Americana Ships
joint venture. This reduction was partly offset by increases in
break-bulk and African volumes.

Outlook

The container shipping industrys immediate
outlook remains difficult. Somewhat stronger economic growth is
improving demand, and capacity rationalization initiatives in a
number of trade lanes have improved the supply/demand balance.
However, the general burden of excess industry capacity from
delivery of new ships is expected to continue through this year
and probably into next year.

CP Ships reported an operating loss in the first
quarter of this year. Results in March and into the second
quarter, based on firmer volumes, have improved. This
years already announced target to cut annualized costs is
expected to be met or exceeded. So, for the year overall, CP
Ships continues to expect to be profitable.

Liquidity and Capital Resources

Overview

Historically, CP Ships principal
sources of liquidity have been cash on hand, operating cash
flow, secured loans and other borrowings, proceeds from sale and
leaseback transactions, structured financing transactions and,
prior to the Spin-off, interest-free loans and capital
contributions from Canadian Pacific. In connection with the
Spin-off, CP Ships repaid all shareholder loans and
returned capital to Canadian Pacific by borrowing
$144 million under the $175 Million Facility.

Following the Spin-off, all of
CP Ships other financing arrangements remained in
place, although some of the terms were amended. As at
31st March 2002, CP Ships facilities
and borrowings comprised (i) the $175 Million Facility
of which $160 million was borrowed; (ii) a
$350 million secured revolving credit facility (the
$350 Million Facility and together with the
$175 Million Facility, the Revolving Credit
Facilities), none of which was available to be borrowed;
(iii) a $50 million loan (the Pacific
Class Vessel Loan) secured on four U.S. flag
Pacific Class ships owned indirectly through separate
U.S. trusts (the PCV Trusts); and (iv) a
$1 million mortgage loan. CP Ships realized proceeds
of $64 million from the sale and leaseback of containers
(the Container Sale and Leaseback) in November 2000.
CP Ships also arranged, in 1995 and 1998, two structured
financing transactions (the Montrose and Montclare Charter
Arrangements) in an aggregate principal amount of
approximately $200 million under which it has entered into
long-term bareboat charters of the four ships (the
Montrose and Montclare Ships) and made certain other
commitments in connection with their financing.

Cash Flow

At 31st March 2002, CP Ships
had cash and cash equivalents of $92 million
($116 million as at 31st December 2001).
CP Ships had cash outflow from operations of
$4 million in the first quarter of 2002 compared to a cash
inflow from operations of $38 million for the same period
in 2001 due mainly to a change from profit to loss for the
period. Cash from operations in 2001 was $192 million, up
$18 million compared to 2000 mainly due to improved
non-cash working capital movements. Cash from operations in 2000
increased by $145 million over the previous year due to
higher profits and a significant improvement in non-cash working
capital movements.




45



---



##### 






The following is a summary of cash flow for the
periods indicated:

|                                                        |  |                    |     |                         |  |      |      |      |  |      |      |   |  |  |      |   |  |  |      |  
|------------------------------------------------------- |  | ------------------ | --- | ----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                        |  |                    |     |                         |  |      |      |     
|                                                        |  | Three months ended |     |                        
|                                                        |  | 31stMarch          |     | Year ended 31stDecember
|                                                        |  |                    |     |                        
|                                                        |  | 2002               |     | 2001                    |  | 2001 |      | 2000 |  | 1999
|($ millions)                                            |  |                    |     |                         |  |      |      |      |  |     
|                                                        |  | (unaudited)        |     | (unaudited)             |  |      |      |      |  |     
|Cash flow from operations                               |  |                    | (4  | )                       |  |      | 38   |      |  |      | 192  |   |  |  | 174  |   |  |  | 29   |  
|Loans from former affiliates (net)                      |  |                    |    |                         |  |      | 45   |      |  |      | (50  | ) |  |  | 1    |   |  |  | 5    |  
|Contributed surplus and return of share
    capital(1)  |  |                    |    |                         |  |      |     |      |  |      | (12  | ) |  |  | 203  |   |  |  | 52   |  
|(Repayment) increase of debt (net)                      |  |                    | (4  | )                       |  |      | (3   | )    |  |      | 146  |   |  |  | (12  | ) |  |  | (12  | )
|Additions to capital assets                             |  |                    | (16 | )                       |  |      | (109 | )    |  |      | (292 | ) |  |  | (307 | ) |  |  | (113 | )
|Proceeds from disposal of capital
    assets(2)         |  |                    | 4   |                         |  |      | 4    |      |  |      | 15   |   |  |  | 70   |   |  |  | 5    |  
|Acquisitions of businesses(3)                           |  |                    |    |                         |  |      |     |      |  |      |     |   |  |  | (61  | ) |  |  |     |  
|Other(4)                                                |  |                    | (4  | )                       |  |      |     |      |  |      | (5   | ) |  |  | (7   | ) |  |  |     |  
|                                                        |  |                    |     |                         |  |      |      |      |  |      |      |   |  |  |      |   |  |  |      |  
|(Decrease) increase in cash and cash
    equivalents(5) |  |                    | (24 | )                       |  |      | (25  | )    |  |      | (6   | ) |  |  | 61   |   |  |  | (34  | )
|                                                        |  |                    |     |                         |  |      |      |      |  |      |      |   |  |  |      |   |  |  |      |  




|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Equity contributions from, and returns of share
    capital to, former affiliated companies.                                                                                          
|(2) | Includes the Container Sale and Leaseback of
    containers for $64 million in November 2000.                                                                                         
|(3) | Comprises the acquisition of the remaining 50%
    interest in the Americana Ships joint venture with effect from
    1st January 2000 and the acquisition of CCAL in
    August 2000.
|(4) | Includes dividends on common and preference
    shares, deferred charges, finance costs, ship deposits and
    proceeds from the disposal of investments.                             
|(5) | Includes cash and temporary investments having a
    maximum maturity of three months.                                                                                                

At 31st March 2002,
CP Ships long-term debt was $226 million,
compared with $230 million at 31st December
2001 and $32 million at 31st December 2000.
The increase in long-term debt in 2001 was principally due to
borrowings under the $175 Million Facility which were
incurred to repay short-term debt to Canadian Pacific and pay
costs associated with the Spin-off, and the assumption by
CP Ships of the Pacific Class Vessel Loan upon the
purchase of the PCV Trusts in September 2001. Total debt net of
cash as at 31st March 2002 was $134 million
and at 31st December 2001 was $114 million.
There was no net debt at 31st December 2000. As
at 31st March 2002, $160 million had been
borrowed under the $175 Million Facility and a further
$15 million was available to be borrowed.

Sources of Liquidity

Revolving Credit Facilities.The $175 Million Facility has a
four-year term expiring in August 2005 and the amount available
to be borrowed will be permanently reduced to $125 million
in August 2004. Borrowings under the $175 Million Facility
are made by subsidiaries of CP Ships, are currently secured
by 11 ships and are guaranteed by CP Ships and certain of
its subsidiaries. Under the $175 Million Facility,
CP Ships must pay interest on amounts borrowed at a rate
equal to LIBOR plus the applicable margin, in addition to a
quarterly commitment fee on the unused portion equal to 50% of
the margin. So long as the facilitys rating by Standard
& Poors, a division of the McGraw-Hill Companies
(S&P) remains at BBB-, the applicable margin is
1.05%. The margin and the commitment fee will be increased if
the facilitys rating is downgraded or withdrawn and
decreased if it is upgraded. Under the $175 Million
Facility, CP Ships has an ongoing obligation to maintain
free liquid assets (defined as credit balances on current or
deposit accounts, short-term certificates of deposit and amounts
of any unutilized, committed credit facilities up to
$50 million) of at least $75 million.

The $350 Million Facility has a five-year
term expiring in December 2006 and the amount available to be
borrowed will be permanently reduced to $262.5 million in
December 2005. Subject to satisfaction of all conditions
precedent, borrowings under the $350 Million Facility may
be made by subsidiaries of CP Ships, will be initially
secured by two used ships and CP Ships rights under
ship building contracts for 10 ships currently under
construction, and will be guaranteed by CP Ships.
CP Ships is currently in the process of satisfying
conditions precedent relating to the provision of security over
these construction contracts. Under the $350 Million
Facility, CP Ships must pay interest on amounts outstanding
equal to LIBOR plus the applicable margin, in addition to a
quarterly commitment fee on the unused portion equal to 40% of
the margin. The applicable margin is based on
CP Ships lowest corporate credit rating as determined
by S&Ps or Moodys Investors Service, Inc.
(Moodys). Currently, such rating is Ba2 (as
rated by Moodys) and the applicable




46



---



##### 






margin is 2.25%. The margin will be decreased if
CP Ships lowest corporate credit rating increases
above Ba2 (or the equivalent S&P rating).


The amount that CP Ships is permitted to
borrow under the Revolving Credit Facilities is affected by a
number of factors, including: (i) the credit rating of the
$175 Million Facility; (ii) the corporate credit
rating of CP Ships, (iii) the appraised value of owned
ships upon which such facilities are secured; (iv) the
payment of purchase price instalments under ship building
contracts; (v) the timing of completion and delivery of
ships under construction and their appraised value at delivery;
(vi) CP Ships ability to meet certain financial
and other covenants under the facilities and (vii) its
ability to meet certain of its obligations under other
borrowings.

Under the $175 Million Facility,
CP Ships may borrow an amount up to 80% of the appraised
value of the ships on which the facility is secured. If
S&Ps rating for this facility falls below BBB- or such
rating is withdrawn, the value of the secured ships must be
reappraised within 30 days and thereafter annually for so
long as such rating is below BBB-. During any such rating
downgrade or withdrawal, borrowings under the $175 Million
Facility may not exceed 70% of the reappraised value of the
secured ships, and to the extent that borrowings under the
facility exceed the 70% threshold, CP Ships may be required
to reduce the borrowings within 15 days of notification. As
at 31st March 2002, the applicable appraised
value of the secured ships was $222 million and,
accordingly, borrowings up to the full amount of this facility
were permitted.

Under the $350 Million Facility,
CP Ships may borrow an amount up to the aggregate of:
(i) 70% (or 80% if its lowest corporate credit rating is
upgraded to BBB-/Baa3 or higher) of the appraised value of the
owned secured ships and (ii) 60% of the amount of all
purchase price instalments paid under the ship building
contracts. The value of all owned secured ships (including ships
currently under construction, once delivered) is subject to an
annual reappraisal. The owned secured ships must also be
reappraised within 30 days following any downgrading of the
lowest of CP Ships corporate credit ratings by either
S&P or Moodys or the withdrawal of such ratings. Based
on the appraised value of the two owned secured ships and the
total instalment payments made by CP Ships, and subject to
satisfaction of all conditions precedent, CP Ships would be
able to borrow approximately $90 million under the
$350 Million Facility.

Under the terms of the Revolving Credit
Facilities, CP Ships is subject to financial and other
covenants. If (i) it fails to comply with such covenants,
or (ii) a change of control (as defined under the Revolving
Credit Facilities) occurs, or (iii) it defaults under the
terms of certain indebtedness and lease obligations, this will
constitute an event of default under the Revolving Credit
Facilities which, unless waived by the lenders, will result in
amounts owing thereunder becoming immediately due and payable.

Container Sale and
Leaseback.On
7th November 2000, a subsidiary of CP Ships
entered into the Container Sale and Leaseback transaction
whereby it agreed to sell containers with a total capacity of
approximately 44,350 teu (the Leased Containers) to
a leasing counterparty (the Lessor) for
$64 million, and agreed to lease such containers from the
Lessor for a minimum of five years (and up to nine years at the
option of CP Ships) under a container lease contract (the
Container Lease). The obligations of the subsidiary
in connection with this transaction are fully guaranteed by
CP Ships (the Container Guarantee). Under the
Container Lease, CP Ships is required to make fixed
quarterly rental payments to the Lessor based on the
amortization of the purchase price plus a return to the Lessor
of 8.05%. The total rent paid by CP Ships under the
Container Lease in the year ended 31st December
2001 was $10 million.

Under the Container Sale and Leaseback,
CP Ships is subject to the same financial covenants as are
contained in the $350 Million Facility, as well as certain other
covenants. If CP Ships fails to comply with such covenants
or an event of default occurs under the terms of certain
indebtedness or other material contracts, this will constitute
an event of default under the Container Sale and Leaseback. In
addition, the Lessor has the right at any time to declare a
material adverse change where (i)
CP Ships long term corporate credit rating by S&P
is lower than BBB-, its current rating, and CP Ships
long-term senior implied rating by Moodys is lower than
Baa3 (it is currently Ba2) or (ii) CP Ships has no such
ratings from either S&P or Moodys. If the Lessor
declares a material adverse change and amendments to
the Container Lease and the Container Guarantee are not agreed
to by CP Ships and the Lessor within 30 days of such
declaration, the Lessor has the right to declare an event of
default under the Container Sale and Leaseback.




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Upon the occurrence of an event of default, the
Lessor may, at its option (i) require CP Ships to
repurchase the Leased Containers at a purchase price based on
their fair market value plus certain breakage costs
incurred by the Lessor or (ii) retain ownership of the Leased
Containers and demand payment of a fixed termination price
which, as at 31st March 2002, was approximately
$57 million. If the Lessor declares an event of default under
the Container Sale and Leaseback, this will also constitute an
event of default under CP Ships other financing
transactions which, unless waived, will result in all amounts
owing thereunder becoming immediately due and payable.

CP Ships has negotiated with the Lessor
certain amendments to the financial and other terms of the
Container Lease and the Container Guarantee, which are subject
to approval by the Lessors credit committee. Under the
amendments, (i) the Lessor will not be entitled to declare a
material adverse change if CP Ships long term
corporate credit rating by S&P is not lower than BB+ or
CP Ships long term senior implied rating by
Moodys is not lower than Ba1 (whichever rating is higher),
(ii) the rate of return to the Lessor will increase to 8.9% for
so long as the lower of such ratings is BB or lower (in the case
of S&P) or Ba2 or lower (in the case of Moodys), will
decrease to 8.4% if and for so long as the lower of such ratings
is BB+ (in the case of S&P) or Ba1 (in the case of
Moodys) and will decrease to 8.05% if and for so long as
the lower of such ratings is BBB- (in the case of S&P) or
Baa3 (in the case of Moodys), and (iii) CP Ships will
have certain rights to purchase the Containers at a specified
price in order to avoid the occurrence of an event of default
under the Container Lease or the Container Guarantee. However,
no assurance can be given that such amendments will be
successfully concluded or that CP Ships ratings will
remain at or above the applicable thresholds.

Pacific Class Vessel and Other
Loans.CP Ships owns, indirectly
through the PCV Trusts, four U.S. flag Pacific Class ships.
The PCV Trusts have entered into agreements dated
22nd July 1998 with a financial institution to
borrow a total of $70.5 million. The obligations of the PCV
Trusts under the Pacific Class Vessel Loan are secured on
the four ships and are guaranteed by CP Ships and one of
its subsidiaries. The Pacific Class Vessel Loan is
repayable in monthly instalments with the final instalment being
due in June 2008, and interest is payable on the declining
principal amount outstanding at the rate of 6.71% per annum. As
at 31st March 2002, the amount outstanding under
the Pacific Class Vessel Loan was $50 million. Under
the terms of the Pacific Class Vessel Loan, CP Ships
is subject to financial and other covenants. If CP Ships
fails to comply with such covenants, this will constitute an
event of default which, unless waived by the lender, will result
in amounts owing thereunder becoming due and payable.

CP Ships has also borrowed $1 million
which is repayable up to 2008 and is secured on an office
building.

Senior Notes.CP Ships is offering $250 million principal amount of
senior notes pursuant to an offering memorandum. The senior
notes will bear interest at the rate of
approximately      % per annum and will
mature
on                  2012.
The senior notes will not be registered under the
U.S. Securities Act of 1933 and may not be offered or sold
in the United States absent registration or an applicable
exemption from registration requirements.

Upon the occurrence of a Change of Control
Triggering Event (as defined in the indenture governing
the senior notes), CP Ships will be required to make an
offer to purchase all of the outstanding senior notes at a
redemption price of 101% of the principal amount thereof plus
accrued and unpaid interest to the date of purchase.

Use of Proceeds from the Offerings and
Liquidity.The total net proceeds from
the offerings of Common Share and senior notes (the
Offerings) are estimated at $337 million,
assuming the over-allotment option with respect to the Common
Share offering is not exercised. Of the net proceeds,
CP Ships intends to use (i) approximately
$180 million to purchase the Montrose and Montclare Ships,
(ii) approximately $40 million to pay for the Italia
Acquisition and (iii) approximately $117 million to
reduce its borrowings under the $175 Million Facility.
Amounts repaid under the $175 Million Facility may be
re-borrowed, subject to compliance with the terms of such
facility. As at 31st March 2002, and after
adjusting for application of the net proceeds of the Offerings,
borrowings under this facility would have been approximately
$42 million with a further $133 million available to
be borrowed.

The terms of the Revolving Credit Facilities
contain, and the terms of the senior notes will contain certain
restrictions on the ability of CP Ships and its
subsidiaries to: (i) incur indebtedness and issue preferred
shares;




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(ii) sell capital stock of their
subsidiaries and certain assets; (iii) convey, sell or
lease all or substantially all of their assets; or
(iv) create liens or encumbrances over their assets, unless
certain financial and other tests are met. A failure to comply
with such restrictions will constitute an event of default under
such facilities and the senior notes which, unless waived by the
lenders or the noteholders, will result in all amounts owing
thereunder becoming due and payable. CP Ships does not
expect that these restrictions will impose any material
limitations on its ability to fund its ongoing operations.


Cash Commitments

The following table shows the total cash
commitments of CP Ships as at 31st December
2001 falling due in the years indicated, without giving effect
to the Offerings:

|                                     |  |                         |     |       |  |      |     |      |  |      |     |      |  |       |     |  |  |  |    |  |  |  |     |  |  |  |       | 
|------------------------------------ |  | ----------------------- | --- | ----- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ----- | --- |  |  |  | -- |  |  |  | --- |  |  |  | ----- | 
|                                     |  |                         |     |       |  |     
|                                     |  | Year ended 31stDecember |     |       |  |     
|                                     |  |                         |     | After |  |     
|                                     |  | 2002                    |     | 2003  |  | 2004 |     | 2005 |  | 2006 |     | 2006 |  | Total
|($ millions, unaudited)              |  |                         |     |       |  |      |     |      |  |      |     |      |  |      
|Long-term debt                       |  |                         | 7   |       |  |      | 7   |      |  |      | 42  |      |  |       | 133 |  |  |  | 8  |  |  |  | 15  |  |  |  | 212   | 
|Capital lease obligations            |  |                         | 8   |       |  |      | 4   |      |  |      | 4   |      |  |       | 2   |  |  |  |   |  |  |  |    |  |  |  | 18    | 
|Montrose and Montclare Ship charters |  |                         | 21  |       |  |      | 21  |      |  |      | 21  |      |  |       | 21  |  |  |  | 21 |  |  |  | 139 |  |  |  | 244   | 
|Other operating leases(1)            |  |                         | 182 |       |  |      | 72  |      |  |      | 41  |      |  |       | 25  |  |  |  | 11 |  |  |  | 10  |  |  |  | 341   | 
|Unconditional purchase obligations   |  |                         | 225 |       |  |      | 170 |      |  |      |    |      |  |       |    |  |  |  |   |  |  |  |    |  |  |  | 395   | 
|                                     |  |                         |     |       |  |      |     |      |  |      |     |      |  |       |     |  |  |  |    |  |  |  |     |  |  |  |       | 
|Total cash commitments               |  |                         | 443 |       |  |      | 274 |      |  |      | 108 |      |  |       | 181 |  |  |  | 40 |  |  |  | 164 |  |  |  | 1,210 | 
|                                     |  |                         |     |       |  |      |     |      |  |      |     |      |  |       |     |  |  |  |    |  |  |  |     |  |  |  |       | 




|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include combined annual rental in an
    amount of $41 million which CP Ships will be required to
    pay in the future in connection with the time charter of six new
    ships agreed to by it in connection with its ship replacement
    program.

The following table shows the total cash
commitments of CP Ships as at 31st December
2001 falling due in the years indicated, after giving effect to
the Offerings and the application of the net proceeds to
purchase the Montrose and Montclare Ships and reduce borrowings
under the $175 Million Facility:

|                                     |  |                         |     |       |  |      |     |      |  |      |    |      |  |       |    |  |  |  |    |  |  |  |     |  |  |  |       | 
|------------------------------------ |  | ----------------------- | --- | ----- |  | ---- | --- | ---- |  | ---- | -- | ---- |  | ----- | -- |  |  |  | -- |  |  |  | --- |  |  |  | ----- | 
|                                     |  |                         |     |       |  |     
|                                     |  | Year ended 31stDecember |     |       |  |     
|                                     |  |                         |     | After |  |     
|                                     |  | 2002                    |     | 2003  |  | 2004 |     | 2005 |  | 2006 |    | 2006 |  | Total
|( $ millions Pro forma, unaudited)   |  |                         |     |       |  |      |     |      |  |      |    |      |  |      
|Long-term debt                       |  |                         | 7   |       |  |      | 7   |      |  |      | 7  |      |  |       | 8  |  |  |  | 8  |  |  |  | 15  |  |  |  | 52    | 
|Capital lease obligations            |  |                         | 8   |       |  |      | 4   |      |  |      | 4  |      |  |       | 2  |  |  |  |   |  |  |  |    |  |  |  | 18    | 
|Montrose and Montclare Ship charters |  |                         |    |       |  |      |    |      |  |      |   |      |  |       |   |  |  |  |   |  |  |  |    |  |  |  |      | 
|Other operating leases(1)            |  |                         | 182 |       |  |      | 72  |      |  |      | 41 |      |  |       | 25 |  |  |  | 11 |  |  |  | 10  |  |  |  | 341   | 
|Unconditional purchase obligations   |  |                         | 225 |       |  |      | 170 |      |  |      |   |      |  |       |   |  |  |  |   |  |  |  |    |  |  |  | 395   | 
|Senior notes due 2012                |  |                         |    |       |  |      |    |      |  |      |   |      |  |       |   |  |  |  |   |  |  |  | 250 |  |  |  | 250   | 
|                                     |  |                         |     |       |  |      |     |      |  |      |    |      |  |       |    |  |  |  |    |  |  |  |     |  |  |  |       | 
|Total cash commitments               |  |                         | 422 |       |  |      | 253 |      |  |      | 52 |      |  |       | 35 |  |  |  | 19 |  |  |  | 275 |  |  |  | 1,056 | 
|                                     |  |                         |     |       |  |      |     |      |  |      |    |      |  |       |    |  |  |  |    |  |  |  |     |  |  |  |       | 




|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include combined annual rental in an
    amount of $41 million which CP Ships will be required to
    pay in the future in connection with the time charter of six new
    ships agreed to by it in connection with its ship replacement
    program.

Owned ships with a net book value at
31st March 2002 of $369 million are
encumbered. Unencumbered assets as at 31st March
2002 include accounts receivables ($377 million), cash
($92 million), inventory ($12 million) and other
capital assets including ships ($400 million).

CP Ships expects to have sufficient cash
flow from operations, cash on hand and committed financing to
meet its obligations as they fall due.




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Capital Expenditures

CP Ships has made significant investments in
new and used ships, containers and other capital equipment
including information systems, motor vehicles and terminal
handling equipment. The following is a summary of capital
expenditure for the periods indicated:

|             |  |                    |    |                         |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 
|------------ |  | ------------------ | -- | ----------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- |  |  |  | --- | 
|             |  |                    |    |                         |  |      |     |     
|             |  | Three months ended |    |                        
|             |  | 31stMarch          |    | Year ended 31stDecember
|             |  |                    |    |                        
|             |  | 2002               |    | 2001                    |  | 2001 |     | 2000 |  | 1999
|($ millions) |  |                    |    |                         |  |      |     |      |  |     
|             |  | (unaudited)        |    | (unaudited)             |  |      |     |      |  |     
|Ships(1)     |  |                    | 2  |                         |  |      | 89  |      |  |      | 185 |  |  |  | 227 |  |  |  | 13  | 
|Containers   |  |                    |   |                         |  |      |    |      |  |      |    |  |  |  | 34  |  |  |  | 38  | 
|Other(2)     |  |                    | 14 |                         |  |      | 20  |      |  |      | 107 |  |  |  | 51  |  |  |  | 62  | 
|             |  |                    |    |                         |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 
|             |  |                    | 16 |                         |  |      | 109 |      |  |      | 292 |  |  |  | 312 |  |  |  | 113 | 
|             |  |                    |    |                         |  |      |     |      |  |      |     |  |  |  |     |  |  |  |     | 




|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(1) | Includes stage payments for ships under
    construction.                                                      
|(2) | Includes computer equipment, terminal equipment,
    fixtures and fittings, leasehold improvement and vehicles.

As at 31st March 2002, under the
ship replacement program, 12 used ships had been purchased
for $309 million. CP Ships has also agreed to purchase
10 new ships pursuant to non-cancellable ship building
contracts at a total cost of $453 million, of which
$93 million had been paid as at 31st March
2002, for expected delivery between June 2002 and July 2003. In
total, $402 million had been invested by CP Ships
under the ship replacement program by 31st March
2002 and a further $391 million was committed. The
following is a summary of amounts invested and committed under
the ship replacement program:

|             |  |                      |     |                       |  |         |     |       |  |         |   |      |  |       |     |       |  |  |     |  |  |  |     |  |  |  |     |  |  |  |     | 
|------------ |  | -------------------- | --- | --------------------- |  | ------- | --- | ----- |  | ------- | - | ---- |  | ----- | --- | ----- |  |  | --- |  |  |  | --- |  |  |  | --- |  |  |  | --- | 
|             |  |                      |     |                       |  |        
|             |  | Invested (unaudited) |     | Committed (unaudited) |  |        
|             |  |                      |     |                       |  |        
|             |  | 2000                 |     | 2001                  |  | 2002(1) |     | Total |  | 2002(2) |   | 2003 |  | Total |     | Total
|($ millions) |  |                      |     |                       |  |         |     |       |  |         |   |      |  |       |     |      
|Used ships   |  |                      | 161 |                       |  |         | 148 |       |  |         |  |      |  |       | 309 |       |  |  |    |  |  |  | 31  |  |  |  | 31  |  |  |  | 340 | 
|New ships    |  |                      | 66  |                       |  |         | 25  |       |  |         | 2 |      |  |       | 93  |       |  |  | 221 |  |  |  | 139 |  |  |  | 360 |  |  |  | 453 | 
|             |  |                      |     |                       |  |         |     |       |  |         |   |      |  |       |     |       |  |  |     |  |  |  |     |  |  |  |     |  |  |  |     | 
|             |  |                      | 227 |                       |  |         | 173 |       |  |         | 2 |      |  |       | 402 |       |  |  | 221 |  |  |  | 170 |  |  |  | 391 |  |  |  | 793 | 
|             |  |                      |     |                       |  |         |     |       |  |         |   |      |  |       |     |       |  |  |     |  |  |  |     |  |  |  |     |  |  |  |     | 




|    |                   
|--- | ------------------
|(1) | Up to 31st March. 
|(2) | As from 1st April.

CP Ships expects to finance its commitments
under the ship replacement program from a combination of cash
generated from operations, borrowings under the Revolving Credit
Facilities and proceeds of the Offerings.

Once the ship replacement program is completed,
CP Ships expects that its capital expenditure on ships will
decline significantly. The average age of its owned fleet was
14.6 years on 31st March 2002 and is
expected to be 6.7 years upon completion of the ship
replacement program. See Description of the
Business  Ship Replacement Program.

Between 1993 and 2001, CP Ships invested
$145 million in new containers, some of which were sold by
CP Ships for $64 million in connection with the
Container Sale and Leaseback. CP Ships does not currently
have any commitments to purchase containers.

As at 31st March 2002,
CP Ships had no other significant capital commitments.

Operating Leases

As at 31st March 2002,
CP Ships had 48 ships under charter and containers
with a total capacity of approximately 250,000 teu under
lease, classified as operating leases in the Consolidated
Financial Statements. The total cost of operating leases for the
three months ended 31st March 2002 was
$88 million ($125 million for the corresponding period
in 2001). In 2001, the total cost of operating leases was
$458 million ($449 million in 2000, $309 million
in 1999), of which $308 million was attributable to ship
charters ($308 million in 2000, $221 million in 1999),
$10 million was attributable to the Container Sale and
Leaseback ($2 million in 2000) and $140 million was
attributable to other leases ($139 million in 2000,
$88 million in 1999). A majority of the




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operating leases relating to ships are time
charters rather than bareboat charters, the cost of which
includes costs relating to ship operations such as the provision
of crew and certain repair and maintenance.


As part of the ship replacement program,
CP Ships has agreed to time charter six new ships for a
minimum period of eight years. The ships are expected to be
delivered between mid-December 2002 and mid-May 2003 and will
have a combined annual rental of $41 million.

CP Ships expects to meet its future
commitments under its operating leases from cash generated from
operations, borrowings under the Revolving Credit Facilities and
proceeds of the Offerings.

Taxation

CP Ships is subject to taxation in the
countries in which it and its constituent companies operate.
CP Ships corporate structure is such that much of the
income it generates from container shipping is subject to tax at
relatively low tax rates.

Bermuda

Lykes Lines Limited, LLC (Lykes LLC)
and TMM Lines Limited, LLC (TMM LLC) are
Delaware limited liability companies and are subject to the
taxation regimes of their sole member, which is a Bermuda
company. Lykes LLC and TMM LLC are, therefore, effectively
exempt from income taxation as their sole member has received
exemption from income taxation in Bermuda until
28th March 2016. They are however taxed on their
activities in certain countries other than Bermuda, including in
the U.S., with respect to their operations in those countries.

United States

CP Ships (UK) Limited (CP Ships
(UK)), CP Ships principal UK operating subsidiary,
and its subsidiaries (which are also organized in the United
Kingdom) have activities in the United States. Under Section 894
of the Code, and the United Kingdom-United States Income Tax
Treaty (as currently in effect, and also under an income tax
treaty between these two countries that has been signed but has
not yet taken effect), income generated by a company that is
resident in the United Kingdom from international shipping
operations is exempt from United States federal income tax.
Because CP Ships UK and its subsidiaries are organized under the
laws of the United Kingdom and are engaged in business in the
United Kingdom, their shipping income is exempt from United
States federal income tax.

CP Ships (Bermuda) Limited (CP Ships
(Bermuda)), directly or through subsidiaries, also has
activities in the United States. Under current law, the United
States source shipping income derived by CP Ships (Bermuda) and
its direct subsidiaries (which are also organized in Bermuda)
should qualify for exemption from United States federal income
tax under Section 883 of the Internal Revenue Code of 1986, as
amended (the Code). Shipping income for
this purpose means the gross amount of any income that is
derived from the use of ships, from the hiring or leasing of
ships for use on a time, voyage or bareboat charter basis, or
from the performance of services directly related to those uses,
to the extent that the shipping income is derived from sources
within the United States, provided that the income is not
otherwise subject to United States federal income tax on a net
income basis (described below). For these purposes, 50% of
shipping income that is attributable to transportation that
either begins or ends (but does not both begin and end) in the
United States constitutes income from sources within the United
States.

One way that the shipping income of CP Ships
(Bermuda) and its subsidiaries may qualify for the exemption
under Section 883 is if (i) CP Ships (Bermuda) (or the relevant
subsidiary thereof) is organized in a foreign country that
grants an equivalent exemption from tax to corporations
organized in the United States and (ii) CP Ships shares
are primarily and regularly traded on one or more established
securities markets in the United States or in a country that
provides an equivalent exemption. With respect to the
requirement in clause (i), the United States Treasury Department
has recognized Bermuda as a foreign country that grants an
equivalent exemption to United States corporations. With respect
to the requirement in clause (ii), CP Ships shares are
primarily and regularly traded on established securities markets
in the United States and in Canada, a country that provides an




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equivalent exemption under the Canada-United
States Income Tax Treaty. In early 2000, the United States
Treasury Department issued proposed regulations under Section
883. As interpreted by these proposed regulations, shares of a
foreign corporation will be considered primarily traded on an
established securities market for purposes of Section 883 if the
number of shares that are traded during any taxable year on that
market exceeds the number of shares traded during that year on
any other established securities market. The Common Shares, the
sole class of shares of CP Ships issued and outstanding, are
traded on the NYSE and the TSX.


Under the proposed regulations, shares of a
foreign corporation will be considered regularly traded on an
established securities market if (i) one or more classes of the
corporations stock representing 80% or more of the
outstanding shares, by voting power and value, are listed on the
market and are traded on the market, other than in minimal
quantities, on at least 60 days during the taxable year; and
(ii) the aggregate number of shares traded during the taxable
year is at least 10% of the average number of shares outstanding
during the year. However, the proposed regulations also provide
that a corporation will not satisfy the publicly traded
requirement for any taxable year in which 50% or more of the
outstanding shares is owned, actually or constructively, by
persons who each own 5% or more of the value of the outstanding
shares. It is anticipated that, taking into account all of the
shares to be outstanding upon completion of the Share Offering,
those persons owning 5% or more of the Common Shares will own
less than 50% of outstanding Common Shares. Accordingly, the
Common Shares are anticipated to be, for purposes of Section
883, primarily and regularly traded on the NYSE and the TSX.
Therefore, to the extent of the United States shipping income
generated by CP Ships (Bermuda) and its subsidiaries (which are
also organized in Bermuda), CP Ships expects to qualify for the
Section 883 exemption. This conclusion is based on the analysis
contained in the proposed regulations described above, and is
consistent with final regulations under another provision of the
Code that also contains special rules for publicly traded
corporations. Because this analysis seems to be a fair
interpretation of the statutory requirements, it should be
reasonable to apply this analysis to periods prior to the
finalization of the proposed regulations. There can be no
assurance, however, that the Internal Revenue Service will not
disagree with this interpretation and that future regulations
promulgated under Section 883 would not adopt an interpretation
that differs from the proposed regulations. In such case, CP
Ships (Bermuda) and its subsidiaries could fail to satisfy the
requirements of Section 883.

Certain other provisions of the proposed
regulations, if adopted, could adversely affect the reciprocal
tax exemption treatment provided by Section 883 of the Code to
certain inland transport, shoreside activity, and chartering
income. Substantial industry comments were received in
opposition to this aspect of the proposed regulations, and it is
uncertain if the Treasury Department will proceed with the
proposed regulations, or how, if at all, the Treasury Department
may modify these provisions before proceeding. Until
interpretive regulations for Section 883 are provided in final
form by the Treasury Department, there can be no assurance that
CP Ships (Bermuda) and its subsidiaries will not face increased
United States tax liability.

If CP Ships UK, CP Ships (Bermuda) and their
respective subsidiaries do not qualify for the exemptions from
United States federal income tax described above, then their
U.S. source shipping income will be subject to U.S. federal
income taxation. The United States federal income tax on such
U.S. source shipping income is 4% of the amount of that income,
not reduced by any deductions.

To the extent that such shipping income is
treated as effectively connected with the conduct of a United
States trade or business, however, such shipping income will be
subject to U.S. federal income tax on a net basis, in lieu of
the tax on gross income discussed above. Any effectively
connected shipping income, net of applicable deductions, would
be subject to United States federal income tax currently imposed
at rates of up to 35% of net income. In addition, such
subsidiaries may be subject to a 30% branch profits tax on
earnings effectively connected with the conduct of the trade or
business, as determined after allowance for applicable
adjustments and on certain interest paid or deemed paid
attributable to the conduct of the United States trade or
business.

UK Tonnage Tax

The United Kingdom introduced a tonnage tax
regime (Tonnage Tax) from
1st January 2000 for qualifying shipping
companies to stimulate investment in UK shipping. Under Tonnage
Tax, the tax liability is calculated with reference to a pre-set
scale of alternate income based on the tonnage of the ships in
the relevant




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fleet, rather than actual income earned.
Therefore, under Tonnage Tax, tax expense varies with the
tonnage of the fleet rather than with the profitability of the
business.


In particular, it is generally not permitted for
a company within Tonnage Tax to reduce its liability to Tonnage
Tax by offsetting losses or depreciation. Entry to Tonnage Tax
requires an election by the relevant shipping company. Such an
election generally must be made for a ten-year period and, once
made, is irrevocable.

CP Ships (UK) entered the Tonnage Tax regime with
effect from 1st January 2001. CP Ships (UK)
comprises the Contship Containerlines business and, from
27th September 2001, the Canada Maritime, Cast
and ANZDL businesses.

Canada

CP Ships and its Canadian subsidiaries that
operate the Racine and Cast marine terminals in Montreal, Quebec
are subject to normal Canadian federal and provincial taxes.

CP Ships believes that it is, and intends to
take all necessary steps to remain, resident solely in Canada
for income tax purposes. CP Ships tax residency is,
however, affected by a number of factors, some of which are
outside its control, including the application and
interpretation of relevant tax laws and treaties. If
CP Ships were to cease to be tax resident in Canada, it
would be liable to pay additional Canadian taxes, including, but
not limited to, capital gains tax based on the difference
between the fair market value and tax cost of its assets at the
relevant time. If such taxes were to become payable, this would
have a material adverse effect on CP Ships business,
financial condition and results of operations. In addition,
CP Ships may be obliged to make indemnification payments
under the Arrangement Agreement if its ceasing to be Canadian
tax resident caused the Spin-off to be taxable. If such
indemnification payments were to become due, this may have an
adverse effect on CP Ships. Further, the Canadian income
tax consequences to Canadian resident holders of Common Shares
would be different from those applicable if CP Ships were
resident in Canada.

Quantitative and Qualitative Disclosure about
Market Risk

CP Ships has global activities and its
operations are exposed to the effect of changes in financial
markets and economic conditions around the world. To minimize
the impact of such changes on the profitability of the business
and its overall financial performance, CP Ships seeks to
identify, evaluate and, where appropriate, hedge financial and
market risks. CP Ships does not use derivative financial
instruments for speculative or trading purposes.

Foreign Currency Exchange Risk

CP Ships functional and reporting
currency is the U.S. dollar. A portion of its revenue and
expenses is denominated in currencies other than
U.S. dollars and consequently CP Ships is subject to
the effect of fluctuation in relevant U.S. dollar exchange
rates. The most significant currency exposures are in Canadian
dollars (which account for approximately 4% of revenue and 8% of
operating costs), euros (which account for approximately 4% of
revenue and 13% of operating costs) and pounds sterling (which
account for approximately 1% of revenue and 4% of operating
costs). CP Ships financial performance is, therefore,
subject to the effect of movements in the relevant
U.S. dollar exchange rates as there is an imbalance between
revenue and costs denominated in different currencies. In
general, a strengthening of these currencies relative to the
U.S. dollar has a negative effect on operating income.
Conversely, a weakening of these currencies has a beneficial
effect on operating income.

To manage foreign currency exchange risk,
CP Ships enters into forward exchange contracts as it deems
appropriate to hedge some or all of its anticipated net
exposures to non U.S. dollar currencies. Gains and losses
resulting from designated hedge contracts are recognized in
income in the same period that the underlying exposure is
recognized. The following table illustrates the estimated effect
on operating income in 2001 of a hypothetical 10% change in the
Canadian dollar, euro and pound sterling exchange rates against
the U.S. dollar for 2001 taking into account hedges
currently in place for 2002:




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|                                             |  |                     |    |  
|-------------------------------------------- |  | ------------------- | -- | -
|                                             |  | Increase/(decrease)
|                                             |  | in operating income
|(unaudited, $ millions)                      |  |                    
|10% strengthening against U.S. dollar of the |  |                     |    |  
| Canadian dollar                            |  |                     | (4 | )
| Euro                                       |  |                     | (8 | )
| Pound sterling                             |  |                     | (8 | )
|10% weakening against U.S. dollar of the     |  |                     |    |  
| Canadian dollar                            |  |                     | 3  |  
| Euro                                       |  |                     | 6  |  
| Pound sterling                             |  |                     | 6  |  

This analysis is based on 2001 revenue and
operating costs and assumes all other variables remain constant.

CP Ships investments in subsidiaries
with a functional currency other than U.S. dollars are not
hedged. The net assets in foreign subsidiaries, which are
denominated mainly in Canadian dollars, were translated into
approximately $97 million using the year end exchange
rates, at 31st December 2001. The potential
effect of a hypothetical 10% adverse change in foreign currency
exchange rates would be a reduction in the value of consolidated
net assets of approximately $10 million as at
31st December 2001. The loss would be reflected
as a cumulative foreign currency translation adjustment in
shareholders equity.

Interest Rate Risk

CP Ships is exposed to interest rate risk as
its borrowings under the Revolving Credit Facilities are at
floating interest rates. As at 31st March 2002,
the amount borrowed under the Revolving Credit Facilities was
$160 million and cash and cash equivalents were
$92 million.

CP Ships interest rate risk is not
currently hedged. Each increase in interest rates of 1% would
result in a decrease in net income of $1.6 million based on
floating rate borrowings at 31st March 2002,
without taking account of cash balances and cash equivalents.
Conversely, each decrease of 1% in interest rates would result
in an increase in net income of $1.6 million.

Changes in Currency and Interest Rate
Exposure

CP Ships exposure to
non-U.S. currency risk in 2000 decreased compared to 1999
due to the acquisition of the remaining 50% interest in the
Americana Ships joint venture, whose revenue and costs are
predominantly in U.S. dollars. Its interest rate risk in
2000 did not change significantly compared to 1999.

CP Ships exposure to interest rate
risks in 2002 will be higher than in 2001 and 2000 due to the
replacement of interest-free, short-term loans from Canadian
Pacific with borrowings under the $175 Million Facility and
an increase in borrowings to finance investments in ships under
the ship replacement program.

Critical Accounting Policies

CP Ships prepares its consolidated financial
statements in accordance with Canadian GAAP. In preparing these
consolidated financial statements, CP Ships makes its best
estimates and judgements of certain amounts included in the
financial statements.

CP Ships significant accounting
policies are more fully described in Note 2 to the Annual
Financial Statements. Certain of the accounting policies are
particularly important to the portrayal of its financial
position and results of operations and require the application
of judgement by its management. These accounting policies
include:

Revenue and Cost Recognition

Revenues and costs directly attributable to
loaded container movements are recognized when delivery of the
container is completed.




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An element of cost of delivery of each container
to its ultimate destination may have to be estimated and accrued
because there can be delays in the receipt or advice of the
final charges from agents and suppliers throughout the world.
Consequently, significant accruals are outstanding at each
financial period end. CP Ships has considerable experience
in estimating the costs of transporting containers. Where CP
Ships determines that such accruals are higher or lower than
necessary to meet its obligations for transportation costs, an
adjustment to the accrual is made in the period that such a
determination is made.

Restructuring Costs

The cost of business acquisitions and any
resulting goodwill includes the estimated cost of plans to
restructure the acquired business that are foreseen and approved
at the time of acquisition. Additionally, during 2001
CP Ships recorded a $19 million charge for the
estimated cost of restructuring organization and offices, mainly
in Europe and North America, during 2001 and 2002. The
provisions for restructuring costs are recorded as liabilities.

The estimates for restructuring costs are based
upon assumptions about future events such as employee severance,
subleases or lease disposals and contract terminations and final
costs may differ from the original estimates. Future changes in
these estimates and assumptions, and market conditions, could
have a material impact on CP Ships consolidated
financial statements.

New Canadian Accounting
Pronouncements

Goodwill and Other Intangible Assets

CICA 3062, Goodwill and other intangible
assets was issued in August 2001 by the Canadian Institute
of Chartered Accountants (CICA) and was effective
for CP Ships for years beginning
1st January 2002 and will be applied
prospectively. Pursuant to CICA 3062, goodwill can no
longer be amortized. Instead, it will be subject to an annual
impairment test. During June 2002, CP Ships completed its
review as required under CICA 3062 and has determined that
there is no impairment of goodwill.

The impact of not amortizing goodwill for the
first quarter of 2002 is to increase net income by
$4 million and basic and diluted earnings per share by
$0.05. For the year ended 31st December 2001 the
impact of not amortizing goodwill would have been to increase
net income by $16 million and increase basic and diluted
earnings per share by $0.20. For 2000, such impact would have
been to increase net income by $18 million and basic and
diluted earnings per share by $0.23. For 1999, applying CICA
3062 would have increased net income by $15 million and
basic and diluted earnings per share by $0.19.

CICA 1650, Foreign currency
translation was effective from 1st January
2002. CP Ships will retroactively adopt a change in the
accounting rules for the treatment of foreign exchange gains and
losses. These changes have not yet been applied to the Annual
Financial Statements. The new rules will no longer allow for the
deferral and amortization of foreign exchange gains and losses
on long-term debt. As the majority of CP Ships debt
is denominated in U.S. dollars, this change will not have a
material effect on its financial statements.

CICA AcG-13 Hedging Relationship is
effective for fiscal years beginning 1st July
2002 and specifies new criteria for applying hedging accounting.
CP Ships is assessing the impact that this guidance will
have on its financial position and results of operations.

Stock Based Compensation

Effective 1st January 2002,
CP Ships prospectively adopted the new recommendations of
the CICA with respect to accounting for stock-based compensation
and other stock-based payments. The new recommendations require
compensation expense to be calculated using the fair value
method and either expensed to income or the effect disclosed in
the notes to the financial statements. As permitted under the
new standard, CP Ships will continue to employ the
intrinsic method of accounting for stock based compensation and
will disclose the effect of using the fair value method for
accounting for its stock-based compensation plans in a note to
its financial statements.




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Recent U.S. Accounting
Pronouncements

On 20th July 2001, the Financial
Accounting Standard Board (FASB) issued Financial
Accounting Statement (FAS) 141, Business
Combinations, and FAS 142, Goodwill and Other
Intangible Assets, which were required to be implemented
with effect from 1st July 2001 and
1st January 2002 respectively. FAS 141 requires
that all business combinations be accounted for by the purchase
method. FAS 142 addresses the accounting for acquired
goodwill and other intangible assets and contains certain
transitional provisions which may affect classification of
intangible assets, as well as the balance of goodwill. The
ongoing impact will be that goodwill will no longer be
amortized, but instead will be tested at least annually for
impairment. The requirements of both statements apply
prospectively from the effective date for the purposes of
presenting U.S. GAAP financial information. During June
2002, CP Ships completed its review as required under
FAS 142 and has determined that there is no impairment of
goodwill.

The impact of not amortizing goodwill for the
year ended 31st December 2001 would have been to
increase net income reported under U.S. GAAP before the
cumulative effect of accounting changes by $14 million and
basic and diluted earnings per share by $0.18.

FAS 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets, was
issued in July 2001. This standard will be effective for
CP Ships fiscal year beginning after
15th June 2002; however, early adoption is
permitted. The standard provides the accounting requirements for
retirement obligations associated with tangible long-lived
assets. The standard requires that the obligation associated
with the retirement of the tangible long-lived assets are
capitalized into the asset cost at the time of initial
recognition. The liability is then discounted to its fair value
at the time of recognition using the guidance provided by the
standard. The requirements of this statement will be reflected
as a cumulative effect adjustment to income for the purposes of
presenting U.S. GAAP financial information. CP Ships
is assessing the impact that this new standard will have on its
financial position and results of operations.

FAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets was issued on
3rd October 2001 and is effective for
CP Ships fiscal year beginning
1st January 2002. The objectives of FAS 144
are to create a single accounting model, based on the framework
established in FAS 121, for long-lived assets including
segments of a business to be disposed of by sale, whether
previously held and used or newly acquired. CP Ships is
assessing the impact that this new standard will have on its
financial position and results of operations.

In April 2002, the FASB issued FAS 145
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections (FAS 145). This standard will require
gains and losses from extinguishment of debt to be classified as
extraordinary items only if they meet the criteria of unusual
and infrequent in Opinion 30, Reporting the Results
of Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. Any gain
or loss on extinguishment will be recorded in the most
appropriate line item to which it relates within net income
before extraordinary items. FAS 145 is effective for fiscal
years beginning after 15th May 2002; however,
certain sections are effective for transactions occurring after
15th May 2002. CP Ships is assessing the
impact that this new standard will have on its financial
position and results of operations.




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