27 April 2004 CPR First Quarter 2004 Results Canadian Pacific Railway Closes First Quarter With Strong Momentum Operating income, excluding impact of foreign exchange, up 9% Freight volumes up 11%, despite weather-related service disruptions Strong finish provides momentum into second quarter Canadian Pacific Railway (TSX/NYSE: CP) reported a decline in net income to $24 million in the three-month period ended 31 Mar 2004, from $102 million in the same period of 2003. On the same basis, diluted earnings per share (EPS) were $0.15, compared with $0.64. The railway said the $78 million decrease in net income was due to a net loss of $14 million in foreign exchange on long-term debt in the first quarter of 2004, compared with a net gain of $64 million in the same period a year earlier.   On an ongoing basis, CPR's results improved operationally throughout the first quarter of 2004. Excluding foreign exchange gains and losses on long-term debt, net income of $38 million (non-GAAP) and EPS of $0.24 (non-GAAP) in first-quarter 2004 were slightly ahead of $37 million and $0.23 in first-quarter 2003. This was achieved despite disruptions caused by severe weather and a major avalanche in January.   Rob Ritchie, President and Chief Executive Officer, said: "The worst avalanche in eight years and severe weather early in the quarter hit us hard in our western corridors over a two-week period. With heavy freight volumes fully consuming available capacity, there was no opportunity to recover the lost volumes in the quarter. This took approximately $25 million out of operating income and cost us about $0.10 on EPS. However, we staged a comeback that saw our railway running more efficiently than ever, and exited the quarter with very strong business fundamentals. In March, compared with February, overall business (revenue ton-miles of freight) increased sharply by 17 percent, and average train weight climbed 5 percent. This momentum has carried into the second quarter."   CPR's operating income in the first quarter of 2004 was $116 million, compared with $118 million in the same period of 2003. Its operating ratio for the three-month period was 86.9 percent, compared with 86.6 percent. The Canadian dollar's 16 percent year-over-year gain against the U.S. dollar had a substantial negative impact on operating income in the first quarter of 2004, compared with first-quarter 2003.   Fluctuations in the value of the Canadian dollar affect CPR's results because U.S. dollar-denominated revenues and expenses are translated into Canadian dollars. A stronger Canadian dollar reduces U.S. dollar-denominated revenues and expenses. Operating income is also reduced because more revenues than expenses are generated in U.S. dollars. In the first quarter, revenues were reduced by approximately $59 million, operating expenses by approximately $46 million, and operating income by approximately $13 million. After-tax income, excluding foreign exchange on long-term debt, was reduced by $4 million, or $0.02 per fully diluted share.   Total revenues in the first quarter of 2004 were $887 million, compared with $879 million in the same period a year earlier. Revenues in CPR's bulk commodity sector increased $19 million, or 5 percent over revenues in first-quarter 2003 as a result of strong demand from Pacific Rim countries for raw materials. Intermodal revenue increased $27 million, or 12 percent, reflecting higher volumes at the ports of Vancouver and Montreal and a temporary market shift caused by a month-long strike at CN. In the merchandise sector, which includes forest and industrial products and automotive, revenues declined $27 million, or 10 percent, largely due to the stronger Canadian dollar.   Operating expenses were $771 million in the first quarter of 2004, compared with $761 million in the same period of 2003. Compensation and benefits expense increased 8 percent over first-quarter 2003. The increase was driven by hiring to handle the 11 percent volume growth, higher pension costs and inflation. These higher costs were partially offset by the beneficial impact of foreign exchange and cost containment measures, including job reductions as CPR continued to meet targets announced in June 2003. Depreciation and amortization expense increased 10 percent, reflecting CPR's investments in new assets and depreciation rate revisions. Although higher freight volumes and fuel prices drove up fuel expense, the increase was more than offset by improved fuel efficiency and foreign exchange rates. Materials, equipment rents and purchased services declined by 6 percent.   Excluding foreign exchange gains and losses on long-term debt, CPR's effective income tax rate rose to 34 percent in first-quarter 2004, compared with 32 percent in the same period of 2003. The increase was largely due to the government of Ontario's repeal of previously announced future income tax rate reductions.   Outlook   "There has been a dramatic surge in demand across most of CPR's lines of business and we are working with our customers to assess the sustainability of this new level of demand," Mr. Ritchie said. "Our short-term response is to hire crews for trains, increase the number and productivity of freight cars and bring on 41 high-performance locomotives in the second quarter of 2004 and another 25 in the fourth quarter. We are continuing to drive improved efficiency into our intermodal trains through changes to our integrated operating plan. Despite these measures, we expect capacity in some areas of CPR's network to remain tight in the medium term, particularly for bulk and intermodal traffic on our western corridors. In addition, current market conditions are favourable for CPR to deliver price increases."   Should the currency environment remain unchanged, the year-over-year impact of foreign exchange on quarterly financial results is expected to ease beginning in the second quarter. Given revised 2004 assumptions of an average exchange rate of $1.33 per U.S. dollar (US$0.75) and a grain crop approaching normal production, CPR expects 2004 revenues to grow in the range of 4 percent to 6 percent over 2003. Assuming an average West Texas Intermediate oil price of US$33 per barrel and factoring in the impact of the previously reported change in tax rates in the province of Ontario, CPR is now targeting diluted EPS growth in 2004, excluding foreign exchange gains and losses on long-term debt, of 5 percent to 10 percent over restated and adjusted EPS of $2.07 in 2003.   RESTATEMENT OF COMPARATIVE FIGURES FOR 2003   Comparative figures for prior periods have been restated (see appendix) for retroactively applied accounting changes. The changes relate to the implementation of new accounting rules under Canadian Generally Accepted Accounting Principles (GAAP) for asset retirement obligations introduced in the first quarter of 2004 and for the expensing of stock options introduced in the fourth quarter of 2003. The combined impact of the changes is a decrease of $0.4 million in net income, or $0.01 in basic EPS previously reported for the first quarter of 2003. Notes 2, 6 and 9 to the financial statements further describe the impact of the accounting changes.   FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT   In the first quarter of 2004, CPR had a foreign exchange loss on long-term debt of $13 million ($14 million after tax), compared with a gain of $71 million ($64 million after tax) in the same period of 2003.   PRESENTATION OF NON-GAAP EARNINGS   CPR presents non-GAAP operating earnings to provide a basis for evaluating underlying earnings trends that can be compared with the prior period's results. Non-GAAP earnings exclude foreign currency translation effects on long-term debt, which can be volatile and short term and are not among CPR's normal ongoing revenues and operating expenses. The impact of volatile, short-term rate fluctuations on foreign-denominated debt is only realized when long-term debt matures or is settled. A reconciliation of income, excluding foreign exchange gains and losses on long-term debt, to net income as presented in the financial statements is detailed in the attached Summary of Rail Data.   It should be noted that CPR's operating earnings, excluding foreign exchange gains and losses on long-term debt, as described in this news release, have no standardized meanings and are not defined by Canadian generally accepted accounting principles and, therefore, are unlikely to be comparable to similar measures presented by other companies.   Note on Forward-Looking Statements   This news release contains forward-looking information. Actual future results may differ materially. The risks, uncertainties and other factors that could influence actual results are described in CPR's annual report and annual information form, and may be updated in CPR's consolidated interim financial statements and interim Management's Discussion and Analysis, which are filed with securities regulators from time to time. However, CPR undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events, or otherwise. Financial results in this news release are reported in Canadian dollars.   Canadian Pacific Railway is a transcontinental carrier operating in Canada and the U.S. Its 14,000-mile rail network serves the principal centres of Canada, from Montreal to Vancouver, and the U.S. Northeast and Midwest regions. CPR feeds directly into America's heartland from the East and West coasts. Alliances with other carriers extend its market reach throughout the U.S. and into Mexico. 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