SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 6-K

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of March, 2003

CANADIAN PACIFIC RAILWAY LIMITED/CANADIAN PACIFIC RAILWAY COMPANY

(Commission File No. 1-01342)

(Commission File No. 1-15272)

Suite 500, Gulf Canada Square, 401 — 9th Avenue, S.W., Calgary, Alberta, Canada, T2P 4Z4

     Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F o		Form 40-F x

     Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o		No x

     If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-     

     This Report furnished on Form 6-K shall be incorporated by reference into each of the following Registration Statements under the Securities Act of 1933 of the registrant: Form S-8 No. 333-13962 (Canadian Pacific Railway Limited), Form S-8 No. 333-13846 (Canadian Pacific Railway Limited), and Form S-3 No. 2-98605 (Canadian Pacific Railway Company). The Management Proxy Circular attached hereto as Exhibit 2, excluding the portions under the headings “Compensation and Other Information – Report on Executive Compensation” and “Compensation and Other Information – Performance Graph” and Appendix 1 thereto, is incorporated by reference into the Registration Statement on Form F-9 No. 333-14014 (Canadian Pacific Railway Company) as an exhibit thereto.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

						CANADIAN PACIFIC RAILWAY LIMITED CANADIAN PACIFIC RAILWAY COMPANY (Registrants)
Date:		March 18, 2003		By:		Signed: Robert V. Horte Name: Robert V. Horte Title: Senior Assistant Corporate Secretary

 

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DOCUMENTS FILED AS PART OF THIS REPORT ON FORM 6-K

1.		Notice of Annual Meeting of Shareholders
2.		Management Proxy Circular
3.		Form of Proxy
4.		2002 Annual Report, including Management’s Discussion and Analysis (pages 1 to 19 inclusive of Annual Report) and 2002 audited financial statements (pages 20 to 58 inclusive of Annual Report)
5.		Letter of Canadian Pacific Railway dated March 18, 2003, addressed to the Securities Commissions or similar authorities in each of the Provinces of Canada enclosing earnings coverage ratios for the twelve-month period ended December 31, 2002.
6.		Letter of PricewaterhouseCoopers LLP dated March 18, 2003 consenting to the incorporation by reference of its audit report dated February 18, 2003 in the short form prospectus of Canadian Pacific Railway Company dated May 28, 2002.

 

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that the annual meeting of the shareholders of Canadian Pacific Railway Limited will be held at the Vancouver Convention & Exhibition Centre, 999 Canada Place, Vancouver, British Columbia, at 9:00 a.m. (Pacific Time) on Monday, April 28, 2003, for the following purposes:

1.

to receive the consolidated financial statements for the year ended December 31, 2002, and the auditors’ report thereon;

2.

to elect directors;

3.

to appoint auditors; and

4.

to transact such other business as may properly come before the meeting or any adjournment thereof.

Shareholders of record at the close of business on March 14, 2003, will be entitled to vote at the meeting.

By order of the board of directors,

Marcella M. Szel, Q.C.
Vice-President, Strategy and Law,
Corporate Secretary

Calgary, Alberta
February 18, 2003

NOTE: Shareholders are entitled to vote at the meeting either in person or by proxy. Registered shareholders wishing to vote by proxy are requested to complete and return the enclosed form of proxy in the envelope provided to the company’s transfer agent, Computershare Trust Company of Canada. Registered shareholders may also vote by telephone or Internet by following the instructions provided on the enclosed form of proxy. Non-registered shareholders should refer to page 2 of the management proxy circular for information on how to vote their shares at the meeting. Proxies must be received by Computershare Trust Company of Canada or Georgeson Shareholder Communications Canada, agents for the company, before 5:00 p.m. (Mountain Time) on April 25, 2003, in order to be used at the meeting.

 

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Dear Shareholder:

The annual meeting of shareholders of Canadian Pacific Railway Limited will be held at the Vancouver Convention & Exhibition Centre in Vancouver, British Columbia, on Monday, April 28, 2003, at 9:00 a.m. (Pacific Time).

We take this opportunity to invite you to attend the meeting in person. However, should you be unable to do so, you can be represented by proxy and ensure that your shares are voted in accordance with your instructions. The form of proxy or voting instruction form (if you are a non-registered shareholder) enables you to vote in advance of the meeting whether or not you are able to attend the meeting. As usual, there will be an opportunity to ask questions, to meet the board of directors, senior management and other shareholders.

The matters of business to be dealt with at the meeting are set out in the Table of Contents and in the Notice of the Meeting.

In closing, we would like to thank all of our shareholders for their continued support and investment in the company.

Yours sincerely,

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CONTENTS

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that the annual meeting of the shareholders of Canadian Pacific Railway Limited will be held at the Vancouver Convention & Exhibition Centre, 999 Canada Place, Vancouver, British Columbia, at 9:00 a.m. (Pacific Time) on Monday, April 28, 2003, for the following purposes:

1.

to receive the consolidated financial statements for the year ended December 31, 2002, and the auditors’ report thereon;

2.

to elect directors;

3.

to appoint auditors; and

4.

to transact such other business as may properly come before the meeting or any adjournment thereof.

Shareholders of record at the close of business on March 14, 2003, will be entitled to vote at the meeting.

By order of the board of directors,

Marcella M. Szel, Q.C.
Vice-President, Strategy and Law,
Corporate Secretary

Calgary, Alberta
February 18, 2003

NOTE: Shareholders are entitled to vote at the meeting either in person or by proxy. Registered shareholders wishing to vote by proxy are requested to complete and return the enclosed form of proxy in the envelope provided to the company’s transfer agent, Computershare Trust Company of Canada. Registered shareholders may also vote by telephone or Internet by following the instructions provided on the enclosed form of proxy. Non-registered shareholders should refer to page 2 of the management proxy circular for information on how to vote their shares at the meeting. Proxies must be received by Computershare Trust Company of Canada or Georgeson Shareholder Communications Canada, agents for the company, before 5:00 p.m. (Mountain Time) on April 25, 2003, in order to be used at the meeting.

 

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MANAGEMENT PROXY CIRCULAR

 

General Information

This Management Proxy Circular (the “Circular”) is furnished in connection with the solicitation of proxies by the management of Canadian Pacific Railway Limited (“CPRL” or the “Corporation”) to be used at the annual meeting of shareholders or adjournment thereof (the “Meeting”) to be held on April 28, 2003, at the Vancouver Convention & Exhibition Centre, 999 Canada Place, Vancouver, British Columbia, and for the purposes set out in the accompanying Notice of Annual Meeting of Shareholders (the “Notice of Meeting”).

The cost of soliciting proxies will be borne by the Corporation. While proxies will be solicited primarily by mail, certain employees of CPRL may also solicit proxies in person or by telephone. CPRL has retained Georgeson Shareholder Communications Canada (“Georgeson”), 66 Wellington Street West, Toronto Dominion Bank Tower, Suite 5210, Toronto, Ontario, M5K 1J3, at a fee of approximately $32,500 plus out-of-pocket expenses, to aid in the solicitation of proxies in Canada and the United States.

Proxies are counted and tabulated by CPRL’s transfer agent, Computershare Trust Company of Canada (“Computershare”). Computershare maintains the confidentiality of individual shareholder votes. However, proxies will be submitted to management where they contain comments clearly intended for management or to meet legal requirements.

Unless otherwise noted, the information contained in this Circular is given as of February 18, 2003, and all dollar amounts used in this document are in Canadian dollars.

 

Information on Voting
Voting Shares and Principal Shareholders

At February 18, 2003, there were 158,507,786 Common Shares (“Shares”) outstanding. Each Share carries one vote.

To the knowledge of the directors and officers of CPRL, based on information at February 18, 2003, no individual or corporation beneficially owned, directly or indirectly, or exercised control over, more than ten per cent of the outstanding Shares.

 

Record Date for Notice of Meeting and Provisions Relating to Voting

The board of directors of CPRL has fixed March 14, 2003, as the record date (the “Record Date”) for the purpose of determining shareholders entitled to receive the Notice of Meeting. Each shareholder is entitled to one vote for each Share held, as shown as registered in such holder’s name on the list of shareholders prepared as of the close of business on the Record Date.

 

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Appointment of Proxyholders

Shareholders wishing to be represented by proxy at the Meeting must deposit a properly executed proxy with Computershare or Georgeson, agents for CPRL, prior to 5:00 p.m. (Mountain Time) on April 25, 2003.

Registered shareholders may also vote by telephone or over the Internet by following the instructions provided on the enclosed form of proxy.

All Shares represented by a properly executed proxy will be voted or withheld from voting on the matters identified in the Notice of Meeting in accordance with the instructions of the shareholder as specified thereon.

Shareholders who have appointed a named appointee of management to act and vote on their behalf as provided in the enclosed form of proxy and who do not provide instructions concerning any matter identified in the Notice of Meeting will have the Shares represented by such proxy voted FOR the election of the persons nominated for election as directors as set forth in this Circular and FOR the appointment of PricewaterhouseCoopers LLP as auditors.

The enclosed form of proxy, when properly signed, confers discretionary authority on the person or persons named to vote on any amendment to matters identified in the Notice of Meeting and on any other matter properly coming before the Meeting. Management is not aware of any such amendment or other matter. If, however, any such amendment or other matter properly comes before the Meeting, the proxies will be voted at the discretion of the person or persons named on the form of proxy, all of whom are officers of CPRL.

Non-registered shareholders, or shareholders that hold their Shares in the name of a “nominee”, such as a bank, trust company, securities broker or other financial institution, will have received this Circular in a mailing from their nominee, together with a form of proxy or voting instruction form. It is important that non-registered shareholders follow the voting instructions provided to them by their nominee. Since CPRL’s registrar and transfer agent, Computershare, does not maintain a record of the names of the Corporation’s non-registered shareholders, Computershare will have no knowledge of a non-registered shareholder’s right to vote, unless the nominee has appointed the non-registered shareholder as proxyholder. Non-registered shareholders wishing to vote in person at the Meeting must insert their name in the space provided on the form of proxy or voting instruction form, received from their nominee, and adhere to the signing and return instructions provided by their nominee. By doing so, non-registered shareholders are instructing their nominee to appoint them as proxyholder.

Shares held by employees under the CPRL Employee Share Purchase Plan (the “Share Purchase Plan”) are registered in the name of Computershare, the Share Purchase Plan Administrator, until such time as the Shares are withdrawn from the Share Purchase Plan pursuant to its terms and conditions. The Shares held by employees under the Share Purchase Plan are referred to as “Employee Shares”.

Voting rights attached to Employee Shares may be exercised through the use of a voting instruction form which provides instructions regarding the voting of Employee Shares by mail, telephone or Internet. Holders of Employee Shares will have received this Circular together with the voting instruction form.

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Employee Shares will be voted in accordance with the instructions received from the employee, being the beneficial owner of the Employee Shares. Only those Employee Shares in respect of which a voting instruction form has been signed and returned or in respect of which voting instructions have been conveyed by telephone or Internet will be voted.

Holders of Employee Shares who have appointed Computershare to act and vote on their behalf, as provided for in the enclosed voting instruction form, and who do not provide instructions concerning any matter identified in the Notice of Meeting will have the Employee Shares represented by such voting instruction form voted FOR the election of the persons nominated for election as directors as set forth in this Circular and FOR the appointment of PricewaterhouseCoopers LLP as auditors.

Revocability of Proxies

A registered shareholder or holder of Employee Shares may revoke a proxy by depositing an instrument in writing executed by such shareholder or by such shareholder’s attorney authorized in writing (or, in the case of a corporation, by a duly authorized officer or attorney), either at the office of the Corporate Secretary, Canadian Pacific Railway, Suite 2000, Gulf Canada Square, 401 — 9th Avenue S.W., Calgary, Alberta, T2P 4Z4, Canada, at any time up to and including the last business day preceding the day of the Meeting, or any adjournment thereof, or with the Chairman of the Meeting on the day of the Meeting, or an adjournment thereof, or in any other manner permitted by law.

If voting instructions were conveyed by mail, telephone or the Internet, the conveying of new instructions by any of these means will supersede the prior instructions.

Non-registered shareholders who have voted and who wish to change their voting instructions should contact their nominee to discuss the appropriate procedure to follow in this regard.

 

BUSINESS TO BE TRANSACTED AT THE MEETING

This Circular contains information relating to the receipt of CPRL’s audited consolidated financial statements, the election of directors and the appointment of auditors.

Financial Statements

The audited consolidated financial statements of the Corporation for the year ended December 31, 2002, and the report of the auditors thereon will be placed before the Meeting. These audited consolidated financial statements form part of the Annual Report of the Corporation which was mailed to shareholders with the Notice of Meeting and Circular. Additional copies of the Annual Report, in English or French, may be obtained from the Corporate Secretary of CPRL upon request and will be available at the Meeting.

Election of Directors

The terms of office of each of the current directors will expire at the close of the Meeting. Shareholders will be asked to elect directors to hold office until the next annual meeting of shareholders or until their successors are otherwise duly elected or appointed.

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CPRL’s articles provide for the board of directors to consist of a minimum of five and a maximum of 20 directors. The number of directors has been set by resolution of the board at 11 directors, all of whom are elected annually.

The Corporate Governance and Nominating Committee of the board reviews annually the qualifications of persons proposed for election to the board of directors and submits its recommendations to the board for consideration. The persons proposed for nomination are, in the opinion of the board, well qualified to act as directors for the ensuing year. Each nominee has established his or her eligibility and willingness to serve as a director if elected. The persons named in the form of proxy are officers of CPRL who intend to vote at the Meeting for the election of the nominees whose names are set out below, unless specifically instructed on the form of proxy to withhold such vote. If, prior to the Meeting, any of the listed nominees becomes unable or unwilling to serve, the persons named in the form of proxy will have the right to use their discretion in voting for such other properly qualified nominees.

Information regarding the proposed nominees, including the number of Shares and Deferred Share Units (“DSUs”) of CPRL beneficially owned by each of them, directly or indirectly, or over which they exercise control or direction, is as follows:

Nominees for Election as Directors

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Appointment of Auditors

There will be submitted to the Meeting a resolution appointing PricewaterhouseCoopers LLP as auditors of CPRL for a term expiring at the close of the 2004 annual meeting of shareholders. To be effective, the resolution must be approved by a majority of the votes cast by the shareholders voting in respect of the resolution. Representatives of PricewaterhouseCoopers LLP will be present at the Meeting with the opportunity to make a statement if they so desire and to respond to appropriate questions.

PricewaterhouseCoopers LLP and its predecessor firm have acted as the auditors of Canadian Pacific Railway Company for more than five years and have been the Corporation’s auditors since October 1, 2001.

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COMPENSATION AND OTHER INFORMATION

 

Report on Executive Compensation by the Management Resources and Compensation Committee

The Management Resources and Compensation Committee (the “Compensation Committee”) is accountable to the board of directors to ensure that the human resource strategies of the Corporation and its subsidiaries, including Canadian Pacific Railway Company (collectively “CPR”) support overall business goals, thereby contributing to the creation of shareholder value. The Compensation Committee’s mandate includes discharging the board’s responsibilities relating to:

•

the appointment, compensation and reporting relationships of CPR’s executive officers at the level of Vice President or higher (“Executive Officers”);

•

the compensation philosophy of CPR;

•

the adoption and amendment of stock option and retirement plans;

•

the establishment of performance objectives and the conduct of performance evaluations for certain Executive Officers;

•

CPR’s organizational effectiveness; and

•

CPR’s succession planning activities.

Specifically during 2002, the Compensation Committee:

•

developed a formal performance evaluation process for the chief executive officer (the “CEO”), including the establishment of key accountabilities;

•

assessed the bench strength of the organization to ensure succession plans for key senior executive positions were in place;

•

reviewed a report on key human resource metrics and the overall effectiveness of the organization;

•

redesigned the annual incentive plan to place a stronger focus on the recognition of individual performance; and

•

reviewed executive compensation levels and policies.

 

Composition of the Management Resources and Compensation Committee

The Compensation Committee is composed of five directors of CPRL who are neither officers nor employees of CPR. During 2002, the following individuals served as members of the Compensation Committee: Stephen E. Bachand (Chairman), James E. Newall, O.C., Dr. James R. Nininger, Michael E.J. Phelps, O.C. and Michael W. Wright.

 

Compensation Philosophy and Process

CPR’s executive compensation program is designed to attract and retain talented executives and to focus their efforts on performance improvement and sustained shareholder value creation. Total compensation for each Executive Officer, including those named in the Summary Compensation Table (the “Named Executive Officers”), is designed to be between the 50th and 75th percentiles of comparable positions in large autonomous Canadian companies with revenues in excess of $1 billion (the “comparator group”). This design is accomplished through targeting base salary and annual incentive compensation at the 50th percentile of the comparator group while placing stock-based compensation at the 75th percentile of the comparator group.

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The compensation of Executive Officers, including the Named Executive Officers, is evaluated and recommended by the Compensation Committee to the board of directors. To establish competitive levels of executive compensation, the Compensation Committee reviews information obtained through independent compensation consultants.

 

Composition of Executive Compensation

Direct compensation for Executive Officers is comprised of base salary and annual incentive and stock-based compensation. The percentage mix of each element varies in accordance with the level of the individual’s position in the organization and is regularly reviewed against competitive practice. The percentage of direct compensation relating to both short and long-term performance incentive plans ranges from 55% for vice presidents to 75% for the CEO, with approximately 20% of this variable compensation relating to the annual incentive plan.

 

Base Salary

The Compensation Committee recommends to the board of directors the base salaries of the Executive Officers, following a review of market data. Salaries are adjusted, as needed, based on individual performance, responsibility and experience, to ensure that they reflect the contribution of each Executive Officer. In establishing the base salary for each Executive Officer, a benchmark of average base salaries paid to the comparable executive officers of the comparator group is used.

 

Annual Incentive Plan

CPR’s Performance Incentive Plan provides an opportunity for participants, including all Executive Officers, to earn an annual cash award based on the achievement of individual performance criteria and corporate financial targets. The financial targets are set annually by the board of directors upon recommendation by the Compensation Committee. Financial performance is measured by comparing actual results against targets established at the beginning of the year. The degree to which CPR achieves these financial targets determines the amount of funds available for distribution to participants, and the ultimate award payable to the participant is based on the degree to which the individual achieves his or her personal objectives. The financial and individual performance criteria vary, based upon the responsibilities of the participant. For selected participants, a portion of their awards is based on the achievement of individual objectives independent of CPR’s performance against its financial targets. For two Named Executive Officers, these objectives relate to specific operational targets, and the portion of their awards based on such objectives represented 25% of their target award level in 2002. For 2002, the financial targets approved by the board of directors were CPR’s operating income and proceeds generated from real estate disposition and property lease revenue.

Potential awards are expressed as a percentage of base salary. For the Named Executive Officers, target award levels in 2002 ranged between 35% and 60% of base salary when CPR and individual performance targets were achieved. The maximum bonus opportunity for exceptional CPR performance was 200% of the target award level.

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For the 2002 plan year, CPR exceeded its performance expectations regarding real estate disposition and property lease revenue, but only partially achieved its operating income target. The fund available for distribution to plan participants, including the Named Executive Officers, that would otherwise have resulted through a strict application of the plan’s provisions relating to the operating income target was adjusted from 35% of target award levels to 61% of target award levels. This adjustment, approved by the board, was in recognition of CPR’s successful management of reduced revenues — caused primarily by depressed coal markets and a decline in grain transportation revenues due to a drought on the Canadian prairies — through expense reduction initiatives, which led to record operating income in 2002. In addition, CPR exceeded its diluted earnings per share and net income targets for the year.

Stock Option Plan

The purpose of the Management Stock Option Incentive Plan (the “Stock Option Plan’’) is to encourage key officers and employees of CPR to increase shareholder value and to participate in the growth and development of CPR. The Compensation Committee makes recommendations to the board of directors regarding grants of stock options to Executive Officers. In determining the size of a new option grant, neither the amount nor the terms of previously granted options are taken into consideration.

The CEO, as well as the Chairman of the Board and the Chairman of the Compensation Committee, also have authority to grant stock options to employees within certain defined parameters. Participants in the Stock Option Plan are granted a number of options exercisable at the last closing market price on the Toronto Stock Exchange of Shares prior to the approval of the grant. The maximum number of Shares approved for issuance under the Stock Option Plan is 11,000,000.

There are two types of options: regular stock options and performance-accelerated stock options.

Regular stock options expire ten years from the date of grant. Half of the regular options become exercisable on the second anniversary of the grant and the balance on the third anniversary. Share appreciation rights (“SARs”) are attached to half the regular options granted. The vesting requirements and term of SARs are consistent with the regular stock options to which they are attached.

Performance-accelerated options expire five years after the date of the grant and become exercisable on the fourth anniversary of the grant, or earlier, upon the achievement by CPR of specified performance criteria. For 2002, specific operating ratio targets were adopted as the performance criteria. There is a minimum one-year vesting requirement, even if the performance criteria have been achieved prior to that time. Aside from an initial grant of performance stock options to all participants in October 2001 in recognition of CPRL becoming a publicly-traded company, grants of performance stock options are restricted to executives and are designed to provide additional incentive opportunity, increasing their target long-term incentive opportunity from the median to the 75th percentile of the comparator group.

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Share Ownership Guidelines

To further align the interests of Executive Officers with those of shareholders, CPR has share ownership guidelines in place for each of its Executive Officers. The guidelines set a level of share ownership, expressed as a multiple of the Executive Officer’s base salary, that the individual is required to hold. The ownership guideline levels range from 100% of base salary for vice presidents to 400% of base salary for the CEO. Each Executive Officer is expected to achieve the applicable minimum level of share ownership over a five-year period. Each Named Executive Officer is at or above his share ownership guideline level as of February 18, 2003.

Deferred Share Unit Plan

To support the accumulation of Shares by its Executive Officers, CPR introduced the Senior Executives’ Deferred Share Unit Plan pursuant to which Executive Officers may acquire deferred share units (“DSUs”) of CPRL. A DSU has the equivalent value of one Share and attracts dividends in the form of additional DSUs at the same rate as dividends are paid on Shares.

To assist in the attainment of an Executive Officer’s share ownership guideline, during the first six months following the appointment of the Executive Officer CPR will contribute one DSU for each three Shares or DSUs acquired by the individual. Following that six-month period, CPR will contribute one DSU for each four Shares or DSUs acquired by the Executive Officer. The CPR match is capped at the minimum level required to meet the share ownership guidelines when combined with the Executive Officer’s contribution. The matching DSUs will vest if the underlying Shares or DSUs are held for a three-year period.

Executive Officers may also elect to receive all or a portion of their annual incentive award in DSUs. The Executive Officer must elect to participate in this aspect of the Senior Executives’ Deferred Share Unit Plan prior to the beginning of the calendar year for which the annual incentive award is paid. When the annual incentive award is determined, the amount elected is converted to DSUs which have a value equal to the average market price of a Share for the ten trading days immediately prior to December 31st of the calendar year for which the award is paid.

Executive Officers may only redeem their DSUs upon termination of employment or retirement. The value of the DSU at the time of payment will be based on the average market price of a Share for the ten trading days immediately preceding the payment date.

Employee Share Purchase Plan

CPR maintains a Share Purchase Plan for eligible employees of CPR. Under the Share Purchase Plan, contributions by CPR and by eligible employees are used to make purchases of Shares on the open market. Each eligible employee may contribute up to six percent of the employee’s salary to the Share Purchase Plan. CPR will purchase and contribute one Share for each three Shares purchased on behalf of each eligible employee under the Share Purchase Plan. In no case will Shares be issued from treasury pursuant to the Share Purchase Plan. Rather, the Share Purchase Plan’s Administrator, Computershare, will purchase all Shares to be contributed under the Share Purchase Plan on the open market. Shares contributed by CPR will not vest in favour of the eligible employee until the end of the first calendar quarter in which the underlying Shares purchased by the employee’s contribution have been held for a period of one

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year. Employees must remain participants of the Share Purchase Plan at the time of vesting in order to receive the CPR match. The Named Executive Officers are among the approximately 56% of employees who are participants in the Share Purchase Plan.

Long-Term Incentive Plan

Prior to 2002, Executive Officers also participated in a Long-Term Incentive Plan (“LTIP”), which is no longer in existence. LTIP was a four-year plan focused on railway-specific goals critical to CPR’s success. As a result of CPRL becoming a publicly traded company in October 2001, the performance period was shortened by one year to December 31, 2001. The cash award, paid out at the end of 2002, was based upon the achievement of the LTIP targets which were comprised of two equally weighted performance measures: average return on capital employed, and cumulative operating income. Both of these measures were adjusted to account for the impact of CPR becoming a publicly traded company and for the revised performance period. DSU’s were credited to Named Executive Officers in 2002 in lieu of all or a portion of their cash award, in order to assist the Named Executive Officers in meeting their minimum shareholding requirements. For the Named Executive Officers, the awards ranged from 94% to 125% of base salary.

Chief Executive Officer Compensation

The pay-for-performance philosophy of CPR’s executive compensation program applies to CPR’s CEO, Mr. R.J. Ritchie. On an annual basis, the Compensation Committee reviews the compensation paid to chief executive officers at the comparator group of companies (i.e., large autonomous Canadian companies with revenues in excess of $1 billion), in order to assess the competitiveness of the CEO’s compensation. Based upon the recommendation of the Compensation Committee, the compensation of the CEO is approved by the board after careful assessment of his personal contribution to CPR’s performance. This assessment is based on a number of quantitative and qualitative factors, including CPR’s financial results, strategy formulation and implementation, and the CEO’s personal leadership and external relationships.

Mr. Ritchie is a participant in CPR’s Performance Incentive Plan, Stock Option Plan and Share Purchase Plan. His base salary and annual incentive compensation are targeted at the 50th percentile of the comparator group, while the stock-based compensation is targeted at the 75th percentile to bring his total direct compensation between the 50th and 75th percentile of CEOs at the comparator group of companies.

In 2002, Mr. Ritchie’s annual salary was increased to $725,000. He was granted an annual incentive award of $265,350 based on 2002 performance, all of which he elected to receive in DSUs. The performance criteria used to establish the amount of the award were CPR’s performance, as measured against its operating income target, and the Compensation Committee’s assessment of his individual performance against specific objectives relating primarily to financial performance, strategy formulation and organizational leadership. Mr. Ritchie’s award was adjusted from 35% of his target award level to 61% of his target award level for the reasons described in the third paragraph of the section herein titled “Annual Incentive Plan”. Mr. Ritchie received an LTIP award of $873,600, of which he elected to receive $389,027 in DSUs and the remainder in cash. As indicated earlier, the LTIP performance period expired as of December 31, 2001, although the final awards thereunder were paid at the end of 2002. Such awards were not included in setting compensation levels in 2002. An aggregate of 177,900 options were granted to Mr. Ritchie under the Stock Option Plan on February 19, 2002. Mr. Ritchie also received matching DSUs under the Senior Executives’ Deferred Share Unit Plan, in respect of Shares held by him.

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The relative weightings of the various components of the 2002 design of Mr. Ritchie’s total compensation, based on his target award levels under the Performance Incentive Plan and Stock Option Plan are set forth in the following table:

The foregoing report has been made by the members of the Management Resources and Compensation Committee of the board of directors:

Stephen E. Bachand (Chairman), James E. Newall, O.C., Dr. James R. Nininger, Michael E.J. Phelps, O.C., Michael W. Wright

Performance Graph

The following Performance Graph illustrates the cumulative total shareholder return on CPRL Shares (assuming reinvestment of dividends) compared with the cumulative total return of the S&P/TSX Composite Index (formerly the TSE 300 Composite Index) from the period beginning October 3, 2001, the date on which CPRL Shares began to publicly trade, and ending December 31, 2002.

The dollar amounts indicated in the graph above and in the chart below are as of October 3, 2001, December 31, 2001, and December 31, 2002.

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Executive Compensation

The following disclosure of executive compensation provides information on the compensation of CPR’s Named Executive Officers, the CEO and CPR’s next four most highly compensated Executive Officers, during the year ended December 31, 2002.

Summary Compensation Table

a.

Mr. Dodge was appointed Executive Vice-President and Chief Operating Officer in July 2001.

b.

Mr. Waites was appointed Executive Vice-President and Chief Financial Officer in March 2000.

c.

Mr. Foot was appointed Vice-President, Mechanical and Engineering Services in October 2000 and Senior Vice-President, Operations in July 2001.

d.

Mr. Green was appointed Vice-President, Yield and Asset Performance in August 2001 and Senior Vice-President, Marketing and Sales in April 2002.

e.

The value of perquisites and other personal benefits is not greater than the lesser of $50,000 and 10% of the total annual salary and bonus of each Named Executive Officer. For 2002, this value represents the dividend equivalents accrued during 2002 in respect of DSUs awarded under the Senior Executives’ Deferred Share Unit Plan.

f.

Represents options granted under the Stock Option Plan. For 2001, also represents replacement options granted under the terms of the Canadian Pacific Limited (“CPL”) Arrangement. Under the terms of the Arrangement, options granted under the CPL Stock Option Plan that were outstanding on the effective date of the Arrangement were cancelled and replaced with stock options in CPRL, CP Ships Limited, Fairmont Hotels & Resorts Inc., Fording Inc. and PanCanadian Energy Corporation, the successor companies of CPL following the Arrangement. The replacement options set out in the table represent CPRL replacement options only.

In addition, SARs are attached to 50% of the options set out in the table with the exclusion of performance-accelerated options.

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g.

LTIP payments for 2002 were made under the LTIP in place from January 1, 1999 to December 31, 2002. As a result of CPRL becoming a publicly traded company, the performance period was shortened by one year to December 31, 2001. The cash payout was based on measurable operational and financial targets at the end of the revised performance period adjusted for the impact of becoming public. The cash payout was made on December 31, 2002.

h.

Represents payout under the former CPL LTIP.

i.

Represents the value of Shares purchased by CPR pursuant to the matching provisions of the Share Purchase Plan. It includes the value of matching DSUs awarded under the Senior Executives’ Deferred Share Unit Plan.

Options and SAR Grants during 2002

The following table shows options and SARs granted under the Stock Option Plan for each of the Named Executive Officers for the fiscal year ended December 31, 2002.

a.

Under the Stock Option Plan each Named Executive Officer was granted regular and performance-accelerated options to purchase Shares on February 19, 2002, at an exercise price of $30.50. SARs are attached to 50% of the regular options which expire 2012/02/19. Performance-accelerated options expire 2007/02/19. One half of regular options and SARs granted become exercisable two years after the grant and the balance become exercisable three years after the grant. Performance-accelerated options become exercisable on the fourth anniversary of the grant or earlier upon the achievement by CPR of specified performance criteria. There is a minimum one-year vesting limit, even if the performance criteria have been achieved prior to the expiration of that time.

b.

F.J. Green was awarded a special grant of regular options on April 23, 2002, at an exercise price of $34.30, in recognition of his promotion to Senior Vice-President, Marketing and Sales.

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Aggregated Option and SAR Exercises during 2002 and
Year-End Options and SAR Values
The following table sets out information on the exercise by each of the Named Executive Officers of options and SARs granted under the Stock Option Plan for the fiscal year ended December 31, 2002, and the option and SAR values at December 31,2002.

a.

SARs are attached to 50% of the number of options set out in the table, with the exclusion of performance-accelerated options granted under the Stock Option Plan.

b.

One half of regular options and SARs granted become exercisable two years after the grant, and the balance become exercisable three years after the grant. Performance-accelerated options become exercisable on the fourth anniversary of the grant, or earlier upon the achievement by CPR of specified performance criteria. There is a minimum one-year vesting limit, even if the performance criteria have been achieved prior to the expiration of that time.

c.

The value of unexercised in-the-money options at December 31, 2002, is the difference between their exercise price and the fair market value of the underlying Shares on December 31, 2002. The value of such underlying Shares on such date was $31.15. These options have not been, and may never be, exercised, and actual gains, if any, on exercise will depend on the value of the Shares on the date of exercise.

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Long-Term Incentive Plans — Awards in 2002
The following table describes the long-term incentive plan awards for the fiscal year ended December 31, 2002 for each of CPR’s Named Executive Officers.

a.

This LTIP program provides for a cash payout at the end of the performance period based on measurable operational and financial targets.

b.

The LTIP awards made to the Named Executive Officers during the financial year ended December 31, 2002 were made under the plan in place from January 1, 1999 to December 31, 2002. The performance period was shortened by one year to December 31, 2001. No securities, units or other rights were awarded. On this basis cash awards were made to the Named Executive Officers as reported in the Summary Compensation Table on page 13.

 

Pension Plans

As at December 31, 2002, CPR maintained a contributory defined benefit pension plan (the “Basic Plan”) pursuant to which pensions are paid to eligible officers and employees of CPR at retirement. Under the Basic Plan, the amount of an individual’s pension is based on 2% of the average of the best five consecutive years or final 60 months of pensionable earnings multiplied by credited years of service up to a maximum of 35, inclusive of pensions under the Canada Pension Plan or Quebec Pension Plan. The normal retirement age under the Basic Plan is 65. The pension is payable for the lifetime of the former Basic Plan member and continues to the surviving spouse at rates set forth in the Basic Plan. A portion of the pension is indexed at 50% of the change in the Consumer Price Index. Under the Basic Plan, the pension benefit is limited to the maximum amount prescribed under the Income Tax Act.

CPR also maintained a non-contributory supplemental pension plan (the “Supplemental Plan”) in which Executive Officers participate. The Supplemental Plan provides pension benefits in excess of the maximum permitted under the Basic Plan. Annual incentive plan awards and notional awards approved by the Compensation Committee are included in the calculation of pensionable earnings (the best five year average of such awards is limited to the individual’s target level at retirement). The Supplemental Plan also provides additional benefits for executives who join the Basic Plan in mid-career.

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Both the Basic Plan and Supplemental Plan were amended effective January 1, 2001. In particular, effective January 1, 2001, management employees and officers were given the opportunity to participate in defined contribution (“DC”) pension provisions and to convert past service defined benefit entitlements as an initial deposit to their DC account. All newly hired management employees and officers will have the option to participate in the defined benefit or DC pension provisions. In addition, members of the Supplemental Plan may now retire with an unreduced pension at age 60.

The following table shows the aggregate annual retirement benefits payable under the Basic Plan and the Supplemental Plan upon retirement at age 65, based upon the defined benefit pension provisions in effect during 2002 (exclusive of the amounts paid under the Canada Pension Plan or Quebec Pension Plan).

Annual Pension Payable upon Retirement at Normal Retirement Age

The respective years of credited service for pension plan purposes as of December 31, 2002 and at age 65 for the Named Executive Officers are: Mr. Ritchie, 32.5 and 35 years; Mr. Dodge, 33.6 and 35 years; Mr. Waites, 5.7 and 21.6 years; Mr. Foot, 27.2 and 35 years; Mr. Green, 24.6 and 35 years.

Severance Agreements

Each Named Executive Officer is entitled to receive, pursuant to the terms of severance agreements between CPR and the Named Executive Officers, certain severance benefits if a change in control of CPR occurs. For each Named Executive Officer, these benefits are triggered if, within the three-year period following the change in control, the individual’s employment is terminated by CPR other than for cause, disability, retirement or death, or by the individual for certain defined reasons such as a change in responsibilities or a reduction in salary or benefits. In the case of the CEO, the benefits are also triggered if, within the three-year period following the change in control, the CEO resigns, provided he remains in his role for the first six months if so required by the acquiring company.

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Each Named Executive Officer will receive a lump sum severance payment equal to the base salary that such Named Executive Officer would have earned through the end of the applicable severance period (36 months for the CEO and 24 months for the other Named Executive Officers). Each severance agreement also provides that the Named Executive Officer is entitled to certain benefits, including payments under CPR’s compensation plans and the continuation of certain insurance plan benefits for the duration of the severance period.

Compensation of Directors

Directors, other than the Chairman of the Board, are each paid a basic annual retainer of $25,000. In addition, members of board commitees are each paid an annual retainer of $3,000. The Chairman of each committee also receives an annual retainer of $5,000 in addition to the committee membership retainer. A fee of $1,500 is paid to each director and committee member for each meeting attended. The Chairman of the Board is paid an all-inclusive annual retainer of $200,000. Directors resident outside of Canada are paid the same face amount in U.S. dollars. All fees are paid quarterly and in arrears. Salaried Executive Officers of CPR are not compensated for serving as directors.

Pursuant to the Directors’ Deferred Share Unit Plan, directors have the choice of receiving compensation either in cash or in the form of DSUs. The DSUs are taken into account under the minimum share ownership guidelines, which are currently set at an amount equal to 400% the value of the basic annual retainer for the directors and $500,000 for the Chairman of the Board. The minimum share ownership level must be attained within five years of the director’s initial appointment or election to the board of directors.

Non-executive directors also participate in the Directors’ Stock Option Plan (“DSOP”) and receive an initial grant of 8,000 options upon joining the board of directors. Non-executive directors will receive an annual grant of 4,000 options on the third trading day on the Toronto Stock Exchange following each annual meeting of shareholders at which directors are elected. Subject to applicable securities rules, options granted under the DSOP may be exercised from time to time on and after the grant date. Options are exercisable during a ten-year period from the date of the grant. The maximum number of Shares approved for issuance under the DSOP is 500,000.

On April 17, 2002, each non-executive director received a grant of 4,000 options at an exercise price of $33.60.

Indebtedness of Directors, Executive Officers and Senior Officers

As at December 31, 2002 there was no indebtedness outstanding by, or any guarantees, support agreements, letters of credit or other similar arrangements provided by CPR to, any of the directors, Executive Officers or senior officers of CPR or any of their associates.

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ADDITIONAL ITEMS

 

Directors’ and Officers’ Liability Insurance

CPRL carries on its own behalf, and on behalf of its subsidiaries, a directors’ and officers’ liability insurance policy. This policy has an annual aggregate coverage limit of $125,000,000 US subject to deductibles of either $250,000 US or $500,000 US ($250,000 US for all claims other than those related to securities) in cases where a director or officer is reimbursed by CPRL or a subsidiary for any loss covered by the policy. The approximate amount of the premium, including corporate reimbursement coverage, paid by CPRL in 2002 in respect of its directors as a group and its officers as a group (including officers of Canadian Pacific Railway Company) was $233,986 US and $510,514 US, respectively. The aggregate amount of the premium paid by the directors and officers of CPRL (including officers of Canadian Pacific Railway Company) in respect of the year 2002 was approximately $100 and $400, respectively.

 

Corporate Governance

CPRL and its board of directors believe that good corporate governance practices are essential to the effective management of the Corporation and to the protection of its investors, employees and other stakeholders.

Significant developments in corporate governance occurred during 2002. In the U.S., the Sarbanes-Oxley Act of 2002 (“SOA”), signed into law on July 30, introduced sweeping changes in corporate governance requirements for U.S. public companies, as well as for foreign private issuers, such as CPRL, whose securities trade on U.S. stock exchanges. Revised listing standards were also proposed by the New York Stock Exchange (“NYSE”) to the U.S. Securities and Exchange Commission (“SEC”) on August 16, although these will not come into force unless and until approved by the SEC.

The stated purpose of the SOA is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the U.S. securities laws. The SOA seeks, inter alia, to expand insider accountability by requiring officer certification of financial reports, prohibiting new personal loans to corporate insiders, and enhancing disclosure requirements with respect to the accuracy and timeliness of financial reports, off-balance sheet transactions and pro forma financial information. It also prescribes new duties for public company audit committees, mandates that such committees be comprised entirely of independent members, and requires certain disclosures about the financial expertise of audit committee members. In addition, the SOA contains provisions designed to reinforce the independence of external auditors of public companies and increase external auditor oversight. Finally, the SOA significantly broadens the sanctions applicable to certain corporate misconduct.

Not all provisions of the SOA are in force at this time. Many of them will take effect only after the SEC has adopted final rules implementing the new requirements and clarifying their scope and application. Foreign private issuers, such as CPRL, are subject to most, but not all, of the provisions of the SOA. For example, while the chief executive officers and chief financial officers of U.S. public companies are required to certify their companies’ quarterly and annual financial reports on Forms 10-Q and 10-K, the certification requirement applies only to annual financial reports of foreign private issuers that do not file quarterly reports on Form 10-Q.

Canadian securities regulators and the Toronto Stock Exchange (“TSX”) are currently engaged in a review of corporate governance standards applicable to Canadian public companies. In April of 2002, the TSX published for public comment proposed changes to its corporate governance standards. Following the enactment of the SOA, the TSX initiated a review of its proposed standards in light of the new U.S. legislation. While the review continues, TSX-listed companies have been advised by the TSX to disclose their corporate governance practices against the current TSX guidelines

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contained in Part IV, Section 472 — 475 of the TSX Company Manual, although they may, at their discretion, provide additional disclosure in reference to the proposed amendments.

The Ontario Securities Commission has also undertaken a review of its corporate governance requirements.

The outcome of these reviews is uncertain at this time, although it is possible that some proposals may be introduced during 2003.

Corporate governance practices at CPRL have been and continue to be of the highest standard and in compliance with applicable Canadian and U.S. requirements. Following the release of the proposed revisions to the TSX corporate governance guidelines and the enactment of the SOA, CPRL undertook a comprehensive review of its governance policies and procedures and continues to monitor developments in Canada and the U.S. with a view to further revising its governance policies and practices, as appropriate.

CPRL’s disclosure addressing each of the TSX’s corporate governance guidelines is attached to this Circular as Appendix 1. Information is also provided therein in reference to some of the proposed TSX corporate governance guideline amendments, notwithstanding that such amendments are not currently in force.

This disclosure statement, including Appendix 1, has been prepared by the Corporate Governance and Nominating Committee of the board and has been approved by the board of directors.

Shareholder Proposals

Any shareholder proposals to be included in the Circular to be issued in respect of the 2004 annual meeting of shareholders must be received by the Vice-President, Strategy and Law, Corporate Secretary by November 21, 2003.

Availability of Documents

Copies of the following documents are available on written request to the office of the Corporate Secretary at Suite 2000, Gulf Canada Square, 401 — 9th Avenue S.W., Calgary, Alberta, T2P 4Z4: the 2002 Annual Information Form (which Form is filed with the United States Securities and Exchange Commission as a Form 40 — F), the 2002 Annual Report to Shareholders containing the comparative consolidated financial statements for the year ended December 31, 2002, together with the auditors’ report thereon and Management’s Discussion and Analysis of financial condition and results of operations, the interim financial statements for periods subsequent to December 31, 2002, and this Circular.

Directors’ Approval

The contents of this Circular and its distribution to each director, to each shareholder entitled to receive the Notice of Meeting, and to the auditors of the Corporation have been approved by the directors of CPRL.

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APPENDIX 1     STATEMENT OF CORPORATE GOVERNANCE PRACTICES

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APPENDIX 1     STATEMENT OF CORPORATE GOVERNANCE PRACTICES

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APPENDIX 1     STATEMENT OF CORPORATE GOVERNANCE PRACTICES

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APPENDIX 1     STATEMENT OF CORPORATE GOVERNANCE PRACTICES

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APPENDIX 1     STATEMENT OF CORPORATE GOVERNANCE PRACTICES

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APPENDIX 1     STATEMENT OF CORPORATE GOVERNANCE PRACTICES

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APPENDIX 1     STATEMENT OF CORPORATE GOVERNANCE PRACTICES

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		Computershare Trust Company of Canada Transfer Agent for Canadian Pacific Railway Limited 9th Floor, 100 University Avenue Toronto, Ontario M5J 2Y1 Telephone 1-800-332-0095 514-982-7800 www.computershare.com
		Security Class
		Holder Account Number

Please print in ink. Print in CAPITAL letters inside the grey areas as shown in this example. A B C 1 2 3 X                      Fold

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Notes to Proxy

1.		Every holder has the right to appoint some other person of their choice, who need not be a shareholder, to attend and act on their behalf at the meeting. If you wish to appoint a person other than the persons whose names are printed herein, please insert the name of your chosen proxyholder in the space provided (see reverse). This proxy should be read in conjunction with the accompanying Notice of the Meeting and Management Proxy Circular.
2.		If the securities are registered in the name of more than one owner (for example, joint ownership, trustees, executors, etc.), then all those registered should sign this form. If you are voting on behalf of a corporation or another individual we may require documentation evidencing your power to sign the proxy with signing capacity stated.
3.		The form of proxy should be signed in the exact manner as the name appears on the proxy.
4.		If the form of proxy is not dated, it will be deemed to bear the date on which it is mailed to the holder.
5.		The securities represented by this proxy will be voted as directed by the holder, however, if such a specification is not made in respect of any matter, this proxy will be voted as recommended by Management.

VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK !

Voting by mail is the only method for holdings held in the name of a corporation or holdings being voted on behalf of another individual.
Voting by mail or by Internet are the only methods by which a holder may appoint a person as proxyholder other than the Management nominees named on the reverse of this proxy.
Instead of mailing this proxy, you may choose one of the two voting methods outlined below to lodge your vote. Have this proxy in hand when you call.
Receive Documents Electronically — You can enroll to receive future securityholder communications electronically, after you vote using the Internet. If you don’t vote online, you can still enroll for this service. Follow the instructions below.

To Vote Using the Telephone                      To Vote Using the Internet                      To Receive Documents Electronically (Within Canada and U.S.)

Call the toll free number listed BELOW from a •Go to the following web site: • You can enrol to receive future securityholder touch tone telephone. There is NO CHARGE www.computershare.com/ca/proxy                      communications electronically, after you vote for this call. using the internet. If you don’t vote online, you can still enrol at:

1 866 871-7158 www.computershare.com/ca/consent

You will need to provide your HOLDER ACCOUNT NUMBER and PROXY ACCESS NUMBER listed below.

HOLDER ACCOUNT NUMBER		PROXY ACCESS NUMBER

If you vote by telephone or the Internet, DO NOT mail back this proxy.
Proxies submitted must be received by 5:00 p.m., (Mountain Time), on April 25, 2003.

THANK YOU

 

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This Form of Proxy is solicited by and on behalf of Management.

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Appointment of Proxy

I/We being holder(s) of Common Shares of Canadian Pacific Railway Limited hereby appoint: Robert J. Ritchie, or failing him Edwin V. Dodge, or failing him Michael T. Waites		OR		Print the name of the person you are appointing if this person is someone other than the named appointees

as my/our proxy with full power of substitution and to vote in accordance with the following directions (or if no directions have been given, as the proxy sees fit) and to vote as the proxy sees fit on amendments to such matters and on all other matters that may come before the Annual Meeting of Shareholders of Canadian Pacific Railway Limited to be held in Vancouver, British Columbia, on Monday, April 28, 2003, at 9:00 a.m. (Pacific Time) and at any adjournment or postponement thereof.

1.     Election of Directors

The proposed nominees named in the accompanying Management Proxy Circular are: 01. Stephen E. Bachand, 02. John E. Cleghorn, 03. Jacques Lamarre, 04. James E. Newall, 05. Dr. James R. Nininger, 06. Madeleine Paquin, 07. Michael E.J. Phelps, 08. Roger Phillips, 09. Robert J. Ritchie, 10. The Rt. Hon., The Viscount Weir, 11. Michael W. Wright

      

FOR all nominees listed above		o
FOR all nominees listed above (except for nominees listed to the right from whom I withhold my vote)		o		Please specify the number of the individual(s):
WITHHOLD vote for all nominees		o
2. Appointment of Auditors
Appointment of PricewaterhouseCoopers LLP as Auditors		For	Withhold
		o	o

Authorized Signature(s) — Sign Here — This section must be completed for your instructions to be executed.

I/We authorize you to act in accordance with my/our instructions set out above. I/We hereby revoke any Proxy previously given with respect to the Meeting. If no voting preferences are indicated above, this Proxy will be voted as recommended by Management.

 

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CHAIRMAN’S MESSAGE 2002 was a challenging and successful year for Canadian Pacific Railway.
It was CPR’s first full year as an independent public company since its spin-off from Canadian Pacific
Limited. I am pleased to report that CPR has emerged from this planned and orderly transition as a
reinvigorated organization with renewed purpose and a strong vision.

GOOD GOVERNANCE
IS GOOD BUSINESS.

 

 

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PRESIDENT’S MESSAGE Canadian Pacific Railway had its most profitable year ever in 2002 on the
basis of operating income. While I am pleased with our results, it is imperative that we continue to improve
our performance so that we have an even greater degree of freedom to build our company and grow
shareholder value.

2002 WAS CPR’S MOST
PROFITABLE YEAR EVER.

 

 

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(1) Further information, including non-recurring items and foreign exchange gains and losses on long-term debt, is available on page 2.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis supplements the consolidated financial statements and related notes contained in the 2002 Annual Report to Shareholders. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars.

 

 

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AUDITORS’ REPORT

To the Shareholders of Canadian Pacific Railway Limited
We have audited the consolidated balance sheets of Canadian Pacific Railway Limited as at December 31, 2002 and 2001, and the consolidated statements of income, retained income and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of Canadian Pacific Railway Limited as at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in accordance with generally accepted accounting principles in Canada.

PricewaterhouseCoopers LLP
Chartered Accountants
Calgary, Alberta

February 18, 2003
 

COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA—U.S.
REPORTING DIFFERENCE

In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the Company’s financial statements, such as the change described in Note 3 to the consolidated financial statements. Our report to the shareholders dated February 18, 2003, is expressed in accordance with Canadian reporting standards which do not require a reference to such a change in accounting principles in the Auditors’ Report when the change is properly accounted for and adequately disclosed in the financial statements.

PricewaterhouseCoopers LLP
Chartered Accountants
Calgary, Alberta

February 18, 2003

 

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Approved on behalf of the Board:

J.E. Newall
Director

R. Phillips
Director

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. REORGANIZATION

For the periods prior to October 1, 2001, Canadian Pacific Railway Company (“CPRC”) was a wholly owned subsidiary of Canadian Pacific Limited (“CPL”). On October 1, 2001, as part of a corporate Plan of Arrangement, CPL distributed its interests in CPRC to a newly created, publicly held company, Canadian Pacific Railway Limited (“CPRL”). As a result, CPRC is now a wholly owned subsidiary of CPRL. As CPRL, CPRC and CPRC’s subsidiaries (collectively referred to as “CPR”, “the Company” or “Canadian Pacific Railway”) were under the control of CPL, the transaction was accounted for in a manner similar to a pooling-of-interests and the historical financial information of CPRC became the historical financial information of newly formed CPRL.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
These consolidated financial statements include the accounts of CPRL and all of its subsidiaries. These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).The Company’s accounts have been adjusted to reflect an accounting basis that is more comparable with that employed by other Class I railways in North America. The unconsolidated books and records of the railway entities within the consolidated group continue to be reported according to generally accepted accounting practices for railways as prescribed in the regulations of the Canadian Transportation Agency in Canada and the Surface Transportation Board in the United States.

These consolidated financial statements are expressed in Canadian dollars, except where otherwise indicated. The preparation of these financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management reviews its estimates, including those related to environmental liabilities, pensions and other benefits, depreciable lives of properties, future income tax assets and liabilities as well as legal and personal injury liabilities based upon currently available information. Actual results could differ from these estimates.

Principal Subsidiaries
The following list sets out CPRL’s principal railway operating subsidiaries, including the jurisdiction of incorporation and the percentage of voting securities owned directly or indirectly by CPRL as of the date hereof.

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Revenue Recognition
Railway freight revenues are recognized based on the percentage of completed service method. Other revenue is recognized as service is performed or contractual obligations are met.

Cash and Short-term Investments
Cash and short-term investments include marketable investments that are readily convertible to cash and purchased three months or less from maturity. Short-term investments are stated at cost, which approximates market value.

Foreign Currency Translation
Foreign currency assets and liabilities of the Company’s operations, other than through foreign subsidiaries, are translated into Canadian dollars at the year-end exchange rate for monetary items and at the historical exchange rates for non-monetary items. Foreign currency revenues and expenses are translated at the exchange rate in effect on the dates of the related transactions. All foreign currency gains and losses are included immediately in income.

The accounts of the Company’s foreign subsidiaries are translated into Canadian dollars using the year-end exchange rate for assets and liabilities and the average exchange rates in effect for the year for revenues and expenses. Exchange gains and losses arising from translation of foreign subsidiaries’ accounts are included under Shareholders’ Equity as foreign currency translation adjustments. A portion of the U.S. dollar denominated long-term debt has been designated as a hedge of the net investment in self-sustaining foreign subsidiaries. Unrealized foreign exchange gains and losses on a portion of the U.S. dollar denominated long-term debt are offset against foreign exchange gains and losses arising from translation of self-sustaining foreign subsidiaries’ accounts.

Pensions and Other Benefits
Pension costs are actuarially determined using the projected benefit method prorated over the credited service periods of employees. This method incorporates management’s best estimate of expected plan investment performance, salary escalation and retirement ages of employees. Market-related values are used to calculate the expected return on plan assets. The discount rate used to determine the benefit obligation is based on market interest rates on high quality corporate debt instruments with matching cash flows. Unrecognized actuarial gains and losses in excess of 10 % of the greater of the benefit obligation and the market-related value of plan assets are amortized over the expected average remaining service period of active employees expected to receive benefits under the plan (approximately 12 years). The transitional asset and obligation arising from implementing the Canadian Institute of Chartered Accountants (“CICA”) accounting standard Section 3461 “Employee Future Benefits” effective January 1, 2000, is being amortized over the expected average remaining service period of active employees who were expected to receive benefits under the plan at January 1, 2000 (approximately 13 years).

Benefits other than pensions, including health care, life insurance and workers’ compensation, are actuarially determined and accrued on a basis similar to pension costs.

Materials and Supplies
Inventories of materials and supplies are valued at the lower of average cost and replacement value.

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Properties
Fixed asset additions and major renewals are recorded at cost. The Company capitalizes computer system development costs on major new systems, including the related variable indirect costs. In addition, CPR capitalizes the cost of major overhauls and large refurbishments. When depreciable property is retired or otherwise disposed of in the normal course of business, the book value, less salvage, is charged to accumulated depreciation. The Company will review the carrying amounts of its properties whenever changes in circumstances indicate that such carrying amounts may not be recoverable based on future undiscounted cash flows or estimated net realizable value. When assets are deemed to be impaired, recorded asset values will be revised to the lower of the carrying amount or the net recoverable amount.

Depreciation is calculated on the straight-line basis at rates based on the estimated service life, taking into consideration the projected annual usage of depreciable property, except for rail and other track material in the United States, which is based directly on usage.

Equipment under capital lease is included in properties and depreciated over the period of expected use. Estimated service life used for principal categories of properties is as follows:

Derivative Financial and Commodity Instruments
Derivative financial and commodity instruments may be used from time to time by the Company to manage its exposure to price risks relating to foreign currency exchange rates, interest rates and fuel prices. The Company’s policy is to not utilize derivative financial and commodity instruments for trading or speculative purposes.

The Company enters from time to time into forward exchange contracts to hedge anticipated sales in U.S. dollars, the related accounts receivable as well as future capital acquisitions. Foreign exchange translation gains and losses on foreign currency denominated derivative financial instruments used to hedge anticipated U.S. dollar denominated sales are recognized as an adjustment of the revenues when the sale is recorded. Those used to hedge future capital acquisitions are recognized as an adjustment of the property amount when the acquisition is recorded.

The Company enters into interest rate swaps to manage the risk related to interest rate fluctuations. These swap agreements require the periodic exchange of payments without the exchange of the principal amount on which the payments are based. Interest expense on the debt is adjusted to include the payments owing or receivable under the interest rate swaps.

Unrealized gains and losses on derivative instruments used as hedges are recognized in income in the period that the hedged exposure is recognized in income, which is the same period the instrument is settled.

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Restructuring Accrual and Environmental Remediation
Restructuring charges are recorded in the year detailed exit or restructuring plans are approved and communicated. Restructuring liabilities are recorded at their present value with the related discount being amortized over the payment period. Environmental remediation accruals cover 10 years of a site-specific remediation program. Provisions for labour restructuring and environmental remediation costs are recorded in deferred liabilities except for the current portion, which is recorded in accrued liabilities.

Income Taxes
The Company follows the liability method of accounting for income taxes. Future income tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities. These differences are then measured using substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in income tax rates on future income tax assets and liabilities is recognized in income in the period the change occurs.

Earnings per Share
Basic earnings per share are calculated using the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated using the treasury stock method for determining the dilutive effect of options.

Stock-based Compensation
No compensation expense is recognized when the exercise price equals the market price at the date when stock options are issued to employees under the Company’s authorized stock-based compensation plans. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital. Compensation expense is recognized for stock appreciation rights (“SAR”), deferred share units (“DSU”) and employee share purchase plans by amortizing the cost over the vesting period, with the liability for SARs and DSUs marked-to-market until exercised.

3. CHANGES IN ACCOUNTING POLICY

Foreign Currency Translation
Effective January 1, 2002, the Company adopted retroactively with restatement the CICA accounting standard for the treatment of foreign exchange gains and losses. The result of this restatement was to reduce opening retained income at January 1, 2000, by $97.5 million, decrease other assets and deferred charges at January 1, 2000, by $120.0 million and decrease future income taxes at January 1, 2000, by $22.5 million. The restatement also reduced net income by $29.7 million and $37.9 million and reduced basic and fully diluted earnings per share by 18 cents and 24 cents for the years ended December 31, 2000 and 2001, respectively.

Under the new standard, foreign exchange gains and losses on long-term debt can no longer be deferred and amortized to income. As a result, long-term debt of approximately CDN$2.3 billion denominated in U.S. dollars is translated into Canadian dollars using the period-end exchange rate, with the effect of the change from the previous period-end rate reflected in income. Approximately CDN$1.3 billion of the long-term debt is designated as a hedge of the net investment in self-sustaining U.S. subsidiaries.

Stock-based Compensation
Effective January 1, 2002, the Company adopted prospectively Section 3870 “Stock-based Compensation and Other Stock-based Payments.” The effect on net income of adopting this standard was immaterial.

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Hedging Transactions
In November 2001, the CICA issued Accounting Guideline 13 (“AcG 13”) “Hedging Relationships,” which will be effective for years beginning on or after July 1, 2003. AcG 13 addresses the identification, designation, documentation, and effectiveness of hedging transactions for the purposes of applying hedge accounting. It also establishes conditions for applying, and deals with the discontinuance of hedge accounting. In December 2002, the CICA approved, subject to written ballot, certain amendments to AcG 13. These amendments are expected to be finalized in the first half of 2003.

Under the new guideline, the Company will be required to document its hedging transactions and explicitly demonstrate the hedges are sufficiently effective in order to continue accrual accounting for positions hedged with derivatives. The effect on net income of adopting this guideline will be immaterial.

Special-purpose Entities
The Company expects to early adopt, retroactively without restatement the accounting rules described in the recent CICA draft guideline “Consolidation of Special-Purpose Entities” (“SPE”) should the new rules be approved by the CICA. The draft guideline requires the primary beneficiary of an SPE to consolidate the SPE when the majority equity owner has not provided the SPE with sufficient funding through equity to allow it to finance its activities without relying on financial support from other parties with an interest in the SPE. CPR has one SPE of which it is the primary beneficiary and meets the criteria for consolidation. The impact of consolidating the SPE will be to increase net properties by approximately $208.0 million and long-term debt by approximately $209.0 million.

Guarantees
In December 2002, the CICA approved, subject to written ballot, the draft guideline relating to guarantees. The draft guideline requires disclosure of key information about certain types of guarantee contracts that require payments contingent on specified types of future events, and is effective for periods beginning on or after January 1, 2003. The Company expects to adopt this guideline in the first quarter of 2003.

Asset Retirement Obligations
In December 2002, the CICA approved, subject to written ballot, a new Handbook section “Asset Retirement Obligations” to replace the current guidance on future removal and site restoration costs included in the CICA accounting standard 3061 “Property, Plant and Equipment.” The standard is effective for years beginning on or after January  1, 2004. The standard requires recognition of a liability at its fair value for the obligation associated with the retirement of a tangible long-lived asset. A corresponding asset retirement cost would be added to the carrying amount of the related asset and amortized to expense over the useful life of the asset. The effect of adopting this standard, on January 1, 2004, has not yet been determined.

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4. OTHER CHARGES

Included in Other above are charges related to the early redemption of CPR’s 8.85 % Debentures –specifically, a call premium of $17.5 million (see Note 13) and accelerated amortization of deferred financing charges of $2.5 million, which is offset by $27.0 million of interest income on an income tax settlement related to prior years (see Note 6).

5. INTEREST EXPENSE

No interest was paid to former affiliates during 2002 (2001 – $2.1 million; 2000 – $25.6 million).

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6. INCOME TAXES

The following is a summary of the major components of the Company’s income tax expense:

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The provision for future income taxes arises from temporary differences in the recognition of revenues and expenses for financial statement and income tax purposes. The temporary differences comprising the future income tax assets and liabilities are as follows:

The Company’s consolidated effective income tax rate differs from the expected statutory tax rate. Expected income tax expense at statutory rates is reconciled to income tax expense as follows:

The Company has $74.0 million of unused non-capital tax losses for U.S. tax purposes expiring between 2004 and 2017, as well as $800.0 million of capital losses available indefinitely for Canadian tax purposes for which no future income tax asset has been recognized.

During 2002, as a result of a favourable decision by the Federal Court of Appeal (the Queen v. Canadian Pacific Limited (legally renamed Canadian Pacific Railway Company in 1996)), the Company reported a recovery of income taxes of approximately $72.0 million.

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7. EARNINGS PER SHARE

At December 31, 2002, the number of shares outstanding was 158.5 million (2001 – 158.4 million).

Basic earnings per share have been calculated using net income for the year divided by the weighted average number of CPRL shares outstanding during the year. For the year ended December 31, 2001, the weighted average number of shares was calculated using the number of shares issued as a result of the corporate reorganization for the first nine months of 2001 (see Note 1) and the actual number of shares outstanding for the last three months of the year. For the year ended December 31, 2000, basic earnings per share have been calculated using the number of shares outstanding immediately after completion of the corporate reorganization.

Diluted earnings per share have been calculated using the treasury stock method, which gives effect to the dilutive value of outstanding options. At December  31,2002, there were 0.7 million replacement options outstanding that had been exchanged after the spin-off for CPL stock options held by CPL employees. In 2002,1.6 million stock options were issued to CPR employees (2001 – 2.7 million new options). For the year ended December 31, 2000, the dilutive effect of stock options was calculated based on the 0.9 million replacement options outstanding immediately after completion of the corporate reorganization.

The number of shares used in the earnings per share calculations is reconciled as follows:

8. SALE OF ACCOUNTS RECEIVABLE

The Company has a securitization agreement involving the non-recourse sale of accounts receivable on a revolving basis, which at December 31, 2002, amounted to $132.0 million (2001 – $132.0 million). Cash proceeds on these receivables were $120.0 million (2001 – $120.0 million) with $12.0 million (2001 – $12.0 million) having been held back as a reserve to be released to the Company upon termination of the agreement. Discounts on the revolving sales and program fees of $3.5 million in 2002 (2001 – $5.7 million; 2000 – $7.1 million) were included in the income statement as part of Other Charges (see Note 4).The reserve is valued on the Company’s books at an amount equal to the undiscounted expected future cash flows. The Company acts as the collector of the receivable but has no claim against the proceeds of collection of the securitized receivables.

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9. CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATED TO OPERATIONS

10. INVESTMENTS

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11. NET PROPERTIES

At December 31, 2002, net properties included assets held under capital lease of $399.3 million at cost (2001 – $399.8 million), and related accumulated depreciation of $57.8 million (2001 – $44.2 million).

During the year, capital assets were acquired under the Company’s capital program at an aggregate cost of $551.1 million (2001 – $688.3 million), none of which were acquired by means of capital leases (2001 – $133.0 million). During 2001, operating leases on certain rolling stock were converted to capital leases, increasing properties by $64.8 million. Cash payments related to capital purchases were $558.5 million in 2002 (2001 – $566.4 million), including payments for capital purchases contained in accounts payable in prior years. At December 31, 2002, no amounts (2001 – $7.4 million) remained in accounts payable related to the above purchases.

12. OTHER ASSETS AND DEFERRED CHARGES

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13. LONG-TERM DEBT

At December 31, 2002, long-term debt denominated in U.S. dollars was CDN$2,661.2 million (2001 – CDN$3,084.3 million).

Interest on each of the following instruments is paid semi-annually. Interest on the 6.250 % Notes and the 7.125 % and 6.875 % Debentures is paid on April 15 and October 15 of each year, with final interest payment and principal repayment for the 6.875 % Debentures occurring on April 15, 2003. Interest on the 9.450 % Debentures is paid on February 1 and August 1 of each year. All of these notes and debentures are unsecured, but carry a negative pledge.

The 8.850 % Debentures were called in June 2002. As a result of the early redemption, CPR was required to pay a call premium of $17.5 million and accelerate the amortization of the related remaining deferred financing charges of $2.5 million. Both these items are included in Other Charges (see Note 4).

The Medium Term Notes are unsecured but carry a negative pledge. Interest is paid semi-annually in arrears on June 28 and December 28 of each year.

The Secured Equipment Notes are full recourse obligations of the Company secured by a first charge on specific units of railway rolling stock. The Company is making semi-annual payments of interest in the amount of $8.1 million on April 1 and October 1 of each year, up to and including October 1, 2004. Thereafter, the Company will pay on April 1 and October 1 of each year, commencing April 1, 2005, up to and including October 1, 2024, equal blended semi-annual payments of principal and interest of $10.9 million.

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The Equipment Trust Certificates are secured by specific locomotive units. Semi-annual interest payments of US$4.5 million are being made on January 15 and July 15 of each year, up to and including January 15,2005. Thereafter, semi-annual payments will vary in amount and will be interest-only payments or blended principal and interest payments. Final payment of principal is due January 15,2021.

The Secured Equipment Loan is secured by specific locomotive units. The interest rate is floating and is calculated based on a six-month average CDOR (calculated based on an average of Bankers’ Acceptance rates) plus 53 basis points (2002 – 3.13 %; 2001 – 4.67 %; and 2000 – 6.54 %). The Company makes blended payments of interest and principal semi-annually on February 1 and August 1 of each year.

The Consolidated Debenture Stock, created by an Act of Parliament of 1889, constitutes a first charge upon and over the whole of the undertaking, railways, works, rolling stock, plant, property and effects of the Company, with certain exceptions.

Annual maturities and sinking fund requirements, excluding those pertaining to capital leases, for each of the five years following 2002 are (in millions): 2003 – $396.8; 2004 – $2.5; 2005 – $260.8; 2006 – $14.7; 2007 – $15.1.

At December 31, 2002, capital lease obligations included in long-term debt were as follows:

14. FINANCIAL INSTRUMENTS

Forward Foreign Currency Exchange Contracts
Exposure to changes arising from fluctuations in exchange rates between Canadian and U.S. dollars on future revenue streams and certain U.S. dollar expenditures has been managed by selling or purchasing forward U.S. dollars at fixed rates in future periods, which are accounted for as cash flow hedges. At December 31, 2002, the Company had entered into foreign exchange contracts to purchase approximately US$40.0 million (2001 – contracts to sell approximately US$170.0 million) in January 2003 at an effective exchange rate of 1.56 (2001 – 1.45 to 1.47). At December 31, 2002, the unrealized gain on forward foreign currency exchange contracts was CDN$0.9 million (unrealized loss in 2001 – CDN$25.0 million).

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Commodity Contracts
Exposure to fluctuations in fuel prices has been managed by selling or purchasing crude oil futures. At December 31, 2002, the Company had entered into futures contracts, which are accounted for as cash flow hedges, to purchase approximately 5,116,000 barrels (2001 – 5,755,000) over the years 2003 to 2007 at average annual prices ranging from US$22.20 to US$20.83 per barrel (2001 – US$23.79 to US$20.68). At December 31, 2002, the unrealized gain on crude oil futures was CDN$26.3 million (unrealized loss in 2001 – CDN$19.4 million).

Interest Rate Contracts
At December 31, 2002, the Company had an outstanding interest rate swap agreement, accounted for as a fair value hedge, for a nominal amount of CDN$40.8 million (2001 – CDN$40.8 million) which converts a portion of its fixed interest rate liability into a variable rate liability.

The following table discloses the terms of the swap agreement in place at December 31, 2002:

The Company is also party to agreements that have established the borrowing rate on CDN$200 million of long-term debt, expected to be issued within the first four months of 2003. Unrealized losses on this arrangement, which is accounted for as a cash flow hedge, are currently $13.6 million and are expected to be amortized over the life of the issue.

Credit Risk Management
The Company is exposed to credit losses in the event of non-performance by counterparties to financial instruments. However, the Company does not anticipate such non-performance as dealings have been with counterparties of high credit quality. In addition, the Company believes there are no significant concentrations of credit risk.

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Interest Rate Exposure and Fair Values
The Company’s exposure to interest rate risk along with the total carrying amounts and fair values of its financial instruments is summarized in the following table:

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies. However, considerable judgment is necessary to develop these estimates. Accordingly, the estimates presented herein are not necessarily indicative of what the Company could realize in a current market exchange. The use of different assumptions or methodologies may have a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

•

Short-term financial assets and liabilities are valued at their carrying amounts as presented in the balance sheet, which are reasonable estimates of fair value due to the relatively short period to maturity of these instruments.

•

The fair value of publicly traded long-term debt is determined based on market prices at December 31,  2002. The fair value of other long-term debt is estimated based on rates currently available to the Company for long-term borrowings with terms and conditions similar to those borrowings in place at the balance sheet date.

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•

The fair value of derivative instruments is estimated as the unrealized gain or loss calculated based on market prices or rates at December 31, 2002, which generally reflects the estimated amounts the Company would receive or pay to terminate the contracts at the balance sheet date.

15. DEFERRED LIABILITIES

Fibre optics rights-of-way deferred revenue is being amortized to income on a straight-line basis over the related lease terms.

16. RESTRUCTURING ACCRUAL AND ENVIRONMENTAL REMEDIATION

At December 31, 2002, the provision for restructuring and environmental remediation was $441.8 million (2001 – $551.0 million). This provision is primarily comprised of labour liabilities for restructuring plans that are substantially implemented as well as the liability for a multi-year soil remediation program. Labour liabilities reflect the expected residual payments to protected employees.

During 2002, CPR began new restructuring initiatives to reduce costs by eliminating 85 positions. The reductions occurred mostly in administrative areas. These initiatives required an increase to the provision of $6.8 million. This change was offset by a net reduction of $3.9 million of previously accrued initiatives due to net experience gains and by an additional $2.3 million present value discount due to a delay in expected payments.

During 2001, CPR announced an additional restructuring initiative to reduce costs by eliminating 500 positions in the area of administration as well as in operations, particularly fleet maintenance. The new initiative required an increase to the provision of $59.5 million (2000 – $18.2 million). This change was offset by a net reduction of $72.7 million (2000 – $24.1 million) of previously accrued initiatives. The reductions resulted from a decrease in the number of surplus crews due to a projected increase in traffic volumes, modifications in the regulatory environment, cost reductions from rule modifications in the latest collective agreements and experience gains.

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17. SHAREHOLDERS’ EQUITY

Reorganization
During 2001, as part of a corporate reorganization, CPL distributed its interest in CPRC to a newly created publicly held company, CPRL. CPRL Common Shares were issued at a ratio of 1:2 for each CPL share outstanding. The number of CPRL shares outstanding on October 5,2001, being the date that former shareholders of CPL became shareholders of CPRL, was 158.3 million. The CPRC Ordinary Shares outstanding at the time of reorganization are now wholly owned by CPRL.

Authorized and Issued Share Capital
The Company’s Articles of Incorporation authorize for issuance an unlimited number of Common Shares and an unlimited number of First Preferred Shares and Second Preferred Shares. At December 31,2002, no Preferred Shares had been issued.

An analysis of Ordinary and Common Share balances is as follows:

Contributed Surplus
During 2001, the Company paid net capital contributions totalling $8.3 million to former affiliates.

Foreign Currency Translation Adjustments
Included in equity are the following cumulative foreign currency translation adjustments:

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18. PENSIONS AND OTHER BENEFITS

Pensions and Other Benefits, Excluding Post-employment Restructuring Benefits
The Company has both defined benefit (“DB”) and defined contribution (“DC”) pension plans.

The DB plans provide for pensions based principally on years of service and compensation rates near retirement. Annual contributions to the DB plans, which are actuarially determined, are made on the basis of not less than the minimum amounts required by federal or provincial pension supervisory authorities.

Other benefits include post-retirement medical and life insurance for pensioners, and post-employment workers’ compensation benefits, which are based on Company-specific claims.

At December 31, the net benefit (credit) expense for DB pension plans and other benefits included the following components:

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Information about the Company’s DB pension plans and other benefits, in aggregate, is as follows:

At December 31, 2002, fund assets consisted primarily of listed stocks and bonds, including 760,000 CPRL Common Shares (2001 — 775,000) at a market value of $23.7 million (2001 — $24.9 million).

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Included in the benefit obligation and fair value of fund assets at year end were the following amounts in respect of plans where the benefit obligation exceeds the fund assets:

Actuarial assumptions used at December 31 are approximately:

Effective January 1,2001, the Company offered Canadian non-unionized employees the option to convert to a DC plan. The DC plan provides a pension based on total employee and employer contributions plus investment income earned on those contributions. Employee contributions are based on a percentage of salary. The Company matches employee contributions to a maximum percentage each year. In 2002, the net expense of this plan, which generally equals the employer’s required contribution, was $2.6 million (2001 — $2.6 million).

Post-employment Restructuring Benefits
The Company accrues post-employment labour liabilities as part of its restructuring accruals (see Note 16). The labour portion of the Company’s accrued restructuring liability was as follows:

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19. STOCK-BASED COMPENSATION

At December 31, 2002, the Company had several stock-based compensation plans, including a stock option plan, tandem SARs, a DSU plan, and an employee stock savings plan. These plans resulted in a compensation cost in the year of $7.4 million (2001 – $4.7 million).

In 2001, charges of $16.6 million for stock compensation resulting from increases in share values between the date the spin-off was announced on February 12, 2001, and the date the spin-off was completed on October 1, 2001, were included in the income statement as part of Spin-off Related, Incentive Compensation and Unusual Charges.

Replacement Options and SARs
Due to the reorganization of CPL, all CPL employees who held CPL options at the date of the spin-off received in exchange for their CPL options fully vested replacement options and SARs in the spun-off companies, according to the reorganization ratio used for Common Shares. The exercise price of the CPL options and SARs was allocated among the replacement options and SARs of each of the spun-off companies based on a formula using the weighted average trading price of the spun-off companies for their first 10 days of trading.

By agreement between CPRL and its former affiliates, the difference between the strike price and the exercise price of SARs of the former affiliates held by CPRL employees is recognized as an expense by CPRL. The difference between the strike price and the exercise price of CPRL SARs held by employees of the former affiliates is recovered from the former affiliates.

SARs are attached to 50 % of the options and there is a one-to-one cancellation ratio between those options and SARs.

Stock Option Plans and SARs
Under the Company’s stock option plans, options are granted to eligible employees and all Directors to purchase Common Shares of the Company at a price equal to the market value of the shares at the grant date. Consequently, these options do not result in a charge to net income. Pursuant to the employee plan, regular options may be exercised upon vesting, which is between 24 and 36 months after the grant date. Performance options vest after 48 months unless certain performance targets are achieved, in which case vesting is accelerated.

At December 31, 2002, there were 6,373,659 (2001 – 7,778,930) Common Shares available for the granting of future options under the stock option plans out of the 11,500,000 Common Shares currently authorized.

With the grant of an option, employees may be simultaneously granted SARs equivalent to one-half the number of regular options granted. A SAR entitles the holder to receive payment of an amount equal to the excess of the market value of a Common Share at the exercise date of the SAR over the related option exercise price. On an ongoing basis, a liability for SARs is accrued on the incremental change in the market value of the underlying stock and amortized to income over the vesting period. SARs may be exercised no earlier than two years and no later than 10 years after the grant date.

Where an option granted is a tandem award, the holder can choose to exercise an option or a SAR of equal intrinsic value.

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No options expired during 2002. The following is a summary of the Company’s fixed stock option plan as of December 31:

At December 31, 2002, the details of the stock options outstanding were as follows:

Deferred Share Unit Plan
The Company established the DSU plan as a means to compensate and assist in attaining share ownership targets set for certain key employees and Directors. A DSU entitles the holder to receive, upon redemption, a cash payment equivalent to the market value of a Common Share at the redemption date. DSUs vest over various periods of up to 36 months and are only redeemable for a specified period after employment is terminated.

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Key employees may choose to receive DSUs in lieu of cash payments for certain incentive programs. In addition, when acquiring Common Shares to meet share ownership targets, key employees may be granted a matching number of DSUs up to 33 % of the shares and DSUs acquired during the first six months after becoming eligible under the plan and, thereafter, up to 25 %. Key employees have five years to meet their ownership targets.

An expense to income for DSUs is recognized over the vesting period for both the initial subscription price and the change in value between reporting periods. At December 31,2002, there were 214,911 (2001 – 28,669) DSUs outstanding. No DSUs were redeemed in 2002.

Employee Share Purchase Plan
In October 2001, the Company created an employee share purchase plan whereby both employee and Company contributions are used to purchase shares on the open market for the employee. The Company’s contributions are expensed over the one-year vesting period.

For those employees who enrolled in the plan prior to December 31,2001, the Company contributes $1,000 (US$650) for the first $1,000 contributed by the employee. After a threshold of $1,000 is reached, and for employees who join the plan subsequent to December 31,2001, the Company matches $1 for every $3 contributed by the employee.

All employees have the opportunity to participate in the program to a maximum of 6 % of annual salary.

At December 31,2002, there were 9,746 (2001 – 10,087) participants in the plan. The total number of shares purchased in 2002 on behalf of participants, including the Company contribution, was 1,023,624 (2001 – 185,661) shares. In 2002, the Company’s contributions totalled $11.3 million (2001 – $4.2 million).

Additional Fair Value Disclosure
The issuance or exercise of the stock options authorized by CPR’s stock compensation plan does not result in a charge to income when the exercise price equals the market price of the stock on the grant date, while an expense for SARs is recognized over the vesting period on the incremental change in the market value of the underlying stock between reporting periods. Had CPR used the fair value method, the fair value of options granted on or after January 1,2002, would have been amortized to compensation expense over the vesting period of the options. Under the fair value method, CPR’s pro forma basis net income and earnings per share would have been as follows:

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Under the fair value method, the pro forma fair value of options at the grant date calculated using the Black-Scholes option-pricing model is estimated to be $8.4 million. The weighted average assumptions were approximately:

20. RELATED PARTY TRANSACTIONS

No rail services were provided to related parties in 2002. For the first nine months of 2001, leading up to the date of the spin-off, $328.2 million of rail services were provided to former affiliates (for the 12 months ended December 31, 2000 – $417.7 million). No amounts were included in accounts receivable at December 31, 2002 (2001 – $23.1 million) as a result of these transactions.

21. COMMITMENTS AND CONTINGENCIES

In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damage to property. The Company maintains provisions it considers to be adequate for such actions. While the final outcome with respect to actions outstanding or pending at December 31, 2002, cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company’s financial position or results of operations.

At December 31, 2002, the Company had committed to future capital expenditures amounting to $197.2 million.

At December 31, 2002, the Company had a committed unused line of credit of $666.0 million available for short-term and long-term financing, repayable three years after signing and prepayable at the Company’s option. The interest rate varies based on bank prime, Bankers’ Acceptances or the London InterBank Offered Rate.

Minimum payments under operating leases were estimated at $486.0 million in aggregate, with annual payments in each of the five years following 2002 of (in millions): 2003 – $131.6; 2004 – $104.0; 2005 – $93.0; 2006 – $71.5; 2007 – $48.6.

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22. SEGMENTED INFORMATION

Operating Segment
The Company operates in only one operating segment: rail transportation. The financial information presented at this level is used by management for decision making.

No customer accounts for more than 10 % of the Company’s revenue.

Geographic Information

Consolidating Information – 2002

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Consolidating Information – 2001

Consolidating Information – 2000

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The condensed income statement and balance sheet for the Canadian operations have been prepared in accordance with the Uniform Classification of Accounts issued by the Canadian Transportation Agency in Canada. The changes required to consolidate the Canadian operations are identified above as consolidating entries with the exception of amounts adjusting current assets and liabilities, which are eliminations of inter-company balances between countries.

23. RECLASSIFICATION

Certain prior years’ figures have been reclassified to conform with the presentation adopted for 2002.

24. SUPPLEMENTARY DATA

Reconciliation of Canadian and United States Generally Accepted Accounting Principles
The consolidated financial statements of the Company have been prepared in accordance with GAAP in Canada. The material differences between Canadian and U.S. GAAP relating to measurement and recognition are explained below, along with their effect on the Company’s statement of consolidated income and balance sheet. Certain additional disclosures as required under U.S. GAAP have not been provided, as permitted by the Securities Exchange Commission.

Accounting for Derivative Instruments and Hedging
Effective January 1, 2001, Financial Accounting Standards Board (“FASB”) Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“FASB 133”), and FASB Statement No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities” (“FASB 138”) became effective for U.S. GAAP. FASB 133 and FASB 138 permit hedging of cash flows when specific documentation is in place from inception of the hedge and the hedge meets effectiveness testing on an ongoing basis. All derivative instruments are recognized on the balance sheet at fair value with changes in fair value being recorded in comprehensive income until the hedged transaction occurs, at which time these amounts are included in the income statement. Under Canadian GAAP, derivative instruments are not recorded on the balance sheet at fair value and gains or losses are included in the income statement when the hedged transaction occurs.

Prior to January 1, 2001, under FASB Statement No. 52 “Foreign Currency Translation” (“FASB 52”) for U.S. reporting purposes, forward foreign exchange contracts associated with anticipated future transactions that do not constitute firm commitments are recognized in the financial statements at fair value, with any resulting gains or losses immediately reflected in income. Under Canadian GAAP, certain of these forward foreign exchange contracts qualify as hedges for accounting purposes. Consequently, the fair value of these unsettled contracts is not reflected in the financial statements and any realized gains or losses are only recognized at the time of completion of the hedged transactions.

Pensions and Post-retirement Benefits
Effective January 1, 2000, the Company adopted prospectively CICA Section 3461 “Employee Future Benefits.” Canadian GAAP policy requires amortization of actuarial gains and losses only if they exceed 10 % of the greater of the benefit obligation and the market-related value of the plan assets (“the corridor”). This harmonizes the Canadian GAAP treatment with FASB Statement No. 87 “Employers’ Accounting for Pensions” (“FASB 87”) and FASB Statement No. 106 “Employers’ Accounting for Post-retirement Benefits Other Than Pensions” (“FASB 106”). Previously, all actuarial gains and losses were amortized under Canadian GAAP.

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Upon transition to CICA Section 3461 effective January 1, 2000, all unamortized gains and losses, including prior service costs, were accumulated into a net transitional asset which is being amortized to income. This created a difference compared with U.S. GAAP in 2002, 2001 and 2000, under which prior service costs continued to be amortized over the expected average remaining service period and all other net gains accumulated prior to January 1, 2000, fell within the corridor.

Post-employment Benefits
Post-employment benefits are covered by the CICA recommendations for accounting for employee future benefits. Consistent with accounting for post-retirement benefits, the new policy requires amortization of actuarial gains and losses only if they fall outside of the corridor. Under FASB Statement No. 112 “Employers’ Accounting for Post-employment Benefits,” such gains and losses are included immediately in income.

Termination Benefits
Termination benefits are also covered by CICA Section 3461. Upon transition to this accounting policy effective January 1, 2000, a net transitional asset was created and is being amortized to income. Under U.S. GAAP, benefits are expensed when paid.

Stock-based Compensation
Under FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation,” a compensation expense must be recorded if the intrinsic value of stock options is not exactly the same immediately before and after an equity restructuring. As a result of the CPL corporate reorganization (see Note 1), CPL underwent an equity restructuring, which resulted in replacement options in new CPRL stock having a different intrinsic value after the restructuring than prior to it. Canadian GAAP does not require revaluation of these options.

Internal Use Software
Under the American Institute of Certified Public Accountants Statement of Position No. 98-1 “Accounting for the costs of computer software developed or obtained for internal use,” certain costs, including preliminary project phase costs, are required to be expensed as incurred. These costs are capitalized under Canadian GAAP.

Capitalization of Interest
The Company expenses interest related to capital projects undertaken during the year. FASB Statement No. 34 “Capitalization of Interest Cost” requires these interest costs to be capitalized.

Income Taxes
Effective January 1, 2000, the Company adopted retroactively without restatement CICA Section 3465 “Future Income Taxes.” This policy, which requires the use of the liability method, is effectively identical to FASB Statement No. 109 “Accounting for Income Taxes” (“FASB 109”), thus eliminating prior-year differences. On adoption of CICA Section 3465 in 2000, the cumulative adjustment was taken to retained earnings for Canadian GAAP. Canadian GAAP requires the use of substantively enacted tax rates for the calculation of future income taxes, whereas under FASB 109, only enacted tax rates can be used. In the period 2000 to 2002, reduced income tax rates were substantively enacted in Canada, for which, under U.S. GAAP, the benefit could not be recognized until the rate changes were enacted.

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Comprehensive Income
FASB Statement No. 130 “Reporting Comprehensive Income” requires disclosure of the change in equity from transactions and other events from non-owner sources during the period. Canadian GAAP does not require similar disclosure. In 2002, other comprehensive income arose from foreign currency translation on the net investment in self-sustaining foreign subsidiaries as well as other foreign currency translation adjustments, foreign currency translation related to long-term debt designated as a hedge of the net investment in self-sustaining foreign subsidiaries, minimum pension liability and derivative instrument adjustments. In 2001 and 2000, other comprehensive income arose from foreign currency translation, minimum pension liability and derivative instrument adjustments.

Assets Purchased Through Conditional Sales Agreement
The Company acquired assets through lease agreements which included conditional sales agreements and a put option to sell the assets to a third party in the future. Under Canadian GAAP, this transaction meets the accounting guidelines for an operating lease and has been accounted for as such. Under U.S. GAAP, FASB Statement No. 13 “Accounting for Leases” states that conditional sales agreements must be accounted for as capital leases.

Impairment or Disposal of Long-lived Assets
On January 1, 2002, the Company adopted FASB Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FASB 144”). FASB 144 supersedes FASB Statement No. 121 “Accounting for the Impairment of Long-Lived Assets to be Disposed of. “FASB 144 applies to all long-lived assets and, consequently, amends Accounting Principles Board Opinion No. 30 “Reporting Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” The impact of adopting FASB 144 was immaterial.

Debt Extinguishment
In the second quarter of 2002, CPR early adopted prospectively FASB Statement No. 145 “Rescission of FASB Statements No. 4,44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“FASB 145”). During 2002, CPR redeemed long-term debt that was due 2022 and incurred a penalty for early redemption. Under U.S. GAAP, this transaction is now treated the same as under Canadian GAAP. There were no such transactions in 2001 and 2000 that would require restatement under FASB 145.

Additional Minimum Pension Liability
In accordance with FASB 87, the Company recorded an additional minimum pension liability for underfunded plans representing the excess of unfunded accumulated benefit obligation over previously recorded pension cost liabilities. The increase in liabilities is charged directly to shareholders’ equity, net of related deferred income taxes. Under Canadian GAAP, there is no requirement to set up a minimum pension liability based on an annual funding test.

Future Accounting Changes
In June 2001, the FASB issued Statement No. 143 “Accounting for Asset Retirement Obligations” (“FASB 143”), which requires that an asset retirement obligation be recognized as a liability, measured at fair value, in the period in which the obligation is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and amortized to expense over the asset’s useful life. FASB 143 is effective for fiscal years beginning after June 15, 2002. The effect on net income of adopting this standard on January 1, 2003, has not yet been determined.

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In June 2002, the FASB issued Statement No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“FASB 146”). FASB 146: addresses accounting and reporting of costs associated with exit or disposal activities, nullifying Emerging Issues Task Force Abstract No. 94-3; requires recognition and measurement of a liability, at fair value, for a cost associated with an exit or disposal activity only when the liability is incurred; and, specifies that a liability for such a cost is incurred when the definition of a liability in FASB Statement No. 6 is met. FASB 146 is effective for exit or disposal activities initiated after December 31,200. The Company adopted this standard prospectively on January 1, 2003. The impact of adopting this standard is not anticipated to be material.

In January 2003, the FASB issued Financial Interpretation No. 46 “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 requires that when the majority equity owner of a variable interest entity holds an equity ownership representing less than 10 % of the total assets of the variable interest entity, the primary beneficiary of the variable interest entity is required to consolidate the variable interest entity. FIN 46 is effective for fiscal periods beginning after June 15, 2003, for variable interests acquired before February 1,2003, and immediately for variable interests created after January 31, 2003. Effective January 1, 2003, the Company early adopted FIN 46 prospectively. The Company has one variable interest entity of which it is the primary beneficiary and meets the criteria for consolidation. The impact of consolidating the variable interest entity will be to increase net properties by approximately $208.0 million and long-term debt by approximately $209.0 million.

In December 2002, the FASB issued Financial Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5,57 and 107” (“FIN 45”). FIN 45 requires that, effective for years beginning after September 15, 2002, a guarantor recognizes, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken in issuing the guarantee. The impact of adopting FIN 45 on January 1, 2003, is not anticipated to be material.

Statement of Cash Flows
There are no material differences in the statement of consolidated cash flows under U.S. GAAP.

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Comparative Income Statement
Net income is reconciled from Canadian to U.S. GAAP in the following manner:

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A summary of railway operating income resulting from Canadian and U.S. GAAP differences is as follows:

Balance Sheet
Had the consolidated balance sheet been prepared under U.S. GAAP, the differences would have been as follows (higher/(lower)):

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Shareholder Information

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Shareholder Administration
Common Shares
Computershare Trust Company of Canada, with transfer facilities in Montreal, Toronto, Calgary and Vancouver, serves as transfer agent and registrar for the Common Shares in Canada. Computershare Trust Company of New York serves as co-transfer agent and co-registrar for the Common Shares in New York.

For information concerning dividends, lost share certificates and estate transfers or for change in share registration or address, please contact the transfer agent and registrar by telephone at 1-800-332-0095 or (514) 982-7800, by fax at 1-888-453-0330, or by e-mail at caregistryinfo@computershare.com, or write to:

Computershare Trust Company of Canada
9th Floor,100 University Avenue, Toronto, Ontario Canada M5J 2Y1

4% Consolidated Debenture Stock
Inquiries with respect to the Canadian Pacific Railway 4 % Consolidated Debenture Stock should be directed to the transfer agent and registrar as follows:

for stock denominated in U.S. currency – The Bank of New York at (212) 815-5346, or by e-mail at vmack@bankofny.com; and

for stock denominated in pounds sterling – BNY Trust Company of Canada at (416) 933-8504, or by e-mail at mredway@bankofny.com.

Market for Securities
The Common Shares of Canadian Pacific Railway Limited are listed on the Toronto and New York stock exchanges. The Debenture Stock is listed on the London, England Stock Exchange (sterling) and on the New York Stock Exchange (U.S. currency).

Trading Symbol
Common Shares – CP

Duplicate Annual Reports
While every effort is made to avoid duplication, some Canadian Pacific Railway Limited registered shareholders may receive multiple copies of shareholder information mailings such as this Annual Report. Registered shareholders who wish to consolidate any duplicate accounts that are registered in the same name are requested to write to Computershare Trust Company of Canada.

Direct Deposit of Dividends
Registered shareholders are offered the option of having their Canadian dollar dividends directly deposited into their personal bank accounts in Canada on the dividend payment dates. Shareholders who receive their dividends in Canadian currency may obtain a direct deposit enrolment form from Computershare Trust Company of Canada.

Corporate Governance
Canadian Pacific Railway’s Board of Directors and its management are committed to a high standard of corporate governance. We believe that effective corporate governance calls for the establishment of processes and structures that contribute to the sound direction and management of the Corporation’s business, with a view to enhancing shareholder value.

Under the rules of the Toronto Stock Exchange (“TSX”), CPR is required to disclose information relating to its system for corporate governance. CPR’s disclosure addressing each of the TSX’s guidelines is set out in Appendix 1 to the Management Proxy Circular issued in connection with the 2003 Annual Meeting of Shareholders.

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please recycle.                          designed and produced by SMITH + ASSOCIATES

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INGENUITY AT CPR New business ideas, creative solutions to opportunities and an entrepreneurial spirit distinguish CPR in the rail industry and in the marketplace. In 2002, we demonstrated that ingenuity at CPR has taken many forms as we strive to deliver value to our customers and our shareholders.

 

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OUR VISION CPR’s vision is to be the preferred business partner in rail-based transportation services. To provide our customers the best service possible, we organize our rail freight business into three groups — Bulk, Carload and Intermodal & Automotive — because each group has its own distinct service and equipment requirements.

 

 

 

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Office of the Corporate Secretary
Suite 2000 Gulf Canada Square
401 — 9th Avenue SW
Calgary Alberta T2P 4Z4
Tel (403) 319-6171 Fax (403) 319-6770

Canadian Pacific Railway

March 18, 2003

Alberta Securities Commission
British Columbia Securities Commission
Saskatchewan Securities Commission
Manitoba Securities Commission
Ontario Securities Commission
Quebec Securities Commission
Office of the Administrator, New Brunswick
Nova Scotia Securities Commission
Registrar of Securities, Prince Edward Island
Department of Government Services and Lands, Newfoundland and Labrador

Dear Sirs:

     Re: Canadian Pacific Railway
              Financial Statements — December 31, 2002

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Pursuant to section 8.4 of National Instrument 44-102 Shelf Distributions, enclosed please find updated earnings coverage calculations for the period ended December 31, 2002. This information is provided in connection with the filing by Canadian Pacific Railway Limited (“CPRL”) of its comparative consolidated financial statements for the twelve months ended December 31, 2002 and in relation to the Medium Term Note program of Canadian Pacific Railway Company, a wholly-owned subsidiary of CPRL, pursuant to a Short Form Prospectus relating to the offering of Medium Term Notes in an aggregate principal amount of up to $1,000,000,000 filed with Canadian securities regulatory authorities on May 28, 2002.

If you have any questions, please contact the undersigned at (403) 319-6171.

Yours truly,

CANADIAN PACIFIC RAILWAY LIMITED
CANADIAN PACIFIC RAILWAY COMPANY

(signed)

Robert V. Horte
Senior Assistant Corporate Secretary

 

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UPDATED EARNINGS COVERAGE RATIOS

The following ratios are provided in connection with CPR’s continuous offering of medium-term notes, and are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in Canada. The asset coverage ratios are calculated at the dates indicated, and the interest coverage ratios are for the 12-month period then ended.

									December 31, 2001
					December 31, 2002				restatedi
(times)
	Interest coverage on long-term debt
		Interest coverage on long-term debt before non-recurring items and foreign exchange on long-term debt				3.0				3.6
		Interest coverage on long-term debt after non-recurring items and foreign exchange on long-term debt				3.4				3.2
	Net tangible asset coverage on long-term debt
		Before the effect of future income taxes				2.4				2.1
		After the effect of future income taxes				2.0				1.8

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i Effective January 1, 2002, CPR was required to adopt retroactively with restatement the new Canadian Institute of Chartered Accountants accounting standard for the treatment of foreign exchange gains and losses on long-term debt.

 

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To the Various Securities Regulatory Authorities		PricewaterhouseCoopers LLP Chartered Accountants 111 5th Avenue SW, Suite 3100 Calgary, Alberta Canada T2P 5L3 Telephone +1 (403) 509 7500 Facsimile +1 (403) 781 1825

March 18, 2003

Dear Sirs

We refer to the short form prospectus of Canadian Pacific Railway Company dated May 28, 2002 relating to the sale and issue of up to $1.0 billion Medium Term Notes (unsecured).

We consent to the use, through incorporation by reference in the above-mentioned prospectus, of our report dated February 18, 2003 to the shareholders of Canadian Pacific Railway Limited on the following financial statements:

•		Balance sheets as at December 31, 2002 and December 31, 2001;
•		Statements of income, retained income and cash flows for each of the three years in the period ended December 31, 2002.

We report that we have read the prospectus and all information specifically incorporated by reference therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the financial statements upon which we have reported or that are within our knowledge as a result of our audit of such financial statements.

This letter is provided solely for the purpose of assisting the securities regulatory authorities to which it is addressed in discharging their responsibilities and should not be used for any other purpose. Any use that a third party makes of this letter, or any reliance or decisions made based on it, are the responsibility of such third parties. We accept no responsibility for loss or damages, if any, suffered by any third party as a result of decisions made or actions taken based on this letter.

Yours very truly,

(Signed) “PricewaterhouseCoopers LLP”

Chartered Accountants

PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.