Canadian Pacific announces its second-quarter results



    CALGARY, July 22 /CNW/ - Canadian Pacific Railway Limited (TSX/NYSE:   CP)
announced its second-quarter results today. Net income in the second quarter
was $155 million, a decrease of 40 per cent from $257 million in 2007, and
diluted earnings per share was $1.00, a decrease from $1.64 in the second
quarter of 2007.

    
    SUMMARY OF SECOND-QUARTER 2008 COMPARED WITH SECOND-QUARTER 2007

    -   Total revenues were essentially flat at $1.22 billion
    -   Income before foreign exchange gains and losses on long-term debt and
        other specified items decreased to $150 million from $175 million
    -   Adjusted diluted earnings per share decreased to $0.97 from $1.12
    -   Operating ratio was 79.4 per cent compared with 74.7 per cent
    

    "This was a tough quarter with the unprecedented rise in fuel prices, the
North American economic downturn, and prolonged flooding on our US mainline,"
said Fred Green, President and CEO. "Combined, these had a significant impact
on CP's earnings."
    "We see the current economic conditions continuing, and CP is taking
aggressive steps which should position us well for 2009," continued Mr. Green.
"I have accelerated a rigorous process to improve our productivity,
efficiency, and yield."
    Freight revenues increased almost two per cent despite a decrease in
traffic. This was mainly due to pricing, inclusive of fuel recoveries. CP
experienced strong growth in industrial and consumer products of 17 per cent,
intermodal of nine per cent and coal of six per cent. This was offset by
decreases in forest products of 21 per cent, grain of nine per cent, sulphur
and fertilizers of five per cent, and automotive of two per cent.
    Operating expenses increased seven per cent with fuel up 34 per cent and
purchased services and other, depreciation and amortization and materials up
from two to nine per cent. This was offset by a decrease in equipment rents of
20 per cent and compensation and benefits of four per cent.

    SUMMARY OF FIRST-HALF 2008 COMPARED WITH FIRST-HALF 2007

    Net income for the first half of 2008 was $246 million compared with
$385 million in 2007, a decrease of 36 per cent. Diluted earnings per share
was $1.59 down from $2.46.
    Freight revenues increased two per cent to $2.3 billion and operating
expenses were up seven per cent to $1.9 billion.

    
    EXCLUDING FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER
    SPECIFIED ITEMS

    -   Income decreased to $267 million from $297 million.
    -   Diluted earnings per share were $1.72 down from $1.90.
    -   Operating ratio deteriorated 400 basis points to 81.0 per cent from
        77.0 per cent.
    

    2008 OUTLOOK

    "We continue to focus on driving positive pricing gains and strengthening
our fuel recovery and cost management programs," said Mike Lambert, Chief
Financial Officer. "However, these will not be enough to offset the challenges
we are facing with the higher price of fuel and the slowing North American
economy. We are updating our guidance to reflect our substantially higher fuel
assumptions and the deteriorating economic conditions. We now expect our
full- year adjusted diluted earnings per share to be in the range of $4.00 to
$4.20, down from our previous guidance of $4.40 to $4.60."
    The 2008 estimate assumes an average currency exchange rate of the U.S.
dollar at par with the Canadian dollar. Crude oil prices are expected to
average US $121 per barrel for the year (versus the previous assumption of  US
$98 per barrel) with the second half averaging roughly US $140 per barrel.
Crack spreads are expected to average US $23 per barrel for the year (versus
the previous assumption of US $20 per barrel) with the second half averaging
US $27 per barrel. The estimated average all-in fuel price is expected to be
between US $3.80 and $3.90 per U.S. gallon for the year.
    CP strives to mitigate the impact of any changes in WTI and crack margins
through fuel recovery programs. However, these programs do not completely
offset the changes in expense caused by changes in WTI and crack margins.
    The approximate net annual impact on EPS of changes in WTI and crack
margins given CP's current portfolio of freight contracts is as follows:

    
    -   A change in WTI of US $2 per barrel impacts EPS by $0.01
    -   A change in crack margins of US $1 per barrel impacts EPS by $0.02
    

    These sensitivities do not consider the impact of the lagged
implementation of changes in fuel surcharges from the timing of actual
expenses incurred. This lag is due to regulatory notice requirements for rail
price adjustments.
    CP expects to grow total revenue by six to eight per cent in 2008, up
from previous guidance of four to six per cent due mostly to increased fuel
recovery, offset somewhat by volume declines. Total operating expenses are
expected to increase by 11 to 13 per cent, revised from the previous guidance
of six to eight per cent due principally to higher fuel cost.
    CP expects its normalized tax rate to be between 26 per cent and 27 per
cent, excluding the impact of the Dakota Minnesota & Eastern Railroad (DM&E)
equity pick-up, a change from the previous outlook of 27 per cent to 29 per
cent as a result of decreasing Canadian provincial tax rates.
    CP expects free cash to be approximately $150 million, adjusted downwards
from the previous outlook of approximately $200 million in 2008, due to lower
projected earnings.
    The 2008 outlook includes the projected after tax earnings of the DM&E on
an equity accounting basis for the full year.

    FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED
    ITEMS

    CP had a foreign exchange gain on long-term debt of $7 million
($5 million after tax) in the second quarter of 2008, compared with a foreign
exchange gain on long-term debt of $89 million ($65 million after tax) in the
second quarter of 2007. There were no other specified items in the second
quarter of 2008. There was a future income tax benefit of $17 million in the
second quarter of 2007 resulting from a reduction in the Canadian federal
income tax rate.
    For the first six months of 2008, CP had a foreign exchange loss on
long- term debt of $10 million ($6 million after tax) compared with a foreign
exchange gain of $97 million ($71 million after tax) in the first half of
2007.
    At June 30, 2008 CP held investments in Canadian Non-Bank Asset Backed
Commercial Paper (ABCP) with an original cost of approximately $144 million.
In the third-quarter of 2007, CP adjusted the estimated fair value of the
investment and took a charge of $21 million ($15 million after tax) and
classified the investments as long-term investments. In the first quarter of
2008, in recognition of current market conditions impacting these investments,
CP further adjusted the estimated fair value of the investments and took an
additional charge of $21 million ($15 million after tax). The estimated fair
value of the investments as at June 30, 2008 was unchanged from the estimated
fair value at March 31, 2008.
    Continuing uncertainties regarding the value of the assets which underlie
the ABCP, the amount and timing of cash flows and the outcome of the
restructuring process could give rise to a material change in the value of the
Company's investments in ABCP which would impact the Company's near-term
earnings.
    In the first quarter of 2008, the company recorded a $21 million
($15 million after tax) impairment of the company's investment in ABCP. Other
than the future income tax benefit of $17 million mentioned above, there were
no additional other specified items in the first half of 2007.

    Presentation of non-GAAP earnings

    CP presents non-GAAP earnings in this news release to provide a basis for
evaluating underlying earnings and liquidity trends in its business that can
be compared with prior periods' results of operations. These non-GAAP earnings
exclude foreign currency translation impacts on long-term debt, which can be
volatile and short term, and other specified items, which are not among CP's
normal ongoing revenues and operating expenses. The impact of volatile
short- term rate fluctuations on foreign-denominated debt is only realized
when long-term debt matures or is settled. A reconciliation of income,
excluding foreign exchange gains and losses on long-term debt and other
specified items, to net income as presented in the financial statements is
detailed in the attached Summary of Rail Data. Diluted EPS, excluding foreign
exchange gains and losses on long-term debt and other specified items, is also
referred to in this news release as "adjusted diluted EPS".
    Free cash is calculated as cash provided by operating activities, less
cash used in investing activities and dividends paid, adjusted for the
acquisition of the DM&E, and now excluding changes in the accounts receivable
securitization program, which was terminated in the second quarter. Free cash
is adjusted for the DM&E acquisition, as it is not indicative of normal
day- to-day investments in the Company's asset base. The securitization of
accounts receivable is a financing-type transaction, which is excluded to
clarify the nature of the use of free cash.
    Earnings that exclude the foreign exchange currency translation impact on
long-term debt and other specified items, and free cash after dividends, as
described in this news release, have no standardized meanings and are not
defined by Canadian generally accepted accounting principles and, therefore,
are unlikely to be comparable to similar measures presented by other
companies.
    Other specified items are material transactions that may include, but are
not limited to, restructuring and asset impairment charges, gains and losses
on non-routine sales of assets, unusual income tax adjustments, and other
items that do not typify normal business activities.

    Note on forward-looking information

    This news release contains certain forward-looking statements relating
but not limited to our operations, anticipated financial performance and
business prospects. Undue reliance should not be placed on forward-looking
information as actual results may differ materially.
    By its nature, CP's forward-looking information involves numerous
assumptions, inherent risks and uncertainties, including but not limited to
the following factors: changes in business strategies; general North American
and global economic and business conditions; risks in agricultural production
such as weather conditions and insect populations; the availability and price
of energy commodities; the effects of competition and pricing pressures;
industry capacity; shifts in market demand; changes in laws and regulations,
including regulation of rates; changes in taxes and tax rates; potential
increases in maintenance and operating costs; uncertainties of litigation;
labour disputes; risks and liabilities arising from derailments; timing of
completion of capital and maintenance projects; currency and interest rate
fluctuations; effects of changes in market conditions on the financial
position of pension plans and investments; and various events that could
disrupt operations, including severe weather conditions, security threats and
governmental response to them, and technological changes.
    There are factors that could cause actual results to differ from those
described in the forward-looking statements contained in this news release.
These more specific factors are identified and discussed in the Outlook
section and elsewhere in this news release with the particular forward-looking
statement in question.
    Except as required by law, CP undertakes no obligation to update publicly
or otherwise revise any forward-looking information, whether as a result of
new information, future events or otherwise.

    Canadian Pacific, through the ingenuity of its employees located across
Canada and in the United States, remains committed to being the safest, most
fluid railway in North America. Our people are the key to delivering
innovative transportation solutions to our customers and to ensuring the safe
operation of our trains through the more than 900 communities where we
operate. Our combined ingenuity makes CPR a better place to work, rail a
better way to ship, and North America a better place to live. Come and visit
us at www.cpr.ca to see how we can put our ingenuity to work for you. Canadian
Pacific is proud to be the official rail freight services provider for the
Vancouver 2010 Olympic and Paralympic Winter Games.


    
    STATEMENT OF CONSOLIDATED INCOME
    (in millions of Canadian dollars, except per share data)

                                                        For the three months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
                                                    -------------------------
                                                             (unaudited)
    Revenues
      Freight                                        $  1,193.1   $  1,174.1
      Other                                                27.2         41.4
                                                    -------------------------
                                                        1,220.3      1,215.5
    Operating expenses
      Compensation and benefits                           315.5        329.8
      Fuel                                                260.3        193.7
      Materials                                            56.5         55.6
      Equipment rents                                      46.1         57.3
      Depreciation and amortization                       124.7        119.1
      Purchased services and other                        166.1        152.3
                                                    -------------------------
                                                          969.2        907.8
                                                    -------------------------
    Revenues less operating expenses                      251.1        307.7

    Other charges (Note 4)                                  4.9          8.2
    Equity income in Dakota, Minnesota & Eastern
     Railroad Corporation (Note 10)                       (13.4)           -
    Foreign exchange gains on long-term debt               (6.8)       (88.6)
    Interest expense (Note 5)                              62.9         49.2
    Income tax expense (Note 6)                            48.6         82.2
                                                    -------------------------

    Net income                                       $    154.9   $    256.7
                                                    -------------------------
                                                    -------------------------

    Basic earnings per share (Note 7)                $     1.01   $     1.66
                                                    -------------------------
                                                    -------------------------

    Diluted earnings per share (Note 7)              $     1.00   $     1.64
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    STATEMENT OF CONSOLIDATED INCOME
    (in millions of Canadian dollars, except per share data)

                                                          For the six months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
                                                    -------------------------
                                                             (unaudited)

    Revenues
      Freight                                        $  2,317.5   $  2,265.0
      Other                                                49.7         66.4
                                                    -------------------------
                                                        2,367.2      2,331.4

    Operating expenses
      Compensation and benefits                           643.8        662.3
      Fuel                                                490.5        364.9
      Materials                                           122.0        118.0
      Equipment rents                                      92.0        112.8
      Depreciation and amortization                       244.6        237.7
      Purchased services and other                        325.0        298.7
                                                    -------------------------
                                                        1,917.9      1,794.4
                                                    -------------------------
    Revenues less operating expenses                      449.3        537.0

    Other charges (Note 4)                                 11.6         13.0
    Equity income in Dakota, Minnesota & Eastern
     Railroad Corporation (Note 10)                       (24.4)           -
    Change in estimated fair value of Canadian third
     party asset-backed commercial paper (Note 10)         21.3            -
    Foreign exchange losses (gains) on long-term debt       9.5        (97.2)
    Interest expense (Note 5)                             122.8         96.0
    Income tax expense (Note 6)                            62.8        139.9
                                                    -------------------------

    Net income                                       $    245.7   $    385.3
                                                    -------------------------
                                                    -------------------------

    Basic earnings per share (Note 7)                $     1.60   $     2.49
                                                    -------------------------
                                                    -------------------------

    Diluted earnings per share (Note 7)              $     1.59   $     2.46
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
    (in millions of Canadian dollars)

                                                        For the three months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
                                                    -------------------------
                                                             (unaudited)
    Comprehensive income

    Net income                                       $    154.9   $    256.7

    Other comprehensive income

      Net change in foreign currency translation
       adjustments, net of hedging activities              (1.1)        (2.9)

      Net change in gains on derivatives designated
       as cash flow hedges                                 16.7         (9.8)
                                                    -------------------------
      Other comprehensive income (loss) before income
       taxes                                               15.6        (12.7)

      Income tax expense                                   (5.3)        (2.0)
                                                    -------------------------

    Other comprehensive income (loss) (Note 13)            10.3        (14.7)
                                                    -------------------------

    Comprehensive income                             $    165.2   $    242.0
                                                    -------------------------
                                                    -------------------------


                                                          For the six months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
                                                    -------------------------
                                                             (unaudited)
    Comprehensive income

    Net income                                       $    245.7   $    385.3

    Other comprehensive income

      Net change in foreign currency translation
       adjustments, net of hedging activities               2.2         (3.2)

      Net change in gains on derivatives designated
       as cash flow hedges                                  7.9        (13.0)
                                                    -------------------------

      Other comprehensive income (loss) before income
       taxes                                               10.1        (16.2)

      Income tax recovery (expense)                         2.7         (1.3)
                                                    -------------------------

    Other comprehensive income (loss) (Note 13)            12.8        (17.5)
                                                    -------------------------

    Comprehensive income                             $    258.5   $    367.8
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    CONSOLIDATED BALANCE SHEET
    (in millions of Canadian dollars)
                                                        June 30  December 31
                                                           2008         2007
                                                    -------------------------
                                                             (unaudited)

    Assets
    Current assets
      Cash and cash equivalents                      $     80.9   $    378.1
      Accounts receivable and other current
       assets (Note 9)                                    681.3        542.8
      Materials and supplies                              199.5        179.5
      Future income taxes                                  66.7         67.3
                                                    -------------------------
                                                        1,028.4      1,167.7

    Investments  (Note 10)                              1,717.6      1,668.6
    Net properties                                      9,464.2      9,293.1
    Other assets and deferred charges (Note 15)         1,468.0      1,235.6
                                                    -------------------------

    Total assets                                     $ 13,678.2   $ 13,365.0
                                                    -------------------------
                                                    -------------------------

    Liabilities and shareholders' equity
    Current liabilities
      Short-term borrowing                           $    255.0   $    229.7
      Accounts payable and accrued liabilities            954.2        980.8
      Income and other taxes payable                       50.7         68.8
      Dividends payable                                    38.1         34.5
      Long-term debt maturing within one year             238.4         31.0
                                                    -------------------------
                                                        1,536.4      1,344.8

    Deferred liabilities                                  717.2        714.6
    Long-term debt (Note 11)                            4,016.8      4,146.2
    Future income taxes                                 1,741.8      1,701.5

    Shareholders' equity
    Share capital (Note 12)                             1,216.9      1,188.6
    Contributed surplus                                    39.8         42.4
    Accumulated other comprehensive income (Note 13)       52.4         39.6
    Retained income                                     4,356.9      4,187.3
                                                    -------------------------
                                                        5,666.0      5,457.9
                                                    -------------------------
    Total liabilities and shareholders' equity       $ 13,678.2   $ 13,365.0
                                                    -------------------------
                                                    -------------------------

    Commitments and contingencies (Note 19).
    See notes to interim consolidated financial statements.



    STATEMENT OF CONSOLIDATED CASH FLOWS
    (in millions of Canadian dollars)
                                                        For the three months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
                                                    -------------------------
                                                             (unaudited)

    Operating activities
      Net income                                     $    154.9   $    256.7
      Add (deduct) items not affecting cash:
        Depreciation and amortization                     124.7        119.1
        Future income taxes                                32.4         57.7
        Foreign exchange gains on long-term debt           (6.8)       (88.6)
        Amortization of deferred charges                    2.6          3.1
        Equity income, net of cash received               (11.4)           -
      Restructuring and environmental remediation
       payments (Note 8)                                  (10.8)       (12.0)
      Other operating activities, net                      29.9          0.9
      Change in non-cash working capital balances
       related to operations (Note 9)                    (132.5)        27.6
                                                    -------------------------
      Cash provided by operating activities               183.0        364.5
                                                    -------------------------
    Investing activities
      Additions to properties                            (237.3)      (158.4)
      Additions to investments and other assets
      (Note 15)                                           (57.8)       (11.4)
      Additions to investment in Dakota, Minnesota
       & Eastern Railroad Corporation (Note 10)            (1.2)           -
      Net (cost) proceeds from disposal of
       transportation properties                           (0.1)        (0.4)
                                                    -------------------------
      Cash used in investing activities                  (296.4)      (170.2)
                                                    -------------------------
    Financing activities
      Dividends paid                                      (38.0)       (34.7)
      Issuance of CP Common Shares                          4.8         15.0
      Purchase of CP Common Shares                            -       (212.0)
      Net (decrease) increase in short-term borrowing     188.3        (77.7)
      Issuance of long-term debt (Note 11)              1,068.7        485.1
      Repayment of long-term debt                      (1,069.9)        (3.5)
      Settlement of treasury rate lock (Note 14)          (30.9)           -
                                                    -------------------------
    Cash provided by financing activities                 123.0        172.2
                                                    -------------------------
    Cash position
      Increase in cash and cash equivalents                 9.6        366.5
      Cash and cash equivalents at beginning of period     71.3         25.6
                                                    -------------------------
      Cash and cash equivalents at end of period     $     80.9   $    392.1
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    STATEMENT OF CONSOLIDATED CASH FLOWS
    (in millions of Canadian dollars)

                                                          For the six months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
                                                    -------------------------
                                                             (unaudited)

    Operating activities
      Net income                                     $    245.7   $    385.3
      Add (deduct) items not affecting cash:
        Depreciation and amortization                     244.6        237.7
        Future income taxes                                27.9         96.2
        Change in estimated fair value of Canadian
         third party asset-backed commercial paper
         (Note 10)                                         21.3            -
        Foreign exchange losses (gains) on
         long-term debt                                     9.5        (97.2)
        Amortization of deferred charges                    5.1          6.2
        Equity income, net of cash received               (20.8)           -
      Restructuring and environmental remediation
       payments (Note 8)                                  (24.5)       (25.2)
      Other operating activities, net                       4.4         (1.8)
      Change in non-cash working capital balances
       related to operations (Note 9)                    (170.2)        (9.0)
                                                    -------------------------
      Cash provided by operating activities               343.0        592.2
                                                    -------------------------
    Investing activities
      Additions to properties                            (364.7)      (362.6)
      Additions to investments and other assets
      (Note 15)                                          (192.5)       (11.7)
      Additions to investment in Dakota, Minnesota
       & Eastern Railroad Corporation (Note 10)            (7.5)           -
      Net (cost) proceeds from disposal of
       transportation properties                           (2.6)         8.5
                                                    -------------------------
      Cash used in investing activities                  (567.3)      (365.8)
                                                    -------------------------
    Financing activities
      Dividends paid                                      (72.5)       (63.8)
      Issuance of CP Common Shares                         17.0         25.1
      Purchase of CP Common Shares                            -       (228.1)
      Net (decrease) increase in short-term
       borrowing                                           25.3            -
      Issuance of long-term debt (Note 11)              1,068.7        485.1
      Repayment of long-term debt                      (1,080.5)      (176.9)
      Settlement of treasury rate lock (Note 14)          (30.9)           -
                                                    -------------------------
      Cash (used in) provided by financing
       activities                                         (72.9)        41.4
                                                    -------------------------
    Cash position
      Increase (decrease) in cash and cash equivalents   (297.2)       267.8
      Cash and cash equivalents at beginning of period    378.1        124.3
                                                    -------------------------
      Cash and cash equivalents at end of period     $     80.9   $    392.1
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
    (in millions of Canadian dollars)

                                                        For the three months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
                                                    -------------------------
                                                             (unaudited)

    Share capital
    Balance, beginning of period                     $  1,210.4   $  1,182.9

    Shares issued under stock option plans                  6.5         18.5

    Shares purchased                                          -        (19.4)
                                                    -------------------------
    Balance, end of period                              1,216.9      1,182.0
                                                    -------------------------

    Contributed surplus
    Balance, beginning of period                           38.5         37.1

    Stock compensation expense                              2.3          2.1

    Stock compensation expense related to shares
     issued under stock option plans                       (1.0)        (0.5)
                                                    -------------------------
    Balance, end of period                                 39.8         38.7
                                                    -------------------------

    Accumulated other comprehensive income
    Balance, beginning of period                           42.1         77.6

    Other comprehensive income (loss) (Note 13)            10.3        (14.7)
                                                    -------------------------
    Balance, end of period                                 52.4         62.9
                                                    -------------------------

    Retained income
    Balance, beginning of period                        4,240.1      3,641.7

    Net income for the period                             154.9        256.7

    Shares purchased                                          -       (168.6)

    Dividends                                             (38.1)       (34.9)
                                                    -------------------------
    Balance, end of period                              4,356.9      3,694.9
                                                    -------------------------
    Total accumulated other comprehensive income
     and retained income                                4,409.3      3,757.8
                                                    -------------------------
                                                    -------------------------
    Shareholders' equity, end of period              $  5,666.0   $  4,978.5
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
    (in millions of Canadian dollars)

                                                          For the six months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
                                                    -------------------------
                                                             (unaudited)

    Share capital
    Balance, beginning of period                     $  1,188.6   $  1,175.7

    Shares issued under stock option plans                 28.3         30.8

    Shares purchased                                          -        (24.5)
                                                    -------------------------
    Balance, end of period                              1,216.9      1,182.0
                                                    -------------------------

    Contributed surplus
    Balance, beginning of period                           42.4         32.3

    Stock compensation expense                              6.8          7.4

    Stock compensation expense related to shares
     issued under stock option plans                       (9.4)        (1.0)
                                                    -------------------------
    Balance, end of period                                 39.8         38.7
                                                    -------------------------

    Accumulated other comprehensive income
    Balance, beginning of period                           39.6         66.4

    Adjustment for change in accounting policy                -         14.0
                                                    -------------------------

    Adjusted balance, beginning of period                  39.6         80.4

    Other comprehensive income (loss) (Note 13)            12.8        (17.5)
                                                    -------------------------

    Balance, end of period                                 52.4         62.9
                                                    -------------------------

    Retained income
    Balance, beginning of period                        4,187.3      3,582.1

    Adjustment for change in accounting policy                -          4.0
                                                    -------------------------
    Adjusted balance, beginning of period               4,187.3      3,586.1

    Net income for the period                             245.7        385.3

    Shares purchased                                          -       (206.6)

    Dividends                                             (76.1)       (69.9)
                                                    -------------------------
    Balance, end of period                              4,356.9      3,694.9
                                                    -------------------------

    Total accumulated other comprehensive income
     and retained income                                4,409.3      3,757.8
                                                    -------------------------
                                                    -------------------------
    Shareholders' equity, end of period              $  5,666.0   $  4,978.5
                                                    -------------------------
                                                    -------------------------

    See notes to interim consolidated financial statements.



    NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
    JUNE 30, 2008
    (unaudited)

    1   Basis of presentation

        These unaudited interim consolidated financial statements and notes
        have been prepared using accounting policies that are consistent with
        the policies used in preparing Canadian Pacific Railway Limited's
        ("CP", "the Company" or "Canadian Pacific Railway") 2007 annual
        consolidated financial statements, except as discussed below and in
        Note 2 for the adoption of new accounting standards. They do not
        include all disclosures required under Generally Accepted Accounting
        Principles for annual financial statements and should be read in
        conjunction with the annual consolidated financial statements.

        CP's operations can be affected by seasonal fluctuations such as
        changes in customer demand and weather-related issues. This
        seasonality could impact quarter-over-quarter comparisons.

    2   New accounting changes

        Financial Instrument and Capital Disclosures

        The CICA has issued the following accounting standards effective for
        fiscal years beginning on or after January 1, 2008: Section 3862
        "Financial Instruments - Disclosures", Section 3863 "Financial
        Instruments - Presentation", and Section 1535 "Capital Disclosures".

        Section 3862 "Financial Instruments - Disclosures" and Section 3863
        "Financial Instruments - Presentation" replace Section 3861
        "Financial Instruments - Disclosure and Presentation", revising
        disclosures related to financial instruments, including hedging
        instruments, and carrying forward unchanged presentation
        requirements.

        Section 1535 "Capital Disclosures" requires the Company to provide
        disclosures about the Company's capital and how it is managed.

        The adoption of these new accounting standards did not impact the
        amounts reported in the Company's financial statements; however, it
        did result in expanded note disclosure (see Note 14 and Note 20).

        Inventories

        Effective January 1, 2008, the CICA has issued accounting standard
        Section 3031 "Inventories". Section 3031 "Inventories" provides
        guidance on the method of determining the cost of the Company's
        materials and supplies. The new accounting standard specifies that
        inventories are to be valued at the lower of cost and net realizable
        value. The standard requires the reversal of previously recorded
        write downs to realizable value when there is clear evidence that net
        realizable value has increased. The adoption of Section 3031
        "Inventories" did not impact the Company's financial statements.

    3   Future accounting changes

        In February 2008, the CICA issued accounting standard Section 3064
        "Goodwill and intangible assets", replacing accounting standard
        Section 3062 "Goodwill and other intangible assets" and accounting
        standard Section 3450 "Research and development costs". The new
        Section will be applicable on a retrospective basis with restatement
        to financial statements relating to fiscal years beginning on or
        after October 1, 2008. Accordingly, the Company will adopt the new
        standards for its fiscal year beginning January 1, 2009. Section 3064
        establishes standards for the recognition, measurement, presentation
        and disclosure of goodwill subsequent to its initial recognition and
        of intangible assets by profit-oriented enterprises. Standards
        concerning goodwill are unchanged from the standards included in the
        previous Section 3062. The Company is currently evaluating the impact
        of the adoption of this new Section.

    4   Other charges

                               For the three months       For the six months
                                   ended June 30             ended June 30
        (in millions)            2008         2007         2008         2007
                             ------------------------  ----------------------

        Amortization of
         discount on
         accruals recorded
         at present value     $   1.6      $   2.2      $   3.1      $   4.2
        Other exchange losses     0.6          2.5          1.9          2.0
        Loss on sale of
         accounts receivable      1.1          1.4          2.7          2.7
        Gains on non-hedging
         derivative
         instruments             (0.9)        (0.1)        (0.9)        (0.4)
        Other                     2.5          2.2          4.8          4.5
                             ------------------------  ----------------------
        Total other charges   $   4.9      $   8.2      $  11.6      $  13.0
                             ------------------------  ----------------------
                             ------------------------  ----------------------


    5   Interest expense

                               For the three months       For the six months
                                   ended June 30             ended June 30
        (in millions)            2008         2007         2008         2007
                             ------------------------  ----------------------

        Interest expense      $  64.8      $  52.3      $ 129.5      $ 101.1
        Interest income          (1.9)        (3.1)        (6.7)        (5.1)
                             ------------------------  ----------------------
        Total interest
         expense              $  62.9      $  49.2      $ 122.8      $  96.0
                             ------------------------  ----------------------
                             ------------------------  ----------------------

    6   Income taxes

        During the six months ended June 30, 2008, legislation was
        substantively enacted to reduce provincial income tax rates. As a
        result of these changes, the Company recorded a $15.7 million benefit
        in future tax liability and income tax expense for the six months
        ended June 30, 2008, related to the revaluation of its future income
        tax balances as at December 31, 2007. For the three months ended
        June 30, 2008, the Company recorded a $5.1 million benefit in future
        income tax liability and income tax expenses.

        Cash taxes paid for the quarter ended June 30, 2008, was
        $13.2 million (three months ended June 30, 2007 - cash taxes refunded
        was $1.1 million). Cash taxes paid in the six months ended June 30,
        2008 was $57.9 million (six months ended June 30, 2007 -
        $8.1 million).


    7   Earnings per share

        At June 30, 2008, the number of shares outstanding was 153.8 million
        (June 30, 2007 - 153.1 million).

        Basic earnings per share have been calculated using net income for
        the period divided by the weighted average number of CP shares
        outstanding during the period.

        Diluted earnings per share have been calculated using the treasury
        stock method, which gives effect to the dilutive value of outstanding
        options.

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

                               For the three months       For the six months
                                   ended June 30             ended June 30
        (in millions)            2008         2007         2008         2007
                             ------------------------  ----------------------

        Weighted average
         shares outstanding     153.7        154.3        153.6        154.9
        Dilutive effect of
         stock options            1.4          1.8          1.4          1.5
                             ------------------------  ----------------------

        Weighted average
         diluted shares
         outstanding            155.1        156.1        155.0        156.4
                             ------------------------  ----------------------
                             ------------------------  ----------------------
        (in dollars)

        Basic earnings
         per share            $  1.01      $  1.66      $  1.60      $  2.49
        Diluted earnings
         per share            $  1.00      $  1.64      $  1.59      $  2.46
                             ------------------------  ----------------------
                             ------------------------  ----------------------

        For the three and six months ended June 30, 2008, 613,933 and 617,825
        options were excluded from the computation of diluted earnings per
        share because their effects were not dilutive (three and six months
        ended June 30, 2007 - nil and 2,425).

    8   Restructuring and environmental remediation

        At June, 2008, the provision for restructuring and environmental
        remediation was $217.2 million (December 31, 2007 - $234.0 million).
        This provision primarily includes labour liabilities for
        restructuring plans. Payments are expected to continue in diminishing
        amounts until 2025. The environmental remediation liability includes
        the cost of a multi-year soil remediation program.

        Set out below is a reconciliation of CP's liabilities associated with
        restructuring and environmental remediation programs:

        Three months ended June 30, 2008

                        Opening                     Amorti-           Closing
                        Balance                      zation  Foreign  Balance
                        April 1                          of Exchange  June 30
        (in millions)      2008  Accrued  Payments Discount   Impact     2008
                      -------------------------------------------------------
        Labour
         liability for
         terminations
         and
         severances     $ 118.9      1.5     (8.3)     1.1     (0.3) $ 112.9
        Other non-labour
         liabilities for
         exit plans         0.6        -        -        -        -      0.6
                      -------------------------------------------------------
        Total
         restructuring
         liability        119.5      1.5     (8.3)     1.1     (0.3)   113.5
                      -------------------------------------------------------

        Environmental
         remediation
         program          105.5      1.0     (2.5)       -     (0.3)   103.7
                      -------------------------------------------------------
        Total
         restructuring
         and
         environmental
         remediation
         liability      $ 225.0      2.5    (10.8)     1.1     (0.6) $ 217.2
                      -------------------------------------------------------
                      -------------------------------------------------------


        Three months ended June 30, 2007

                        Opening                     Amorti-           Closing
                        Balance                      zation  Foreign  Balance
                        April 1  Accrued                 of Exchange  June 30
        (in millions)      2007 (reduced) Payments Discount   Impact     2007
                      -------------------------------------------------------
        Labour
         liability for
         terminations
         and
         severances     $ 176.1     (2.1)    (9.6)     1.7     (2.5) $ 163.6
        Other non-labour
         liabilities for
         exit plans         1.3        -        -        -     (0.2)     1.1
                      -------------------------------------------------------
        Total
         restructuring
         liability        177.4     (2.1)    (9.6)     1.7     (2.7)   164.7
                      -------------------------------------------------------

        Environmental
         remediation
         program          119.2      1.1     (2.4)       -     (5.2)   112.7
                      -------------------------------------------------------
        Total
         restructuring
         and
         environmental
         remediation
         liability      $ 296.6     (1.0)   (12.0)     1.7     (7.9) $ 277.4
                      -------------------------------------------------------
                      -------------------------------------------------------


        Six months ended June 30, 2008

                        Opening                     Amorti-           Closing
                        Balance                      zation  Foreign  Balance
                         Jan. 1                          of Exchange  June 30
        (in millions)      2008  Accrued  Payments Discount   Impact     2008
                      -------------------------------------------------------
        Labour
         liability for
         terminations
         and
         severances     $ 129.2      1.5    (20.6)     2.2      0.6  $ 112.9
        Other non-labour
         liabilities for
         exit plans         0.8        -     (0.2)       -        -      0.6
                      -------------------------------------------------------
        Total
         restructuring
         liability        130.0      1.5    (20.8)     2.2      0.6    113.5
                      -------------------------------------------------------

        Environmental
         remediation
         program          104.0      1.9     (3.7)       -      1.5    103.7
                      -------------------------------------------------------
        Total
         restructuring
         and
         environmental
         remediation
         liability      $ 234.0      3.4    (24.5)     2.2      2.1  $ 217.2
                      -------------------------------------------------------
                      -------------------------------------------------------


        Six months ended June 30, 2007

                        Opening                     Amorti-           Closing
                        Balance                      zation  Foreign  Balance
                         Jan. 1  Accrued                 of Exchange  June 30
        (in millions)      2007 (reduced) Payments Discount   Impact     2007
                      -------------------------------------------------------
        Labour
         liability for
         terminations
         and
         severances     $ 187.4     (2.1)   (22.1)     3.2     (2.8) $ 163.6
        Other non-labour
         liabilities for
         exit plans         1.4        -     (0.1)       -     (0.2)     1.1
                      -------------------------------------------------------
        Total
         restructuring
         liability        188.8     (2.1)   (22.2)     3.2     (3.0)   164.7
                      -------------------------------------------------------

        Environmental
         remediation
         program          120.2      1.3     (3.0)       -     (5.8)   112.7
                      -------------------------------------------------------
        Total
         restructuring
         and
         environmental
         remediation
         liability      $ 309.0     (0.8)   (25.2)     3.2     (8.8) $ 277.4
                      -------------------------------------------------------
                      -------------------------------------------------------

        Amortization of Discount is charged to income as "Other Charges",
        "Compensation and Benefits" and "Purchased Services and Other" as
        applicable. New accruals and adjustments to previous accruals are
        reflected in "Compensation and Benefits" and "Purchased Services and
        Other" as applicable.


    9   Accounts Receivable

        As at March 31, 2008, the Company had an accounts receivable
        securitization program. Under the terms of the program, the Company
        sold an undivided co-ownership interest in $120.0 million of eligible
        freight receivables to an unrelated trust. In the second quarter of
        2008, the Company's accounts receivable securitization program was
        terminated. As a result of this termination, in the Company's
        Consolidated balance sheet, Accounts receivable and other current
        assets increased by $120.0 million and in the Statement of
        consolidated cash flows the Change in non-cash working capital
        balances related to operations reflected an outflow of
        $120.0 million. As well, the related servicing asset and liability
        which had previously been recognized are no longer required to be
        maintained and were settled as part of the termination.


    10  Investments

        Dakota, Minnesota & Eastern Railroad Corporation ("DM&E")

        Effective October 4, 2007, the Company acquired all of the issued and
        outstanding shares of DM&E. The Company is currently accounting for
        the purchase by the equity method until such time as the acquisition
        has been approved by the United States Surface Transportation Board.
        The purchase price was $1.499 billion cash payment, including a
        $6 million post closing adjustment in the first quarter of 2008,
        and transaction costs of $22 million incurred to June 30, 2008.
        Future contingent payments of up to approximately US$1.05 billion may
        become payable up to December 31, 2025 upon achievement of certain
        milestones.

        The equity income from the Company's investment in DM&E, which is
        recorded net of tax, was $13.4 million during the three months ended
        June 30, 2008 and $24.4 million during the six months ended June 30,
        2008. The difference between cost and the underlying net book value
        of DM&E at the date of acquisition was US$983.5 million. For the
        three months ended June 30, 2008 the equity income from the Company's
        investment in DM&E was reduced by $3.4 million to recognize
        additional depreciation expense based on the assigned cost using fair
        values at that date of acquisition and $0.5 million to recognize
        amortization of the fair value of intangible assets acquired. For the
        six months ended June 30, 2008, the additional depreciation expense
        was $6.8 million and the amortization of intangible assets was
        $0.9 million.

        Canadian Third Party Asset-backed Commercial Paper ("ABCP")

        At June 30, 2008, the Company held ABCP issued by a number of trusts
        with an original cost of $143.6 million. At the dates the Company
        acquired these investments they were rated R1 (High) by DBRS Limited
        ("DBRS"), the highest credit rating issued for commercial paper, and
        backed by R1 (High) rated assets and liquidity agreements. These
        investments matured during the third quarter of 2007 but, as a result
        of liquidity issues in the ABCP market, did not settle on maturity.
        As a result, the Company has classified its ABCP as long-term
        investments after initially classifying them as Cash and cash
        equivalents.

        On August 16, 2007, an announcement was made by a group representing
        banks, asset providers and major investors on an agreement in
        principle to a long-term proposal and interim agreement to convert
        the ABCP into long-term floating rate notes maturing no earlier than
        the scheduled maturity of the underlying assets. On September 6,
        2007, a pan-Canadian restructuring committee consisting of major
        investors was formed. The committee was created to propose a solution
        to the liquidity problem affecting the ABCP and has retained legal
        and financial advisors to oversee the proposed restructuring process.

        The ABCP in which the Company has invested has not traded in an
        active market since mid-August 2007 and there are currently no market
        quotations available.

        On March 17, 2008, a court order was obtained which commenced the
        process of restructuring the ABCP under the protection of the
        Companies' Creditors Arrangement Act ("CCAA"). A vote of the holders
        of the ABCP approving the restructuring occurred on April 25, 2008,
        and on June 25, 2008 a court order sanctioning the restructuring of
        the ABCP was made pursuant to the CCAA. The sanction order remains
        subject to appeals by certain of the holders of ABCP, and the
        restructuring is not expected to be implemented until all appeals
        have been finally resolved.

        On March 20, 2008, the pan-Canadian restructuring committee issued an
        Information Statement containing details about the proposed
        restructuring. Based on this and other public information it is
        estimated that, of the $143.6 million of ABCP in which the Company
        has invested:

           -  $12.5 million is represented by traditional securitized assets
              and the Company will, on restructuring, receive replacement TA
              Tracking long-term floating rate notes with a maturity of
              approximately eight and one half years. As the underlying
              assets are primarily comprised of cash and Canadian Lines of
              Credit which are subject to an offer to repurchase at par
              value, the Company has assumed that these notes will be repaid
              in full significantly in advance of maturity;
           -  $117.7 million is represented by a combination of leveraged
              collateralized debt, synthetic assets and traditional
              securitized assets and the Company will, on restructuring,
              receive replacement senior Class A-1 and Class A-2 and
              subordinated Class B and Class C long-term floating rate notes
              with maturities of approximately eight years and nine months.
              The Company expects to receive replacement notes with par
              values as follows:
                       -  Class A-1: $59.7 million
                       -  Class A-2: $46.5 million
                       -  Class B: $8.0 million
                       -  Class C: $3.5 million
              The replacement senior notes are expected to obtain a AA rating
              while the replacement subordinated notes are likely to be
              unrated; and
           -  $13.4 million is represented by assets that have an exposure to
              US mortgages and sub-prime mortgages. On restructuring, the
              Company is likely to receive IA Tracking long-term floating
              rate notes with maturities of approximately between five years
              and three months and eight years and seven months. These notes
              may be rated, although at this time the pan-Canadian
              restructuring committee has provided no indication of the
              rating these notes may receive.

        The valuation technique used by the Company to estimate the fair
        value of its investment in ABCP at June 30, 2008, incorporates
        probability weighted discounted cash flows considering the best
        available public information regarding market conditions and other
        factors that a market participant would consider for such
        investments. The assumptions used in determining the estimated fair
        value reflect the details included in the Information Statement
        issued by the pan-Canadian restructuring committee and the risks
        associated with the long-term floating rate notes. The interest rates
        and maturities of the various long-term floating rate notes, discount
        rates and credit losses modelled are:

              Probability weighted average interest rate  3.2 per cent
              Weighted average discount rate              7.4 per cent
              Maturity of long-term floating rate notes   five to nine years
              Credit losses                               rated notes(1): nil
                                                          to 25 percent
                                                          unrated notes(2):
                                                          15 to 100 percent

              (1) TA Tracking, Class A-1 and Class A-2 senior notes and IA
                  Tracking notes.
              (2) Class B and Class C subordinated notes.

        Interest rates and credit losses vary by each of the different
        replacement long-term floating rate notes to be issued as each has
        different credit ratings and risks. Interest rates and credit losses
        also vary by the different probable cash flow scenarios that have
        been modelled.

        Discount rates vary dependent upon the credit rating of the
        replacement long-term floating rate notes. Discount rates have been
        estimated using Government of Canada benchmark rates plus expected
        spreads for similarly rated instruments with similar maturities and
        structure. An increase in the estimated discount rates of 1 percent
        would reduce the estimated fair value of the Company's investment in
        ABCP by approximately $5 million.

        Maturities vary by different replacement long-term floating rate
        notes as a result of the expected maturity of the underlying assets.

        One of the cash flow scenarios modelled is a liquidation scenario
        whereby, if the restructuring is not successfully completed, recovery
        of the Company's investment is through the liquidation of the
        underlying assets of the ABCP trusts. In addition, while the
        likelihood is remote, there remains a possibility that a liquidation
        scenario may occur even with a successful approval of the
        restructuring plan.

        In addition, assumptions have also been made as to the amount of
        restructuring costs that the Company will bear.

        The probability weighted discounted cash flows resulted in an
        estimated fair value of the Company's ABCP of $100.8 million at
        June 30, 2008. This was unchanged from the estimated fair value at
        March 31, 2008. However, it represents a reduction from the estimated
        fair value at December 31, 2007 of $122.1 million. A charge to income
        of $21.3 million before tax ($15.0 million after tax) was recorded in
        the first quarter of 2008. This first quarter charge represents
        15 percent of the original value, bringing the aggregate write-down
        to a total of approximately 30 percent of the original value.
        Sensitivity analysis is presented below for key assumptions:


        (in millions)                               Change in fair value of
                                                              ABCP
                                                   -------------------------
        Probability of successful restructuring
          1 percent increase                               $     0.4
          1 percent decrease                               $    (0.4)

        Interest rate
          50 basis point increase                          $     2.9
          50 basis point decrease                          $    (2.9)

        Discount rate
          50 basis point increase                          $    (2.4)
          50 basis point decrease                          $     2.5
                                                   -------------------------


        Continuing uncertainties regarding the value of the assets which
        underlie the ABCP, the amount and timing of cash flows and the
        outcome of the restructuring process could give rise to a further
        material change in the value of the Company's investment in ABCP
        which could impact the Company's near term earnings.


    11  Long-term debt

        During the second quarter of 2008, the Company issued US$400 million
        5.75% 5-year notes, US$300 million 6.50% 10-year notes and
        CDN$375 million 6.25% 10-year notes. Net proceeds from these
        offerings were CDN$1,068.7 million. The notes are unsecured, but
        carry a negative pledge. The proceeds from these offerings were used
        to partially repay the bridge financing.


    12  Shareholders' equity

        An analysis of Common Share balances is as follows:

                               For the three months       For the six months
                                   ended June 30             ended June 30
        (in millions)            2008         2007         2008         2007
                             ------------------------  ----------------------
        Share capital,
         beginning of period    153.6        155.2        153.3        155.5
        Shares issued under
         stock option plans       0.2          0.4          0.5          0.8
        Shares purchased            -         (2.5)           -         (3.2)
                             ------------------------  ----------------------
        Share capital,
         end of period          153.8        153.1        153.8        153.1
                             ------------------------  ----------------------
                             ------------------------  ----------------------

        For the six months ended June 30, 2008, there were no shares
        purchased (2.5 million shares were purchased during the three months
        ended June 30, 2007 at an average price per share of $74.16 and for
        the six months ended June 30, 2007 3.2 million shares were purchased
        at an average price per share of $73.64).

        Purchases are made at the market price on the day of purchase, with
        consideration allocated to share capital up to the average carrying
        amount of the shares, and any excess allocated to retained earnings.
        When shares are purchased, it takes three days before the transaction
        is settled and the shares are cancelled. The cost of shares purchased
        in a given month and settled in the following month is accrued in the
        month of purchase.


    13  Other comprehensive income and accumulated other comprehensive income

        Components of other comprehensive income and the related tax effects
        are as follows:

                                                   For the three months
                                                       ended June 30
        (in millions)                                       2008
                                                           Income
                                                Before        tax     Net of
                                                   tax   (expense)       tax
                                                amount   recovery     amount
                                            ---------------------------------
        Unrealized foreign exchange gain on
         translation of U.S.
         dollar-denominated long-term debt
         designated as a hedge of the net
         investment in U.S. subsidiaries     $     8.0  $    (1.1) $     6.9

        Unrealized foreign exchange loss on
         translation of the net investment
         in U.S. subsidiaries                     (9.1)         -       (9.1)

        Realized gain on cash flow hedges
         settled in the period                    (6.0)       1.9       (4.1)

        Decrease in unrealized holding
         losses on cash flow hedges               21.0       (6.6)      14.4

        Realized loss on cash flow hedges
         settled in prior periods                  1.7        0.5        2.2

                                            ---------------------------------
        Other comprehensive income (loss)    $    15.6  $    (5.3) $    10.3
                                            ---------------------------------
                                            ---------------------------------


                                                   For the three months
                                                       ended June 30
        (in millions)                                       2007
                                                           Income
                                                Before        tax     Net of
                                                   tax   (expense)       tax
                                                amount   recovery     amount
                                            ---------------------------------
        Unrealized foreign exchange gain on
         translation of U.S.
         dollar-denominated long-term debt
         designated as a hedge of the net
         investment in U.S. subsidiaries     $    33.8  $    (5.2) $    28.6

        Unrealized foreign exchange loss on
         translation of the net investment
         in U.S. subsidiaries                    (36.7)         -      (36.7)

        Realized gain on cash flow hedges
         settled in the period                    (4.8)       1.5       (3.3)

        Decrease in unrealized holding gains
         on cash flow hedges                      (6.6)       2.2       (4.4)

        Realized loss on cash flow hedges
         settled in prior periods                  1.6       (0.5)       1.1

                                            ---------------------------------
        Other comprehensive loss             $   (12.7) $    (2.0) $   (14.7)
                                            ---------------------------------
                                            ---------------------------------


                                                    For the six months
                                                       ended June 30
        (in millions)                                       2008
                                                           Income
                                                Before        tax     Net of
                                                   tax   (expense)       tax
                                                amount   recovery     amount
                                            ---------------------------------
        Unrealized foreign exchange loss on
         translation of U.S.
         dollar-denominated long-term debt
         designated as a hedge of the net
         investment in U.S. subsidiaries     $   (35.0) $     4.7  $   (30.3)

        Unrealized foreign exchange gain on
         translation of the net investment
         in U.S. subsidiaries                     37.2          -       37.2

        Realized gain on cash flow hedges
         settled in the period                    (8.9)       3.6       (5.3)

        Decrease in unrealized holding
         losses on cash flow hedges               15.2       (6.1)       9.1

        Realized loss on cash flow hedges
         settled in prior periods                  1.6        0.5        2.1

                                            ---------------------------------
        Other comprehensive income           $    10.1  $     2.7  $    12.8
                                            ---------------------------------
                                            ---------------------------------


                                                    For the six months
                                                       ended June 30
        (in millions)                                       2007
                                                           Income
                                                Before        tax     Net of
                                                   tax   (expense)       tax
                                                amount   recovery     amount
                                            ---------------------------------
        Unrealized foreign exchange gain on
         translation of U.S.
         dollar-denominated long-term debt
         designated as a hedge of the net
         investment in U.S. subsidiaries     $    37.7  $    (5.8) $    31.9

        Unrealized foreign exchange loss on
         translation of the net investment
         in U.S. subsidiaries                    (40.9)         -      (40.9)

        Realized gain on cash flow hedges
         settled in the period                    (8.1)       2.8       (5.3)

        Decrease in unrealized holding
         gains on cash flow hedges                (6.5)       2.2       (4.3)

        Realized loss on cash flow hedges
         settled in prior periods                  1.6       (0.5)       1.1

                                            ---------------------------------
        Other comprehensive loss             $   (16.2) $    (1.3) $   (17.5)
                                            ---------------------------------
                                            ---------------------------------


        Changes in the balances of each classification within Accumulated
        other comprehensive income are as follows:

        Three months ended June 30, 2008

                                               Opening               Closing
                                               Balance,              Balance,
        (in millions)                           Apr. 1,    Period    June 30,
                                                  2008     change       2008
                                            ---------------------------------

        Foreign exchange gain on U.S. dollar
         debt designated as a hedge of the
         net investment in U.S.
         subsidiaries                        $   259.4  $     6.9  $   266.3

        Foreign exchange loss on net
         investment in U.S. subsidiaries        (200.6)      (9.1)    (209.7)

        Unrealized effective losses on
         cash flow hedges                        (12.7)      10.3       (2.4)

        Deferred loss on settled
         hedge instruments                        (4.0)       2.2       (1.8)
                                            ---------------------------------

        Accumulated other comprehensive
         income                              $    42.1  $    10.3  $    52.4
                                            ---------------------------------
                                            ---------------------------------


        Three months ended June 30, 2007

                                               Opening               Closing
                                               Balance,              Balance,
        (in millions)                           Apr. 1,    Period    June 30,
                                                  2007     change       2007
                                            ---------------------------------

        Foreign exchange gain on U.S. dollar
         debt designated as a hedge of the
         net investment in U.S.
         subsidiaries                        $   238.6  $    28.6  $   267.2

        Foreign exchange loss on net
         investment in U.S. subsidiaries        (172.7)     (36.7)    (209.4)

        Unrealized effective gains on cash
         flow hedges                              17.0       (7.7)       9.3

        Deferred loss on settled
         hedge instruments                        (5.3)       1.1       (4.2)
                                            ---------------------------------

        Accumulated other comprehensive
         income                              $    77.6  $   (14.7) $    62.9
                                            ---------------------------------
                                            ---------------------------------


        Six months ended June 30, 2008
                                               Opening               Closing
                                               Balance,              Balance,
        (in millions)                           Jan. 1,    Period    June 30,
                                                  2008     change       2008
                                            ---------------------------------
        Foreign exchange gain on U.S. dollar
         debt designated as a hedge of the
         net investment in U.S. subsidiaries $   296.6  $   (30.3) $   266.3

        Foreign exchange loss on net
         investment in U.S. subsidiaries        (246.9)      37.2     (209.7)

        Unrealized effective losses on
         cash flow hedges                         (6.2)       3.8       (2.4)

        Deferred loss on settled hedge
         instruments                              (3.9)       2.1       (1.8)
                                            ---------------------------------

        Accumulated other comprehensive
         income                              $    39.6  $    12.8  $    52.4
                                            ---------------------------------
                                            ---------------------------------


        Six months ended June 30, 2007

                                   Adjustment  Adjusted
                         Opening          for   Opening              Closing
                         Balance,   change in   Balance,             Balance,
        (in millions)     Jan. 1,  accounting    Jan. 1,   Period    June 30,
                            2007       policy      2007    change       2007
                       ------------------------------------------------------
        Foreign exchange
         gain on U.S.
         dollar debt
         designated
         as a hedge
         of the net
         investment
         in U.S.
         subsidiaries  $   234.9  $     0.4  $   235.3  $    31.9  $   267.2

        Foreign exchange
         loss on net
         investment
         in U.S.
         subsidiaries     (168.5)         -     (168.5)     (40.9)    (209.4)

        Unrealized
         effective
         gains of cash
         flow hedges           -       18.9       18.9       (9.6)       9.3

        Deferred loss
         on settled
         hedge
         instruments           -       (5.3)      (5.3)       1.1       (4.2)
                       ------------------------------------------------------

        Accumulated
         other
         comprehensive
         income        $    66.4  $    14.0  $    80.4  $   (17.5) $    62.9
                       ------------------------------------------------------
                       ------------------------------------------------------

        During the next twelve months, the Company expects $15.9 million of
        unrealized holding gains on derivative instruments to be realized and
        recognized in the Statement of Consolidated Income. Existing
        derivative instruments designated as cash flow hedges will be fully
        matured by December 31, 2009.


    14  Financial instruments

        The fair value of a financial instrument is the amount of
        consideration that would be agreed upon in an arm's length
        transaction between willing parties. The Company uses the following
        methods and assumptions to estimate fair value of each class of
        financial instruments for which carrying amounts are included in the
        Consolidated Balance Sheet as follows:

        Loans and receivables
        ---------------------
        Accounts receivable and other current assets - The carrying amounts
        approximate fair value because of the short maturity of these
        instruments.

        Investments - Long-term receivable balances are carried at amortized
        cost based on an initial fair value as determined at the time using
        discounted cash flow analysis and observable market based inputs.

        Financial liabilities
        ---------------------
        Accounts payable and accrued liabilities, short-term borrowings, and
        deferred liabilities - The carrying amounts approximate fair value
        because of the short maturity of these instruments.

        Long-term debt - The carrying amount of long-term debt is at
        amortized cost based on an initial fair value as determined at the
        time using the quoted market prices for the same or similar debt
        instruments.

        Available for sale
        ------------------
        Investments - Certain equity investments which are recorded on a cost
        basis have a carrying value that equals cost as fair value cannot be
        reliably established as there are no quoted prices in an active
        market for these investments.

        Held for trading
        ----------------
        Derivative instruments that are designated as hedging instruments are
        measured at fair value determined using the quoted market prices for
        the same or similar instruments. Derivative instruments that are not
        designated in hedging relationships are classified as held for
        trading and measured at fair value determined by using quoted market
        prices for similar instruments and changes in fair values of such
        derivatives are recognized in net income as they arise.

        Cash and cash equivalents - The carrying amounts approximate fair
        value because of the short maturity of these instruments.

        Investments - Canadian third party asset-backed commercial paper
        (ABCP) is carried at fair value, which has been determined using
        valuation techniques that incorporate probability weighted discounted
        future cash flows reflecting market conditions and other factors that
        a market participant would consider (see Note 10).

        The table below reconciles carrying value positions of the Company's
        financial instruments with Consolidated Balance Sheet categories:

        (in millions)                                June 30, 2008
                                          -----------------------------------
                                              Carrying     Carrying
                                              Value of     Value of
                                             Financial        Other  Balance
                                               Assets/      Assets/    Sheet
                                           Liabilities  Liabilities   Amount
                                          -----------------------------------
        Assets
          Cash and cash
           equivalents                       $    80.9  $       -  $    80.9
                                          -----------------------------------
          Accounts receivable and other
           current assets
            Accounts receivable                  603.5          -
            Current portion of crude
             oil swaps                            17.5          -
            Current portion of interest
             rate swaps                            2.6          -
            Total return swap                      2.3          -
            Other                                    -       55.4
                                          -----------------------------------
                                                 625.9       55.4      681.3
                                          -----------------------------------
          Investments
            Equity investments at cost             1.2          -
            Long-term receivables at
             amortized cost                       11.3          -
            ABCP                                 100.8          -
            Other                                    -    1,604.3
                                          -----------------------------------
                                                 113.3    1,604.3    1,717.6
                                          -----------------------------------
          Other assets and deferred charges
            Long-term portion of crude
             oil swaps                             9.0          -
            Long-term portion of interest
             rate swaps                            3.5          -
            Other                                    -    1,455.5
                                          -----------------------------------
                                                  12.5    1,455.5    1,468.0
                                          -----------------------------------
        Liabilities
        Short-term borrowings                    255.0          -      255.0
                                          -----------------------------------
        Accounts payable and accrued
         liabilities
          Accounts payable and accrued
           liabilities                           782.9          -
          Current portion of foreign
           exchange contracts on fuel              1.3          -
          Current portion of treasury
           rate lock                                 -          -
          Current portion of interest
           rate swaps                                -          -
          Other                                      -      170.0
                                          -----------------------------------
                                                 784.2      170.0      954.2
                                          -----------------------------------
          Long-term debt maturing
           within one year                   $   238.4  $       -  $   238.4
                                          -----------------------------------
          Deferred liabilities
            Long-term portion of foreign
             exchange contracts on fuel            0.7          -
            Long-term portion of
             currency forward                     11.5          -
            Long-term portion of
             interest rate swaps                     -          -
            Total return swap                        -          -
            Long-term portion of Accounts
             payable and accrued liabilities      42.6          -
            Other                                    -      662.4
                                          -----------------------------------
                                                  54.8      662.4      717.2
                                          -----------------------------------
        Long-term debt                         4,016.8          -    4,016.8
                                          -----------------------------------


        (in millions)                              December 31, 2007
                                          -----------------------------------
                                              Carrying     Carrying
                                              Value of     Value of
                                             Financial        Other  Balance
                                               Assets/      Assets/    Sheet
                                           Liabilities  Liabilities   Amount
                                          -----------------------------------
        Assets
          Cash and cash
           equivalents                       $   378.1  $       -  $   378.1
                                          -----------------------------------
          Accounts receivable and other
           current assets
            Accounts receivable                  483.0          -
            Current portion of crude
             oil swaps                            12.9          -
            Current portion of interest
             rate swaps                              -          -
            Total return swap                        -          -
            Other                                    -       46.9
                                          -----------------------------------
                                                 495.9       46.9      542.8
                                          -----------------------------------
          Investments
            Equity investments at cost             1.3          -
            Long-term receivables at
             amortized cost                       17.5          -
            ABCP                                 122.1          -
            Other                                    -    1,527.7
                                          -----------------------------------
                                                 140.9    1,527.7    1,668.6
                                          -----------------------------------
          Other assets and deferred charges
            Long-term portion of crude
             oil swaps                             8.5          -
            Long-term portion of interest
             rate swaps                              -          -
            Other                                    -    1,227.1
                                          -----------------------------------
                                                   8.5    1,227.1    1,235.6
                                          -----------------------------------
        Liabilities
        Short-term borrowings                    229.7          -      229.7
                                          -----------------------------------
        Accounts payable and accrued
         liabilities
          Accounts payable and accrued
           liabilities                           750.6          -
          Current portion of foreign
           exchange contracts on fuel              2.1          -
          Current portion of treasury
           rate lock                              30.6          -
          Current portion of interest
           rate swaps                             (1.0)         -
          Other                                      -      198.5
                                          -----------------------------------
                                                 782.3      198.5      980.8
                                          -----------------------------------
          Long-term debt maturing
           within one year                   $    31.0  $       -  $    31.0
                                          -----------------------------------
          Deferred liabilities
            Long-term portion of foreign
             exchange contracts on fuel            1.5          -
            Long-term portion of
             currency forward                     15.7          -
            Long-term portion of
             interest rate swaps                  (4.5)         -
            Total return swap                      3.8          -
            Long-term portion of Accounts
             payable and accrued liabilities      41.9          -
            Other                                    -      656.2
                                          -----------------------------------
                                                  58.4      656.2      714.6
                                          -----------------------------------
        Long-term debt                         4,146.2          -    4,146.2
                                          -----------------------------------


        Carrying value and fair value of financial instruments
        ------------------------------------------------------
        The carrying values of financial instruments equal or approximate
        their fair values with the exception of long-term debt which has a
        carrying value of approximately $4,255.2 million (December 31, 2007 -
        $4,177.2 million) and a fair value of approximately $4,240.0 million
        at June 30, 2008 (December 31, 2007 - $4,302.6 million). The fair
        value of publicly traded long-term debt is determined based on market
        prices at June 30, 2008 and December 31, 2007, respectively. 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 applicable
        Consolidated Balance Sheet date.

        Financial risk management
        -------------------------
        In the normal course of operations, the Company is exposed to various
        market risks such as foreign exchange risk, interest rate risk, other
        price risk, as well as credit risk and liquidity risk. To manage
        these risks, the Company utilizes a Financial Risk Management (FRM)
        framework. The FRM goals and strategy are outlined below:

        FRM objectives:
        -  Maintaining sound financial condition as an ongoing entity;
        -  Optimizing earnings per share and cash flow;
        -  Financing operations of the group of CP companies at the optimal
           cost of capital; and
        -  Ensuring liquidity to all Canadian and U.S. operations.

        In order to satisfy the objectives above, the Company has adopted the
        following strategies:
        -  Prepare multi-year planning and budget documents at prevailing
           market rates to ensure clear, corporate alignment to performance
           management and achievement of targets;
        -  Measure the extent of operating risk within the business;
        -  Identify the magnitude of the impact of market risk factors on the
           overall risk of the business and take advantage of natural risk
           reductions that arise from these relationships; and
        -  Utilize financial instruments, including derivatives to manage the
           remaining residual risk to levels that fall within the risk
           tolerance of the Company.

        Under the governance structure established by the Company and
        approved by the Audit, Finance and Financial Risk Management
        Committee ("Audit Committee"), the Board of Directors has the
        authority to approve the Financial Risk Management Policies of the
        Company. The Board has delegated to the Audit Committee the
        accountability for ensuring a structure is in place to ensure
        compliance with the individual Corporate Risk Management Policies
        across the Company's operations.

        The policy objective with respect to the utilization of derivative
        financial instruments is to selectively mitigate the impact of
        fluctuations in foreign exchange ("FX") rates, interest rates, fuel
        price, and share price. The use of any derivative instruments is
        carried out in accordance with approved trading limits and authorized
        counterparties as specified in the policy and/or mandate. It is not
        the Company's intent to use financial derivatives or commodity
        instruments for trading or speculative purposes.

        Risk factors
        ------------
        The following is a discussion of market, credit and liquidity risks
        and related mitigation strategies that have been identified through
        the FRM framework. This not an exhaustive list of all risks, nor
        will the mitigation strategies eliminate all risks listed. Risks
        related to the Company's investment in ABCP are discussed in more
        detail in Note 10.

        Foreign exchange risk
        ---------------------
        This risk refers to the fluctuation of financial commitments, assets,
        liabilities, income or cash flows due to changes in FX rates. The
        Company conducts business transactions and owns assets in both Canada
        and the United States; as a result, revenues and expenses are
        incurred in both Canadian dollars and U.S. dollars. The Company's
        income is exposed to FX risk largely in the following ways:

        -  Translation of U.S. dollar denominated revenues and expenses into
           Canadian dollars - When the Canadian dollar changes relative to
           the U.S. dollar, income reported in Canadian dollars will change.
           The impact of a strengthening Canadian dollar on U.S. dollar
           revenues and expenses will reduce net income because the Company
           has more U.S. dollar revenues than expenses. This impact is
           excluded from the sensitivity in the table below; and
        -  Translation of U.S. dollar denominated debt and other monetary
           items - A strengthening Canadian dollar will reduce the Company's
           U.S. dollar denominated debt in Canadian dollar terms and generate
           a FX gain on long-term debt, which is recorded in income. The
           Company calculates FX on long-term debt using the difference in FX
           rates at the beginning and at the end of each reporting period.
           Other U.S. dollar denominated monetary items will also be impacted
           by changes in FX rates.

        Foreign exchange management

        In terms of net income, excluding FX on long-term debt, mitigation of
        U.S. dollar FX exposure is provided primarily through offsets created
        by revenues and expenses incurred in the same currency. Where
        appropriate the Company negotiates with U.S. customers and suppliers
        to reduce the net exposure. The Company may from time to time reduce
        residual exposure by hedging revenues through FX forward contracts.
        The Company had no revenue forward sales of U.S. dollars outstanding
        at June 30, 2008.

        The FX gains and losses on long-term debt are mainly unrealized and
        can only be realized when U.S. dollar denominated long-term debt
        matures or is settled. The Company also has long term FX exposure on
        its investment in U.S. affiliates. A portion of the Company's U.S.
        dollar denominated long-term debt has been designated as a hedge of
        the net investment in self-sustaining foreign subsidiaries. This
        designation has the effect of mitigating volatility on net income by
        offsetting long-term FX gains and losses on long-term debt. In
        addition, for long-term debt denominated in U.S. dollars in Canada,
        the Company may enter into currency forwards to hedge debt that is
        denominated in U.S. dollars.

        Occasionally the Company will enter into short-term FX forward
        contracts as part of its cash management strategy.

        The table below depicts the quarterly impact to net income and other
        comprehensive income of long-term debt had the exchange rate
        increased or decreased by one cent. The impact on other U.S. dollar
        denominated monetary items is not considered to be material.

                                                        Three months ended
        (in millions)                                     June 30, 2008
                                                      -----------------------
                                                                      Impact
                                                                    to Other
                                                                      compre-
                                                        Impact to    hensive
                                                       Net income     income
                                                      -----------------------

        1 cent strengthening in Canadian dollar         $    (1.1) $    (2.1)
        1 cent weakening in Canadian dollar                   1.1        2.1
                                                      -----------------------
                                                      -----------------------
        Note: All variables excluding FX are held constant. Impact to net
        income would be decreased by $10.9 million and to other comprehensive
        income would be increased by $10.9 million if the net investment
        hedge was not included in the above table.


        Foreign exchange forward contracts

        In June 2007, the Company entered into a currency forward to fix the
        exchange rate on US$400 million 6.250% Notes due 2011. This
        derivative guarantees the amount of Canadian dollars that the Company
        will repay when its US$400 million 6.25% note matures in
        October 2011. During the three months ended June 30, 2008, the
        Company recorded a loss of $9.7 million and a gain of $4.2 million
        for the first half of 2008 to "Foreign exchange (gain) loss on
        long-term debt". For the same periods in 2007, the Company recorded a
        loss of $2.0 million. At June 30, 2008, the unrealized loss on the
        forward was $11.5 million (December 31, 2007 - $15.7 million).

        Interest rate risk
        ------------------
        This refers to the risk that the fair value or income and future cash
        flows of a financial instrument will vary as a result of changes in
        market interest rates.

        In order to manage funding needs or capital structure goals, the
        Company enters into debt or capital lease agreements that are subject
        to either fixed market interest rates set at the time of issue or
        floating rates determined by on-going market conditions. Debt subject
        to variable interest rates exposes the Company to variability in
        interest expense, while debt subject to fixed interest rates exposes
        the Company to variability in the fair value of the debt.

        The table below depicts the floating and fixed maturities for all
        financial assets and liabilities:

        (in millions)                                       June 30, 2008
                                                       ----------------------
                                                               At         At
                                                         floating      fixed
                                                         interest   interest
                                                            rates      rates
                                                       ----------------------
        Financial assets
        Cash and short-term investments                 $    80.9  $       -
        ABCP                                                100.8          -

        Financial liabilities
        Short-term borrowings                               255.0          -
        Long-term debt (1)                                  553.9    3,701.3

                                                         --------------------
                                                         --------------------
        (1) Includes impact of interest rate swaps

        Interest rate management

        To manage interest rate exposure, the Company accesses diverse
        sources of financing and manages borrowings in line with a targeted
        range of capital structure, debt ratings, liquidity needs, maturity
        schedule, and currency and interest rate profiles. In anticipation of
        future debt issuance, the Company may enter into forward rate
        agreements such as treasury rate locks, bond forwards or forward
        starting swaps to substantially lock in all or a portion of the
        effective future interest expense. The Company may also enter into
        swap agreements to manage the mix of fixed and floating rate debt.

        The table below depicts the quarterly impact to net income and other
        comprehensive income had interest rates increased or decreased by
        50 basis points. Typically, as rates increase, net income decreases.

                                                          Three months ended
        (in millions)                                       June 30, 2008
                                                         --------------------
                                                              Impact to
                                                              Net income
                                                         --------------------
        50 basis point increase in rates                           $    (0.5)
        50 basis point decrease in rates                                 0.5
                                                         --------------------
                                                         --------------------

        Note: All variables excluding interest rates are held constant.

        At June 30, 2008, the Company had outstanding interest rate swap
        agreements, classified as a fair value hedge, for a notional amount
        of US$200 million or $203.9 million. The swap agreements convert a
        portion of the Company's fixed-interest-rate liability into a
        variable-rate liability for the 6.250% Notes. During the three months
        ended June 30, 2008, the Company recorded a gain of $0.9 million
        (three months ended June 30, 2007 - losses of $0.3 million) to
        "Interest expense". For the six months ended June 30, 2008 this gain
        was $1.1 million (six months ended June 30, 2007 - losses of
        $0.8 million). At June 30, 2008, the unrealized gain, derived from
        the fair value of the swap, was $6.1 million (December 31, 2007 -
        $5.5 million).

        The following table discloses the terms of the swap agreements at
        June 30, 2008:

        Expiration                                          October 15, 2011
        Notional amount of principal (in CDN$ millions)              $ 203.9
        Fixed receiving rate                                          6.250%
        Variable paying rate - YTD                                    4.859%
        ---------------------------------------------------------------------

        Based on U.S. three-month LIBOR.


        During 2007, the Company entered into derivative agreements, which
        were designated as cash flow hedges, that established the benchmark
        rate on $350.0 million of 30 year debt that was expected to be
        issued. These hedges were de- designated on May 13, 2008 when it was
        no longer probable that the Company would issue 30 year debt. On
        May 23, 2008, the fair value of these instruments was a loss of
        $30.9 million at the time of the issuance of the debt and the
        settlement of the derivative instrument. A gain of $1.3 million from
        the date of de-designation to the date of settlement of the
        derivative instrument was recorded in net income. Losses of $0.2 and
        $1.1 million due to some ineffectiveness were recognized and recorded
        in net income during the 3 months and six months ended June 30, 2008,
        respectively. Effective hedge losses of $28.7 million will be
        deferred in accumulated other comprehensive income and will be
        amortized in earnings as an adjustment to interest expense.

        Stock-based compensation risk
        -----------------------------
        This risk refers to the probability of increased compensation expense
        due to the increase in the Company's share price.

        The Company's compensation expense is subject to volatility due to
        the movement of share price and its impact on the value of certain
        management and director stock-based compensation programs. These
        programs, as described in the management proxy circular, include
        deferred share units, restricted share units, performance share units
        and share appreciation rights. As the share price appreciates, these
        instruments are marked to market increasing compensation expense.

        Stock-based compensation expense management

        To minimize the volatility to compensation expense created by changes
        in share price, the Company entered into a Total Return Swap ("TRS")
        to reduce the volatility and total cost to the Company over time of
        the four types of stock-based compensation programs noted above.
        These are derivatives that provide price appreciation and dividends,
        in return for a charge by the counterparty. The swaps minimize
        volatility to compensation expense by providing a gain to
        substantially offset increased compensation expense as the share
        price increases and a loss to offset reduced compensation expense
        when the share price falls. If stock-based compensation share units
        fall out of the money after entering the program, the loss associated
        with the swap would no longer be offset by any compensation expense
        reductions.

        The table below depicts the quarterly impact to net income as a
        result of the TRS had the share price increased or decreased $1 from
        the closing share price on June 30, 2008.

                                                          Three months ended
        (in millions)                                       June 30, 2008
                                                         --------------------
                                                                   Impact to
                                                                  Net income
                                                         --------------------

        $1 increase in share price                                 $     1.7
        $1 decrease in share price                                      (1.7)
                                                         --------------------
                                                         --------------------
        Note: All variables excluding share price are held constant.


        During the three months ended June 30, 2008, Compensation and
        benefits expense decreased by $3.3 million (three months ended
        June 30, 2007 - $16.5 million) and $6.0 million for the six months
        ended June 30, 2008 (six months ended June 30, 2007 - $22.8 million)
        due to unrealized gains for these swaps. At June 30, 2008, the
        unrealized gain on the swap was $2.3 million (December 31, 2007 -
        unrealized loss of $3.8 million).

        Commodity risk
        --------------
        The Company is exposed to commodity risk related to purchases of
        diesel fuel and the potential reduction in net income due to
        increases in the price of diesel. Because fuel expense constitutes a
        large portion of the Company's operating costs, volatility in diesel
        fuel prices can have a significant impact on the Company's income.
        Items affecting volatility in diesel prices include, but are not
        limited to, fluctuations in world markets for crude oil and
        distillate fuels, which can be affected by supply disruptions and
        geopolitical events.

        Fuel price management

        The impact of variable fuel expense is mitigated substantially
        through fuel recovery programs which apportion incremental changes in
        fuel prices to shippers through price indices, tariffs, and, by
        contract, within agreed upon guidelines. While these programs provide
        effective and meaningful coverage, residual exposure remains as the
        fuel expense risk cannot be completely recovered from shippers due to
        timing and volatility in the market. The Company continually monitors
        residual exposure, and where appropriate, may enter into derivative
        instruments.

        Derivative instruments used by the Company to manage fuel expense
        risk may include, but are not limited to, swaps and options for crude
        oil and diesel. In addition, the Company may combine FX forward
        contracts with fuel derivatives to effectively hedge the risk
        associated with FX variability on fuel purchases and commodity
        hedges.

        The table below depicts the quarterly impact to net income (excluding
        recoveries through pricing mechanisms) and other comprehensive income
        as a result of our crude forward contracts had the price of West
        Texas Intermediate ("WTI") changed by $1 for the three months ended
        June 30, 2008:

                                                       Three months ended
        (in millions)                                    June 30, 2008
                                                  ---------------------------
                                                                      Impact
                                                                    to Other
                                                    Impact to  Comprehensive
                                                   Net income         income
                                                  ---------------------------

        $1 increase in price per barrel            $      0.1     $      0.2
        $1 decrease in price per barrel                  (0.1)          (0.2)
                                                  ---------------------------
                                                  ---------------------------
        Note: All variables excluding WTI per barrel are held constant.


        At June 30, 2008, the Company had crude forwards contracts, which are
        accounted for as cash flow hedges, to purchase approximately
        258,000 barrels over the 2008-2009 period at average quarterly prices
        ranging from US$35.17 to US$38.19 per barrel. This represents
        approximately 2% of estimated fuel purchases in 2008 and 2009. At
        June 30, 2008, the unrealized gain on these forward contracts was
        $26.6 million (December 31, 2007 - $21.4 million).

        At June 30, 2008, the Company had FX forward contracts (in
        conjunction with the crude purchases above), which are accounted for
        as cash flow hedges, totalling US$9.4 million over the 2008-2009
        period at exchange rates ranging from 1.2276 to 1.2611. At June 30,
        2008, the unrealized loss on these forward contracts was $1.9 million
        (December 31, 2007 - $3.5 million).

        For the three months ended June 30, 2008, fuel expense was reduced by
        $5.2 million (three months ended June 30, 2007 - $4.8 million) as a
        result of $5.8 million in realized gains (three months ended June 30,
        2007 - $5.6 million) arising from settled swaps, partially offset by
        $0.7 million in realized losses (three months ended June 30, 2007 -
        $0.8 million) arising from the settled FX forward contracts. For the
        six months ended June 30, 2008, fuel expense was reduced by
        $8.8 million (six months ended June 30, 2007 - $9.4 million) as a
        result of $10.1 million in realized gains (six months ended June 30,
        2007 - $10.5 million) arising from settled swaps, partially offset by
        $1.3 million in realized losses (six months ended June 30, 2007 -
        $1.1 million) arising from settled FX forward contracts.

        Credit risk
        -----------
        Credit risk refers to the possibility that a customer or counterparty
        will fail to fulfil its obligations under a contract and as a result,
        create a financial loss for the Company. The Company's credit risk
        regarding its investment in ABCP are discussed in more detail in
        Note 10.

        Credit risk management

        The railway industry services predominantly financially established
        customers and the Company has experienced limited financial loss with
        respect to credit risk. The credit worthiness of customers is
        assessed using credit scores supplied by a third party, and through
        direct monitoring of their financial well-being on a continual basis.
        The Company establishes guidelines for customer credit limits and
        should thresholds in these areas be reached, appropriate precautions
        are taken to improve collectibility. Pursuant to their respective
        terms, accounts receivable are aged as follows at June 30, 2008:

        (in millions)

        Up to date                                                 $   463.7
        Under 30 days past due                                          81.0
        30-60 days past due                                             22.3
        61-90 days past due                                              8.6
        Over 91 days past due                                           27.9
                                                                 ------------
                                                                   $   603.5
                                                                 ------------
                                                                 ------------

        Counterparties to financial instruments expose the Company to credit
        losses in the event of non-performance. Counterparties for derivative
        and cash transactions are limited to high credit quality financial
        institutions, which are monitored on an ongoing basis. Counterparty
        credit assessments are based on the financial health of the
        institutions and their credit ratings from external agencies. With
        exception of ABCP, the Company does not anticipate non-performance
        that would materially impact the Company's financial statements.

        With the exception of ABCP, the Company believes there are no
        significant concentrations of credit risk. The maximum exposure to
        credit risk can be taken from our financial assets values reported in
        the table reconciling the carrying value positions of the Company's
        financial instruments with Consolidated Balance Sheet categories and
        as discussed in Note 19 under guarantees.

        Liquidity risk
        --------------
        The Company monitors and manages its liquidity risk to ensure access
        to sufficient funds to meet operational and investing requirements.

        Liquidity risk management

        The Company has long-term debt ratings of Baa3, BBB, and BBB from
        Moody's Investors Service, Inc. ("Moody's"), Standard and Poor's
        Corporation ("S&P"), and DBRS respectively. The S&P rating has a
        negative outlook, while the ratings of Moody's and DBRS have a stable
        outlook. The Company intends to manage its capital structure and
        liquidity at levels that sustain an investment grade rating.

        The Company has a five year revolving credit facility of
        $945 million, with an accordion feature to $1.15 billion, of which
        $351 million was available on June 30, 2008.

        This facility is arranged with a core group of highly rated
        international financial institutions and they incorporate pre-agreed
        pricing. The revolving credit facility is available on next day
        terms.

        The Company plans to access both Canadian and U.S. capital markets to
        secure long term financing for the temporary credit facility. Market
        conditions allowing, the Company will access debt capital markets in
        various maturities periodically prior to the expiry of the temporary
        credit facility in order to minimize risk and optimize pricing. It is
        the Company's intention to manage its long term financing structure
        to maintain its investment grade rating. The Company may decide to
        enter certain derivative instruments to reduce interest rate and
        foreign exchange exposure in advance of these issuances.

        Surplus cash is invested into a range of short dated money market
        instruments meeting or exceeding the parameters of the Company's
        investment policy.

        The table below reflects the contractual maturity of the Company's
        undiscounted cash flows for its financial liabilities and
        derivatives:

        (in millions)                         As at June 30, 2008
                                  -------------------------------------------
                                                2009-
                                     2008       2011      2012+      Total
                                  -------------------------------------------

        Financial liabilities
          Short-term borrowings   $   255.0  $       -  $       -  $   255.0
          Accounts payable and
           accrued liabilities        782.9       42.6          -      825.5
          Foreign exchange
           contracts on fuel            0.7        1.3          -        2.0
          Currency forward                -       13.0          -       13.0
          Long-term debt               32.5    1,193.9    3,642.4    4,868.8
                                  -------------------------------------------
                                  -------------------------------------------


    15  Additions to investments and other assets

        Additions to investment and other assets includes the acquisition of
        locomotives and freight car assets of $57.4 million and
        $192.1 million for the three and six months ended June 30, 2008,
        respectively, (three and six months ended June 30, 2007 -
        $12.0 million). These assets were purchased in anticipation of a sale
        and lease back arrangement with a financial institution.


    16  Stock-based compensation

        In 2008, under CP's stock option plans, the Company issued 1,360,400
        options to purchase Common Shares at the weighted average price of
        $71.59 per share, based on the closing price on the grant date. In
        tandem with these options, 425,650 stock appreciation rights were
        issued at the weighted average exercise price of $71.54.

        Pursuant to the employee plan, options may be exercised upon vesting,
        which is between 24 months and 36 months after the grant date, and
        will expire after 10 years. Some options vest after 48 months, unless
        certain performance targets are achieved, in which case vesting is
        accelerated. These options expire five years after the grant date.
        Other options only vest if certain performance targets are achieved
        and expire approximately five years after the grant date.

        The following is a summary of the Company's fixed stock option plans
        as of June 30 (including options granted under the Directors' Stock
        Option Plan, which was suspended in 2003):

                                   2008                        2007
                       --------------------------  --------------------------
                                        Weighted                    Weighted
                                         average                     average
                         Number of      exercise     Number of      exercise
                           options         price       options         price
                       --------------------------  --------------------------
        Outstanding,
         January 1       6,981,108         43.97     6,815,494       $ 38.50
        New options
         granted         1,360,400         71.59     1,302,700         62.59
        Exercised         (493,460)        34.40      (811,856)        31.78
        Forfeited/
         cancelled         (85,050)        47.09      (111,725)        39.38
                       ------------                ------------
        Outstanding,
         June 30         7,762,998         49.39     7,194,613       $ 43.61
                       --------------------------  --------------------------
                       --------------------------  --------------------------
        Options
         exercisable
         at June 30      4,637,348         38.33     4,239,713       $ 34.01
                       --------------------------  --------------------------
                       --------------------------  --------------------------

        Compensation expense is recognized over the vesting period for stock
        options issued since January 1, 2003, based on their estimated fair
        values on the date of grants, as determined by the Black-Scholes
        option pricing model.

        Under the fair value method, the fair value of options at the grant
        date was $14.1 million for options issued in the first six months of
        2008 (first six months of 2007 - $11.3 million). The weighted average
        fair value assumptions were approximately:

                                                          For the six months
                                                             ended June 30
                                                           2008         2007
                                                    -------------------------
        Expected option life (years)                       4.39         4.00
        Risk-free interest rate                            3.54%        3.90%
        Expected stock price volatility                      22%          22%
        Expected annual dividends per share          $     0.99   $     0.90
        Weighted average fair value of options
         granted during the year                     $    15.12   $    12.96
                                                    -------------------------
                                                    -------------------------

    17  Pensions and other benefits

        The total benefit cost for the Company's defined benefit pension
        plans and post-retirement benefits for the three months ended
        June 30, 2008, was $19.9 million (three months ended June 30, 2007 -
        $27.1 million) and for the six months ended June 30, 2008, was
        $39.0 million (six months ended June 30, 2007 - $54.5 million).

    18  Significant customers

        During the first six months of 2008, one customer comprised 12.3% of
        total revenue (first six months of 2007 - 11.7%). At June 30, 2008,
        that same customer represented 5.4% of total accounts receivable
        (June 30, 2007 - 5.2%).

    19  Commitments and contingencies

        In the normal course of its operations, the Company becomes involved
        in various legal actions, including claims relating to injuries and
        damages 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 June 30, 2008, 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.

        During the quarter ended March 31, 2008, the Canadian Transportation
        Agency announced a Decision directing a downward adjustment of the
        railway maximum revenue entitlement for movement of regulated grain
        under the Canada Transportation Act, for the period from August 1,
        2007 to July 31, 2008. The Company has applied to the Federal Court
        of Appeal for leave to appeal the decision. A provision considered
        adequate by management is maintained for the prospective adjustment.
        The retroactive component of the adjustment, which is estimated to be
        $23 million, is not considered to be legally supportable and as such
        a provision has not been made.

        Capital commitments

        At June 30, 2008, the Company had multi-year capital commitments of
        $566.5 million, mainly for locomotive overhaul agreements, in the
        form of signed contracts. Payments for these commitments are due in
        2008 through 2022.

        Operating lease commitments

        At June 30, 2008, minimum payments under operating leases were
        estimated at $707.7 million in aggregate, with annual payments in
        each of the next five years of: 2008 - $71.1 million; 2009 -
        $114.5 million; 2010 - $92.6 million; 2011 - $81.9 million; 2012 -
        $76.8 million.

        Guarantees

        At June 30, 2008, the Company had residual value guarantees on
        operating lease commitments of $246.9 million and certain guarantees
        related to the Company's investment in the DM&E, which include
        minimum lease payments of $58.5 million, residual value guarantees of
        $11.6 million, and a line of credit of US$25 million. The maximum
        amount that could be payable under these and all of the Company's
        other guarantees cannot be reasonably estimated due to the nature of
        certain of the guarantees. All or a portion of amounts paid under
        certain guarantees could be recoverable from other parties or through
        insurance. The Company has accrued for all guarantees that it expects
        to pay. At June 30, 2008, these accruals amounted to $6.0 million.

    20  Capital disclosures

        The Company's objectives when managing its capital are:

        -   to maintain a flexible capital structure which optimizes the cost
            of capital at acceptable risk while providing an appropriate
            return to its shareholders;
        -   to manage capital in a manner which balances the interests of
            equity and debt holders;
        -   to manage capital in a manner that will maintain compliance with
            its financial covenants;
        -   to manage its long term financing structure to maintain its
            investment grade rating; and
        -   to maintain a strong capital base so as to maintain investor,
            creditor and market confidence and to sustain future development
            of the business.

        The Company defines its capital as follows:

        -   shareholders' equity;
        -   long-term debt, including the current portion; and
        -   short-term borrowing.

        The Company manages its capital structure and makes adjustments to it
        in accordance with the aforementioned objectives, as well as in the
        light of changes in economic conditions and the risk characteristics
        of the underlying assets. In order to maintain or adjust its capital
        structure, the Company may adjust the amount of dividends paid to
        shareholders, purchase shares for cancellation pursuant to normal
        course issuer bids, issue new shares, issue new debt, and/or issue
        new debt to replace existing debt with different characteristics.

        The Company monitors capital using a number of key financial metrics,
        including:

        -   net-debt to net-debt-plus-equity; and
        -   interest coverage ratio: earnings before interest and taxes
            ("EBIT") to interest expense.

        Both of these metrics have no standardized meanings prescribed by
        GAAP and, therefore, are unlikely to be comparable to similar
        measures of other companies.

        The calculations for the aforementioned key financial metrics are as
        follows:

        Net-debt to net-debt-plus-equity
        --------------------------------
        Net debt, which is a non-GAAP measure, is the sum of long-term debt,
        long-term debt maturing within one year and short-term borrowing,
        less cash and short-term investments. This sum is divided by total
        net debt plus total shareholders' equity as presented on our
        Consolidated Balance Sheet.

        Interest coverage ratio
        -----------------------
        EBIT, which is a non-GAAP measure that is calculated, on a twelve
        month rolling basis, as revenues less operating expenses, less change
        in estimated fair value of ABCP, other income and charges, and equity
        income in DM&E, divided by interest expense.

        The following table illustrates the financial metrics and their
        corresponding guidelines currently in place:

        ---------------------------------------------------------------------
                                                       June 30,      June 30,
        (in millions)                 Guidelines          2008          2007
        ---------------------------------------------------------------------
        Long-term debt                             $   4,016.8   $   3,046.6
        Long-term debt maturing
         within one year                                 238.4          30.6
        Short-term borrowing                             255.0             -
        Less:
          Cash and cash equivalents                      (80.9)       (392.1)
        ---------------------------------------------------------------------
        Net Debt(1)                                $   4,429.3   $   2,685.1
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Shareholders' equity                       $   5,666.0   $   4,978.5
        Net debt                                       4,429.3       2,685.1
        ---------------------------------------------------------------------
        Net Debt plus Equity(1)                    $  10,095.3   $   7,663.6
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Revenues less operating expenses           $   1,076.5   $   1,156.2
        Less:
          ABCP                                           (42.8)            -
          Other income and charges                       (28.2)        (26.3)
          Equity income in DM&E                           36.7             -
        ---------------------------------------------------------------------
        EBIT(1)(2)                                 $   1,042.2   $   1,129.9
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Net debt                                   $   4,429.3   $   2,685.1
        Net debt plus equity                       $  10,095.3   $   7,663.6
        ---------------------------------------------------------------------
        Net-debt to Net-debt-
         plus-equity(1)         No more than 50.0%        43.9%         35.0%
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        EBIT                                       $   1,042.2   $   1,129.9
        Interest expense                           $     231.1   $     194.6
        ---------------------------------------------------------------------
        Interest Coverage
         Ratio(1)(2)             No less than 4.0          4.5           5.8
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        (1) These earnings measures have no standardized meanings prescribed
            by GAAP and, therefore, are unlikely to be comparable to similar
            measures of other companies.
        (2) The balance is calculated on a rolling twelve month basis.


        The Company's financial objectives and strategy as described above
        have remained substantially unchanged over the last two fiscal years.
        The objectives are reviewed on an annual basis and financial metrics
        and their guidelines are monitored on a quarterly basis. The Company
        believes that adherence to these guidelines increases its ability to
        access to capital at a reasonable cost and maintain credit ratings of
        an investment grade. The Company believes that these ratios are
        within reasonable limits, in light of the relative size of the
        Company and its capital management objectives.

        The Company is also subject to financial covenants in the bridge
        financing agreement obtained for the acquisition of DM&E and revolver
        loan agreements. Net-debt to net-debt-plus-equity and interest
        coverage ratio are two financial metrics that provide indicators as
        to whether the Company will be in compliance with its financial
        covenants. The Company is in compliance with all financial covenants.


                            Summary of Rail Data
                            --------------------

                                                  Second Quarter
                                  -------------------------------------------
                                     2008       2007     Variance         %
                                  ---------- ---------- ---------- ----------
    Financial (millions, except
    ---------------------------
     per share data and ratios)
     --------------------------

    Revenues
    --------
      Freight revenue              $1,193.1   $1,174.1   $   19.0        1.6
      Other revenue                    27.2       41.4      (14.2)     (34.3)
                                  ---------- ---------- ----------
                                    1,220.3    1,215.5        4.8        0.4
                                  ---------- ---------- ----------
    Operating expenses
    ------------------
      Compensation and benefits       315.5      329.8      (14.3)      (4.3)
      Fuel                            260.3      193.7       66.6       34.4
      Materials                        56.5       55.6        0.9        1.6
      Equipment rents                  46.1       57.3      (11.2)     (19.5)
      Depreciation and amortization   124.7      119.1        5.6        4.7
      Purchased services and other    166.1      152.3       13.8        9.1
                                  ---------- ---------- ----------
                                      969.2      907.8       61.4        6.8
                                  ---------- ---------- ----------

    Operating income                  251.1      307.7      (56.6)     (18.4)

      Equity income (net of tax)
       in Dakota, Minnesota &
       Eastern Railroad
       Corporation (DM&E)             (13.4)         -      (13.4)         -
      Other charges                     4.9        8.2       (3.3)     (40.2)
      Interest expense                 62.9       49.2       13.7       27.8
      Income tax expense before
       foreign exchange (gains)
       losses on long-term debt
       and other specified items(1)    46.3       75.5      (29.2)     (38.7)
                                  ---------- ---------- ----------
      Income before foreign
       exchange (gains) losses
       on long-term debt and
       other specified items(1)       150.4      174.8      (24.4)     (14.0)
                                  ---------- ---------- ----------

    Foreign exchange (gains) losses
    -------------------------------
     on long-term debt (FX on LTD)
     -----------------------------
      FX on LTD                        (6.8)     (88.6)      81.8          -
      Income tax on FX on LTD(2)        2.3       23.8      (21.5)         -
                                  ---------- ---------- ----------
      FX on LTD (net of tax)           (4.5)     (64.8)      60.3          -

    Other specified items
    ---------------------
      Change in estimated fair
       value of Canadian third
       party asset-backed
       commercial paper (ABCP)            -          -          -          -
      Income tax on special charges       -          -          -          -
                                  ---------- ---------- ----------
      Change in estimated fair
       value of ABCP (net of tax)         -          -          -          -
      Income tax benefits due to
       rate reductions on opening
       future income tax balances         -      (17.1)      17.1          -
                                  ---------- ---------- ----------
      Net income                   $  154.9   $  256.7   $ (101.8)     (39.7)
                                  ---------- ---------- ----------
                                  ---------- ---------- ----------

    Earnings per share (EPS)
    ------------------------
      Basic earnings per share     $   1.01   $   1.66   $  (0.65)     (39.2)
      Diluted earnings per share   $   1.00   $   1.64   $  (0.64)     (39.0)

    EPS before FX on LTD and
    ------------------------
     other specified items(1)
     ------------------------
      Basic earnings per share     $   0.98   $   1.13   $  (0.15)     (13.3)
      Diluted earnings per share   $   0.97   $   1.12   $  (0.15)     (13.4)

      Weighted average (avg) number
       of shares outstanding
       (millions)                     153.7      154.3       (0.6)      (0.4)
      Weighted avg number of
       diluted shares outstanding
       (millions)                     155.1      156.1       (1.0)      (0.6)

      Operating ratio(1)(3)(%)         79.4       74.7        4.7          -

      ROCE before FX on LTD and
       other specified items
       (after tax)(1)(3)(%)             9.2       10.3       (1.1)         -

      Net debt to net debt plus
       equity (%)                      43.9       35.0        8.9          -

      EBIT before FX on LTD and
       other specified items(1)(3)
       (millions)                  $  259.6   $  299.5   $  (39.9)     (13.3)

      EBITDA before FX on LTD and
       other specified items(1)(3)
       (millions)                  $  384.3   $  418.6   $  (34.3)      (8.2)



                                                  Year-to-date
                                  -------------------------------------------
                                     2008       2007     Variance         %
                                  ---------- ---------- ---------- ----------
    Financial (millions, except
    ---------------------------
     per share data and ratios)
     --------------------------

    Revenues
    --------
      Freight revenue              $2,317.5   $2,265.0   $   52.5        2.3
      Other revenue                    49.7       66.4      (16.7)     (25.2)
                                  ---------- ---------- ----------
                                    2,367.2    2,331.4       35.8        1.5
                                  ---------- ---------- ----------
    Operating expenses
    ------------------
      Compensation and benefits       643.8      662.3      (18.5)      (2.8)
      Fuel                            490.5      364.9      125.6       34.4
      Materials                       122.0      118.0        4.0        3.4
      Equipment rents                  92.0      112.8      (20.8)     (18.4)
      Depreciation and amortization   244.6      237.7        6.9        2.9
      Purchased services and other    325.0      298.7       26.3        8.8
                                  ---------- ---------- ----------
                                    1,917.9    1,794.4      123.5        6.9
                                  ---------- ---------- ----------

    Operating income                  449.3      537.0      (87.7)     (16.3)

      Equity income (net of tax)
       in Dakota, Minnesota &
       Eastern Railroad
       Corporation (DM&E)             (24.4)         -      (24.4)         -
      Other charges                    11.6       13.0       (1.4)     (10.8)
      Interest expense                122.8       96.0       26.8       27.9
      Income tax expense before
       foreign exchange (gains)
       losses on long-term debt
       and other specified items(1)    72.5      130.6      (58.1)     (44.5)
                                  ---------- ---------- ----------
      Income before foreign
       exchange (gains) losses
       on long-term debt and
       other specified items(1)       266.8      297.4      (30.6)     (10.3)
                                  ---------- ---------- ----------

    Foreign exchange (gains) losses
    -------------------------------
     on long-term debt (FX on LTD)
     -----------------------------
      FX on LTD                         9.5      (97.2)     106.7          -
      Income tax on FX on LTD(2)       (3.4)      26.4      (29.8)         -
                                  ---------- ---------- ----------
      FX on LTD (net of tax)            6.1      (70.8)      76.9          -

    Other specified items
    ---------------------
      Change in estimated fair
       value of Canadian third
       party asset-backed
       commercial paper (ABCP)         21.3          -       21.3          -
      Income tax on special charges    (6.3)         -       (6.3)         -
                                  ---------- ---------- ----------
      Change in estimated fair
       value of ABCP (net of tax)      15.0          -       15.0          -
      Income tax benefits due to
       rate reductions on opening
       future income tax balances         -      (17.1)      17.1          -
                                  ---------- ---------- ----------

      Net income                   $  245.7   $  385.3   $ (139.6)     (36.2)
                                  ---------- ---------- ----------
                                  ---------- ---------- ----------

    Earnings per share (EPS)
    ------------------------
      Basic earnings per share     $   1.60   $   2.49   $  (0.89)     (35.7)
      Diluted earnings per share   $   1.59   $   2.46   $  (0.87)     (35.4)

    EPS before FX on LTD and
    ------------------------
     other specified items(1)
     ------------------------
      Basic earnings per share     $   1.74   $   1.92   $  (0.18)      (9.4)
      Diluted earnings per share   $   1.72   $   1.90   $  (0.18)      (9.5)

      Weighted average (avg) number
       of shares outstanding
       (millions)                     153.6      154.9       (1.3)      (0.8)
      Weighted avg number of
       diluted shares outstanding
       (millions)                     155.0      156.4       (1.4)      (0.9)

      Operating ratio(1)(3)(%)         81.0       77.0        4.0          -

      ROCE before FX on LTD and
       other specified items
       (after tax)(1)(3)(%)             9.2       10.3       (1.1)         -

      Net debt to net debt plus
       equity (%)                      43.9       35.0        8.9          -

      EBIT before FX on LTD and
       other specified items(1)(3)
       (millions)                  $  462.1   $  524.0   $  (61.9)     (11.8)

      EBITDA before FX on LTD and
       other specified items(1)(3)
       (millions)                  $  706.7   $  761.7   $  (55.0)      (7.2)

    (1) These earnings measures have no standardized meanings prescribed by
        GAAP and may not be comparable to similar measures of other
        companies.
        See note on non-GAAP earnings measures attached to commentary.
    (2) Income tax on FX on LTD is discussed in the MD&A in the "Other Income
        Statement Items" section - "Income Taxes".
    (3) EBIT:              Earnings before interest and taxes.
        EBITDA:            Earnings before interest, taxes, and depreciation
                           and amortization.
        ROCE (after tax):  Return on capital employed (after tax)
                           = earnings before after-tax interest
                           expense (last 12 months) divided by average net
                           debt plus equity.
        Operating ratio:   Operating expenses divided by revenues.



                                                  Second Quarter
                                  -------------------------------------------
                                     2008       2007     Variance         %
                                  ---------- ---------- ---------- ----------
    Commodity Data
    --------------
      Freight Revenues (millions)
        - Grain                    $  203.0   $  224.0   $  (21.0)      (9.4)
        - Coal                        172.4      162.4       10.0        6.2
        - Sulphur and fertilizers     137.9      144.5       (6.6)      (4.6)
        - Forest products              58.4       74.3      (15.9)     (21.4)
        - Industrial and consumer
           products                   185.3      158.8       26.5       16.7
        - Automotive                   86.7       88.5       (1.8)      (2.0)
        - Intermodal                  349.4      321.6       27.8        8.6
                                  ---------- ---------- ----------
      Total Freight Revenues       $1,193.1   $1,174.1   $   19.0        1.6
                                  ---------- ---------- ----------

      Millions of Revenue
       Ton-Miles (RTM)
        - Grain                       6,775      7,309       (534)      (7.3)
        - Coal                        6,118      5,834        284        4.9
        - Sulphur and fertilizers     5,552      6,106       (554)      (9.1)
        - Forest products             1,438      2,019       (581)     (28.8)
        - Industrial and consumer
           products                   4,655      4,177        478       11.4
        - Automotive                    645        659        (14)      (2.1)
        - Intermodal                  7,296      7,424       (128)      (1.7)
                                  ---------- ---------- ----------
      Total RTMs                     32,479     33,528     (1,049)      (3.1)
                                  ---------- ---------- ----------

      Freight Revenue per RTM
       (cents)
        - Grain                        3.00       3.06      (0.06)      (2.0)
        - Coal                         2.82       2.78       0.04        1.4
        - Sulphur and fertilizers      2.48       2.37       0.11        4.6
        - Forest products              4.06       3.68       0.38       10.3
        - Industrial and consumer
           products                    3.98       3.80       0.18        4.7
        - Automotive                  13.44      13.43       0.01        0.1
        - Intermodal                   4.79       4.33       0.46       10.6

      Freight Revenue per RTM          3.67       3.50       0.17        4.9

      Carloads (thousands)
        - Grain                        87.7       91.2       (3.5)      (3.8)
        - Coal                         77.2       75.0        2.2        2.9
        - Sulphur and fertilizers      53.4       61.3       (7.9)     (12.9)
        - Forest products              23.1       29.9       (6.8)     (22.7)
        - Industrial and consumer
           products                    86.4       79.2        7.2        9.1
        - Automotive                   40.1       45.7       (5.6)     (12.3)
        - Intermodal                  315.1      311.9        3.2        1.0
                                  ---------- ---------- ----------
      Total Carloads                  683.0      694.2      (11.2)      (1.6)
                                  ---------- ---------- ----------

      Freight Revenue per Carload
        - Grain                    $  2,315   $  2,456   $   (141)      (5.7)
        - Coal                        2,233      2,165         68        3.1
        - Sulphur and fertilizers     2,582      2,357        225        9.5
        - Forest products             2,528      2,485         43        1.7
        - Industrial and consumer
           products                   2,145      2,005        140        7.0
        - Automotive                  2,162      1,937        225       11.6
        - Intermodal                  1,109      1,031         78        7.6
      Freight Revenue per Carload  $  1,747   $  1,691   $     56        3.3



                                                  Year-to-date
                                  -------------------------------------------
                                     2008       2007     Variance         %
                                  ---------- ---------- ---------- ----------
    Commodity Data
    --------------
      Freight Revenues (millions)
        - Grain                    $  435.4   $  443.6   $   (8.2)      (1.8)
        - Coal                        312.5      293.7       18.8        6.4
        - Sulphur and fertilizers     268.6      266.9        1.7        0.6
        - Forest products             116.4      146.3      (29.9)     (20.4)
        - Industrial and consumer
           products                   352.7      310.7       42.0       13.5
        - Automotive                  158.8      170.6      (11.8)      (6.9)
        - Intermodal                  673.1      633.2       39.9        6.3
                                  ---------- ---------- ----------
      Total Freight Revenues       $2,317.5   $2,265.0   $   52.5        2.3
                                  ---------- ---------- ----------

      Millions of Revenue
       Ton-Miles (RTM)
        - Grain                      14,273     14,793       (520)      (3.5)
        - Coal                       11,204     10,417        787        7.6
        - Sulphur and fertilizers    10,982     11,090       (108)      (1.0)
        - Forest products             2,963      4,019     (1,056)     (26.3)
        - Industrial and consumer
           products                   9,142      8,310        832       10.0
        - Automotive                  1,193      1,284        (91)      (7.1)
        - Intermodal                 14,264     14,350        (86)      (0.6)
                                  ---------- ---------- ----------
      Total RTMs                     64,021     64,263       (242)      (0.4)
                                  ---------- ---------- ----------

      Freight Revenue per RTM
       (cents)
        - Grain                        3.05       3.00       0.05        1.7
        - Coal                         2.79       2.82      (0.03)      (1.1)
        - Sulphur and fertilizers      2.45       2.41       0.04        1.7
        - Forest products              3.93       3.64       0.29        8.0
        - Industrial and consumer
           products                    3.86       3.74       0.12        3.2
        - Automotive                  13.31      13.29       0.02        0.2
        - Intermodal                   4.72       4.41       0.31        7.0

      Freight Revenue per RTM          3.62       3.52       0.10        2.8

      Carloads (thousands)
        - Grain                       180.0      180.5       (0.5)      (0.3)
        - Coal                        142.0      133.5        8.5        6.4
        - Sulphur and fertilizers     105.7      111.5       (5.8)      (5.2)
        - Forest products              47.6       60.0      (12.4)     (20.7)
        - Industrial and consumer
           products                   167.3      154.9       12.4        8.0
        - Automotive                   76.4       88.1      (11.7)     (13.3)
        - Intermodal                  611.8      599.5       12.3        2.1
                                  ---------- ---------- ----------
      Total Carloads                1,330.8    1,328.0        2.8        0.2
                                  ---------- ---------- ----------

      Freight Revenue per Carload
        - Grain                    $  2,419   $  2,458   $    (39)      (1.6)
        - Coal                        2,201      2,200          1          -
        - Sulphur and fertilizers     2,541      2,394        147        6.1
        - Forest products             2,445      2,438          7        0.3
        - Industrial and consumer
           products                   2,108      2,006        102        5.1
        - Automotive                  2,079      1,936        143        7.4
        - Intermodal                  1,100      1,056         44        4.2
      Freight Revenue per Carload  $  1,741   $  1,706   $     35        2.1



                                                  Second Quarter
                                  -------------------------------------------
                                     2008       2007     Variance         %
                                  ---------- ---------- ---------- ----------

    Operations and Productivity
    ---------------------------

    Freight gross ton-miles
     (GTM) (millions)                62,397     64,481     (2,084)      (3.2)
    Revenue ton-miles (RTM)
     (millions)                      32,479     33,528     (1,049)      (3.1)
    Average number of active
     employees                       16,223     15,878        345        2.2
    Number of employees at end
     of period                       16,407     15,720        687        4.4


    FRA personal injuries per
     200,000 employee-hours(1)         1.11       2.09      (0.98)     (46.9)
    FRA train accidents per
     million train-miles(1)            1.11       2.11      (1.00)     (47.4)


    Total operating expenses
     per RTM (cents)                   2.98       2.71       0.27       10.0
    Total operating expenses
     per GTM (cents)                   1.55       1.41       0.14        9.9
    Compensation and benefits
     expense per GTM (cents)           0.51       0.51          -          -
    GTMs per average active
     employee (000)                   3,846      4,061       (215)      (5.3)

    Miles of road operated at
     end of period(2)                13,199     13,260        (61)      (0.5)

    Average train speed - AAR
     definition (mph)                  24.1       23.5        0.6        2.6
    Terminal dwell time - AAR
     definition (hours)                21.6       21.7       (0.1)      (0.5)
    Car miles per car day             147.3      147.5       (0.2)      (0.1)
    Average daily total cars
     on-line - AAR definition (000)    83.7       81.5        2.2        2.7
    Average daily active cars
     on-line (000)                     55.7       59.0       (3.3)      (5.6)

    U.S. gallons of locomotive
     fuel per 1,000 GTMs -
     freight & yard                    1.19       1.19          -          -
    U.S. gallons of locomotive
     fuel consumed - total
     (millions)(3)                     73.6       76.8       (3.2)      (4.2)

    Average foreign exchange
     rate (US$/Canadian$)             0.991      0.901      0.090       10.0
    Average foreign exchange
     rate (Canadian$/US$)             1.009      1.111     (0.102)      (9.2)



                                                  Year-to-date
                                  -------------------------------------------
                                     2008       2007     Variance         %
                                  ---------- ---------- ---------- ----------

    Operations and Productivity
    ---------------------------

    Freight gross ton-miles
     (GTM) (millions)               122,258    122,041        217        0.2
    Revenue ton-miles (RTM)
     (millions)                      64,021     64,263       (242)      (0.4)
    Average number of active
     employees                       15,648     15,381        267        1.7
    Number of employees at end
     of period                       16,407     15,720        687        4.4


    FRA personal injuries per
     200,000 employee-hours(1)         1.25       1.95      (0.70)     (35.9)
    FRA train accidents per
     million train-miles(1)            1.65       2.06      (0.41)     (19.9)


    Total operating expenses
     per RTM (cents)                   3.00       2.79       0.21        7.5
    Total operating expenses
     per GTM (cents)                   1.57       1.47       0.10        6.8
    Compensation and benefits
     expense per GTM (cents)           0.53       0.54      (0.01)      (1.9)
    GTMs per average active
     employee (000)                   7,813      7,935       (122)      (1.5)

    Miles of road operated at
     end of period(2)                13,199     13,260        (61)      (0.5)

    Average train speed - AAR
     definition (mph)                  23.7       23.3        0.4        1.7
    Terminal dwell time - AAR
     definition (hours)                22.8       22.8          -          -
    Car miles per car day             142.7      141.0        1.7        1.2
    Average daily total cars
     on-line - AAR definition (000)    83.2       81.4        1.8        2.2
    Average daily active cars
     on-line (000)                     56.4       59.0       (2.6)      (4.4)

    U.S. gallons of locomotive
     fuel per 1,000 GTMs -
     freight & yard                    1.24       1.22       0.02        1.6
    U.S. gallons of locomotive
     fuel consumed - total
     (millions)(3)                    149.9      149.1        0.8        0.5

    Average foreign exchange
     rate (US$/Canadian$)             0.999      0.877      0.122       13.9
    Average foreign exchange
     rate (Canadian$/US$)             1.001      1.141     (0.140)     (12.3)

    (1) Certain prior period figures have been revised to conform with
        current presentation or have been updated to reflect new information.
    (2) Excludes track on which CP has haulage rights.
    (3) Includes gallons of fuel consumed from freight, yard and commuter
        service but excludes fuel used in capital projects and other non-
        freight activities.
    





For further information:

For further information: Media, Leslie Pidcock, Tel.: (403) 319-6878,
email: leslie_pidcock@cpr.ca; Investment Community, Janet Weiss, Assistant
Vice-President, Investor Relations, Tel.: (403) 319-3591, email:
investor@cpr.ca


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