Canadian Pacific announces its second-quarter results

CALGARY, Jul 22, 2008 (Canada NewsWire via COMTEX) ----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