(The Canadian Pacific Railway issued the following on January 27, 2009.)
CALGARY — Canadian Pacific Railway Limited (TSX/NYSE: CP) announced its fourth-quarter and full-year 2008 results today. Net income was $201 million down from $342 million in fourth-quarter 2007 and diluted earnings per share were $1.29, down from $2.21 in fourth-quarter 2007. This decrease is primarily due to a future tax benefit that was recorded in fourth-quarter 2007. Excluding the impact of foreign exchange on long-term debt and other specified items, diluted earnings per share were $1.15, down $0.05 or four per cent. Fourth-quarter operating income (a non-GAAP measure) was $305 million, essentially flat despite a charge of $23 million in 2008 as a result of a federal court decision regarding the retroactive adjustment to the grain revenue entitlement related to the 2007/2008 crop year.
SUMMARY OF FOURTH-QUARTER 2008 COMPARED WITH FOURTH-QUARTER 2007:
* Total revenues increased nine per cent to $1.3 billion from $1.2 billion
* Operating expenses were $995 million an increase of 13 per cent from $883 million
* Excluding foreign exchange gains and losses on long-term debt and other specified items: – Diluted earnings per share decreased to $1.15 from $1.20; and – Income decreased four per cent to $178 million from $185 million
At the end of October, following the US Surface Transportation Board’s approval, CP assumed control of the Dakota, Minnesota & Eastern Railroad (DM&E). For the first ten months of 2008, the DM&E was accounted for on an equity basis. The results for the final two months are consolidated on a line-by-line basis.
The impact of a stronger US dollar in the fourth quarter increased both freight revenues and operating expenses that were denominated in US currency. Relative to the US dollar, the Canadian dollar weakened from $0.98 per US dollar in the fourth quarter of 2007 to $1.17 per US dollar on average during the fourth quarter of 2008.
Freight revenues were up 10 per cent in the fourth quarter on foreign exchange, continued pricing strength inclusive of fuel recoveries, and DM&E revenues for the last two months of the quarter and partially offset by the retroactive grain adjustment and lower volumes. Revenues from industrial and consumer products increased 37 per cent, with grain revenues increasing 19 per cent and coal and automotive both improving six per cent. Intermodal was flat year-over-year. These gains were offset somewhat by decreases in forest products and sulphur and fertilizers of seven and three per cent respectively.
Operating expenses increased 13 per cent in the fourth quarter driven mainly by foreign exchange and the inclusion of two months of DM&E expenses, partially offset by declining volumes and the results of CP’s cost management actions.
SUMMARY OF FULL YEAR 2008 COMPARED WITH FULL YEAR 2007:
Net income for full year 2008 was $619 million compared with $946 million in 2007. Diluted earnings per share were $3.98, down from $6.08. This decrease was mostly the result of a large foreign exchange gain on long-term debt and a large future income tax benefit, both recorded in 2007, and lower operating income in 2008.
* Total revenues increased five per cent to $4.9 billion from $4.7 billion
* Operating expenses increased nine per cent to $3.9 billion from $3.5 billion
* Free cash flow (a non-GAAP measure) was $231 million
* Excluding foreign exchange gains and losses on long-term debt and other specified items: – Diluted earnings per share were $4.06, down six per cent from $4.32; and – Income decreased six per cent to $632 million from $673 million
2009 OUTLOOK
Capital investment in 2009 is expected to be in the range of $800 million to $820 million which is a reduction of approximately $200 million when compared with the combined CP and DM&E cash capital investment for the full year 2008. This 2009 outlook assumes an average currency exchange rate of $1. 25 per U.S. dollar (US$0.80).
CP is updating its current outlook for upcoming pension contributions. Based on preliminary calculations and subject to filing a January 1, 2009 valuation of the main Canadian pension plan with the applicable regulatory agency, CP expects that aggregate contributions to all of its defined benefit pension plans will increase from C$95 million in 2008 to a range of C$150 million to C$195 million for 2009. CP estimates its minimum required contributions for 2010 to be in the range of C$295 million to C$345 million. The lower end of the ranges are based on the passing into law of the temporary funding relief proposed by the Canadian federal government in November 2008 and the upper ends do not include any funding relief. The estimated contributions for 2010 assume the plans’ investments in public equities, real estate and infrastructure funds achieve, in aggregate, a 10 per cent return in 2009, and long Canada bond yields as at December 31, 2009 are 4.0 per cent (versus 3.45 per cent at December 31, 2008).
FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT AND OTHER SPECIFIED ITEMS
CP had a net foreign exchange loss of $4 million on long-term debt (a gain of $22 million after tax) in the fourth quarter of 2008, compared with a net foreign exchange gain on long-term debt of $8 million ($11 million after tax) in the fourth quarter of 2007.
For the full year 2008, CP had a net foreign exchange loss on long-term debt of $16 million (a gain of $22 million after tax) compared with a net foreign exchange gain of $170 million ($126 million after tax) for the full year 2007.
As part of a consolidated financing strategy, CP structures its U.S. dollar long-term debt in different taxing jurisdictions. As well, a portion of this debt is designated as a net investment hedge against net investment in U.S. subsidiaries. As a result, the tax on foreign exchange gains and losses on long-term debt in different taxing jurisdictions can vary significantly.
At December 31, 2008 CP held investments in Canadian Non-Bank Asset Backed Commercial Paper (ABCP) with an original cost of approximately $144 million. In 2007, CP adjusted the estimated fair value of the investments and took a charge of $22 million ($15 million after tax) and classified the investments as long-term investments. In 2008, in recognition of changing market conditions impacting these investments, CP further adjusted the estimated fair value of the investments and took an additional charge of $49 million ($35 million after tax).
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 fourth-quarter 2007, CP recorded a future income tax benefit of $146 million as an other specified item. For the full year 2007, a future income tax benefit of $163 million was recorded as an other specified item.