(Canadian Pacific issued the following on January 29.)
CALGARY — Canadian Pacific Railway Limited (TSX/NYSE: CP) announced its fourth-quarter and full year results for 2007 today. In the fourth quarter, net income increased to $342 million in 2007 compared with $146 million in 2006 primarily due to lower future Canadian income tax rates. For the full year 2007, net income improved 19 per cent to $946 million compared with $796 million in 2006. This improvement was driven by an increase in operating income and a foreign exchange gain on long-term debt. In 2007, CP recorded a full year future tax benefit of $163 million compared with a tax benefit in 2006 of $176 million, both due to lower future Canadian income tax rates. Diluted earnings per share was $2.21 in fourth-quarter 2007 compared with $0.92 in fourth-quarter 2006 and $6.08 for the full year 2007 and $5.02 in 2006.
Q4 and Full Year 2007 Earnings Release and Financial Reports
SUMMARY OF FOURTH-QUARTER 2007 COMPARED WITH FOURTH-QUARTER 2006
* Income before foreign exchange gains and losses on long-term debt and other specified items increased two per cent to $185 million from $181 million, due primarily to lower income tax rates in the quarter.
* Diluted earnings per share increased four per cent to $1.20 from $1.15 excluding foreign exchange gains and losses on long-term debt and other specified items.
* Operating ratio was 74.3 per cent compared with 73.1 per cent in 2006.
* Total revenues were flat at $1.19 billion.
“We delivered earnings growth in 2007 in a year that brought us many challenges,” said Fred Green, President and Chief Executive Officer. “Most recently, in December, our operations were hit hard by harsh weather that affected the entire supply chain, including high winds that shut down port and terminal operators for several extended periods. This restricted our ability to move the freight volumes we’d planned.”
Freight revenue, excluding the impact of foreign exchange, grew in the fourth quarter by five per cent, however this growth was more than offset by the impact of the stronger Canadian dollar, resulting in a decline in freight revenue of one per cent to $1.14 billion when compared with fourth-quarter 2006. Operating expenses increased one per cent to $883 million in the fourth-quarter 2007 compared with $870 million driven mainly by an increase in fuel prices offset, to a degree, by foreign exchange.
“Even with the impact of foreign exchange, we had revenue growth in some sectors, including industrial and consumer products, intermodal and automotive,” added Mr. Green. “However, the rapid rise in the cost of fuel, and the inherent lag in our fuel recovery programs combined with the net negative impact of foreign exchange to reduce our operating income.”
SUMMARY OF FULL YEAR 2007 COMPARED WITH FULL YEAR 2006
Excluding foreign exchange gains and losses on long-term debt and other specified items:
* Income increased seven per cent to $673 million from $628 million.
* Diluted earnings per share grew nine per cent to $4.32 from $3.95.
* Operating ratio improved 10 basis points to 75.3 per cent from 75.4 per cent.
* Total revenue increased three per cent to $4.7 billion.
* Operating expenses increased three per cent to $3.5 billion.
2008 OUTLOOK
The outlook for 2008 for diluted earnings per share before foreign exchange gains and losses on long-term debt and other specified items is expected to be in the range of $4.70 to $4.85.
“We continue to see strong demand in our bulk portfolio for 2008,” said Mr. Green. “And this, coupled with improved yield and a renewed focus on our Integrated Operating Plan, will drive results. We still expect to meet our objective for 2008 diluted earnings per share.”
The 2008 estimate assumes an average currency exchange rate of the U.S. dollar at par with the Canadian dollar, and crude oil prices averaging US $87 per barrel, which is a change from the previous assumption of US $80 per barrel.
The outlook for growth in the North American economy continues to be uncertain but CP expects to grow total revenue by four to six per cent in 2008 while total operating expenses are expected to increase by three to five per cent.
Capital investment is expected to be in the range of $885 to $895 million in 2008, essentially flat when compared with 2007.
CP expects free cash to be in excess of $250 million in 2008.
The 2008 outlook includes the projected earnings of the Dakota Minnesota & Eastern Railroad (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 $8 million ($11 million after tax) in the fourth quarter of 2007, compared with a foreign exchange loss on long-term debt of $45 million ($35 million after tax) in the fourth quarter of 2006. Canadian income tax rate changes resulted in a benefit of $146 million in the fourth-quarter due to a revaluation of opening future income tax balances in 2007.
For the full year 2007, CP had a foreign exchange gain on long-term debt of $170 million ($126 million after tax) compared with a foreign exchange loss of $0.1 million ($7 million after tax) for the full year 2006. Canadian income tax rate changes resulted in a benefit of $163 million in 2007 due to a revaluation of opening future income tax balances. This compares with a future income tax benefit of $176 million for the full year 2006.
At December 31, 2007 CP held investments in Asset Backed Commercial Paper (ABCP) with an original cost of $144 million. When acquired, these investments were rated R1 (High) by Dominion Bond Rating Service (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. Since early September 2007, a pan-Canadian restructuring committee consisting of major investors has been working to develop a solution to the liquidity problem affecting the ABCP market. The pan-Canadian restructuring committee anticipates that, following approval by the investors, a restructuring could be effected in March 2008 which would result in the exchange of ABCP held by investors for a variety of new long-term floating rate notes, certain of which may receive AAA credit ratings. As a result, the Company adjusted the estimated fair value of the investment and took a charge in the third-quarter of 2007 of $21 million ($15 million after tax) and classified its ABCP as long-term investments. As at December 31, 2007 there has been no further change in the estimated fair value of the Company’s ABCP.
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 material change in the value of the Company’s investment in ABCP which would impact the Company’s near-term earnings.