CALGARY, Jan. 29 /PRNewswire-FirstCall/ -- 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. 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 and
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. 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, and adjusted for the
acquisition cost of DM&E and the investment in ABCP. 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. In
addition, free cash excludes the investment in ABCP, which, upon
acquisition, was initially classified as Cash and cash equivalents
and was subsequently classified as a long-term investment, as noted
above. This presentation for accounting purposes does not result in
a change in cash flow. 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. 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 except as required by law. 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 http://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, except per share data) For the
three months ended December 31 2007 2006
--------------------------- (unaudited) Revenues Freight $ 1,142.6
$ 1,151.5 Other 45.7 38.9 --------------------------- 1,188.3
1,190.4 Operating expenses Compensation and benefits 308.4 322.2
Fuel 196.3 171.2 Materials 47.9 53.7 Equipment rents 45.1 47.8
Depreciation and amortization 116.3 115.9 Purchased services and
other 168.8 159.5 --------------------------- 882.8 870.3
--------------------------- Operating income 305.5 320.1 Other
(income) charges (Note 4) (3.8) 6.4 Foreign exchange (gains) losses
on long-term debt (8.3) 44.9 Interest expense (Note 5) 63.4 49.8
Income tax (recovery) expense (Note 6) (88.1) 73.4
--------------------------- Net income $ 342.3 $ 145.6
--------------------------- --------------------------- Basic
earnings per share (Note 7) $ 2.23 $ 0.93
--------------------------- --------------------------- Diluted
earnings per share (Note 7) $ 2.21 $ 0.92
--------------------------- --------------------------- See notes
to interim consolidated financial statements. STATEMENT OF
CONSOLIDATED INCOME (in millions, except per share data) For the
year ended December 31 2007 2006 ---------------------------
(unaudited) Revenues Freight $ 4,555.2 $ 4,427.3 Other 152.4 155.9
--------------------------- 4,707.6 4,583.2 Operating expenses
Compensation and benefits 1,284.2 1,327.6 Fuel 746.8 650.5
Materials 215.5 212.9 Equipment rents 207.5 181.2 Depreciation and
amortization 472.0 464.1 Purchased services and other 617.4 618.3
--------------------------- 3,543.4 3,454.6
--------------------------- Operating income 1,164.2 1,128.6 Other
charges (Note 4) 17.3 27.8 Change in fair value of Canadian third
party asset-backed commercial paper (Note 9) 21.5 - Foreign
exchange (gains) losses on long-term debt (169.8) 0.1 Interest
expense (Note 5) 204.3 194.5 Income tax expense (Note 6) 144.7
109.9 --------------------------- Net income $ 946.2 $ 796.3
--------------------------- --------------------------- Basic
earnings per share (Note 7) $ 6.14 $ 5.06
--------------------------- --------------------------- Diluted
earnings per share (Note 7) $ 6.08 $ 5.02
--------------------------- --------------------------- See notes
to interim consolidated financial statements. CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME (in millions) For the three
months ended December 31 2007 2006 ---------------------------
(unaudited) Comprehensive income Net income $ 342.3 $ 145.6 Other
comprehensive income Net change in foreign currency translation
adjustments, net of hedging activities (3.5) (1.1) Net change in
gains on derivatives designated as cash flow hedges (17.9) -
--------------------------- Other comprehensive loss before income
taxes (21.4) (1.1) Income tax recovery 7.2 3.7
--------------------------- Other comprehensive (loss) income (Note
12) (14.2) 2.6 --------------------------- Comprehensive income $
328.1 $ 148.2 ---------------------------
--------------------------- See notes to interim consolidated
financial statements. For the year ended December 31 2007 2006
--------------------------- (unaudited) Comprehensive income Net
income $ 946.2 $ 796.3 Other comprehensive income Net change in
foreign currency translation adjustments, net of hedging activities
(7.4) (1.6) Net change in gains on derivatives designated as cash
flow hedges (36.8) - --------------------------- Other
comprehensive loss before income taxes (44.2) (1.6) Income tax
recovery 3.4 0.5 --------------------------- Other comprehensive
loss (Note 12) (40.8) (1.1) ---------------------------
Comprehensive income $ 905.4 $ 795.2 ---------------------------
--------------------------- See notes to interim consolidated
financial statements. CONSOLIDATED BALANCE SHEET (in millions)
December 31 December 31 2007 2006 ---------------------------
(unaudited) Assets Current assets Cash and cash equivalents $ 378.1
$ 124.3 Accounts receivable and other current assets 542.8 615.7
Materials and supplies 179.5 158.6 Future income taxes 67.3 106.3
--------------------------- 1,167.7 1,004.9 Investments (Note 9)
1,668.6 64.9 Net properties 9,293.1 9,122.9 Other assets and
deferred charges 1,235.6 1,223.2 --------------------------- Total
assets $ 13,365.0 $ 11,415.9 ---------------------------
--------------------------- Liabilities and shareholders' equity
Current liabilities Short-term borrowing $ 229.7 $ - Accounts
payable and accrued liabilities 980.8 1,002.6 Income and other
taxes payable 68.8 16.0 Dividends payable 34.5 29.1 Long-term debt
maturing within one year 31.0 191.3 ---------------------------
1,344.8 1,239.0 Deferred liabilities 714.6 725.7 Long-term debt
(Note 10) 4,146.2 2,813.5 Future income taxes 1,701.5 1,781.2
Shareholders' equity Share capital (Note 11) 1,188.6 1,175.7
Contributed surplus 42.4 32.3 Accumulated other comprehensive
income (Note 12) 39.6 66.4 Retained income 4,187.3 3,582.1
--------------------------- 5,457.9 4,856.5
--------------------------- Total liabilities and shareholders'
equity $ 13,365.0 $ 11,415.9 ---------------------------
--------------------------- Commitments and contingencies (Note
18). See notes to interim consolidated financial statements.
STATEMENT OF CONSOLIDATED CASH FLOWS (in millions) For the three
months ended December 31 2007 2006 ---------------------------
(unaudited) Operating activities Net income $ 342.3 $ 145.6 Add
(deduct) items not affecting cash: Depreciation and amortization
116.3 115.9 Future income taxes (129.6) 73.0 Foreign exchange
(gains) losses on long-term debt (8.3) 44.9 Amortization of
deferred charges 2.9 3.4 Restructuring and environmental
remediation payments (Note 8) (22.0) (27.1) Other operating
activities, net 20.6 (73.4) Change in non-cash working capital
balances related to operations 58.8 33.7
--------------------------- Cash provided by operating activities
381.0 316.0 --------------------------- Investing activities
Additions to properties (324.6) (204.5) Reductions in investments
and other assets (Note 14) 16.8 23.3 Acquisition of Dakota,
Minnesota & Eastern Railroad Corporation (Note 9) (1,492.6) -
Net proceeds from disposal of transportation properties 5.6 18.7
--------------------------- Cash used in investing activities
(1,794.8) (162.5) --------------------------- Financing activities
Dividends paid (34.5) (29.4) Issuance of CP Common Shares 1.2 14.3
Purchase of CP Common Shares - (59.5) Net increase in short-term
borrowing 229.7 - Issuance of long-term debt (Note 10) 1,260.2 2.8
Repayment of long-term debt (3.9) (3.8) ---------------------------
Cash provided by (used in) financing activities 1,452.7 (75.6)
--------------------------- Cash position Increase in cash and cash
equivalents 38.9 77.9 Cash and cash equivalents at beginning of
period 339.2 46.4 ---------------------------
--------------------------- Cash and cash equivalents at end of
period $ 378.1 $ 124.3 ---------------------------
--------------------------- See notes to interim consolidated
financial statements. STATEMENT OF CONSOLIDATED CASH FLOWS (in
millions) For the year ended December 31 2007 2006
--------------------------- (unaudited) Operating activities Net
income $ 946.2 $ 796.3 Add (deduct) items not affecting cash:
Depreciation and amortization 472.0 464.1 Future income taxes 38.7
75.3 Change in fair value of Canadian third party asset-backed
commercial paper (Note 9) 21.5 - Foreign exchange (gains) losses on
long-term debt (169.8) 0.1 Amortization of deferred charges 12.1
16.5 Restructuring and environmental remediation payments (Note 8)
(61.0) (96.3) Other operating activities, net 4.6 (103.4) Change in
non-cash working capital balances related to operations 50.3
(101.6) --------------------------- Cash provided by operating
activities 1,314.6 1,051.0 --------------------------- Investing
activities Additions to properties (893.2) (793.7) Reductions in
investments and other assets (Note 14) 0.2 2.2 Acquisition of
Dakota, Minnesota & Eastern Railroad Corporation (Note 9)
(1,492.6) - Net proceeds from disposal of transportation properties
14.9 97.8 Investment in Canadian third party asset-backed
commercial paper (Note 9) (143.6) - ---------------------------
Cash used in investing activities (2,514.3) (693.7)
--------------------------- Financing activities Dividends paid
(133.1) (112.4) Issuance of CP Common Shares 30.4 66.6 Purchase of
CP Common Shares (231.1) (286.4) Net increase in short-term
borrowing 229.7 - Issuance of long-term debt (Note 10) 1,745.3 2.8
Repayment of long-term debt (187.7) (25.4)
--------------------------- Cash provided by (used in) financing
activities 1,453.5 (354.8) --------------------------- Cash
position Increase in cash and cash equivalents 253.8 2.5 Cash and
cash equivalents at beginning of year 124.3 121.8
--------------------------- Cash and cash equivalents at end of
year $ 378.1 $ 124.3 ---------------------------
--------------------------- See notes to interim consolidated
financial statements. CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY (in millions) For the three months ended
December 31 2007 2006 Restated (see Note 2)
--------------------------- (unaudited) Share capital Balance,
beginning of period $ 1,187.2 $ 1,166.6 Shares issued under stock
option plans 1.4 15.1 Shares purchased - (6.0)
--------------------------- Balance, end of period 1,188.6 1,175.7
--------------------------- Contributed surplus Balance, beginning
of period 40.6 51.9 Movement in stock-based compensation 1.8 2.3
Shares purchased - (21.9) --------------------------- Balance, end
of period 42.4 32.3 --------------------------- Accumulated other
comprehensive income Balance, beginning of period 53.8 63.8 Other
comprehensive (loss) income (Note 12) (14.2) 2.6
--------------------------- Balance, end of period 39.6 66.4
--------------------------- Retained income Balance, beginning of
period 3,879.5 3,491.9 Net income for the period 342.3 145.6 Shares
purchased - (26.5) Dividends (34.5) (28.9)
--------------------------- Balance, end of period 4,187.3 3,582.1
--------------------------- Total accumulated other comprehensive
income and retained income 4,226.9 3,648.5
--------------------------- ---------------------------
Shareholders' equity, end of period $ 5,457.9 $ 4,856.5
--------------------------- --------------------------- See notes
to interim consolidated financial statements. CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (in millions) For the
year ended December 31 2007 2006 Restated (see Note 2)
--------------------------- (unaudited) Share capital Balance,
beginning of year $ 1,175.7 $ 1,141.5 Shares issued under stock
option plans 37.4 71.0 Shares purchased (24.5) (36.8)
--------------------------- Balance, end of year 1,188.6 1,175.7
--------------------------- Contributed surplus Balance, beginning
of year 32.3 245.1 Movement in stock-based compensation 10.1 10.3
Shares purchased - (223.1) --------------------------- Balance, end
of year 42.4 32.3 --------------------------- Accumulated other
comprehensive income Balance, beginning of year 66.4 67.5
Adjustment for change in accounting policy (Note 2) 14.0 -
--------------------------- Adjusted balance, beginning of year
80.4 67.5 Other comprehensive loss (Note 12) (40.8) (1.1)
--------------------------- Balance, end of year 39.6 66.4
--------------------------- Retained income Balance, beginning of
year 3,582.1 2,930.0 Adjustment for change in accounting policy
(Note 2) 4.0 - --------------------------- Adjusted balance,
beginning of year 3,586.1 2,930.0 Net income for the year 946.2
796.3 Shares purchased (206.6) (26.5) Dividends (138.4) (117.7)
--------------------------- Balance, end of year 4,187.3 3,582.1
--------------------------- Total accumulated other comprehensive
income and retained income 4,226.9 3,648.5
--------------------------- ---------------------------
Shareholders' equity, end of year $ 5,457.9 $ 4,856.5
--------------------------- --------------------------- See notes
to interim consolidated financial statements. NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2007 (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") 2006 annual consolidated financial
statements, except as discussed below and in Note 2 for the
adoption of new accounting standards for financial instruments,
hedges and comprehensive income. 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. Financial Instruments
--------------------- From January 1, 2007, certain financial
instruments, including those classified as loans and receivables,
available for sale, held for trading and financial liabilities, are
initially measured at fair value and subsequently measured at fair
value or amortized cost. Amortization is calculated using the
effective interest rate for the instrument. Financial instruments
that will be realized within the normal operating cycle are
measured at their carrying amount as this approximates fair value.
Transaction costs related to the issuance of long-term debt are
netted against the fair value of the related instrument on issue
and are amortized to income in conjunction with the amortization of
the instrument using the effective interest rate method. Derivative
financial and commodity instruments
---------------------------------------------- Derivative financial
and commodity instruments may be used from time to time by the
Company to manage its exposure to price risks relating to foreign
currency exchange rates, stock-based compensation, interest rates
and fuel prices. When CP utilizes derivative instruments in hedging
relationships, CP identifies, designates and documents those
hedging transactions and regularly tests the transactions to
demonstrate effectiveness in order to continue hedge accounting.
Commencing from January 1, 2007, all derivative instruments are
recorded at their fair value. Any change in the fair value of
derivatives not designated as hedges is recognized in the period in
which the change occurs in the Statement of Consolidated Income in
the line item to which the derivative instrument is related. On the
Consolidated Balance Sheet they are classified in "Other assets and
deferred charges", "Deferred liabilities", "Accounts receivable and
other current assets" or "Accounts payable and accrued liabilities"
as applicable. Prior to 2007, only derivative instruments that did
not qualify as hedges or were not designated as hedges were carried
at fair value on the Consolidated Balance Sheet in "Other assets
and deferred charges" or "Deferred liabilities". Gains and losses
arising from derivative instruments will affect the following
income statement lines: "Revenues", "Compensation and benefits",
"Fuel", "Other (income) charges", "Foreign exchange (gains) losses
on long- term debt" and "Interest expense". For fair value hedges,
the periodic change in value is recognized in income, on the same
line as the changes in values of the hedged items are also
recorded. For a cash flow hedge, the change in value of the
effective portion is recognized in "Other comprehensive income".
Any ineffectiveness within an effective cash flow hedge is
recognized in income as it arises in the same income account as the
hedged item when realized. Should the hedging of a cash flow hedge
relationship become ineffective, previously unrealized gains and
losses remain within "Accumulated other comprehensive income" until
the hedged item is settled and, prospectively, future changes in
value of the derivative are recognized in income. The change in
value of the effective portion of a cash flow hedge remains in
"Accumulated other comprehensive income" until the related hedged
item settles, at which time amounts recognized in "Accumulated
other comprehensive income" are reclassified to the same income or
balance sheet account that records the hedged item. Prior to
January 1, 2007, the periodic change in the fair value of an
effective hedging instrument prior to settlement was not recognized
in the financial statements. In the Statement of Consolidated Cash
Flows, cash flows relating to derivative instruments designated as
hedges are included in the same line as the related item. The
transitional date for the assessment of embedded derivatives was
January 1, 2001. 2 New accounting policies Financial instruments,
hedging and comprehensive income On January 1, 2007, the Company
adopted the following accounting standards issued by the Canadian
Institute of Chartered Accountants ("CICA"): Section 3855
"Financial Instruments - Recognition and Measurement", Section 3861
"Financial Instruments - Disclosure and Presentation", Section 3865
"Hedges" and Section 1530 "Comprehensive Income". These sections
require certain financial instruments and hedge positions to be
recorded at their fair value. They also introduce the concept of
comprehensive income and accumulated other comprehensive income.
Adoption of these standards was on a prospective basis without
retroactive restatement of prior periods, except for the
restatement of equity balances to reflect the reclassification of
"Foreign currency translation adjustments" to "Accumulated other
comprehensive income". The impact of the adoption of these
standards on January 1, 2007, was an increase in net assets of
$18.0 million, a reduction in "Foreign currency translation
adjustments" of $66.4 million, an increase in "Retained earnings"
of $4.0 million, and the recognition of "Accumulated other
comprehensive income" of $80.4 million. The fair value of hedging
instruments at January 1, 2007, was $31.7 million reflected in
"Other assets and deferred charges" and "Accounts receivable and
other current assets" and $4.8 million reflected in "Deferred
liabilities" and "Accounts payable and accrued liabilities". The
inclusion of transaction costs within "Long-term debt" at amortized
cost reduced "Long-term debt" by $33.4 million with an associated
reduction in "Other assets and deferred charges" of $26.9 million.
Deferred gains and losses on previously settled hedges were
reclassified to "Accumulated other comprehensive income" and
"Retained earnings" with a resultant decrease in "Other assets and
deferred charges" of $4.8 million. The recognition of certain other
financial instruments at fair value or amortized cost resulted in
reductions in "Long-term debt" of $2.8 million, "Investments" of
$1.5 million and "Other assets and deferred charges" of $0.4
million. The adoption of these standards increased the liability
for "Future income taxes" by $11.6 million. Accumulated other
comprehensive income is comprised of foreign currency gains and
losses on the net investment in self-sustaining foreign
subsidiaries, foreign currency gains and losses related to
long-term debt designated as a hedge of the net investment in
self-sustaining foreign subsidiaries', effective portions of gains
and losses resulting from changes in the fair value of cash flow
hedging instruments, and the reclassification of cumulative foreign
currency translation adjustments. The adjustment to opening
retained earnings reflects the change in measurement basis, from
original cost to fair value or amortized cost, of certain financial
assets, financial liabilities, transaction costs associated with
the Company's long-term debt and previously deferred gains and
losses on derivative instruments that were settled in prior years
and which, had they currently existed, did not meet the criteria
for hedge accounting under Accounting Standard Section 3865. The
amounts recorded on the adoption of these standards differed from
the estimated amounts disclosed in Note 3 to the 2006 annual
financial statements as a result of the refinement of certain
estimates used at the year end. Accounting Changes Effective from
January 1, 2007, the CICA amended Accounting Standard Section 1506
"Accounting Changes" to prescribe the criteria for changing
accounting policies and related accounting treatment and
disclosures of accounting changes. Changes in accounting policies
are permitted when required by a primary source of GAAP, for
example when a new accounting section is first adopted, or when the
change in accounting policy results in more reliable and relevant
financial information being reflected in the financial statements.
The adoption of this amended accounting standard did not impact the
financial statements of the Company. 3 Future 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" will require the Company to provide
disclosures about the Company's capital and how it is managed. It
is not anticipated that the adoption of these new accounting
standards will impact the amounts reported in the Company's
financial statements as they primarily relate to disclosure.
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 Company currently reflects
materials and supplies at the lower of cost and replacement 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. Additional disclosures will also be
required. Adoption of Section 3031 "Inventories" will be recognized
in 2008 as an adjustment to opening inventory and opening retained
earnings and is not expected to have a material impact on the
Company's financial statements. 4 Other (income) charges For the
three months For the year ended December 31 ended December 31 (in
millions) 2007 2006 2007 2006 ---------------------
--------------------- Amortization of discount on accruals recorded
at present value $ 1.9 $ 1.9 $ 8.1 $ 10.0 Other exchange losses 1.5
2.0 5.8 6.5 Loss on sale of accounts receivable 1.6 1.3 5.8 5.0
Losses (gains) on non-hedging derivative instruments 1.4 (0.8) 1.5
(1.2) Equity income in Dakota, Minnesota & Eastern Railroad
Corporation (12.3) - (12.3) - Other 2.1 2.0 8.4 7.5
--------------------- --------------------- Total other (income)
charges $ (3.8) $ 6.4 $ 17.3 $ 27.8 ---------------------
--------------------- --------------------- --------------------- 5
Interest expense For the three months For the year ended December
31 ended December 31 (in millions) 2007 2006 2007 2006
--------------------- --------------------- Interest expense $ 67.0
$ 51.4 $ 219.6 $ 200.5 Interest income (3.6) (1.6) (15.3) (6.0)
--------------------- --------------------- Total interest expense
$ 63.4 $ 49.8 $ 204.3 $ 194.5 ---------------------
--------------------- --------------------- --------------------- 6
Income taxes During the three months ended December 31, 2007,
legislation was substantively enacted to reduce Canadian Federal
corporate income tax rates. As a result of these changes, the
Company recorded a $145.8 million benefit in future tax liability
and income tax expense for the three months ended December 31,
2007, related to the revaluation of its future income tax balances
as at December 31, 2006. During the three months ended June 30,
2007, legislation was substantively enacted to reduce Canadian
corporate income tax rates. As a result of these changes, the
Company recorded a $17.1 million benefit in future tax liability
and income tax expense for the three months ended December 31,
2007, related to the revaluation of its future income tax balances
as at December 31, 2006. In the second quarter of 2006, federal and
provincial legislation was substantively enacted to reduce Canadian
corporate income tax rates over a period of several years. As a
result of these changes, the Company recorded a $176.0 million
reduction in future tax liability and income tax expense related to
the revaluation of its future income tax balances as at December
31, 2005. Cash taxes refunded for the three months ended December
31, 2007, was $2.2 million (three months ended December 31, 2006 -
cash taxes paid was $24.3 million). Cash taxes paid in the year
ended December 31, 2007, was $6.7 million (year ended December 31,
2006 - $50.9 million). 7 Earnings per share At December 31, 2007,
the number of shares outstanding was 153.3 million (December 31,
2006 - 155.5 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
year ended December 31 ended December 31 (in millions) 2007 2006
2007 2006 --------------------- --------------------- Weighted
average shares outstanding 153.2 155.8 154.0 157.3 Dilutive effect
of stock options 1.4 1.6 1.6 1.5 ---------------------
--------------------- Weighted average diluted shares outstanding
154.6 157.4 155.6 158.8 --------------------- ---------------------
--------------------- --------------------- (in dollars) Basic
earnings per share $ 2.23 $ 0.93 $ 6.14 $ 5.06 Diluted earnings per
share $ 2.21 $ 0.92 $ 6.08 $ 5.02 8 Restructuring and environmental
remediation At December 31, 2007, the provision for restructuring
and environmental remediation was $234.0 million (December 31, 2006
- $309.0 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 December 31, 2007 Opening
Amorti- Closing Balance zation Foreign Balance Oct. 1 Accrued of
Exchange Dec. 31 (in millions) 2007 (reduced) Payments Discount
Impact 2007 ------------------------------------------------------
Labour liability for terminations and severances $ 152.8 (11.2)
(14.0) 1.4 0.2 $ 129.2 Other non-labour liabilities for exit plans
0.8 - - - - 0.8
------------------------------------------------------ Total
restructuring liability 153.6 (11.2) (14.0) 1.4 0.2 130.0
------------------------------------------------------
Environmental remediation program 106.7 5.3 (8.0) - - 104.0
------------------------------------------------------ Total
restructuring and environmental remediation liability $ 260.3 (5.9)
(22.0) 1.4 0.2 $ 234.0
------------------------------------------------------
------------------------------------------------------ Three months
ended December 31, 2006 Opening Amorti- Closing Balance zation
Foreign Balance Oct. 1 Accrued of Exchange Dec. 31 (in millions)
2006 (reduced) Payments Discount Impact 2006
------------------------------------------------------ Labour
liability for terminations and severances $ 204.6 (4.5) (15.9) 1.7
1.5 $ 187.4 Other non-labour liabilities for exit plans 2.0 - (0.6)
- - 1.4 ------------------------------------------------------
Total restructuring liability 206.6 (4.5) (16.5) 1.7 1.5 188.8
------------------------------------------------------
Environmental remediation program 125.0 3.1 (10.6) - 2.7 120.2
------------------------------------------------------ Total
restructuring and environmental remediation liability $ 331.6 (1.4)
(27.1) 1.7 4.2 $ 309.0
------------------------------------------------------
------------------------------------------------------ Year ended
December 31, 2007 Opening Amorti- Closing Balance zation Foreign
Balance Jan. 1 Accrued of Exchange Dec. 31 (in millions) 2007
(reduced) Payments Discount Impact 2007
------------------------------------------------------ Labour
liability for terminations and severances $ 187.4 (12.8) (46.8) 6.1
(4.7) $ 129.2 Other non-labour liabilities for exit plans 1.4 (0.2)
(0.2) - (0.2) 0.8
------------------------------------------------------ Total
restructuring liability 188.8 (13.0) (47.0) 6.1 (4.9) 130.0
------------------------------------------------------
Environmental remediation program 120.2 7.5 (14.0) - (9.7) 104.0
------------------------------------------------------ Total
restructuring and environmental remediation liability $ 309.0 (5.5)
(61.0) 6.1 (14.6) $ 234.0
------------------------------------------------------
------------------------------------------------------ Year ended
December 31, 2006 Opening Amorti- Closing Balance zation Foreign
Balance Jan. 1 Accrued of Exchange Dec. 31 (in millions) 2006
(reduced) Payments Discount Impact 2006
------------------------------------------------------ Labour
liability for terminations and severances $ 263.6 (14.1) (71.8) 9.8
(0.1) 187.4 Other non-labour liabilities for exit plans 5.8 0.7
(5.0) 0.1 (0.2) 1.4
------------------------------------------------------ Total
restructuring liability 269.4 (13.4) (76.8) 9.9 (0.3) 188.8
------------------------------------------------------
Environmental remediation program 129.4 10.5 (19.5) - (0.2) 120.2
------------------------------------------------------ Total
restructuring and environmental remediation liability $ 398.8 (2.9)
(96.3) 9.9 (0.5) $ 309.0
------------------------------------------------------
------------------------------------------------------ Amortization
of Discount is charged to income as "Other (Income) 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 Investments For the year ended December
31 (in millions) 2007 2006 ------------------- Rail investments
accounted for on an equity basis $ 1,528.6 $ 37.9 Other investments
140.0 27.0 ------------------- Total investments $ 1,668.6 $ 64.9
------------------- ------------------- Dakota, Minnesota &
Eastern Railroad Corporation ("DM&E") Effective October 4,
2007, the Company acquired all of the issued and outstanding shares
of DM&E, a Class II railroad operating in the U.S. Midwest, for
a purchase price of approximately US$1.5 billion, including
acquisition costs. Future contingent payments of up to US$1.05
billion, may become payable up to December 31, 2025, upon the
achievement of certain milestones towards the completion of a track
expansion into the Powder River Basin and the achievement of
certain traffic volume targets. Any contingent payments that may be
made would be recorded as additional goodwill. The acquisition has
been financed with cash on hand and debt. On October 4, 2007, the
Company drew down US$1.27 billion from an eighteen-month US$1.8
billion credit agreement entered into in October 2007 specifically
to fund the acquisition of DM&E. The credit facility bears
interest at a variable rate based on London Interbank Offered Rate
("LIBOR"). The purchase is subject to review and approval by the
U.S. Surface Transportation Board ("STB"), during which time the
shares of DM&E have been placed in a voting trust and are
administered by an independent trustee. The Company anticipates
that the STB will complete its review and provide a final ruling in
2008. During the review period, the investment in the DM&E is
accounted for on an equity basis. Equity income for the three
months ended and year ended December 31, 2007, of $12.3 million
(2006 - nil) has been included in "Other (Income) Charges" (See
Note 4). If the proposed transaction is approved by the STB, the
acquisition will be accounted for prospectively using the purchase
method of accounting. Under this method, the Company will prepare
its consolidated financial statements reflecting a line-by-line
consolidation of DM&E and the allocation of the purchase price
to acquire DM&E to the fair values of their assets and
liabilities. Asset-backed Commercial Paper ("ABCP") At December 31,
2007, the Company held Canadian third party asset- backed
commercial paper ("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 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. As a result, the Company has classified its
ABCP as long- term assets within 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 that they had agreed 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 market 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. The ABCP in which the
Company has invested continues to be rated R1 (High, Under Review
with Developing Implications) by DBRS. Through to January 31, 2008,
a Standstill Agreement is in place that commits investors not to
take any action that would precipitate an event of default. It is
expected that the restructuring of the ABCP will occur in March
2008 if approval by investors is obtained to do so. This approval
will be requested on a trust by trust basis most likely during
February 2008. On December 23, 2007, the pan-Canadian restructuring
committee provided certain details about the expected
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 long-term floating rate notes that are expected to
receive a AAA credit rating; - $119.0 million is represented by a
combination of leveraged collaterized debt, synthetic assets and
traditional securitized assets and the Company will, on
restructuring, receive replacement senior and subordinated
long-term floating rate notes. The senior notes are expected to
obtain a AAA rating while the subordinated notes are likely to be
unrated; and - $12.1 million is represented by assets that have an
exposure to US sub-prime mortgages. On restructuring, the Company
is likely to receive long-term floating rate notes that may be
rated, although at this time the pan-Canadian restructuring
committee has provided no indication of the likely rating these
notes may receive. The valuation technique used by the Company to
estimate the fair value of its investment in ABCP at December 31,
2007, 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 public statements made by the
pan-Canadian restructuring committee that it expects the ABCP will
be converted into various long-term floating rate notes, as
discussed above, with maturities matching the maturities of the
underlying assets and bearing market interest rates commensurate
with the nature of the underlying assets and their associated cash
flows and the credit rating and risk 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 4.6
per cent Weighted average discount rate 5.3 per cent Maturity of
long-term floating rate notes five to seven years Credit losses nil
to 25 per cent on a going concern basis 5 per cent to 50 per cent
on a liquidation basis 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. Maturities vary by different replacement
long-term floating rate notes as a result of the expected maturity
of the underlying assets. One of the probable 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, assumptions have also been made as to the
amount of restructuring costs that the Company will bear. Based on
additional information that became publicly available during the
fourth quarter of 2007, the probability weighted cash flows
resulted in an estimated fair value of the Company's investment in
ABCP of $122.1 million at December 31, 2007. This was unchanged
from the estimated fair value at September 30, 2007. The reduction
in the fair value of $21.5 million compared to the original cost of
the ABCP was recorded as a charge to income in the third quarter of
2007 with no further charges required in the fourth quarter of
2007. 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. 10
Long-term debt During the year ended December 31, 2007, the Company
issued US$450 million of 5.95% 30 - year notes. The notes are
unsecured, but carry a negative pledge. Also, during October 2007,
the Company entered into an eighteen-month US$1.80 billion credit
agreement. The credit facility bears interest at a variable rate
based on London Interbank Offered Rate ("LIBOR"), and is unsecured.
As at December 31, 2007, the Company had drawn down US$1.27 billion
from the credit facility specifically to fund the acquisition of
DM&E. 11 Shareholders' equity An analysis of Common Share
balances is as follows: For the three months For the year ended
December 31 ended December 31 (millions of shares) 2007 2006 2007
2006 ------------------------------------------- Share capital,
beginning of period 153.2 155.9 155.5 158.2 Shares issued under
stock option plans 0.1 0.5 1.0 2.3 Shares purchased - (0.9) (3.2)
(5.0) ------------------------------------------- Share capital,
end of period 153.3 155.5 153.3 155.5
-------------------------------------------
------------------------------------------- In June 2006, the
Company completed the acquisition of Common Shares under the
previous normal course issuer bid and filed a new normal course
issuer bid to purchase, for cancellation, up to 3.9 million of its
outstanding Common Shares. Under this filing, share purchases could
have been made during the 12-month period beginning June 6, 2006,
and ending June 5, 2007. Of the 3.9 million shares authorized for
purchase under this filing, 3.4 million were purchased in 2006 at
an average price per share of $56.66 and 0.2 million shares were
purchased during the three month period ended March 31, 2007, at an
average price per share of $64.11. In March 2007, the Company
completed the filing for a new normal course issuer bid ("2007
NCIB") to cover the period of March 28, 2007 to March 27, 2008, to
authorize the purchase, for cancellation, up to 5.0 million of its
outstanding Common Shares. Effective April 30, 2007, the 2007 NCIB
was amended to authorize the purchase, for cancellation, up to 15.3
million of its outstanding Common Shares. Of the 15.3 million
shares authorized under the 2007 NCIB, 2.7 million shares were
purchased at an average price per share of $73.64. In addition,
pursuant to a notice of intention to make an exempt issuer bid
filed on March 23, 2007, the Company purchased, for cancellation,
0.3 million shares through a private agreement with an arm's length
third party on March 29, 2007, at an average price of $63.12. For
the three months ended December 31, 2007, there were no shares
purchased (2006 - 0.9 million shares were purchased at an average
price per share of $63.85) and for the year ended December 31,
2007, 3.2 million shares were purchased at an average price per
share of $71.99 (2006 - 5.0 million shares were purchased at an
average price per share of $57.28). The 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 first to contributed surplus and then 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. 12 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 December 31 (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 $ 3.5 $ 0.7 $ 4.2 Unrealized foreign exchange loss on
translation of the net investment in U.S. subsidiaries (7.0) -
(7.0) Realized gain on cash flow hedges settled in the period (1.6)
0.9 (0.7) Decrease in unrealized holding gains on cash flow hedges
(17.0) 5.9 (11.1) Realized loss on cash flow hedges settled in
prior periods 0.7 (0.3) 0.4 ----------------------------- Other
comprehensive loss $ (21.4) $ 7.2 $ (14.2)
----------------------------- ----------------------------- For the
three months ended December 31 (in millions) 2006 Before Income Net
of tax tax 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 $ (23.6) $ 3.7 $ (19.9) Unrealized
foreign exchange gain on translation of the net investment in U.S.
subsidiaries 22.5 - 22.5 ----------------------------- Other
comprehensive income $ (1.1) $ 3.7 $ 2.6
----------------------------- ----------------------------- For the
year ended December 31 (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 $ 71.0 $ (9.7) $
61.3 Unrealized foreign exchange loss on translation of the net
investment in U.S. subsidiaries (78.4) - (78.4) Realized gain on
cash flow hedges settled in the period (12.8) 4.8 (8.0) Decrease in
unrealized holding gains on cash flow hedges (26.2) 9.1 (17.1)
Realized loss on cash flow hedges settled in prior periods 2.2
(0.8) 1.4 ----------------------------- Other comprehensive loss $
(44.2) $ 3.4 $ (40.8) -----------------------------
----------------------------- For the year ended December 31 (in
millions) 2006 Before Income Net of tax tax 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 $
(3.7) $ 0.5 $ (3.2) Unrealized foreign exchange gain on translation
of the net investment in U.S. subsidiaries 2.1 - 2.1
----------------------------- Other comprehensive loss $ (1.6) $
0.5 $ (1.1) -----------------------------
----------------------------- Changes in the balances of each
classification within Accumulated other comprehensive income are as
follows: Three months ended December 31, 2007 Opening Closing
Balance, Balance, Oct. 1, Period Dec. 31, (in millions) 2007 change
2007 ----------------------------- Foreign exchange on U.S. dollar
debt designated as a hedge of the net investment in U.S.
subsidiaries $ 292.4 $ 4.2 $ 296.6 Foreign exchange on net
investment in U.S. subsidiaries (239.9) (7.0) (246.9) Increase
(decrease) in unrealized effective gains of cash flow hedges 5.6
(11.8) (6.2) Unrealized loss on settled hedge instruments (4.3) 0.4
(3.9) ----------------------------- Accumulated other comprehensive
income $ 53.8 $ (14.2) $ 39.6 -----------------------------
----------------------------- Three months ended December 31, 2006
Opening Closing Balance, Balance, Oct. 1, Period Dec. 31, (in
millions) 2006 change 2006 ----------------------------- Foreign
exchange on U.S. dollar debt designated as a hedge of the net
investment in U.S. subsidiaries $ 254.8 $ (19.9) $ 234.9 Foreign
exchange on net investment in U.S. subsidiaries (191.0) 22.5
(168.5) ----------------------------- Accumulated other
comprehensive income $ 63.8 $ 2.6 $ 66.4
----------------------------- ----------------------------- Year
ended December 31, 2007 Adjustment for Adjusted Opening change
Opening Closing Balance, in ac- Balance, Balance, Jan. 1, counting
Jan. 1, Period Dec. 31, (in millions) 2007 policy 2007 change 2007
------------------------------------------------- Foreign exchange
on U.S. dollar debt designated as a hedge of the net investment in
U.S. subsidiaries $ 234.9 $ 0.4 $ 235.3 $ 61.3 $ 296.6 Foreign
exchange on net investment in U.S. subsidiaries (168.5) - (168.5)
(78.4) (246.9) Increase (decrease) in unrealized effective gains of
cash flow hedges - 18.9 18.9 (25.1) (6.2) Unrealized loss on
settled hedge instruments - (5.3) (5.3) 1.4 (3.9)
------------------------------------------------- Accumulated other
comprehensive income $ 66.4 $ 14.0 $ 80.4 $ (40.8) $ 39.6
-------------------------------------------------
------------------------------------------------- Year ended
December 31, 2006 Opening Closing Balance, Balance, Jan. 1, Period
Dec. 31, (in millions) 2006 change 2006
----------------------------- Foreign exchange on U.S. dollar debt
designated as a hedge of the net investment in U.S. subsidiaries $
238.1 $ (3.2) $ 234.9 Foreign exchange on net investment in U.S.
subsidiaries (170.6) 2.1 (168.5) -----------------------------
Accumulated other comprehensive income $ 67.5 $ (1.1) $ 66.4
----------------------------- ----------------------------- During
the next twelve months, the Company expects $10.9 million of
unrealized holding gains on derivative instruments to be realized
and recognized in the Statement of Consolidated Income. Derivative
instruments designated as cash flow hedges will mature during the
year ending December 31, 2009. 13 Fair value of 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 included in the Consolidated Balance Sheet
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 determined
using discounted cash flow analysis using observable market based
inputs. Financial liabilities --------------------- Accounts
payable and accrued liabilities and short-term borrowings - The
carrying amounts included in the Consolidated Balance Sheet
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 determined
using the quoted market prices for the same or similar debt
instruments. Available for sale ------------------ Investments -
The Company's equity investments recorded on a cost basis have a
carrying value that equals cost as fair value cannot be reliably
established. The Company's equity investments recorded on an equity
basis have a carrying value equal to cost plus the Company's share
of the investees net income, less any dividends received, which
approximates fair value. These investments are not traded on a
liquid market. Held for trading ---------------- Other assets and
deferred charges and Deferred liabilities - 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
the same or similar instruments and changes in the fair values of
such derivative instruments are recognized in net income as they
arise. Cash and cash equivalents - The carrying amounts included in
the Consolidated Balance Sheet approximate fair value because of
the short maturity of these instruments. Investments - 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 9). 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 $4,177.2 million and a fair value of
approximately $4,308.3 million at December 31, 2007. 14 Reductions
in investments and other assets Reductions in investments and other
assets includes the acquisition of freight car assets which were
purchased in anticipation of a sale and lease back arrangement with
a financial institution. For the three months ended December 31,
2007, $4.7 million in assets were acquired and $19.2 million were
sold; and for the year ended December 31, 2007, $19.2 million in
assets were acquired and $20.2 million sold. For the three months
ended December 31, 2006, $4.6 million in assets were acquired and
$26.7 million were sold; and for the year ended December 31, 2006,
$137.1 million in assets were acquired and $136.1 million sold. No
gains or losses were incurred in these sale and leaseback
arrangements. 15 Stock-based compensation In 2007, under CP's stock
option plans, the Company issued 1,304,500 options to purchase
Common Shares at the weighted average price of $62.60 per share,
based on the closing price on the day prior to the grant date. In
tandem with these options, 434,400 stock appreciation rights were
issued at the weighted average exercise price of $62.60. 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 December 31 (including options granted under the Directors'
Stock Option Plan, which was suspended in 2003): 2007 2006
----------------------- ----------------------- Weighted Weighted
average average Number of exercise Number of exercise options price
options price ----------------------- -----------------------
Outstanding, January 1 6,807,644 $ 38.50 7,971,917 $ 32.07 New
options granted 1,304,500 62.60 1,467,900 57.80 Exercised (972,281)
31.99 (2,330,664) 28.59 Forfeited/cancelled (158,755) 35.76
(301,509) 39.07 ----------- ----------- Outstanding, December 31
6,981,108 $ 43.97 6,807,644 $ 38.50 -----------------------
----------------------- -----------------------
----------------------- Options exercisable at December 31
4,035,008 $ 34.12 2,918,294 $ 29.64 -----------------------
----------------------- -----------------------
----------------------- 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
$11.3 million for options issued during the year ended December 31,
2007 (year ended December 31, 2006 - $12.4 million). The weighted
average fair value assumptions were approximately: For the year
ended December 31 2007 2006 -------------------- Expected option
life (years) 4.00 4.50 Risk-free interest rate 3.90% 4.07% Expected
stock price volatility 22% 22% Expected annual dividends per share
$0.90 $0.75 Weighted average fair value of options granted during
the year $12.97 $12.99 -------------------- -------------------- 16
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 December 31, 2007, was $26.4
million (three months ended December 31, 2006 - $30.3 million) and
for the year ended December 31, 2007, was $95.0 million (year ended
December 31, 2006 - $119.0 million). 17 Significant customers
During the year ended 2007, one customer comprised 11.5% of total
revenue (year ended 2006 - 11.5%). At December 31, 2007, that same
customer represented 6.2% of total accounts receivable (December
31, 2006 - 5.6%). 18 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 December 31, 2007, 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. Capital
commitments At December 31, 2007, the Company had multi-year
capital commitments of $504.2 million, mainly for locomotive
overhaul agreements, in the form of signed contracts. Payments for
these commitments are due in 2008 through 2016. Operating lease
commitments At December 31, 2007, minimum payments under operating
leases were estimated at $614.9 million in aggregate, with annual
payments in each of the next five years of: 2008 - $120.3 million;
2009 - $86.8 million; 2010 - $68.9 million; 2011 - $60.9 million;
2012 - $58.0 million. Guarantees The Company had residual value
guarantees on operating lease commitments of $321.7 million at
December 31, 2007. 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 December 31, 2007, these accruals amounted to
$7.0 million. DATASOURCE: Canadian Pacific Railway CONTACT: Media:
Leslie Pidcock, Tel.: (403) 319-6878, email: ; Investment
Community: Janet Weiss, Assistant Vice-President, Investor
Relations, Tel.: (403) 319-3591, email:
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