Canadian Pacific announces 2008 results

Calgary, Alberta

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.
2008 Earnings Release and Financial Reports

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.

Presentation of non-GAAP earnings

CP presents non-GAAP earnings measures in this news release to provide an additional basis for evaluating underlying earnings and liquidity trends in its business that can be compared with prior periods' results of operations. When foreign exchange gains and losses on long-term debt and other specified items are excluded from diluted earnings per share, income and income tax expense, these are non-GAAP measures. Additional non-GAAP measures are free cash and operating income.

These non-GAAP earnings measures exclude foreign currency translation effects on long-term debt, which can be volatile and short term. 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. In addition, these non-GAAP measures exclude other specified items (as described in this news release) that are not among CP's normal ongoing revenues and operating expenses.

Revenues less operating expenses are referred to as "Operating Income".

Free cash, as referred to in this news release, is calculated as cash provided by operating activities, less cash used in investing activities and dividends paid, adjusted for the acquisition of DM&E, and changes in cash and cash equivalent balances resulting from foreign exchange fluctuations, and excluding changes in the accounts receivable securitization program of $120 million, which was terminated in the second quarter of 2008, and the investment in ABCP. Free cash is adjusted for the DM&E acquisition and the investment in ABCP, as these are not indicative of normal day-to-day investments in CP's asset base. The securitization of accounts receivable is a financing transaction, which is excluded to clarify the nature of the use of free cash. As each of these amounts are presented in the Statement of Consolidated Cash Flows, with the exception of the accounts receivable securitization program noted above, no reconciliation of free cash to changes in Cash and Cash Equivalents has been provided.

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.

The non-GAAP earnings measures 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.

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, including the potential adverse impact of the current global credit crisis; 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; transportation of dangerous goods, timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates 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. Canadian Pacific is proud to be the official rail freight services provider for the Vancouver 2010 Olympic and Paralympic Winter Games.