30 October 2007
CP Takes 14.5% Hit on ABCP Holdings
Canadian Pacific Railway Ltd. became the first major Canadian
company to write off a substantial portion of its investment in the troubled asset-backed commercial-paper
market yesterday, saying that uncertainty in the market could affect future earnings.
The country's second-largest railway said it was writing off $21-million, or $15-million after
tax, of the $144-million it had tied up in the ABCP market. That paper matured in the third quarter, but because of
liquidity issues relating to the current credit crunch were not settled on maturation.
ABCP was supposed to be accounted for as a "cash equivalent," but that term can only be applied to short-term
investments that are highly liquid and readily convertible to known amounts of cash that are subject to insignificant changes in value.
CP is now classifying its ABCP as long-term investments.
CP said yesterday that continued uncertainties regarding the value of its assets in the ABCP market could affect the company's future
earnings, which was the rationale behind the writedown.
Earlier yesterday, Accountability Research Corp. said it would be appropriate to expect Canadian corporations with
non-bank ABCP to write down 15% to 20% of the value of those investments.
The market has already seen at least one other write-down and more are likely on the way. Earlier this month, 407
International, owner of the toll highway that runs across the north end of Toronto, said its holdings of $163-million of
non-bank ABCP had decreased in value by 4%, a figure some observers said was optimistic.
407 International conceded that its estimate of the losses is rough, since "there is currently no certainty regarding the outcome
of the Montreal Proposal."
Yesterday's news came as CP reported its third-quarter earnings late last evening, in which it reported a net income
increase of 34% to $219-million, or $1.41 diluted earnings per share. Excluding the impact of
foreign-exchange gains and losses on long-term debt and other specified items, diluted EPS increased 15%, the
railway said.
However, like its larger rival, Canadian National Railway Co., softer forestry volumes and the strong Canadian dollar continued to
erode the value of its U.S. revenue and slowed exports.
"We see ongoing challenges with the strengthening Canadian dollar and fuel price pressures," said Mike Lambert, chief
financial officer, in a statement.
As a result, the railway said it was lowering its earnings-per-share guidance for 2007 from $4.45 a share to $4.30 for the
year.
"The stronger Canadian dollar will also impact revenues, and we expect to be just below our target of 4% to 6% revenue growth for
2007," Mr. Lambert said.
CP said it expected free cash to exceed $300-million in 2007, based on current oil prices and exchange rates.
"CP posted strong results for this quarter, and we delivered these results in the face of a strengthening Canadian dollar and
increasing fuel costs," said Fred Green, the railway's chief executive, in a statement released late yesterday. "We moved
record volumes in the quarter and with the recent acquisition of Dakota Minnesota & Eastern Railroad Corporation, the largest
regional railroad in the U.S., we are well-positioned to continue our growth."
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