POWER CORPORATION OF CANADA ANNUAL REPORT 2007

Transcription

1 POWER CORPORATION OF CANADA ANNUAL REPORT 2007

2 TABLE OF CONTENTS FINANCIAL HIGHLIGHTS 1 GROUP ORGANIZATION CHART 2 CORPORATE PROFILE 3 DIRECTORS REPORT TO SHAREHOLDERS 5 REVIEW OF FINANCIAL PERFORMANCE 13 FINANCIAL STATEMENTS AND NOTES 30 FIVE-YEAR FINANCIAL SUMMARY 71 BOARD OF DIRECTORS 72 OFFICERS 73 CORPORATE INFORMATION 74 THIS ANNUAL REPORT IS DESIGNED TO PROVIDE INTERESTED SHAREHOLDERS AND OTHERS WITH SELECTED INFORMATION CONCERNING POWER CORPORATION OF CANADA. FOR FURTHER INFORMATION CONCERNING THE CORPORATION, SHAREHOLDERS AND OTHER INTERESTED PERSONS SHOULD CONSULT THE CORPORATION S DISCLOSURE DOCUMENTS, SUCH AS ITS ANNUAL INFORMATION FORM AND MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATING RESULTS. COPIES OF THE CORPORATION S CONTINUOUS DISCLOSURE DOCUMENTS CAN BE OBTAINED AT ON THE CORPORATION S WEB SITE AT OR FROM THE OFFICE OF THE SECRETARY, AT THE ADDRESSES SHOWN AT THE END OF THIS REPORT. READERS SHOULD ALSO REVIEW THE NOTE, FURTHER IN THIS REPORT, IN THE REVIEW OF FINANCIAL PERFORMANCE SECTION CONCERNING THE USE OF FORWARD-LOOKING STATEMENTS, WHICH APPLIES TO THE ENTIRETY OF THIS ANNUAL REPORT. IN ADDITION, SELECTED INFORMATION CONCERNING THE BUSINESS, OPERATIONS, FINANCIAL CONDITION, PRIORITIES, ONGOING OBJECTIVES, STRATEGIES AND OUTLOOK OF POWER CORPORATION OF CANADA S SUBSIDIARIES AND INVESTMENTS AT EQUITY IS DERIVED FROM PUBLIC INFORMATION PUBLISHED BY SUCH SUBSIDIARIES AND INVESTMENTS AT EQUITY AND IS PROVIDED HERE FOR THE CONVENIENCE OF THE SHAREHOLDERS OF POWER CORPORATION OF CANADA. FOR FURTHER INFORMATION CONCERNING SUCH SUBSIDIARIES AND INVESTMENTS AT EQUITY, SHAREHOLDERS AND OTHER INTERESTED PERSONS SHOULD CONSULT THE WEB SITES OF AND OTHER PUBLICLY AVAILABLE INFORMATION PUBLISHED BY SUCH SUBSIDIARIES AND INVESTMENTS AT EQUITY.

3 FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS] Total revenue 29,408 28,451 Operating earnings 1,458 1,166 Operating earnings per participating share Net earnings 1,463 1,393 Net earnings per participating share Dividends paid per participating share Consolidated assets 133, ,767 Consolidated assets and assets under administration 531, ,184 Shareholders equity 10,037 8,601 Book value per participating share Participating shares outstanding [in millions] THE CORPORATION USES OPERATING EARNINGS AS A PERFORMANCE MEASURE IN ANALYSING ITS FINANCIAL PERFORMANCE. FOR A DISCUSSION OF THE CORPORATION S USE OF NON-GAAP FINANCIAL MEASURES, PLEASE REFER TO THE REVIEW OF FINANCIAL PERFORMANCE IN THIS ANNUAL REPORT. THE FOLLOWING ABBREVIATIONS ARE USED THROUGHOUT THIS REPORT: POWER CORPORATION OF CANADA (POWER CORPORATION OR THE CORPORATION); BERTELSMANN AG (BERTELSMANN); CITIC PACIFIC LIMITED (CITIC PACIFIC); GESCA LTÉE (GESCA); GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY (GREAT-WEST LIFE & ANNUITY OR GWL&A); GREAT-WEST LIFECO INC. (GREAT-WEST LIFECO OR LIFECO); GROUPE BRUXELLES LAMBERT (GBL); IGM FINANCIAL INC. (IGM FINANCIAL OR IGM); IMERYS S.A. (IMERYS); INVESTMENT PLANNING COUNSEL INC. (INVESTMENT PLANNING COUNSEL); INVESTORS GROUP INC. (INVESTORS GROUP); LAFARGE S.A. (LAFARGE); LONDON LIFE INSURANCE COMPANY (LONDON LIFE); MACKENZIE FINANCIAL CORPORATION (MACKENZIE FINANCIAL OR MACKENZIE); PARGESA HOLDING SA (PARGESA); PARJOINTCO N.V. (PARJOINTCO); POWER FINANCIAL CORPORATION (POWER FINANCIAL); POWER TECHNOLOGY INVESTMENT CORPORATION (PTIC); PUTNAM INVESTMENTS, LLC (PUTNAM INVESTMENTS OR PUTNAM); SUEZ S.A. (SUEZ); THE CANADA LIFE ASSURANCE COMPANY (CANADA LIFE); THE GREAT-WEST LIFE ASSURANCE COMPANY (GREAT-WEST LIFE); TOTAL S.A. (TOTAL). POWER CORPORATION OF CANADA ANNUAL REPORT

4 GROUP ORGANIZATION CHART POWER CORPORATION OF CANADA 100% 66.4% GESCA LTÉE POWER FINANCIAL CORPORATION CASH, INVESTMENTS & CORPORATE ASSETS [1] PARGESA HOLDING SA 4.2% 70.4% [2] GREAT-WEST LIFECO INC. 55.9% IGM FINANCIAL INC. 3.5% 100% [3] 100% 100% 100% 100% 100% 100% PUTNAM INVESTMENTS, LLC GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY THE GREAT-WEST LIFE ASSURANCE COMPANY LONDON LIFE INSURANCE COMPANY THE CANADA LIFE ASSURANCE COMPANY INVESTORS GROUP INC. MACKENZIE FINANCIAL CORPORATION PERCENTAGES DENOTE YEAR-END EQUITY INTEREST UNLESS OTHERWISE NOTED. [1] THROUGH ITS WHOLLY OWNED SUBSIDIARY POWER FINANCIAL EUROPE B.V., POWER FINANCIAL CORPORATION HELD A 50 PER CENT INTEREST IN PARJOINTCO N.V. PARJOINTCO HELD A VOTING INTEREST OF 62.9% PER CENT AND AN EQUITY INTEREST OF 54.1% PER CENT IN PARGESA HOLDING SA. [2] 65 PER CENT DIRECT AND INDIRECT VOTING INTEREST [3] DENOTES VOTING INTEREST 2 POWER CORPORATION OF CANADA ANNUAL REPORT 2007

5 CORPORATE PROFILE INCORPORATED IN 1925, POWER CORPORATION OF CANADA IS A DIVERSIFIED INTERNATIONAL MANAGEMENT AND HOLDING COMPANY WITH INTERESTS IN COMPANIES THAT ARE ACTIVE IN THE FINANCIAL SERVICES, COMMUNICATIONS AND OTHER BUSINESS SECTORS. POWER CORPORATION HOLDS THE CONTROLLING INTEREST IN POWER FINANCIAL CORPORATION AND A 100 PER CENT INTEREST IN GESCA AND PTIC. POWER FINANCIAL CORPORATION Power Financial Corporation holds the controlling interest in Great-West Lifeco and IGM Financial. Power Financial and the Frère group each hold a 50 per cent interest in Parjointco, which holds their interest in Pargesa. GREAT-WEST LIFECO holds a 100 per cent interest in The Great-West Life Assurance Company, Great-West Life & Annuity Insurance Company and in Putnam Investments, LLC. Great-West Life holds 100 per cent of London Insurance Group Inc., which in turn owns 100 per cent of London Life Insurance Company; Great-West Life also has 100 per cent of Canada Life Financial Corporation, which holds 100 per cent of The Canada Life Assurance Company. At December 31, 2007, Lifeco and its subsidiaries had more than $394 billion in assets under administration. GREAT-WEST LIFE is a leading insurer with interests in the life and health insurance, investment, retirement savings and reinsurance businesses, primarily in Canada and Europe. In Canada, Great-West Life, London Life and Canada Life serve the financial security needs of more than 12 million Canadians. LONDON LIFE offers Canadians financial security advice and planning through its Freedom 55 TM Financial division. London Life provides savings and investment, retirement income and individual life insurance products and mortgages in Canada, and operates in international markets through its subsidiary London Reinsurance Group Inc., a supplier of reinsurance in the United States and Europe. CANADA LIFE provides insurance and wealth management products and services in Canada and internationally, primarily in the United Kingdom, Isle of Man, Ireland and Germany. In the United States, Canada Life is a leading provider of traditional mortality, financial and annuity reinsurance solutions to U.S. life insurers. GREAT-WEST LIFE & ANNUITY operates in the United States, administering retirement savings plans for employees in the public/non-profit and corporate sectors, and providing annuities and life insurance for individuals and businesses. PUTNAM INVESTMENTS is a Boston-based global money management firm with 70 years of investment experience. The company has approximately C$184 billion in total assets under management, including over 100 mutual funds, and offers a full range of financial products and services, both in the United States and globally, for individual and institutional investors. POWER CORPORATION OF CANADA ANNUAL REPORT

6 CORPORATE PROFILE CONTINUED IGM FINANCIAL is one of Canada s premier personal financial services companies, and one of the country s largest managers and distributors of mutual funds and other managed asset products, with $123 billion in total assets under management. The company serves the financial needs of Canadians through multiple distinct businesses including Investors Group, Mackenzie Financial and Investment Planning Counsel. INVESTORS GROUP provides comprehensive financial planning, advice, and services, including investment, retirement, estate and tax planning, through a network of over 4,300 consultants to nearly one million Canadians. Investors Group offers investment management, securities, insurance, mortgage and other financial services to its clients through integrated financial planning. MACKENZIE FINANCIAL is a multidimensional financial services company with more than 100 mutual funds and is recognized as one of Canada s premier investment managers, providing investment advisory and related services in North America. PARGESA GROUP holds significant positions in five large companies based in Europe: Total (energy), Suez (energy, water, waste services), Imerys (specialty minerals), Lafarge (cement and building materials) and Pernod Ricard (wines and spirits). GESCA Gesca holds a 100 per cent interest in the Montréal daily newspaper La Presse and six other daily newspapers in the provinces of Québec and Ontario. Gesca also produces television programming, publishes specialty magazines and books, and operates several Internet sites. POWER TECHNOLOGY INVESTMENT CORPORATION Power Technology Investment Corporation is a wholly owned subsidiary of Power Corporation which invests in the biotechnology and technology sectors. In addition to its investments in biotechnology companies based in Canada, PTIC also holds interests in various U.S.-based technology funds, as well as minority ownership positions in several companies. 4 POWER CORPORATION OF CANADA ANNUAL REPORT 2007

7 DIRECTORS REPORT TO SHAREHOLDERS IN THE FINANCIAL SERVICES INDUSTRY, THE COMPANIES OF THE POWER FINANCIAL GROUP ARE LOW-COST PRODUCERS WITH POWERFUL DISTRIBUTION SYSTEMS AND SIGNIFICANT MARKET SHARES. OPERATING IN NORTH AMERICA AND EUROPE, THESE COMPANIES ARE WELL PLACED TO PARTICIPATE IN THE EVOLUTION OF THEIR RESPECTIVE INDUSTRIES. OUR HOLDINGS IN ASIA, IN THE BIOTECHNOLOGY INDUSTRY, AND IN PRIVATE EQUITY ADD TO OUR GEOGRAPHIC AND SECTORIAL DIVERSITY. Power Corporation of Canada reported operating earnings of $1,458 million or $3.12 per participating share for the year ended December 31, 2007, compared with $1,166 million or $2.49 per share in This represents a 25.3 per cent increase on a per share basis. Growth in operating earnings reflects an increase of $186 million or 16.3 per cent in the contribution from subsidiaries, primarily driven by the growth of 15.8 per cent in operating earnings recorded by Power Financial in 2007, as well as a significant increase from income from investments, which was primarily recorded in previous quarters. Other items, not included in operating earnings, were $5 million or $0.01 per share in 2007, compared with $227 million or $0.51 per share in 2006, which included an amount of $236 million or $0.52 per share representing the impact of the gain recorded by Groupe Bruxelles Lambert on the sale of its interest in Bertelsmann. As a result, net earnings were $1,463 million or $3.13 per share in 2007, compared with $1,393 million or $3.00 per share in DIVIDENDS Dividends paid in 2007 on the Corporation s Participating Preferred and Subordinate Voting Shares rose to cents per share, compared with cents per share in 2006, an increase of 21 per cent. Dividends were also increased during the year at Power Financial, Great-West Lifeco, IGM Financial and Pargesa. GROUP COMPANIES RESULTS POWER FINANCIAL Power Financial Corporation s operating earnings for the year ended December 31, 2007 were $2,082 million or $2.84 per share, compared with $1,802 million or $2.46 per share in This represents a 15.8 per cent increase on a per share basis. Growth in operating earnings reflect primarily an increase of $276 million or 14.8 per cent in the contribution from the subsidiaries and Parjointco, from $1,871 million to $2,147 million. Based upon Lifeco s growth in net income on a constant currency basis, Power Financial s operating earnings on a per share basis for the year would have increased by 17.0 per cent. POWER CORPORATION OF CANADA ANNUAL REPORT

8 DIRECTORS REPORT TO SHAREHOLDERS CONTINUED Other items, not included in operating earnings, were a net charge of $38 million or $0.05 per share in 2007, reflecting primarily the impact of a provision recorded by Lifeco during the third quarter, partly offset by Power Financial s share of non-operating earnings recorded in the fourth quarter. In 2006, other items were $353 million or $0.50 per share, including an amount of $356 million representing the impact of the gain recorded by Groupe Bruxelles Lambert on the sale of its interest in Bertelsmann. As a result, net earnings were $2,044 million or $2.79 per share in 2007, compared with $2,155 million or $2.96 per share in GREAT-WEST LIFECO Great-West Lifeco reported adjusted net income attributable to common shareholders of $2,153 million or $2.413 per share in 2007, compared with $1,875 million or $2.104 per share in 2006, an increase of 15 per cent. Adjusted net income in 2007 excludes a provision for certain Canadian retirement plans of $97 million after tax, which was recorded in the third quarter. Net income attributable to common shareholders after this provision was $2,056 million or $2.304 per share for the twelve months ended December 31, On a constant currency basis, adjusted net income attributable to common shareholders increased 16 per cent over Results for the year were strong across all three of Lifeco s business segments: Canada, United States and Europe. The acquisition of Putnam closed on August 3, Lifeco results include the results of Putnam from that date. Putnam contributed approximately $0.046 per share since the closing of the transaction. Lifeco continues to benefit from a high-quality asset portfolio in the face of significant uncertainty in global credit markets. Adjusted return on common shareholders equity was 21.6 per cent for the twelve months ended December 31, For the twelve months ended December 31, 2007, net income attributable to common shareholders of the Canadian segment of Great-West Lifeco was up 9 per cent to $973 million from $893 million for the twelve months ended December 31, Individual Insurance & Investment Products earnings at $637 million were up 9 per cent while Group Insurance earnings of $384 million were up 15 per cent. Total sales for the twelve months ended December 31, 2007 were $9.4 billion, compared with $8.4 billion in 2006, an increase of 12 per cent. Total assets under administration at December 31, 2007 for the Canadian segment were $101.0 billion, compared with $96.6 billion at December 31, POWER CORPORATION OF CANADA ANNUAL REPORT 2007

9 OPERATING EARNINGS PER SHARE [presented on a post-subdivision basis] [in dollars] YEAR-END ANNUALIZED DIVIDENDS [in dollars] For the United States segment, for the twelve months ended December 31, 2007, net income attributable to common shareholders was up 11 per cent to $569 million from $511 million in Net income includes $203 million in 2007, compared with $191 million for 2006 in connection with Lifeco s U.S. healthcare business, which has been designated as discontinued operations. On a constant currency basis, net income increased by 18 per cent for the year. Total sales for the year were $21.0 billion, compared with $3.4 billion in Putnam s asset management business is included from August 3, Total assets under administration at December 31, 2007 for the U.S. segment were $231.4 billion, compared with $48.2 billion in Included in assets under administration were $184 billion of mutual fund and institutional account assets managed by Putnam. For the twelve months ended December 31, 2007, net income attributable to common shareholders of Great-West Lifeco s European segment was up 26 per cent to $611 million from $486 million for the twelve months ended December 31, On a constant currency basis, net income from the segment increased 25 per cent for the year. Total sales for the twelve months were $6.1 billion, compared with $5.8 billion in 2006, an increase of 4 per cent. Total assets under administration at December 31, 2007 for the European segment were $61.7 billion, compared with $67.8 billion at December 31, IGM FINANCIAL IGM Financial reported that adjusted net income for the year ended December 31, 2007 was $863.8 million, compared with adjusted net income of $763.0 million in 2006, an increase of 13.2 per cent. Adjusted earnings per share were $3.23 in 2007, compared with $2.85 in 2006, an increase of 13.3 per cent. Adjusted net income in both years excluded a non-cash income tax benefit resulting from decreases in the federal corporate income tax rates and their effect on the future income tax liability related to indefinite life intangible assets arising from the acquisition of Mackenzie Financial in A benefit of $15.3 million was reported in the fourth quarter of 2007 and $13.7 million was reported in the second quarter of Net income without adjustment for the year ended December 31, 2007 was $879.1 million, compared with net income without adjustment of $776.7 million in 2006, an increase of 13.2 per cent. Earnings per share on this basis were $3.29 in 2007, compared with $2.90 in 2006, an increase of 13.4 per cent. Gross revenues for the year ended December 31, 2007 were $2.90 billion, compared with $2.60 billion in the prior year. Operating expenses were $1.66 billion, compared with $1.49 billion in Total assets under management at December 31, 2007 were $123.0 billion. This compares with total assets under management of $119.4 billion at December 31, 2006, an increase of 3.0 per cent. POWER CORPORATION OF CANADA ANNUAL REPORT

10 DIRECTORS REPORT TO SHAREHOLDERS CONTINUED Shareholders equity at December 31, 2007 was $4.2 billion, compared with $3.8 billion at December 31, Adjusted return on average common equity for 2007 was 21.5 per cent, compared with adjusted return on average common equity of 21.1 per cent in For IGM Financial s Investors Group unit, mutual fund sales for 2007 were $7.2 billion, compared with $6.2 billion in the prior year and mutual fund net sales were $2.2 billion, compared with $1.3 billion a year ago. The number of Investors Group consultants was 4,331 at December 31, 2007, up from 3,917 at December 31, Investors Group has experienced fourteen consecutive quarters of growth, resulting in an increase of more than 35 per cent in the consultant network since June 30, Investors Group s twelve-month trailing redemption rate (excluding money market funds) was at a record low level of 7.3 per cent at December 31, 2007, down from 7.9 per cent at December 31, Mutual fund assets under management at December 31, 2007 were $60.2 billion, compared with $58.2 billion at December 31, 2006, an increase of 3.4 per cent. For IGM Financial s Mackenzie Financial unit, total sales for 2007 were $12.7 billion, compared with $11.7 billion in the prior year. Total net sales were $1.0 billion, compared with $2.2 billion in the prior year. Mackenzie s total assets under management at December 31, 2007 totalled $63.3 billion. This compares with assets under management of $61.5 billion at December 31, 2006, an increase of 2.8 per cent. Mutual fund assets under management at December 31, 2007 were $46.6 billion, relatively unchanged from one year ago. PARGESA Together with the Frère group of Belgium, Power Financial holds a 54.1 per cent equity interest in Pargesa. Pargesa reported operating earnings of SF609 million in 2007, compared with SF539 million in Non-operating earnings were SF113 million in 2007, compared with SF1,754 million in 2006, the latter being composed primarily of Pargesa s share of the gain recorded by GBL on the sale of its interest in Bertelsmann. As a result, net earnings reported by Pargesa were SF722 million in 2007, compared with SF2,293 million in The group companies financial results and operations for the year ended December 31, 2007 are discussed at greater length in the Corporation s Management s Discussion and Analysis of Operating Results dated March 13, 2008, available at or from the Secretary of the Corporation. 8 POWER CORPORATION OF CANADA ANNUAL REPORT 2007

11 TECHNOLOGY Power Technology Investment Corporation was created to provide Power Corporation with technology investment opportunities through direct investments in operating companies and indirect investments such as technology funds. PTIC holds several investments in the biotechnology sector which are in various stages of development. This sector represents a small percentage of Power Corporation s assets. It offers diversification, but is subject to greater volatility. COMMUNICATIONS Gesca is a media group engaged primarily in the publication of daily newspapers in the provinces of Québec and Ontario. La Presse, the leading French-language daily newspaper in Canada, is recognized as a quality newspaper on the strength of its news coverage, series, columnists and innovative style of presentation. Published in compact formats, the group s other newspapers, Le Soleil, Le Droit, Le Nouvelliste, La Tribune, Le Quotidien and La Voix de l Est serve their communities successfully. Over the last few years, Gesca has been transformed considerably through a series of acquisitions and the undertaking of new activities pursuant to the company s development strategy. In line with this strategy, Gesca reorganized to achieve greater revenue diversification. The company s development activities are combined under a new division named Gesca Development, which brings together the Cyberpresse sites, television production, magazine and book publishing activities, Gesca Digital Investments, as well as the company s interests in Workopolis and the online advertising network Olive Canada. INVESTMENTS IN FUNDS Power Corporation holds positions in several investment funds, private equity funds and hedge funds. Over the years, and again in 2007, these funds have produced returns that, in the view of the Board, are very satisfying. Established in 2001 and based in Paris, Sagard SAS, a subsidiary of the Corporation, currently manages two private equity funds focusing primarily on the mid-size market in francophone Europe. These two funds Sagard 1 and Sagard 2 have gathered in aggregate over 1.5 billion of commitments, including 300 million from the Corporation and 250 million from the Pargesa group. POWER CORPORATION OF CANADA ANNUAL REPORT

12 DIRECTORS REPORT TO SHAREHOLDERS CONTINUED Sagard 1 is fully invested and has disposed of four investments, including two in Cumulative net proceeds from these four sales distributed to investors as at December 31, 2007 amounted to million, compared with a total of 569 million called from investors. There remain eight companies in the portfolio of Sagard 1. Sagard 2 closed its fund-raising in December 2006 with 1 billion in commitments, and has already invested million in four investments completed in In addition, Sagard Capital Partners, L.P., an investment fund that is indirectly wholly owned by the Corporation, has begun investing in public companies in the United States, pursuant to a plan to allocate a portion of its cash resources, initially limited to a maximum of US$250 million, to selected investment opportunities in that country. ASIA In Asia, Power Corporation holds a 7.1 per cent interest in CITIC Pacific. CITIC Pacific s net profit continued to grow, increasing 31% from HK$8,272 million in 2006 to HK$10,843 million in While this includes a number of non-recurring items, the comparative recurring earnings increased 36% to HK$5,023 million. The steel sector contribution increased by 68% to HK$2,242 million. Growth was due to an increase in both production output and higher average selling prices for the company s specialty steel products. The company s iron ore project in Western Australia is proceeding as planned and is the destination of the bulk of CITIC Pacific s capital expenditures, totalling HK$6,844 million last year. Cathay Pacific contributed over HK$1,200 million, despite a reduction in ownership as a result of the restructuring in The listing of CITIC 1616 and Dah Chong provided gains of HK$1,928 million and HK$2,624 million, respectively, in 2007, compared with the aviation restructuring and sale of Festival Walk in 2006 for HK$2,236 million and HK$1,313 million, respectively. Cash flow from operations was sufficient to allow for the repurchase of 18 million shares and a special dividend of HK$0.20. The company has also increased its regular dividend by 9% to HK$1.20. In November 2007, your Directors visited China and Hong Kong, where they received a number of presentations from senior management of CITIC Pacific. The visit to China included site visits to some of the core sector facilities of the company. In October 2004, the Corporation was granted a license to operate as a Qualified Foreign Institutional Investor (QFII) in the Chinese A shares market, for an initial amount of US$50 million. This activity generated almost $135 million in pre-tax earnings in 2007, as the local markets experienced significant growth during the year. These investments, as well as the investments in funds, support the diversification strategy of the Corporation. However, their contribution to operating earnings may be more volatile. 10 POWER CORPORATION OF CANADA ANNUAL REPORT 2007

13 GROUP DEVELOPMENTS On August 3, 2007, Great-West Lifeco Inc. announced that it had completed the acquisition of Putnam. The acquisition was described at greater length in Power Financial s Annual Report for The acquisition allows Lifeco to achieve, with a single transaction, a major presence in the mutual fund and institutional asset management industry in the United States. It also broadens Great-West Lifeco s operations in Europe and gives an entry into Japan. Established in 1937, Putnam is one of the oldest and largest investment managers in the United States. In November 2007, Great-West Lifeco Inc. announced that its subsidiary, U.S.-based Great-West Life & Annuity Insurance Company, had signed a definitive agreement to sell its healthcare business, Great-West Healthcare, to a subsidiary of CIGNA Corporation. The transaction has an enterprise value of US$2.25 billion and is expected to close during the first half of 2008, subject to regulatory and certain other approvals. Pursuant to the transaction, Great-West Life & Annuity is expected to receive US$1.5 billion in cash and will retain an estimated US$750 million representing the amount of equity invested in the business as at the anticipated closing date. After payment of taxes and write-offs associated with intangibles and certain other assets of the business, the company will have approximately US$1.6 billion that will be used to repay bridge financing associated with the acquisition of Putnam. In February 2008, Great-West Lifeco announced that its Irish reinsurance subsidiary, Canada Life International Re Limited, had signed an agreement with Standard Life Assurance Limited, a U.K.-based provider of life, pension and investment products, to assume, by way of indemnity reinsurance, a large block of U.K. payout annuities. The reinsurance transaction will increase policyholder liabilities by approximately $13 billion, with a corresponding increase in assets. In 2007 and early in 2008, GBL increased its investment in Lafarge and currently holds in excess of 20 per cent. GBL intends to account for its interest in Lafarge under the equity method in GBL also increased its position in Pernod Ricard to 6.2 per cent and increased its equity interest in Suez from 8.0 per cent to 9.3 per cent by the year-end. In 2008, Pargesa has increased its equity interest in GBL from 48.6 per cent to 49.2 per cent, bringing its voting interest to 50.8 per cent as of March 3, POWER CORPORATION OF CANADA ANNUAL REPORT

14 DIRECTORS REPORT TO SHAREHOLDERS CONTINUED EXECUTIVE APPOINTMENT In January 2008, Mr. Philip K. Ryan was appointed Executive Vice-President and Chief Financial Officer of Power Corporation and of Power Financial. Mr. Ryan had previously been employed for 22 years with Credit Suisse Group in financial management roles and in investment banking to financial institutions, including serving as Chief Financial Officer. Mr. Michel Plessis-Bélair has retired as Chief Financial Officer, having passed the Corporation s normal age of retirement. He joined Power Corporation in The Directors are pleased to report that Mr. Plessis-Bélair will continue to serve the Power group as Vice-Chairman of the Board of Directors of Power Corporation of Canada and will also continue as a Director of Power Financial Corporation and certain group companies. THE POWER GROUP Your Directors and management seek to provide sustainable long-term shareholder returns at Power Corporation and at its group companies. We believe our group is positioned to meet the challenges of the more volatile capital markets and difficult economic conditions expected in In the financial services industry, the companies of the Power Financial group are lowcost producers with powerful distribution systems and significant market shares. The Pargesa group holds interests in companies that are among the world s leaders in their fields. These companies are well placed to participate in the evolution of their respective industries. Our holdings in Asia, in the biotechnology industry, and in private equity add to our geographic and sectorial diversity, and hold potential. Your Directors wish to express gratitude on behalf of the shareholders for the important contribution of the employees of Power Corporation and its associated companies to the successful results that have been achieved in the year On behalf of the Board of Directors, Signed, Paul Desmarais, Jr., O.C. Chairman and Co-Chief Executive Officer March 13, 2008 Signed, André Desmarais, O.C. President and Co-Chief Executive Officer 12 POWER CORPORATION OF CANADA ANNUAL REPORT 2007

15 POWER CORPORATION OF CANADA REVIEW OF FINANCIAL PERFORMANCE MARCH 13, 2008 This Annual Report is designed to provide interested shareholders and others with selected information concerning Power Corporation of Canada. For further information concerning the Corporation, shareholders and other interested persons should consult the Corporation s disclosure documents such as its Annual Information Form and Management s Discussion and Analysis of Operating Results. Copies of the Corporation s continuous disclosure documents can be obtained at on the Corporation s Web site at or from the office of the Secretary at the addresses shown at the end of this report. FORWARD-LOOKING STATEMENTS Certain statements, other than statements of historical fact, are forward-looking statements based on certain assumptions and reflect the Corporation s and its subsidiaries current expectations. Forward-looking statements are provided for the purpose of presenting information about management s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. These statements may include, without limitation, statements regarding the operations, business, financial condition, priorities, ongoing objectives, strategies and outlook of Power Corporation and its subsidiaries for the current fiscal year and subsequent periods. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as expects, anticipates, plans, believes, estimates, intends, targets, projects, forecasts or negative versions thereof and other similar expressions, or future or conditional verbs such as may, will, should, would and could. This information is based upon certain material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forwardlooking statements, including the perception of historical trends, current conditions and expected future developments, as well as other factors that are believed to be appropriate in the circumstances. By its nature, this information is subject to inherent risks and uncertainties that may be general or specific. A variety of material factors, many of which are beyond the Corporation s and its subsidiaries control, affect the operations, performance and results of the Corporation and its subsidiaries, and their businesses, and could cause actual results to differ materially from current expectations of estimated or anticipated events or results. These factors include, but are not limited to: the impact or unanticipated impact of general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, management of market liquidity and funding risks, changes in accounting policies and methods used to report financial condition, including uncertainties associated with critical accounting assumptions and estimates, the effect of applying future accounting changes, business competition, technological change, changes in government regulation and legislation, changes in tax laws, unexpected judicial or regulatory proceedings, catastrophic events, the Corporation s and its subsidiaries ability to complete strategic transactions and integrate acquisitions, and the Corporation s and its subsidiaries success in anticipating and managing the foregoing factors. The reader is cautioned that the foregoing list of factors is not exhaustive of the factors that may affect any of the Corporation s and its subsidiaries forward-looking statements. The reader is also cautioned to consider these and other factors carefully and not to put undue reliance on forward-looking statements. Other than as specifically required by law, the Corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise. Additional information about the risks and uncertainties of the Corporation s business is provided in its disclosure materials, including its Annual Information Form, filed with the securities regulatory authorities in Canada, available at POWER CORPORATION OF CANADA ANNUAL REPORT

16 REVIEW OF FINANCIAL PERFORMANCE ALL TABULAR AMOUNTS ARE IN MILLIONS OF CANADIAN DOLLARS UNLESS OTHERWISE NOTED. Power Corporation is a holding company whose principal asset is its controlling interest in Power Financial Corporation (Power Financial). As of the date hereof, Power Corporation holds a 66.4% equity and voting interest in Power Financial. POWER FINANCIAL CORPORATION Power Financial holds substantial interests in the financial services industry through its controlling interest in each of Great-West Lifeco Inc. (Lifeco) and IGM Financial Inc. (IGM). Power Financial also holds, together with the Frère group of Belgium, an interest in Pargesa Holding SA (Pargesa). As previously disclosed, on August 3, 2007, Lifeco acquired the asset management business of Putnam Investments Trust (Putnam) and Lifeco s subsidiaries, The Great-West Life Assurance Company (Great-West Life) and The Canada Life Assurance Company (Canada Life), also acquired Putnam s 25% interest in T.H. Lee Partners, representing an aggregate transaction value of approximately $4.2 billion, including transaction costs. In addition, on November 26, 2007, Lifeco announced that its subsidiary Great-West Life & Annuity Insurance Company (GWL&A) had signed a definitive agreement to sell its healthcare business, Great-West Healthcare, to a subsidiary of CIGNA Corporation. The transaction, representing an aggregate enterprise value of US$2.25 billion, is expected to close in the first half of 2008, subject to regulatory and certain other approvals. On December 31, 2007, Power Financial and IGM held 70.4% and 4.2%, respectively, of Lifeco s common shares, representing approximately 65% of the voting rights attached to all outstanding Lifeco voting shares. On December 31, 2007, Power Financial and Great-West Life held 56.0% and 3.5%, respectively, of IGM s common shares. Power Financial Europe B.V., a wholly owned subsidiary of Power Financial, and the Frère group each hold a 50% interest in Parjointco N.V. (Parjointco), which, as of December 31, 2007, held a 54.1% equity interest in Pargesa, representing 62.9% of the voting rights of that company. These numbers do not reflect the dilution which could result from the potential conversion of the debentures convertible into new bearer shares issued by Pargesa in 2006 and The Pargesa group has substantial holdings in major companies based in Europe. These investments are held by Pargesa directly or through its affiliated Belgian holding company, Groupe Bruxelles Lambert (GBL). As at March 3, 2008, Pargesa held a 49.2% equity interest in GBL, representing 50.8% of the voting rights. OVERVIEW As of December 31, 2007, Pargesa s portfolio was composed of interests in various sectors, including oil, gas and chemicals through Total S.A. (Total); energy, water and waste services through Suez S.A. (Suez); specialty minerals through Imerys S.A. (Imerys); cement and building materials through Lafarge S.A. (Lafarge); and wine and spirits through Pernod Ricard, in which GBL made its initial investment in the latter part of Also, as previously disclosed, on May 30, 2007, GBL and Compagnie Nationale à Portefeuille S.A. (CNP), a company controlled by the Frère group, announced that together they held 5% of the capital of Iberdrola, a Spanish listed company which operates in the energy sector, with GBL owning 3% of that company, representing an investment of approximately 1.4 billion. On December 3, 2007, GBL and CNP announced that they had reduced their ownership in Iberdrola. GBL s interest in Iberdrola was 1.4% as at December 31, 2007, and was further reduced since the beginning of 2008, to 0.6% as of March 3, In addition, Pargesa and GBL have also invested or committed to invest in the area of private equity, including in the French private equity funds Sagard 1 and 2, whose management company is a subsidiary of Power Corporation. POWER TECHNOLOGY INVESTMENT CORPORATION Power Technology Investment Corporation (PTIC), a wholly owned subsidiary of the Corporation, is an investor in the biotechnology and technology sectors. As at December 31, 2007, PTIC held approximately, both directly and indirectly, a 14.1% interest in Neurochem Inc. and a 9.6% interest in Adaltis Inc., two public companies based in Montréal. PTIC also holds, directly or indirectly, interests in various technology funds, as well as minority ownership positions in several other companies. Further information concerning Neurochem Inc. and Adaltis Inc. is contained in their respective disclosure documents at GESCA LTÉE Gesca Ltée (Gesca) is a wholly owned subsidiary of Power Corporation. As a media group, it is engaged in the publication of seven daily newspapers, including the French-language national newspaper La Presse, as well as Le Soleil, Le Droit, Le Nouvelliste, La Tribune, Le Quotidien and La Voix de l Est. In addition, through its Development Division, Gesca produces television programming and publishes several specialty magazines and books. Gesca, through its new division, Gesca Digital, operates several Web sites, including Cyberpresse.ca, LaPresseAffaires.com, Technaute.com, MonToit.ca and MonVolant.ca. Gesca holds a 50% interest in Workopolis, an Internet-based careers and recruitment business. Gesca also has a significant interest in the Internet-based classified advertising site LiveDeal.ca, as well as in Olive Canada Network, one of Canada s leading online advertising sales networks. 14 POWER CORPORATION OF CANADA ANNUAL REPORT 2007

17 REVIEW OF FINANCIAL PERFORMANCE ASIA In Asia, the most significant investment of the Corporation is its holding in CITIC Pacific Limited (CITIC Pacific) (7.1% equity interest as of the date hereof, compared with 5.2% at the end of 2006), a public corporation whose shares are listed on the Hong Kong Stock Exchange. CITIC Pacific s businesses span manufacturing special steel, iron ore mining, developing and investing in real estate properties, power generation, civil infrastructure and aviation. CITIC Pacific is also engaged in marketing and distributing motor vehicles and consumer products throughout China. In addition, Power Corporation is involved in selected investment projects in China and in October 2004 was granted a license to operate as a Qualified Foreign Institutional Investor (QFII) in the Chinese A shares market, for an amount of US$50 million. In November 2007, Power Pacific Corporation Limited, a wholly owned subsidiary of the Corporation, sold to Bombardier Inc. (Bombardier), for gross proceeds of US$39 million, its 50% interest in the joint venture through which Power and Bombardier were involved in transportation projects in China. INVESTMENT IN FUNDS AND SECURITIES Over the years, Power Corporation has invested, directly or through wholly owned subsidiaries, in a number of selected investment funds, hedge funds and securities. These investments and the investments in Asia support the diversification strategy of the Corporation. However, their contribution to operating earnings, both in terms of magnitude and timing, is by nature expected to be difficult to predict. In 2002, Power Corporation made a commitment of 100 million to Sagard Private Equity Partners (Sagard 1), a 535 million fund, in which GBL also made a commitment of 50 million. Sagard 1 has completed 12 investments, two of which were sold during the second quarter of 2006 and an additional two of which were sold during the first quarter of In 2006, Sagard 2 was launched, a new fund with the same investment strategy as Sagard 1. This new fund closed with total commitments of 1.0 billion. Power Corporation made a 200 million commitment to Sagard 2, while Pargesa and GBL made commitments of 50 million and 150 million, respectively. As of the date of this report, Sagard 2 has completed four investments. The Sagard 1 and 2 funds are managed by Sagard SAS, a subsidiary of the Corporation based in Paris, France. The Corporation currently owns 73% of Sagard SAS, compared with 100% at the end of In addition, a wholly owned subsidiary of the Corporation has begun investing in public companies in the United States, pursuant to a plan to allocate a portion of its cash resources (initially limited to a maximum of US$250 million) to selected investment opportunities in that country. As of the date hereof, there were 48,854,772 Participating Preferred Shares, unchanged from December 31, 2007 and 2006, and 407,398,671 Subordinate Voting Shares of the Corporation outstanding, compared with 405,034,752 as of December 31, 2007 and 402,606,144 as of December 31, OUTSTANDING NUMBER OF PARTICIPATING SHARES The increase in the number of outstanding Subordinate Voting Shares reflects the exercise of options under the Corporation s Executive Stock Option Plan. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES The Consolidated Financial Statements of the Corporation have been prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP or GAAP herein) and are presented in Canadian dollars. CHANGES IN ACCOUNTING POLICIES The Corporation adopted the new provisions of the Canadian Institute of Chartered Accountants (CICA) Handbook on Accounting for Financial Instruments, effective January 1, The new sections on Financial Instruments, Hedges and Comprehensive Income, including revisions to the section on Life Insurance Enterprises, replace all previous guidance on these items issued by the CICA. These standards require that all financial assets be classified as available for sale, held to maturity, trading, or loans and receivables. The standards require that all financial assets be carried at fair value, if determinable, in the balance sheet, except loans and receivables, including mortgages and securities classified as held to maturity, which are carried at amortized cost using the effective interest method. Financial liabilities must be classified as either trading, which are carried at fair value, or other than held for trading, which are carried at amortized cost using the effective interest method. Changes in the fair value of trading securities are reported in earnings, while changes in the fair value of securities that are available for sale are recorded in other comprehensive income until realized or impaired, at which time they are recorded in the statement of earnings. All derivatives, including embedded derivatives that must be separately accounted for, must be recorded at fair value in the balance sheet and the changes in fair value must be recorded in the statement of earnings, except those described below. POWER CORPORATION OF CANADA ANNUAL REPORT

18 REVIEW OF FINANCIAL PERFORMANCE Derivative instruments specifically designated as a hedge and meeting the criteria for hedge effectiveness may offset changes in fair values or cash flows of hedged items. A hedge must be designated as a cash flow hedge, fair value hedge, or a hedge of net investments in selfsustaining foreign operations. A fair value hedge requires the change in fair value of the hedging derivative and the change in fair value of the hedged item relating to the hedged risk to both be recorded in the statement of earnings. A cash flow hedge requires the change in fair value of the derivative, to the extent effective, to be recorded in other comprehensive income, which will be reclassified to earnings when the hedged transaction impacts earnings. Any hedge ineffectiveness on a cash flow hedge is recorded in the statement of earnings. A consolidated statement of comprehensive income is included in the Corporation s financial statements. Unrealized gains and losses on financial assets that are held as available for sale, the effective portion of changes in the fair value of cash flow hedging instruments and unrealized foreign currency translation gains and losses are recorded in the statement of comprehensive income until recognized in the statement of earnings. Accumulated other comprehensive income forms part of shareholders equity. Investments backing actuarial liabilities, investments backing participating account surplus in Canada Life, and preferred shares classified as liabilities are designated by Lifeco as held for trading using the fair value option. Changes in the fair value of these investments and preferred shares flow through net earnings. The impact for assets backing actuarial liabilities is largely offset by corresponding changes in the actuarial liabilities which also flow through net earnings. Investments backing Lifeco s shareholder capital and surplus, with the exception of the investments backing participating account surplus in Canada Life, are classified as available for sale. Unrealized gains and losses on these investments flow through other comprehensive income until they are realized. Certain investment portfolios are classified as held for trading as a reflection of their underlying nature. Changes in the fair value of these investments flow through net earnings. There has been no change to Lifeco s method of accounting for real estate or loans. In addition, effective January 1, 2007, Lifeco no longer defers net realized gains on financial instruments (bonds, shares, and mortgages), nor does it carry investments in shares at cost plus a moving average market value adjustment for unrealized gains and losses. On January 1, 2007, deferred net realized gains on bonds, shares, and mortgages carried on the balance sheet were eliminated, with corresponding adjustments to retained earnings and actuarial liabilities. At December 31, 2006, deferred net realized gains totalled $2,821 million or $2,628 million excluding real estate. On January 1, 2007, IGM s securities portfolio was designated as available for sale. IGM s loans portfolio was designated as loans and receivables and is carried at amortized cost. IGM s deposits and certificates were classified as other than held for trading and are carried at amortized cost. A significant portion of the Pargesa portfolio consists of investments in public companies, which are not consolidated or accounted for under the equity method, and are classified by Pargesa as available-for-sale investments. As at December 31, 2007, the investments in Total, Suez, Lafarge and Pernod Ricard, as well as the investment in Iberdrola and other smaller holdings in publicly traded companies, were classified as available-for-sale investments. Please see also the section Inclusion of Pargesa s results. On January 1, 2007, the remainder of the Corporation s investment in shares was designated as available for sale. As a consequence of the new standards, transition adjustments were made to Power Corporation s financial statements on January 1, 2007 to certain existing financial instruments to adjust their carrying value to market, to recognize derivative financial instruments on the balance sheet and to eliminate the recognition of deferred realized gains with corresponding adjustments to actuarial liabilities. The following table summarizes the adjustments required to adopt the new standards. 16 POWER CORPORATION OF CANADA ANNUAL REPORT 2007