DBRS Confirms Canadian Pacific Railway at BBB (high), Trends Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating, the Unsecured Debentures rating and the Medium-Term Notes rating of Canadian Pacific Railway Company (CP or the Company) at BBB (high) and the Company’s Commercial Paper rating at R-2 (high). All trends are Stable. The confirmation reflects CP’s continued improvements in operating performance and financial measures since 2011 to levels consistent with its ratings. The Stable trend reflects DBRS’s view that, despite expectation of slower volume growth and elevated capex for asset renewal and regulatory compliance in the medium term, CP’s sustained efforts to improve productivity and strong pricing power should still allow it to generate similar levels of operating cash flow and to support its current ratings. The Company’s ongoing share repurchases could further increase its debt level and prevent financial metrics from reaching levels consistent with higher ratings.

CP has sustained its efforts to improve productivity and reduce its operating ratio (measured as operating expenses to revenue) from 70% in 2013 to 65% in 2014 and further to 61% in the first half of 2015. The Company also enjoyed moderate volume (in revenue-ton-mile or RTM) and pricing (in revenue per RTM) increases, both at 4% in 2014. However, operating conditions have become less favourable since mid-2014, reflecting the impact of substantially lower crude oil prices, weak commodity prices, a slowing Canadian economy and economic uncertainties in Europe and China, both major markets of North American exports. Debt coverage metrics have remained steady since 2013 despite strong cash flow, as the Company increased its debt level to support elevated capex of $2.1 billion and share repurchases of $3.0 billion for the 18 months ended June 30, 2015. Adjusted cash flow-to-debt and debt-to-EBITDA for the last-12-months (LTM) ended June 30, 2015, were 34% and 2.3 times (x), respectively, similar to their 2013 levels, which remain supportive of the ratings.

DBRS expects CP’s cash flow and earnings growth to slow down, as the aforementioned less favourable conditions could persist in 2015 and possibly beyond. Moreover, a joint announcement in May 2015 by U.S. and Canadian regulators to tighten regulations and lower speed limits on trains carrying hazardous materials could potentially result in increased capex, reduced network fluidity and constraint improvement in operating ratio. This, together with share repurchases, could limit future improvement or moderately weaken CP’s financial metrics. DBRS understands that CP intends to maintain its unadjusted debt-to-EBITDA ratio within 2.5x. Within this target, the Company’s corresponding financial metrics should still support the current ratings. Conversely, material and sustained deviation from this threshold could pressure the ratings. DBRS considers CP’s appeal against a Québec Court ruling in favour of compensation for victims of the July 2013 Lac-Mégantic accident to be an event risk, and given that the timing and amount of payments by CP is still uncertain, DBRS has not factored potential liabilities into the rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Railway Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Financial Ratio Definitions and Accounting Adjustments Non-Financial Companies, which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.