DBRS Upgrades Canadian Pacific Railway Company to BBB (high), Changes Trends to Stable from Positive

DBRS Limited (DBRS) upgraded the Issuer Rating, Medium-Term-Notes rating and Unsecured Debentures rating of Canadian Pacific Railway Company (CP or the Company) to BBB (high) from BBB as well as its commercial paper rating to R-2 (high) from R-2 (middle). DBRS also changed all trends to Stable from Positive. The upgrade and trend change reflect the Company’s strong operating performance and efficiency across its network as well as its commitment to a balanced financial policy that favours funding share repurchases with internally generated cash flows, which resulted in solid leverage and operating metrics which DBRS anticipates are sustainable going forward. CP has accommodated strong demand and is well positioned to continue growing in 2019 and 2020 with adequate available capacity and capital investments made.

In the last 12 months ending September 30, 2018 (LTM 2018), CP’s revenue ton miles (RTM) grew by approximately 6% compared with 2017 as strong North American economies elevated demand for the commodities and goods the Company transports. Last winter, strong demand and harsh weather affected the Company’s performance and led to some pinch points. Since then, CP has been able to accommodate growth across its segments without affecting network fluidity as much as some of its peers. In particular, the Company’s Potash and Energy segment’s RTMs grew by 12% while CP’s Chemicals and Plastics division’s RTMs also grew by 22%, driven by strong demand for rail capacity from Canadian oil producers seeking alternatives to already-full pipelines to transport their products to U.S. refineries. The Company has committed to annual capital investments of about $1.6 billion in 2018, 2019 and 2020. These investments include high-capacity grain hoppers as well as other network improvements and fleet modernizations which, in DBRS’s understanding, will increase CP’s capacity and network efficiency. As a consequence and combined with the continuation of a balanced financial policy, credit metrics are expected to continue improving in 2019 and into 2020 with debt-to-EBITDA trending below 2.5 times (x) and cash flow-to-debt to around 35% in 2019 compared with about 2.6x and 33% as of LTM 2018, respectively. The Company’s commitment to a strong balance sheet gives DBRS comfort that CP will not take actions that will disproportionally favour equityholders over debtholders (i.e., funding share repurchases solely through debt- issuance proceeds).

The Stable trends indicate that the ratings are currently well positioned and, while unlikely at the moment, negative rating pressure could arise if CP took credit-negative actions or experienced significant slowdown in its markets such that cash flow-to-debt deteriorated and remained below 30% and debt-to-EBITDA increased and remained well above 2.5x for a sustained period of time. Conversely, positive rating pressure could arise if cash flow-to-debt increased above 35% and debt-to-EBITDA trended below 2.0x on a sustained basis.

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

The principal methodologies are Rating Companies in the Railway Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on dbrs.com 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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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