Morningstar DBRS Changes Trend on Canadian Pacific Railway Company to Positive From Stable; Confirms Credit Ratings at BBB (high)

DBRS Limited (Morningstar DBRS) changed the trend on Canadian Pacific Railway Company's (CP) Issuer Rating to Positive from Stable and confirmed the credit ratings at BBB (high). Concurrently, DBRS Morningstar discontinued and withdrew its credit ratings on the Company's Unsecured Debentures and Medium-Term Notes. The action to discontinue and withdraw the credit ratings on the Unsecured Debentures and Medium-Term Notes is unrelated to the Company's credit profile.

KEY CREDIT RATING CONSIDERATIONS
On December 3, 2024, Morningstar DBRS upgraded the Company's Issuer Rating and Unsecured Debentures rating to BBB (high) from BBB and changed the trends to Stable from Positive. At that time, Morningstar DBRS stated that trends could be upgraded if the political risks subsided and the Company continued to attain steady improvement in the credit metrics through a combination of strong operational execution and disciplined capital allocation policy.

Since then, although the political risks have not significantly abated, CP has successfully mitigated the impact of adverse trade policies through a combination of solid operational execution, sustained earnings and cash flow growth, and synergy benefits from KCS (Kansas City Southern) acquisition. As a result, EBITDA increased to above $7.6 billion in the last 12 months (LTM), ended September 30, 2025, and $7.2 billion at the end of F2024 from $6.2 billion from F2023. Leverage also declined to 3.1 times (x) at the end of F2025 from 3.2x at the end F2024 and 3.6x at the end of F2023. Despite the elevated and sustained political risks to trade, Morningstar DBRS expects the strong trading relationship between Canada, U.S., and Mexico to continue and further expects the Company to continue to effectively navigate a challenging operating scenario. This along with overall improvement in CP's credit risk profile and coupled with expectations of sustained improvement in credit metrics supports the case for trend change to Positive from Stable.

CREDIT RATING DRIVERS
Given expectations of continuing cross-border trading relationships and the Company's demonstrated ability in effectively navigating tariffs, Morningstar DBRS would upgrade the ratings if the Company maintained strong operational execution such that key credit metrics i.e., debt-to-EBITDA (leverage) declined below 3x on a sustainable basis. Although unlikely, Morningstar DBRS could change the trend back to Stable should the Company demonstrate weaker-than-expected operating performance for a prolonged period and/or more indulged in aggressive shareholder remuneration, which increased leverage toward 3.5x. Morningstar DBRS could also downgrade the trend to Stable if its baseline expectations of political risks were significantly challenged.

EARNINGS OUTLOOK
Morningstar DBRS expects the Company's earning profile to remain solid, with revenues forecast to grow above $15.0 billion in F2025 and above $15.9 billion in F2026 from $14.5 billion in F2024 and $15.0 billion in the last 12 months (LTM) ended September 30, 2025 (Q3 2025). The top-line growth should be supported through a combination of price increases, volume growth, synergy benefits, and network enhancements. In 2026, volumes should grow across the grain, potash, coal, and domestic intermodal segments. Automotive volumes should reflect marginal growth in 2026 after being largely flat in 2025 and growing to more than two times from 2022 to 2024. On the other hand, Energy, Chemicals, Metal and Mining and Lumber should reflect stagnating volumes. International intermodal could reflect some volume weakness as trade issues persist. Overall revenue growth and margin expansion should drive EBITDA growth, with EBITDA increasing to above $7.5 billion in F2025 and close to $8.5 billion in F2026 from $7.2 billion in F2024.

FINANCIAL OUTLOOK
Strong EBITDA should translate to solid cash flow generation with operating cash flow reaching above $5.5 billion in F2025 and $6.2 billion in F2026 from $5.2 billion in F2024 and $5.5 billion in the LTM ended Q3 2025. As the Company continues to invest in its rolling stock and network operations, capital expenditure is set to remain elevated with more than $2.9 billion expected for F2025 and F2026 billion, respectively (from $2.9 billion in F2024). As a result, Morningstar DBRS forecasts free cash flow net of dividends and before working capital cash flow to be above $1.9 billion in F2025 and above $2.1 billion in F2026 (from $1.7 billion in F2024). In line with expectations, the Company had restarted its share repurchase program in 2025. Morningstar DBRS expects the Company to maintain share repurchases in F2026 and manage the credit metrics, notably its long-term leverage target of 2.75x. As such, in line with Morningstar DBRS' expectations, credit metrics should improve further, with debt-to-EBITDA declining toward 3.1x in F2025 from 3.2x in F2024 and below 3x in F2026.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): AL/BBBH
The credit ratings continue to reflect CP's significant credit strengths, which include a solid railroad network connecting Canada, the U.S., and Mexico, high network efficiency, including consistently improving operating efficiency of the KCS network, solid operational execution, and experienced management. The credit ratings also consider the high capital intensity of the railway industry, structural trends of sustained regulatory focus on safety and service, reasonable probability of continuing political actions disrupting or slowing down North American trade and the consequential impact on the CP operations, probability of an economic slowdown in Canada and/or the U.S, and a mature industry with fewer growth opportunities relative to other cyclical industries.

Comprehensive Financial Risk Assessment (CFRA): AL
The CFRA reflects consistent and visible earnings and cash flow generation and the Company's consistently improving financial position.

Intrinsic Assessment (IA): BBBH
The IA is based on the CFRA and CBRA. Taking into consideration the current geopolitical risks to trade and peer comparisons, among other factors, Morningstar DBRS placed CP's IA in the lower end of the IA range.

Additional Considerations: None
CP's credit ratings include no further negative or positive adjustments because of additional considerations.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/468926.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at (May 16, 2025), https://dbrs.morningstar.com/research/454196.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025), https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 [email protected].

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 600
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577