DBRS Confirms Canadian Pacific Railway Company at BBB (high)

DBRS has today confirmed the ratings of the Unsecured Debentures and Medium-Term Notes of Canadian Pacific Railway Company (CPR or the Company) at BBB (high). The trends are Stable.

In DBRS’s view, the ratings will remain steady given the Company’s disciplined financial policies, the solid demand for rail-transportation services and structural changes in the transportation industry that have benefited CPR. As a result, the Company’s risk profile has steadily improved.

Rail in general – and more specifically, CPR’s competitive position within the transportation industry – has improved. CPR has enhanced its service offering and increased its efficiency with greater speed and fluidity, new locomotives, more effective asset utilization and expanded capacity. Of note, CPR has created additional network capacity without heavy reliance on additional track. This has been achieved through greater average speeds, enhanced communications and technology equipment, and more efficient operations overall. In the current environment where fuel prices have risen dramatically, rail offers an even-greater-than-normal, cost-efficient solution for long-distance shipping. This has been particularly advantageous because of increased trade globalization and the demand for natural resources in the emerging economies. In 2006, CPR has also benefited from solid U.S. economic indicators such as real GDP growth and industrial production, which have bolstered demand for transportation. CPR’s relatively higher exposure to less-cyclical bulk commodities has also added stability to earnings.

Robust operations have had a positive impact on major freight statistics, the key one being the operating ratio, which reached approximately 75% in 2006. CPR’s strong financial results were primarily driven by price increases across various commodities. In addition, CPR’s focus on cost containment and the development of more fluid operations have played a key role. As a result, the Company’s financial flexibility has strengthened, enabling it to increase organic investment where strategically optimal. In the 12 months ended September, 2006, free cash flow (before working capital) was nearly $400 million and operating margins have continued to grow.

DBRS notes that CPR’s ability to navigate the next economic downturn with less operational and financial fluctuations could have positive credit-profile implications.

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