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Rating Action:

MOODY'S CONFIRMS CANADIAN PACIFIC RAILWAY Baa2 SR. UNSECURED RATING; OUTLOOK STABLE

18 Mar 2003
MOODY'S CONFIRMS CANADIAN PACIFIC RAILWAY Baa2 SR. UNSECURED RATING; OUTLOOK STABLE

Approximately $ 2.6 billion of debt affected

New York, March 18, 2003 -- Moody's Investors Service confirmed Canadian Pacific Railway's (CPR) Baa2 senior unsecured rating. The outlook has been changed to stable.

The stable outlook reflects Moody's view that free cash flow will be breakeven to only modestly positive over the near term, with relatively little improvement in financial leverage. Moody's anticipates a higher level of capital investment and expansion spending at CPR, while the company continues to be challenged by a weak operating environment for grain and coal hauls and uncertainty in the car load businesses. Because little change is expected in CPR's net debt levels or credit metrics in the near term, and cash flow is likely to be breakeven after several years of positive cash flow, Moody's revised the outlook to stable.

Nonetheless, over the longer-term, Moody's believes that CPR will remain one of the industry's better rail operators, with a capital structure and financial policies that are appropriate for a capital intensive company. Moody's notes that CPR has invested to align its assets with opportunities in its markets, such as high horsepower AC locomotives and purchasing well tested operating and information systems. Further productivity improvements are expected beyond the solid results already recorded, as CPR fully exploits its investment in its infrastructure, rolling stock and operating systems. The more flexible operations were evident in FY 2002 as the railroad accommodated a higher than expected volume of time-sensitive intermodal and automotive traffic and lower than expected commodity hauls, while recording lower operating costs and generally better productivity statistics.

Moody's notes that CPR is also somewhat less exposed to the long term business cycle than other carrier because of the relatively high proportion of commodity traffic in CPRs revenue. However, revenue and profits were unusually hard hit recently because of one of the poorest Canadian grain harvest in decades -- grain is normally about 21% of CPRs revenue. Over time, the harvest should return to normal growth rates and, with the increased traffic, the related operating income should accrue back to CPR. Moody's also notes, however, with the high commodity content in revenue, CPR has relatively lower opportunities to increase revenue in a market expansion. CPR could be somewhat less effective than other carriers in the strategy to increase yields, in part because of the high commodity content, although some improvement is expected as service continues to improve.

CPR has built a solid cash position and, other than $250 million in 2003 and C$250 million in 2005, has very modest scheduled debt maturing over the next several years. CPR also has a relatively high portion of its near term fuel requirements hedged and, while its pension is underfunded, the funding requirements are expected to be manageable. As well, there are few major projects remaining, either infrastructure or operating systems, and the track network is expected to be at maintenance levels for some time. Moody's points out, however, that this maintenance required is substantial and could be large in any year depending on CPR's equipment orders. Nonetheless, Moody's believes that CPR will be able to generate sufficient cash from operations to appropriately invest in its railroad network, and is likely to seek to improve its financial leverage somewhat over time.

Debt confirmed

Canadian Pacific Railway senior unsecured at Baa2; Pass Through Trust Certificates at A3.

Canadian Pacific Railway, based in Calgary, Alberta, operates a trans-continental railway serving major ports in Canada and gateways to the U.S.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Jankowitz
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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