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Rating Action:

MOODY'S CONFIRMS CANADIAN PACIFIC RAILWAY (SENIOR UNSECURED AT Baa2); OUTLOOK POSITIVE

25 Jun 2001
MOODY'S CONFIRMS CANADIAN PACIFIC RAILWAY (SENIOR UNSECURED AT Baa2); OUTLOOK POSITIVE

Approximately C$2.1 Billion of Debt Securities Affected.

Toronto, June 25, 2001 -- Moody's Investors Service confirmed the Baa2 senior unsecured rating of Canadian Pacific Railway Company (CP Railway) and changed the rating outlook to positive from stable. This confirmation is based on Moody's understanding that CP Railway intends to pay a Special Distribution of approximately C$ 700 million to its parent company, Canadian Pacific Limited (CP Ltd), as part of the planned reorganization of CP Ltd into five separate companies. The positive outlook takes into account Moody's expectation of still further operating improvement, debt reduction from operating cash flow, and establishing conservative financial policies once CP Railway is a separate company. This completes the review opened on February 14, 2001. Moody's also said that because CP Ltd plans to repay all of its debt at the time of the reorganization, Moody's expects to withdraw the ratings on CP Ltd.'s senior unsecured debt when the reorganization is completed.

Ratings confirmed are:

Canadian Pacific Railway Company ... Senior unsecured at Baa2, Pass-Through Certificates at A3.

According to Moody's, CP Railway has emerged as one of the most efficient operators among the major railways, following completion of significant infrastructure investment through its Franchise Renewal Program. The Franchise Renewal Program stretched across all parts of CP Railway's physical assets to upgrade the rolling stock and the densest portions of the track network, as well as vastly improve its Information Technology systems. These investments, which totalled about C$ 2.8 billion from 1997 through 1999, established the base for the meaningful cost and productivity gains recognized to date, which are similar to the gains recognized by other railways. Moody's anticipates still further modest productivity improvement over time from better utilization of labor and assets, as well as some possible revenue increases from enhanced service levels - although revenue gains are likely to more difficult to generate and sustain.

CP Railway has a relatively balanced book of revenue with grain, coal sulphur and fertilizer, and intermodal about evenly split and producing about 64% of total revenue, according to Moody's. As the revenues are mostly bulk commodities, CP Railway is relatively less exposed to dramatic swings from economic cycles than certain other rail competitors. While the commodity-based hauls do provide some stability to revenue, they also limit the degree of revenue upside that can be generated from price increases and differentiated service offerings that could be obtained with a broader book of merchandise business, in Moody's view.

Reflecting the nature of its heavy commodity hauls, CP Railway has made one of the largest relative investments in AC locomotive power - now about 40% of its road locomotive horsepower. With new locomotive deliveries, the company has also outsourced a substantial portion of its locomotive maintenance which permits CP Railway to concentrate on freight movement rather than heavy equipment maintenance. The railroad can now run longer, heavier trains with far better locomotive availability and asset utilization. CP Railway has trailed the leaders in establishing a scheduled railroad, although the infrastructure investments provide the basis to do so, and scheduled operations are likely to provide considerable incremental operating benefit, in Moody's view.

Moody's expects CP Railway to remain solidly free cash flow positive from its much improved operations, as it is beyond the high point of its capital investment program. Capital spending is likely to remain sufficiently high to ensure an infrastructure strong enough to meet higher service requirements, yet the company is not expected to require external funding for these investments for some time, in Moody's view.

On a pro-forma basis assuming the C$700 million Special Distribution to CP Ltd, CP Railway's debt protection measures will be among the strongest compared to its railroad peer group, and these statistics are expected to improve with debt reduction. An issue for CP Railway as a stand-alone company is to establish financial policies for use of the expected free cash flow as well as liquidity and financial risk management practices. The expectation of prudent financial policies is factored into the positive outlook, and Moody's expects that CP Railway will establish a dividend pay out policy that is within the range of other railways, as well as apply free cash flow to debt reduction

CP Railway is the only major railway not to have participated in a major merger over the last several years, and merger-related event risk is currently low, in Moody's view. With its completed capital investment program and access to western Canada's grain and mineral deposits, CP Railway has become a more attractive merger candidate. However, Moody's believes that the railroad industry is unlikely to pursue mergers for quite some time as the industry needs to recognize the synergies promised in the last round of mergers.. As well, recent changes to U.S. merger rules make it more difficult to attain regulatory approval for railroad mergers and will likely limit mergers as a growth strategy among the railroads. Instead, Moody's expects the industry to aggressively pursue a range of strategic partnerships that can provide merger-like benefits without many of the integration risks -- an approach that the rating agency views positively.

CP Railway has established C$ 1.8 billion revolving line of credit among a group of relationship banks to fund the Special Distribution and provide liquidity following the CP Ltd reorganization. Moody's notes that this bank credit facility will mature in 2003, and will continue to evaluate CP Rail's liquidity risk as part of its establishment as a separate company.

Canadian Pacific Railway Company, based in Calgary, Alberta, owns and operates one of Canada's largest trans-continental railways.

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

Toronto
Robert Jankowitz
V.P. - Senior Credit Officer
Corporate Finance
Moody's Canada Inc.
(416) 214-1635

No Related Data.
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