Canadian Pacific Railway Ltd. is paying down its pension deficit for the third consecutive year.
Canadian Pacific Railway Ltd. is borrowing $500-million (U.S.) to reduce its pension deficit, a move designed to give the company more room to invest in its train network.
It marks the third consecutive year that CP has opted to make large lump-sum payments to chop its pension solvency deficit. The freight carrier made voluntary pension contributions of $500-million (Canadian) in 2009 and $650-million in 2010.
CP's two-part offering of senior unsecured notes carry 10-year and 30-year maturities.
"CP believes that the transactions will be a tax-efficient means for the company to reduce the volatility in defined-benefit pension plan funding requirements and provide greater flexibility to direct future cash from operations to infrastructure investments," the railway said.
Moody's Investors Service said Monday that CP's pension shortfall, which stood at $673-million on Dec. 31, 2010, "is expected to have increased through 2011, given a reduction in discount rates and weak asset returns."
Calgary-based CP said the U.S. debt issue will finance "the voluntary prepayment in 2011 to the company's Canadian defined-benefit pension plan," noting the impact is expected to help earnings, or be accretive.
Moody's said its review of CP isn't influenced by New York-based Pershing Square Capital Management LP becoming the railway's largest shareholder. Pershing, headed by activist investor William Ackman, has a 12.4-per-cent stake in CP. It's unclear whether Pershing's investment will severely alter CP's finances or operations, Moody's said.
Credit rating agency DBRS Ltd. recently assessed CP's long-term debt as a negative trend. But Moody's said its outlook is stable for CP because the railway has good exposure to hauling commodities such as coal, potash and grain – impressive enough for "Baa3" ratings for CP.
Still, Moody's cautioned that CP's "credit metrics" have been weakening. CP's adjusted debt is 3.8 times its EBITDA (earnings before interest, taxes, depreciation and amortization) while "retained cash flow to debt of about 17 per cent are weak for the rating category," Moody's said. "And any increase in its pension plan deficits from the end of 2010 will further stress these metrics, leaving the company with only limited cushion to withstand downside shocks within its rating category."
CP's operating costs-to-revenue ratio has risen after severe winter weather and spring flooding disrupted deliveries in the first half of 2011. Despite some setbacks, Moody's said CP is becoming more efficient and should be able to transport "modestly higher volume levels" in 2012.
Last week, the Teamsters Canada Rail Conference's bargaining team held contract talks with CP negotiators. Management is seeking cost-cutting reforms to the defined-benefit pension, which provides a guaranteed payout level upon retirement.
Seeking more flexibility from the Teamsters, CP also told the union that it wants "the ability to unilaterally establish workdays that are up to and including 12 hours in all types of service" and new rules to spread annual vacation allotments throughout the year.
Teamsters officials have said the labour talks are still in the early stages, but CP negotiators argue that significant changes are crucial to remove "antiquated work rules" and shave operating costs.
"We must enhance our ability to provide service to customers, even in the face of adverse weather," CP said in its presentation to the union. "The ability to respond quickly by unilaterally lifting mileage restrictions or triggering temporary relocations is critical."
The union represents 4,800 conductors, engineers and rail traffic controllers.
Brent Jang