29 January 2009
CPR Offering Shows Pension Deficit Soared
Canadian Pacific Railway Ltd.'s pension shortfall has nearly
quadrupled to $1.6-billion over the past year, but the freight carrier's plan to raise up to $510-million in
an equity offering has soothed analysts' concerns about its financial muscle.
In its preliminary prospectus for selling stock to a group of underwriters for $36.75 a share, CPR disclosed that its defined benefit
pension plan's assets tumbled to $6-billion on 1 Jan 2009, down 20 percent from $7.5-billion a
year earlier.
With estimated solvency liabilities of $7.6-billion, that leaves a $1.6-billion pension deficit, assuming
Calgary-based CPR files its valuation to regulators by midyear, according to the prospectus.
CPR plans to issue 12.6 million common shares, with a further 1.3 million for an overallotment option.
"With a stock price near four-year lows but leverage in line with peers, we view this as a sign of management
concern about CP's liquidity position," Standard & Poor's Corp. analyst Kevin Kirkeby said in a research report. "We
note that pension contributions and cash taxes should rise significantly in '09, and investment needs remain high."
During the railway's quarterly conference call on Tuesday, CPR chief financial officer Kathryn McQuade said calculations for the
solvency deficit involve "a lot of moving pieces."
Companies in a variety of sectors already had been keeping a watchful eye on their pension deficits even before last year's global
financial crisis. CPR had a $415-million pension shortfall at the end of 2007.
Corporations are counting on Ottawa to follow through with its pension relief proposals unveiled last fall.
Given CPR's generation of free cash flow and its borrowing capabilities, the railway should be in good shape this year, but 2010 could
pose some challenges if the economy continues to sputter, analysts say.
CPR is forecasting pension contributions this year of between $150-million and $195-million, compared with
$95-million last year. For 2010, the railway estimates contributions in the range of $295-million to
$345-million.
"The reduction in refinancing risk related mainly to term debt maturing in 2010 is the primary positive attribute of the equity
issuance," said DBRS Ltd. "The company's decision to increase available cash in this manner is prudent," given
challenges such as "large pension funding requirements in 2010."
UBS Securities Canada Inc. analyst Fadi Chamoun said CPR is positioned to meet its debt and higher pension funding contributions over
the next three years.
"This equity issue essentially provides a degree of insurance by enhancing the balance sheet at a cost of approximately
7 percent dilution to shareholders," said Mr. Chamoun, whose research note trimmed UBS's 52-week target price for
CPR to $66 from $73.
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