DBRS Confirms Burlington Northern Santa Fe Corporation at BBB (high)

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of Burlington Northern Santa Fe Corporation (BNSF, or the Company) at BBB (high).

BNSF’s credit metrics continued to strengthen. However, BNSF’s rating is somewhat limited as most of the Company’s strong operational performance was generally expected with robust global economic conditions. Furthermore, for 2006 and 2007, BNSF’s financial measures should remain robust as global economic indicators such as real GDP growth are expected to remain favourable.

Strong global demand for commodities and industrial goods has resulted in record demand for rail transportation as it is ideally suited for long-distance transportation of heavy materials and offers compelling cost efficiency, which is particularly relevant with fuel prices escalating. Imports from China to the United States and Chinese demand for commodities have been major growth drivers. As a result, all of BNSF’s major freight statistics have strengthened. For example, productivity has improved as the operating ratio has steadily declined in recent years.

In addition, the Company’s competitive position within the transportation industry has strengthened. BNSF is strategically laying its rail system closer to sources, streamlining operations, expanding rail infrastructure with new tracks, and adding new, more efficient locomotives. As a result, cycle/delivery time has improved (an area where rail has underperformed in the past) and service offering has been enhanced, thus enabling BNSF to compete more effectively against trucking, which dominates the short-distance market. However, trucking has recently faced capacity constraints with labour restrictions, fuel costs and highway congestion, and this has created an opportunity for rail transportation to gain market share. The extent to which BNSF capitalizes on the changing transportation landscape will bear on its credit profile.

However, DBRS notes that the Company’s balance sheet remained substantially leveraged at 50% (including leases), and ongoing aggressive share repurchases could undermine credit profile enhancement. Still, robust demand with moderate industry capacity expansion has bolstered pricing power. Pricing increases were a major contributor to the Company’s strong earnings growth, with EBIT nearly doubling to $3.1 billion from fiscal 2003 to the 12 months ended March 2006. Furthermore, growth was solid across all the Company’s major segments, further reinforcing performance.

Notes:
All amounts are in U.S. dollars unless otherwise noted.
This rating is based on public information.