DBRS Confirms CN Ratings, Trend Changed to Positive

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Canadian National Railway Company (CN or the Company) at A (low), along with the ratings of its Unsecured Bonds, Debentures & Notes and Commercial Paper at A (low) and R-1 (low), respectively. The trends for the Issuer and Unsecured Bonds, Debentures & Notes ratings have been changed to Positive from Stable. The rating action reflects CN’s improvement in its business profile as well as strong financial results above expectations. DBRS notes that the outlook remains positive, with favourable industry conditions supporting positive rating action. DBRS could upgrade CN by one notch over the next three to six months, should the Company sustain similar levels of credit metrics and operating efficiency, while continuing to benefit from strengthening industry fundamentals.

DBRS notes CN’s business profile has improved above the current rating levels. The Company recorded a steady improvement in its efficiency, as indicated by the OR, which has improved from the mid-sixties levels to the low-sixties presently. The improvement underscores CN’s leadership in operating efficiency (including energy cost management), as well as solid revenue growth profile due to a diversified product and geographic mix (relative to industry).

CN’s operations were resilient in 2014, as it continued to chug along despite substantial weather- and congestion-related issues rippling throughout the North American Class I network. The solid operating performance bolstered CN’s financial profile. Adjusted debt coverage ratios strengthened above the currently assigned ratings toward the mid-A rating range. Cash flow from operations was $4.6 billion in 2014, compared with $3.8 billion in 2013, and helped offset increased cash usages, including dividends, share repurchases and capital expenditures. Credit metrics were bolstered by strong earnings and cash flows from operations.

Going forward, CN is expected to benefit from solid Canadian rail fundamentals, as discussed in the DBRS commentary DBRS Updates Outlook for the North American Railways, published in September 2014. Furthermore, a positive economic landscape throughout 2015 should remain supportive of performance momentum across all major customer industries, with a weaker CAD contributing to better results. In terms of crude-by-rail, while DBRS acknowledges that the outlook has deteriorated due to the collapse of oil prices, relatively strong growth is nonetheless expected due to sustained shipments of production volumes from larger producers in the short term.

DBRS notes that CN performed ahead of expectations in 2014, and DBRS could upgrade the Company over the next three to six months should it continue to sustain credit metrics and operating efficiency at similar levels. In addition, DBRS expects the Company to maintain conservative financial policies, compatible with the appropriate rating level. As such, DBRS could change the trend back to Stable, or take negative rating action, in the event of a material increase in leverage or a severe downturn.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Railway Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.