DBRS Upgrades Canadian National Railway to “A,” Trends Stable

DBRS Limited (DBRS) has today upgraded the Issuer Rating and Unsecured Debt rating of Canadian National Railway Company (CN or the Company) to “A” from A (low) and confirmed its Commercial Paper rating at R-1 (low). The trend on all ratings is now Stable. In February 2015, DBRS revised the trend of CN’s previous A (low) rating to Positive from Stable to reflect its improvements in business profile and strong financial results, indicating that the long-term ratings could be upgraded by one notch, should the Company sustain similar levels of credit metrics and operating efficiency. This rating action reflects that CN has sustained the levels achieved in 2014, with adjusted cash flow-to-debt sustained at 50% and adjusted debt-to-EBITDA maintained at 1.6 times (x) for the 12 months (LTM) ended June 30, 2015, while operating ratio (measured as operating expenses to revenue) for the first half of 2015 remained strong at 61%. DBRS also confirms CN’s Commercial Paper rating at R-1 (low), the short-term rating level that corresponds to its “A” long-term rating.

DBRS opines that CN’s strong business profile is supported by its superior track network (reaching all three coasts and passing through relatively less congested regions), cost leadership and business diversity, giving the Company sustainable competitive advantages over other Class 1 railroads and trucking. Operating conditions for the industry have become less favourable in the first half of 2015, reflecting the impact of substantially lower crude oil prices, weak commodity prices, declining coal volume and a slowing Canadian economy. While CN experienced similar challenges, overall volume remained at a similar level as the first half of 2014, mitigated by the relatively stronger consumer spending and housing starts in the United States, supporting volume in segments such as intermodal, automotive, forest products and plastic and chemical goods. CN also achieved an industry leading operating ratio of 56.4% in the second quarter of 2015 despite flat volume, thanks to active asset utilization and productivity management, materially lower fuel expenses and positive translation effect of U.S. dollar revenue.

The Stable trend reflects DBRS’s view that, despite expectation of slower volume growth and elevated capex in the near term, CN’s continued focus on productivity and strong pricing power should help generate similarly strong operating cash flow. DBRS notes that CN has used its free cash flow and a moderate increase in borrowing to reward shareholders through share repurchases in the past five years, but has done so in a measured manner to maintain its debt coverage metrics at levels supportive of its current ratings. The Stable trend factors in DBRS’s expectation that CN will maintain a similarly measured approach toward financial leverage and share repurchases going forward. Adoption of a materially more aggressive approach could pressure the ratings.

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

The Commercial Paper rating applies to the Canadian Commercial Paper program only.

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

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.