DBRS Confirms Canadian National Railway Company at “A” and R-1 (low), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debt rating of Canadian National Railway Company (CN or the Company) at “A” and confirmed its Commercial Paper rating at R-1 (low). The trend on all ratings is Stable. The rating confirmation reflects that CN has maintained its strong market position and focus on operating efficiency, and that despite the weaker than expected overall freight volume in 2015, its finan¬cial metrics remain consistent with its ratings. The Stable trend reflects DBRS’s expectation that, despite continued challenging operating conditions, CN will remain focused on productivity and have the discipline in maintaining its financial profile con¬sistent with its ratings.

Operating conditions for the freight railway industry in 2015 were weaker than expected, with essentially no growth in vol¬ume, reflecting mainly the adverse effects of depressed commod¬ity prices, a weak Canadian economy, a slowing emerging mar¬ket in manufacturing production and economies, and continued declines in coal volume. These adverse developments effectively offset growth in intermodal, automotive and forest products sec¬tors, which were supported by the relatively stronger U.S. econ¬omy, housing sector and automobile sales. Despite 2% volume decline and lower fuel surcharge revenues, CN’s revenue grew by 4% in 2015. CN’s modest revenue growth of 4% was mainly contributed by pricing increases and the favourable translation of U.S. dollar revenue resulting from a weak Canadian dol¬lar. DBRS recognizes that CN has maintained its leading operating efficiency by proactive adjustments in capacity and cost reduction, with its operating ratio falling to 58.2% in 2015, compared to industry averages of 64.9% and 61.9% in the previ¬ous year. Lower fuel expenses due to declining diesel prices also partly contributed to this improvement. As the industry expects the weak operating conditions to continue into 2016 and possibly beyond, DBRS believes that CN’s continued focus in operating efficiency will be important in maintaining its market position and cost leadership.

Despite more moderate growths in EBITDA and cash flow, the Company has maintained financial metrics consistent with the “A” range for the railway industry, with adjusted cash flow-to-debt in 2015 of 46% and adjusted debt-to-EBITDA of 1.7 times (x). Going forward, DBRS expects that CN’s debt level could in¬crease at a moderately faster pace to finance its elevated capital expenditure (capex) and a possible increase in share repurchas¬es. As a result, CN’s adjusted debt-to-EBITDA could increase to¬ward 1.8x to 2.0x, with corresponding adjusted cash flow-to-debt falling toward the 35% to 40% range. While not currently antici¬pated, DBRS believes that materially weaker financial metrics beyond these ranges could pressure CN’s ratings. In the event of further deterioration in operating conditions, DBRS expects that CN should be able to maintain its financial metrics at similar levels by scaling down its share repurchase program and capex.

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.

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

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

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.