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

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Bonds, Debentures & Notes rating of Canadian National Railway Company (CN or the Company) at “A” as well as its Commercial Paper rating at R-1 (low). All trends remain Stable. The rating confirmations reflect CN’s continued strong market position and focus on operating efficiency, which supports growing earnings and cash flows from operations. After substantially increasing its capital expenditure program in 2018, DBRS expects CN to continue to do so in 2019 to support and accommodate strong demand across its network in a manner that preserves its fluidity, train velocity and, ultimately, its operating efficiency. The Stable trends reflect DBRS’s expectation that the Company will continue to execute on efforts to grow its business in a resilient and sustainable manner while maintaining a financial profile consistent with the ratings, such as adjusted debt-to-EBITDA below 2.00 times (x) and adjusted cash flow-to-debt above 40%.

In 2018, CN invested significantly in its network to respond to volume growth across most of its segments and to restore fluidity, train speed and through dwell times, which were negatively affected during the 2017-2018 winter. Nevertheless, the Company was able to grow its volume (as expressed in revenue ton miles) by 5% as well as its revenue by 10% with strong momentum in the petroleum and chemicals as well as the intermodal segments. CN completed a significant number of projects in 2018, the benefit of which became visible in the second half of the year with sequential improvement in its operating ratio to 61.9% in Q4 2018 from an elevated 67.8% in Q1 2018. In 2019, CN will continue to invest in critical aspects of its network such as track infrastructure, especially on its western corridor, as well as locomotives and cars. The Company is also engaged in several innovative projects, such as automated track and train inspection capabilities, which will contribute to more fluid operations over time. Finally, CN indicated that it is exploring inorganic opportunities, which would support growth on a sustained and long-term basis. Barring any major slowdown in North American economies or trade disruptions, investments completed in 2018 as well as the significant expected $3.9 billion 2019 capital program provide good visibility into a continued improvement in operational metrics, which will allow CN to continue growing its revenue by around 10% based on DBRS’s forecast. The Company’s diversified book of business is a major advantage in achieving growth in a balanced way. Nevertheless, growth is expected to be particularly supported by increased shipments of coal, grain, forest products and crude oil as well as increased container traffic benefiting from expansion at the Prince Rupert Terminal on the west coast. In terms of crude by rail shipments, CN has contracted with certain oil producers for minimum volumes, which guarantees a floor on revenues, however, DBRS expects that demand for rail shipments of Western Canadian crude will subside once pipeline capacity comes on line over the next two to three years.

DBRS expects the Company’s 2019 strong cash flow and earnings to support a slight improvement in its financial metrics, which are consistent with the “A”-rating range for the railway industry. In 2018, CN partly debt-funded share repurchases of $2.0 billion, consistent with DBRS’s expectations. Financial leverage expressed as adjusted cash flow-to-debt and adjusted debt-to-EBITDA is expected to slightly improve to around 45.0% and 1.85x in 2019 from 42.8% and 1.96x in 2018, respectively. DBRS expects the Company’s financial metrics to remain commensurate with the rating and does not see any near term factors which could lead to a positive rating action; however, an erosion in leverage caused by weaker earnings and/or higher debt to fund shareholder distributions, such that cash flow to debt declines below 35% and debt-to-EBITDA increases above 2.0x on a sustained basis, could lead to a negative rating action.

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

The principal methodologies are Rating Companies in the Railway Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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