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Rating Action:

MOODY'S CONFIRMS CANADIAN NATIONAL'S DEBT RATING (SENIOR UNSECURED AT Baa1); OUTLOOK CHANGED TO POSITIVE

19 Apr 2005
MOODY'S CONFIRMS CANADIAN NATIONAL'S DEBT RATING (SENIOR UNSECURED AT Baa1); OUTLOOK CHANGED TO POSITIVE

Approximately $4.2 billion of debt affected

New York, April 19, 2005 -- Moody's Investors Service confirmed Canadian National Railway Company's (CN) senior unsecured debt rating at Baa1, and changed the rating outlook to positive from stable.

The rating reflects CN's position as the lowest cost operator in the North American railway industry, and the company's steadily improving financial results with the currently favorable pricing environment and strong demand for transportation services. CN's record of consistent investment in its railway network, effective integration of its acquisitions, conservative capital structure and liquidity profile, and thoughtful governance practices also support the rating. These strengths are balanced by a high level of ongoing capital expenditures and Moody's expectation that, as acquisitions are integrated, CN will redirect a growing portion of free cash flow to share repurchases or dividend increases. Nonetheless, we expect the company will prudently manage its share repurchase program to preserve strong credit metrics.

The positive outlook reflects our expectation of improving operating profits and strong free cash flow over the near term, given CN's ability to handle the strong demand for rail service without significant incremental CAPEX, as well as CN's increasing opportunity to take some market share from the truckers. CN is somewhat ahead of its plan to integrate the recent acquisitions of BC Rail and GLT Transportation, which is also factored in the outlook change.

The rating could be raised provided CN is consistently able to generate a return in excess of its cost of capital and can maintain a ratio of Adjusted Debt to EBITDAR below the 2.5x level over the cycle. CN's ability to continue to set the industry standard for consistent service to the shippers, and maintain steady yield improvements while preserving its low-cost operations with an operating ratio below 70% could contribute favorably to the rating.

CN's disciplined adherence to scheduled railway operations has produced an industry leading cost structure and predictable rail service for its customers. This has resulted in a meaningful differential advantage for the company in pricing its services in the market. CN has a good balance of business. Over 60% of its volume originates from merchandise shippers who are very receptive to predictable service. With its consistent operations, even during the recent surge in demand, the company has made strides in increasing its freight pricing to reflect the value to shippers. Under these conditions, CN's financial results have accelerated as the economy recovered over the last year and, assuming continued favorable demand, financial results should continue to be strong. As well, CN is applying its scheduled rail practices to the high growth intermodal segment, and has already demonstrated some of the possible profit potential in that segment.

CN has been recognizing the target merger synergies from the BC Rail and GLT Transportation acquisitions at a somewhat faster rate than initially anticipated. Partially, this is attributed to the sharper than expected growth in the markets served by those two railroads, but also to CN's experience in merger integration. With the expectation of strong free cash flow from operations, the company is likely to restore its credit metrics to pre-acquisition ranges in the near term. As CN approaches its long-term targeted level of financial leverage, which the company has indicated to be adjusted debt to capital in the range of 35%, we anticipate a growing portion of free cash flow will be redirected to share repurchases rather than further debt reduction. Reflecting CN's past practices, however, should CN make another sizeable acquisition we anticipate the company will suspend share repurchases until credit metrics are restored.

Ratings affected

Canadian National Railway Company senior unsecured and issuer rating confirmed at Baa1, pass through certificates confirmed at A2, and shelf registration for senior secured, senior unsecured and subordinated confirmed at (P)A3, (P)Baa1 and (P)Baa2 respectively; Illinois Central Railroad Company guaranteed senior unsecured confirmed at Baa1; Wisconsin Central Transportation Corporation guaranteed senior unsecured confirmed at Baa1; Gulf Mobile & Ohio Railroad Co debt rating of Ba1 withdrawn.

Canadian National Railway Company, based on Montreal, Quebec, operates a transcontinental railroad in Canada as well as extensive rail service in mid-America in the United States.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Jankowitz
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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