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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
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.
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.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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