MOODY'S UPGRADES THE RATINGS OF CANADIAN NATIONAL RAILWAY COMPANY (SENIOR UNSECURED AT A3)
Approximately $4.1 billion of debt affected
New York, December 22, 2005 -- Moody's Investors Service upgraded the debt ratings of Canadian
National Railway ("CN") -- senior unsecured
to A3. The rating outlook is stable. This completes the
rating review opened on July 27, 2005.
The rating action takes into account CN's industry-leading
financial performance; focused approach to continuous improvement
in operations; sizeable free cash flow generation; and,
achieving a return on capital consistent with other industrial issuers
at the single-A rating level. As well, Moody's
expects CN will preserve its strong credit metrics and liquidity,
and further improve its return on capital. Also considered are
Moody's expectations that the company will continue to use most
of the future free cash flow to repurchase shares and the potential for
modest-sized acquisitions, in addition to the considerable
amount of capital spending necessary in the railway industry to support
high service levels.
CN's scheduled railroad continues to set new standards for performance
in the rail industry, and the discipline to scheduled railroading
as well as consistently strong investment in the network is generating
considerable Free Cash Flow. For FY 2005, operating income
growth in excess of 20% should produce Free Cash Flow in excess
of C$1.2Bn. Moody's expects that the high level
of demand for transportation services will continue over the near term
and that CN's results will reflect further volume growth and fluidity
in its network, as well as the favorable environment for further
improving yield.
The stable outlook reflects Moody's expectations that CN is likely
to modestly increase leverage near term, and will be aggressive
in share repurchases in doing so. CN believes itself as slightly
underlevered compared to its relatively conservative target capital structure.
As such, Moody's believes that the company will use most of
its Free Cash Flow to repurchase shares and not to prepay debt.
Nonetheless, CN views investment in its business through capital
spending and appropriate acquisitions as its most important use of cash.
Should the company engage in acquisitions, Moody's expects that
it would greatly limit, or end, share repurchases until the
acquisitions are fully integrated and operations are restored to pre-acquisition
levels. Moody's notes that the company eliminated share repurchases
post the 2004 BC Rail and Great Lakes Transportation acquisitions.
Moreover, with CN's strong operating performance, Moody's
expects that CN will maintain key credit metrics consistent with similarly
rated peers, including Debt to EBITDA ranging between 2.1
and 2.5x and free cash flow to debt in excess of 10% (using
Moody's standard adjustments).
The rating could be raised further if CN applies a meaningful portion
of expected free cash flow to debt reduction and sustain Debt to EBITDA
(using Moody's standard adjustments) at less than 2.0x,
and can further improve operations to generate free cash flow to debt
approaching 20% and higher return on capital with EBITDA to Assets
greater than 12%. The rating could be lowered if CN pursues
a sizeable acquisition while continuing its share repurchase program,
or accelerates its share repurchases to materially exceed near term free
cash flow, or the business weakens such the free cash flow to Debt
falls to the mid single digit level.
Capital investment is expected to continue to be substantial, with
gross capital expenditures for the year likely in the $1.4
billion range; up approximately $175 million, and largely
reflecting the needs of BC Rail and Great Lakes Transportation.
In 2006, capital spending is likely to continue to grow, as
CN moves increasing volumes and implements programs to improve efficiency
and reduce asset intensity. Capital investment is expected to remain
at one of the highest levels in the industry, and Moody's
expects capital spending to be in the range of 18 to 19% of revenue
over time. CN's scheduled railroad and efficiency programs
are expected to lead to continued lowered costs and higher revenue potential
through better customer service.
Moody's believes that CN will be the operational leader for some
time. The company will likely achieve an operating ratio at the
low to mid 60% level --the lowest among its competitors.
Productivity gains are likely to offset much of the inflationary cost
pressures. Elevated fuel costs are increasingly being passed through
via fuel surcharges, and Moody's believes that CN has among
the highest recovery levels in the industry.
The near-term outlook for each of CN's business segments
is favorable, with the exception of its modest exposure to the auto
industry. About 60% of CN's revenue is from merchandise
traffic, whose shippers require high service levels but are also
most receptive to consistent performance. Higher fuel prices and
increasing costs within the trucking industry also improve the economics
of rail transport, and CN is therefore well positioned to take additional
traffic off the highway. Strong demand for rail service and CN's
performance also present the opportunity for CN to gradually improve its
yield, and the higher volume and better yield should contribute
to steady revenue growth over time. While the higher than industry
average exposure to merchandise traffic does increase CN's exposure
to an economic downturn, Moody's believes that CN's
consistent service somewhat offsets the economic risk as shippers will
generally prefer the lower cost of rail transport during soft business
conditions.
CN is currently seeing the benefit of several years of considerable reductions
in its fixed cost structure. Because of this, growth in cash
generation will be more reliant on top-line growth, rather
than on cost reductions. Price increases and market share gains,
therefore, will be most important—pointing further to the
need for continued strong service levels. In addition, CN's
focus on applying its scheduled railroad approach to Intermodal traffic
has considerable potential, particularly since Intermodal is expected
to be the fastest growth segment for some time.
Upgrades:
..Issuer: Canadian National Railway Company
....Issuer Rating, Upgraded to A3 from
Baa1
....Senior Secured Pass-Through,
Upgraded to A1 from A2
....Senior Secured Shelf, Upgraded to
(P)A2 from (P)A3
....Senior Unsecured Bank Credit Facility,
Upgraded to A3 from Baa1
....Senior Unsecured Regular Bond/Debenture,
Upgraded to A3 from Baa1
....Senior Unsecured Shelf, Upgraded
to (P)A3 from (P)Baa1
....Subordinated Shelf, Upgraded to
(P)Baa1 from (P)Baa2
..Issuer: Illinois Central Railroad Company
....Senior Unsecured Medium-Term Note
Program, Upgraded to A3 from Baa1
....Senior Unsecured Regular Bond/Debenture,
Upgraded to A3 from Baa1
..Issuer: Wisconsin Central Transportation Corporation
....Senior Unsecured Regular Bond/Debenture,
Upgraded to A3 from Baa1
Outlook Actions:
..Issuer: Canadian National Railway Company
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Illinois Central Railroad Company
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Wisconsin Central Transportation Corporation
....Outlook, Changed To Stable From
Rating Under Review
Canadian National Railway, based in Montreal Quebec, operates
a transcontinental railroad across Canada and also serves the middle U.S.
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