Morningstar DBRS Confirms Canadian National Railway Company at "A" and R-1 (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Canadian National Railway Company's (CN or the Company) Issuer Rating and Unsecured Bonds, Debentures & Notes rating at "A." Morningstar DBRS also confirmed CN's Commercial Paper rating at R-1 (low). All trends remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect the Company's ongoing sound operating performance despite a challenging set of conditions through 2024, including difficult weather conditions and labour issues that affected volumes. While Morningstar DBRS acknowledges that certain credit metrics of CN are weak relative to historical levels and could also be modestly challenged further temporarily due to the economic impacts from the U.S. trade tariffs, the Company's resilient operating performance should support a financial risk assessment commensurate with the current credit ratings over the medium-to-long term.

In 2024, revenue modestly increased by 1.3% year over year (YOY) to approximately $17.0 billion. This was largely attributable to improved pricing (revenue/carload) across most segments and due to a positive translation impact from the continuing weakness in the Canadian dollar, partially offset by lower applicable fuel surcharge rates. Price increases were partially offset by overall lower carloads with declines in the metals, coal, automotive, and forest products segments but partially mitigated by increased carloads across intermodal, petroleum and chemicals, grain, and fertilizer segments. Carloads shifted lower owing to a colder than expected winter and labour issues at both the Company and at the ports of Prince Rupert, Vancouver, and Montréal. EBITDA and operational cash flow (as defined by Morningstar DBRS) declined to approximately $8.4 billion (-1.8% YOY) and $6.6 billion (-5.9% YOY), respectively. Free cash flow after dividends also declined to $0.9 billion ($1.8 billion in 2023) largely because of higher capital expenditures (capex) of $3.5 billion in 2024 ($3.2 billion in 2023) and increased dividends of $2.1 billion (+3.2% YOY). CN used its free cash flow in combination with incremental debt of $1.0 billion to support its share repurchases of $2.7 billion in 2024. Consequentially, debt-to-EBITDA leverage (as defined by Morningstar DBRS) increased to 2.55 times (x) in 2024 from 2.2x in 2023 and 1.8x in 2022.

CREDIT RATING DRIVERS
Credit ratings may be pressured if key credit metrics continue to weaken and remain at levels beyond what Morningstar DBRS deems acceptable for the current credit rating (i.e., debt-to-EBITDA of meaningfully above 2.5x and/or combined with commensurate deterioration in key credit rating metrics) as a result of either weaker-than-expected operating performance and/or more aggressive financial management.

Furthermore, a sustained period of weaker-than-expected operating performance reflecting a permanent downward shift of the Company's business risk profile would require Canadian National Railway Company to maintain stronger credit metrics in order to support the same credit rating. Conversely, should key credit metrics materially improve (i.e., debt-to-EBITDA improving comfortably below 2.0x) over a sustained period coupled with management's commitment to maintain key credit metrics at such levels may result in a positive credit rating action.

EARNINGS OUTLOOK
Although U.S. and Canadian tariffs could likely weigh on total volumes carried across most sectors, Morningstar DBRS anticipates that some sectors like grain, potash, and oil could show growth. Additionally, Morningstar DBRS expects CN to implement price increases across most sectors. Consequently, revenues are projected to grow to above $17.5 billion in 2025 from $17 billion in 2024. Morningstar DBRS expects the Company to actively maintain a strong focus on cost efficiency including precision scheduled railroading (PSR). Consequentially, EBITDA is expected to grow to more than $8.5 billion in 2025 and $9 billion in 2026 (from $8.4 billion in 2024). Morningstar DBRS notes that significant economic disruptions stemming from an uncertain U.S. trade policy could upend the base case and result in lower revenue and EBITDA growth.

FINANCIAL OUTLOOK
Despite the ongoing geopolitical uncertainty weighing on the economic activity, cash flow generation should remain strong with operating cash flow estimated to remain above $6.7 billion in 2025 and grow to more than $7.1 billion in 2026. As the Company continues to invest in its fleet and its network, capex is likely to remain elevated with approximately $3.5 billion expected for 2025 and $3.6 billion for 2026. However, management may delay some capex should the ongoing tariffs result in a significant decline in volumes. As a result, Morningstar DBRS forecasts free cash flow net of dividends to remain above $1 billion in 2025 and above $1.1 billion in 2026. Morningstar DBRS expects the Company to use its free cash flow in combination with incremental debt for shareholder repurchases while actively maintaining key credit metrics at current levels (such as debt-to-EBITDA at 2.5x).

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): A
The CBRA reflects CN's vast network, diversified product and customer base, industry-leading operating efficiency, traditionally strong cash flow generation, and the structural importance of the sector to the broader economy. The ratings also consider the potential for further strengthening of the business risk profile over the medium to long term helped by planned port terminal expansions at Halifax; Contrecoeur, Québec; Vancouver; Prince Rupert, British Columbia; and New Orleans. Additionally, the potential of future partnerships like the Company's partnership with UP and GMXT, which led to the development of the premium intermodal product offering connecting Canada, Mexico, and the U.S., should help with medium to long term growth profile and could positively affect the business risk profile. Offsetting these advantages are the high capital intensity of the railway industry, regulatory focus on safety and service, and the overall maturity of the industry with its modest long-term growth relative to other cyclical industries. Ratings further consider the heightened probability of rising trade frictions between the USA and Canada, potential for a material economic growth slowdown in the USA and/or Canada and the resulting impact on CN's operations.

Comprehensive Financial Risk Assessment (CFRA): AL
The CFRA reflects consistent and visible earnings and cash flow generation amid the Company's reasonably conservative financial policy. Morningstar DBRS notes that the Company remains committed to its target leverage of 2.5x.

Intrinsic Assessment (IA): A
The IA is based on the CFRA and CBRA. Taking into consideration peer comparisons, among other factors, Morningstar DBRS placed CN's IA in the middle of the IA range.

Additional Considerations: None
CN's credit ratings include no further negative or positive adjustments because of additional considerations.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/453709.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS 
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025),
https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

-- Morningstar DBRS Global Corporate Criteria (February 3, 2025),
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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