Why Climate Change Is Unlikely to Derail Canadian Railway Credit Ratings
This commentary focuses on climate change impacts on Canadian National Railway Company (CN) and Canadian Pacific Railway Company (CP) operations and infrastructure in response to acute and chronic climate events. We discuss the financial materiality of such extreme weather events on the credit profiles of the Canadian railways vis-à-vis their structural characteristics, notably the large size and scale of their operations, strong liquidity, and the resilience of their balance sheets and business models. Furthermore, we analyze how the Canadian railways are managing physical risks related to climate change and their adaptation strategies to become more resilient.Key highlights include:
-- How the railways’ timely responses to 2021 climate events--such as wildfires, drought, and washouts--helped them mitigate losses.
-- CN's and CP's strong climate change related risk management strategies, which are embedded within their enterprise risk management frameworks—guided by their Boards of Directors—and fall under the purview of senior management.
-- How strong enterprise risk management and operational capacity support the railways’ credit stability.
DBRS Morningstar believes that both CN and CP have the personnel and the technological and operational capacities to help them navigate stresses caused by climate change. “This should provide the Canadian railways with the ability to absorb some climate related revenue losses, operations expenses, and capital expenditures every now and then, without weakening their credit profiles,” said Raja Kalra, Vice President, Diversified Industries.
Canadian Pacific Railway operates a transcontinental railway in Canada and the U.S. Co.'s business mix includes bulk commodities, merchandise freight and intermodal traffic, serving the principal business centers of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. As of Dec 31 2016, Co. operated on a network of approximately 12,400 miles of track, of which CP owns 10,800 miles and has access to 1,600 miles under trackage rights and lease agreements. Of the total mileage operated, about 5,600 miles were located in western Canada, 2,000 miles in eastern Canada, 4,400 miles in the U.S. Midwest and 400 miles in the U.S. Northeast.
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