BNSF “has continued to improve its profitability despite lower demand, while also financing dividends with cash flow rather than incremental debt,” S&P said. “Although we believe the company could pursue debt-financed dividends going forward, we expect its credit metrics will continue to improve over the next two years. Therefore, we raised our issuer credit rating to AA- from A+.”
S&P also said it raised all issue-level ratings for BNSF by one notch, except for the rating for BNSF’s equipment trust certificates, which remain at AA+.
Although BNSF is privately owned by Berkshire Hathaway, the revised credit rating reflects BNSF’s contributing value to its parent company.
“We continue to assess BNSF as strategically important to its parent,” S&P said. “Our issuer credit rating reflects three notches of uplift from our stand-alone assessment of the company. This reflects our belief that BRK would likely provide extraordinary support to BNSF. The company has historically contributed about 25% of BRK’s pretax earnings and is among its largest noninsurance businesses.”
The upgraded rating comes amid an anticipated increase in carload volumes and revenues in 2021 relative to 2020. The lifting of pandemic-related government restrictions should also provide support to the markets through the end of the year, according to S&P.
Higher grain export volumes, increased industrial output and growing intermodal volumes should lend support to BNSF in 2021, while energy-related carloads such as coal, petroleum and hydraulic fracturing are expected to be lower this year. In light of these market conditions, S&P anticipates BNSF’s total revenue to increase by around 9% to 10% in 2021 and by around 3% to 5% in 2022 as macroeconomic growth moderates.
And while BNSF has not formally adopted precision scheduled railroading like its Class I peers, the railroad has taken steps to increase train speeds, reduce dwell time and decrease the size of its locomotive and freight car fleets, all of which enable operational efficiency, S&P said.
“Our outlook on BNSF is stable. We believe the company will benefit from higher demand in 2021 for freight transportation across most of the commodities and goods it hauls,” S&P said. “We also believe improved operating efficiency will result in somewhat stronger profitability and cash flows, contributing to credit metrics that will support this rating level even with significant dividends to its parent.”