CNI

Business Context and Reporting Period

Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Half (H1) of 2013 (January 1 – June 30, 2013)
Filing Date: August 12, 2013
Currency: Canadian Dollars (CAD), unless otherwise noted.
Accounting Basis: U.S. GAAP

This filing serves as an Investor Fact Book update, providing unaudited quarterly financial statements and statistical operating data for the first two quarters of 2013, alongside comparative data for 2010–2012.

Key Financial Metrics (H1 2013)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by 5.0% year-over-year (YoY) to $5,132 million, driven by higher volumes and pricing across key commodity sectors.
• Operating Income: Operating income rose 2.5% to $1,822 million, despite a deterioration in the operating ratio.
• Operating Ratio: The operating ratio increased from 63.6% in H1 2012 to 64.5% in H1 2013, indicating a slight decrease in operating efficiency relative to revenue.
• Profitability: While reported Net Income decreased to $1,272 million (from $1,406 million), Adjusted Net Income increased to $1,223 million (from $1,182 million) after excluding non-recurring items.
• Balance Sheet: Total assets grew to $27,545 million as of June 30, 2013, up from $26,466 million in the prior year period. Long-term debt increased to $6,141 million.
• Cash Flow: Free cash flow declined significantly to $437 million from $703 million in H1 2012, primarily due to higher capital expenditures and dividend payments.

Outlook, Commentary, and Risks

Management Commentary: The Company emphasizes the use of non-GAAP measures (Adjusted Net Income, Free Cash Flow) to facilitate period-to-period comparisons by excluding items that do not arise from normal day-to-day operations. Management views Free Cash Flow as a key indicator of the ability to generate cash after capital expenditures and dividends.

Unusual Items / Adjustments:

• H1 2013 Adjustments: Adjusted Net Income excludes a gain on the exchange of perpetual railroad operating easements ($18 million after-tax) and a gain on the disposal of a segment of the Oakville subdivision ($36 million after-tax).
• H1 2012 Adjustments: Prior year adjusted figures excluded a significant gain on the disposal of the Bala and Oakville subdivisions ($252 million after-tax).

Risks and Contingencies:

• Statistical Data: The filing notes that statistical data and productivity measures are based on estimated data and are subject to change as more complete information becomes available.
• Non-GAAP Measures: The Company warns that non-GAAP measures do not have standardized meanings prescribed by U.S. GAAP and may not be comparable to similar measures presented by other companies.

Guidance: This specific filing does not contain forward-looking financial guidance or specific outlook statements for the remainder of 2013.

Investor Verification Checklist

• Operating Ratio Trend: Verify the cause of the 0.9 percentage point increase in the operating ratio (63.6% to 64.5%) and its impact on future margins.
• Free Cash Flow Decline: Investigate the drivers behind the 38% drop in Free Cash Flow ($703M to $437M) to determine if it is due to temporary capital spending or structural changes.
• Debt Levels: Confirm the trajectory of the Debt-to-Total Capitalization ratio, which rose to 39.6%, and assess the Company's leverage management strategy.
• Non-GAAP Reconciliations: Review the Appendix to understand the specific one-time gains excluded from Adjusted Net Income to ensure accurate trend analysis.
• Volume vs. Price: Analyze the breakdown of revenue growth between volume increases (Gross Ton Miles) and pricing (Revenue per RTM) to assess demand sustainability.