Business Context and Reporting Period
This Form 6-K filing, dated March 22, 2010, serves as a report of foreign issuer for Canadian National Railway Company (CN). The document primarily contains the Notice of Annual Meeting of Shareholders, the Management Proxy Circular, and the 2009 Annual Report. The financial data presented covers the fiscal year ended December 31, 2009. The filing announces the annual meeting scheduled for April 27, 2010, in Montreal, Quebec, to elect directors, appoint auditors, and receive the 2009 consolidated financial statements.
Key Financial Metrics (Year Ended December 31, 2009)
- Revenues: CAD $7,367 million (a 13% decrease from 2008).
- Operating Income: CAD $2,406 million (a 17% decrease from 2008).
- Net Income: CAD $1,854 million (a 2% decrease from 2008).
- Diluted Earnings Per Share (EPS): CAD $3.92 (a 1% decrease from 2008).
- Operating Ratio: 67.3% (an increase of 1.4 points from 65.9% in 2008).
- Free Cash Flow: CAD $790 million.
- Total Assets: CAD $25,176 million.
- Total Long-Term Debt: CAD $6,391 million (excluding current portion).
- Dividends Declared: CAD $1.01 per share (a 10% increase from 2008).
Material Changes Versus Prior Period
The 2009 results were significantly impacted by the global economic recession, which caused a sharp decline in freight volumes across almost all commodity groups. Revenues decreased by CAD $1,115 million, primarily due to lower volumes and a reduction in fuel surcharges. Despite the revenue decline, the company maintained profitability through rigorous cost-control measures, resulting in a decrease in operating expenses of CAD $627 million.
Notable non-recurring items affecting comparability include:
- Gains on Asset Sales: CAD $226 million in gains from the sale of the Weston and Lower Newmarket subdivisions.
- Acquisition Costs: CAD $49 million in costs related to the acquisition of the Elgin, Joliet and Eastern Railway Company (EJ&E).
- Tax Recovery: A deferred income tax recovery of CAD $157 million, largely due to lower provincial corporate income tax rates.
Leadership transition occurred during the period, with E. Hunter Harrison retiring as President and CEO on December 31, 2009, and Claude Mongeau assuming the role on January 1, 2010.
Guidance, Outlook, and Management Commentary
Management expressed optimism regarding the anticipated gradual recovery of the North American and global economies. The company highlighted its "Precision Railroading" model as a key driver of efficiency and cost control. Strategic initiatives for 2010 include:
- Capital Investment: Planned capital spending of approximately CAD $1.5 billion, with CAD $1 billion targeted for track infrastructure.
- Shareholder Returns: Approval of a 7% increase in the quarterly dividend and the initiation of a new share repurchase program for up to 15.0 million shares.
- Growth Opportunities: Focus on oil sands transportation, intermodal growth at Prince Rupert, and sustainable energy products.
Risks and Contingencies: The filing identifies significant risks including economic conditions, labor negotiations (specifically regarding the Teamsters Canada Rail Conference), environmental liabilities (approximately 310 sites identified), and regulatory changes in both Canada and the U.S. The company maintains provisions for personal injury claims and environmental remediation, though the ultimate costs remain uncertain.
Important Facts for Investor Verification
- Leadership Transition: Verify the integration of the new CEO, Claude Mongeau, and the stability of the executive team following the retirement of E. Hunter Harrison.
- Freight Volume Recovery: Monitor quarterly reports for signs of volume recovery in key commodity groups (automotive, forest products, intermodal) to confirm the economic recovery thesis.
- Labor Relations: Track the status of collective bargaining agreements, particularly with the Teamsters Canada Rail Conference, as strikes or work stoppages could materially impact operations.
- Environmental Liabilities: Review updates on the 310 identified environmental sites and the adequacy of the CAD $103 million provision for remediation costs.
- Capital Allocation: Confirm the execution of the new share repurchase program and the maintenance of the dividend increase amidst capital expenditure requirements.