Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Date: July 18, 2007
Reporting Period: The filing primarily announces the release of the 2007 Investor Fact Book and the "Delivering Responsibly" corporate social responsibility report. Financial data presented covers the full fiscal years 2004, 2005, and 2006, with quarterly breakdowns for 2005 and 2006.
Key Financial Metrics (Fiscal Year 2006)
| Metric | 2006 Value (CAD) | 2005 Value (CAD) |
|---|---|---|
| Revenues | $7,929 million | $7,446 million |
| Operating Income | $3,030 million | $2,624 million |
| Net Income (Reported) | $2,087 million | $1,556 million |
| Adjusted Net Income | $1,810 million | $1,556 million |
| Adjusted Diluted EPS | $3.40 | $2.77 |
| Operating Ratio | 61.8% | 64.8% |
| Free Cash Flow | $1,343 million | $1,301 million |
| Net Capital Expenditures | $1,298 million | $1,180 million |
| Debt to Total Capitalization | 36.3% | 35.5% |
Note: All financial figures are in Canadian dollars. Adjusted Net Income excludes items affecting comparability, specifically a $277 million deferred income tax recovery in 2006.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6.5% to $7.929 billion, driven by freight rate increases and volume growth in Intermodal, Grain, and Coal segments.
- Efficiency Gains: The Operating Ratio improved by 3.0 percentage points to 61.8%, significantly outperforming the industry average and nearest competitors.
- Productivity: Car velocity improved 10% in 2006 to 171 car miles per car day. Gross ton miles increased to 352.972 billion.
- Cost Management: Despite rising fuel prices (average $2.13/gallon in 2006 vs. $1.72 in 2005), the company utilized a fuel surcharge program to offset volatility. Fuel hedging activities were terminated in late 2006.
- Capital Investment: Capital expenditures rose to $1.56 billion in 2006 (20% of revenue), focusing on rail infrastructure, rolling stock, and IT systems.
Guidance, Outlook, and Risks
Outlook and Strategy
- 2007 Capital Plan: CN plans to invest approximately $1.6 billion in 2007, with $1 billion allocated to track infrastructure and $350 million to equipment (including 65 new locomotives).
- Growth Drivers: Key opportunities include the opening of the Prince Rupert intermodal terminal (autumn 2007), expansion of the Alberta oil sands market, and increased ethanol and biodiesel shipments.
- Service Focus: Continued emphasis on "Precision Railroading" to improve asset utilization and service reliability.
Risks and Contingencies
- Labor Relations: A significant strike by the United Transportation Union (UTU) occurred in February 2007. The dispute was resolved via "back-to-work" legislation (Bill C-46) passed in April 2007, with an arbitrator appointed to finalize terms.
- Economic Sensitivity: Results are sensitive to North American economic conditions. A one-cent annual appreciation of the Canadian dollar against the U.S. dollar negatively impacts net income by approximately $10 million.
- Regulatory Environment: Subject to economic and safety regulations by the Canadian Transportation Agency (CTA) and the U.S. Surface Transportation Board (STB). New fuel surcharge tariffs (CN 7402) were implemented in April 2007 following STB rulings.
Investor Verification Checklist
- Strike Resolution: Verify the final terms of the UTU collective agreement resulting from the arbitration process initiated in April 2007.
- Prince Rupert Terminal: Confirm the operational start date and initial volume uptake for the new intermodal facility scheduled for autumn 2007.
- Fuel Surcharge Impact: Monitor the effectiveness of the new mileage-based fuel surcharge (Tariff CN 7402) in covering rising diesel costs.
- Oil Sands Volumes: Track the growth in shipments related to Alberta oil sands infrastructure development and diluent transport.
- Adjusted vs. Reported Earnings: Review the reconciliation of non-GAAP measures, specifically the $277 million tax recovery included in 2006 reported net income but excluded from adjusted figures.