CNI

Business Context and Reporting Period

Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth quarter and full year ended December 31, 2003
Release Date: January 28, 2004
Business Overview: CN operates a transcontinental railway spanning Canada and mid-America, connecting the Atlantic and Pacific oceans to the Gulf of Mexico. The company reported strong performance driven by grain, container, lumber, and iron traffic, despite headwinds from a strong Canadian dollar and high fuel costs.

Key Financial Metrics

Note: Q4 2002 results were significantly impacted by non-recurring charges. Full year 2003 results include a $79 million deferred tax expense and a $48 million accounting change benefit.

Material Changes vs. Prior Period

• Revenue Impact of Currency: The 19% appreciation of the Canadian dollar in Q4 2003 reduced reported revenues by approximately $145 million. Excluding this currency impact, Q4 revenues would have risen 7% year-over-year.
• Expense Reduction: Operating expenses declined 31% in Q4 2003 compared to Q4 2002, driven by a reduced workforce, lower equipment rents, and curbed discretionary spending. Full-year operating expenses improved 12%.
• Operating Ratio Improvement: The Q4 operating ratio reached a record 66.1%, a 2.2-point improvement over the adjusted Q4 2002 ratio. The full-year ratio was 69.8%.
• Adjusted Earnings Growth: Excluding non-recurring items (tax charges in 2003; injury claims and workforce reductions in 2002), adjusted Q4 net income rose 11% and adjusted diluted EPS rose 16% to $1.58.
• Debt Reduction: Long-term debt decreased by $828 million year-over-year to $4.175 billion, aided by the completion of a share repurchase program and debt refinancing.

Guidance, Outlook, and Risks

• Management Commentary: CEO E. Hunter Harrison highlighted strong performance in grain, overseas container traffic, lumber, and new iron traffic to China. He noted that expense management and the "Intermodal Excellence" (IMX) initiative contributed to lower costs and improved contribution.
• Outlook: Management believes Q4 results set the stage for continued strong performance in 2004.
• Acquisitions:
  • BC Rail: Agreed to acquire BC Rail for $1 billion (cash), subject to regulatory approval, expected to close in Q2 2004.
  • Great Lakes Transportation (GLT): Agreed to acquire GLT railroads and holdings for $380 million (cash), subject to regulatory approval, expected to close in Q2 2004.
• Subsequent Events:
  • Stock Split: Approved a 3-for-2 common stock split to be effected as a stock dividend in February 2004.
  • EWS Investment: CN will receive approximately Cdn$188 million from English Welsh and Scottish Railway (EWS) via a share cancellation plan, reducing CN's ownership to ~31%.
• Risks: Forward-looking statements involve risks including currency fluctuations, fuel costs, and regulatory approvals for acquisitions. The filing references the company's Form 40-F for a summary of major risks.

Investor Verification Checklist

• Currency Sensitivity: Verify the impact of the strong Canadian dollar on future revenue reporting, as it masked underlying volume growth in 2003.
• Acquisition Integration: Monitor the closing dates and regulatory conditions for the BC Rail ($1B) and GLT ($380M) acquisitions scheduled for Q2 2004.
• Adjusted vs. GAAP: Review the reconciliation of non-GAAP measures (adjusted net income) to ensure comparability, noting the $79 million tax charge in 2003 and significant one-time charges in 2002.
• Capital Allocation: Confirm the execution of the 3-for-2 stock split and the impact on share count and per-share metrics in future filings.
• Debt Structure: Assess the refinancing of debt and the utilization of the $800 million commercial paper program and revolving credit facility.