Business Context and Reporting Period
This Form 6-K filing, dated March 21, 2005, serves as a report of foreign issuer for Canadian National Railway Company (CN). The document primarily consists of the Information Circular and Notice of Annual Meeting of Shareholders scheduled for April 21, 2005, in Montreal, Quebec. The filing also incorporates the Company's 2004 Annual Report, which details financial results for the fiscal year ended December 31, 2004. Key business developments in 2004 included the acquisitions of Great Lakes Transportation LLC (GLT) and BC Rail, which were integrated into CN's operations.
Key Financial Metrics (Year Ended December 31, 2004)
Financial data is presented in Canadian dollars (CAD) unless otherwise noted, based on U.S. GAAP.
| Metric | 2004 | 2003 |
|---|---|---|
| Revenues | $6,548 million | $5,884 million |
| Operating Income | $2,168 million | $1,777 million |
| Net Income | $1,258 million | $1,014 million |
| Diluted Earnings Per Share | $4.34 | $3.49 |
| Operating Ratio | 66.9% | 69.8% |
| Free Cash Flow | $1,025 million | $578 million |
| Long-term Debt | $5,164 million | $4,658 million |
| Total Assets | $22,365 million | $20,337 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11% year-over-year, driven by the inclusion of GLT and BC Rail revenues ($351 million), core business growth, and an improved Canadian grain crop. This growth occurred despite a negative translation impact of approximately $255 million due to a stronger Canadian dollar.
- Operating Efficiency: The operating ratio improved by 2.9 percentage points to a record 66.9%, reflecting the Company's ability to absorb volume growth at low incremental costs.
- Acquisitions: The 2004 results include GLT (from May 10) and BC Rail (from July 14). These acquisitions were accretive to earnings from day one and expanded CN's network and commodity reach.
- Strike Impact: A one-month strike by the Canadian Auto Workers (CAW) union in the first quarter negatively impacted operating income by $35 million and net income by $24 million.
- Dividends and Buybacks: CN announced its ninth consecutive dividend increase. Additionally, the Company repurchased 4.0 million common shares for $273 million in 2004 and announced a new program to repurchase up to 14 million shares in 2005.
Guidance, Outlook, and Risks
Outlook and Strategy: Management emphasizes a "precision railroading" business model focused on asset utilization, cost control, and service reliability. The Company expects to continue realizing benefits from the GLT and BC Rail acquisitions and is expanding its intermodal (IMX) and carload (CX) initiatives. Future growth is anticipated in overseas traffic, particularly with China, leveraging the Port of Vancouver and Prince Rupert.
Risks and Contingencies:
- Labor Relations: While several collective agreements were settled in early 2005, negotiations were ongoing with other unions (UTU, TCRC, IBEW) representing a significant portion of the Canadian workforce. The risk of future strikes or lockouts remains a material contingency.
- Personal Injury Claims: The Company maintains significant reserves ($642 million) for U.S. personal injury and occupational disease claims. Changes in actuarial assumptions could materially affect expenses.
- Environmental Liabilities: CN faces potential liabilities for environmental cleanup at approximately 17 Superfund sites and other properties. While current accruals are $113 million, future costs cannot be precisely estimated.
- Competition: CN faces competition from Canadian Pacific Railway, trucking companies, and barge traffic (particularly for Illinois Central Railroad operations).
- Foreign Exchange: A significant portion of revenues and expenses are U.S. dollar-denominated. A one-cent change in the CAD/USD exchange rate impacts net income by approximately $8 million annually.
Key Facts for Investor Verification
- Shareholder Approval Required: Shareholders are voting to approve an amendment to the Management Long-Term Incentive Plan to increase the share reserve by 7.5 million shares (from 22.5 million to 30 million).
- CEO Compensation: CEO E. Hunter Harrison received a total compensation package valued at approximately $13 million in 2004, including a $3.5 million bonus and significant restricted share unit grants tied to a new employment agreement extending through 2008.
- Debt Structure: The Company has a $1 billion revolving credit facility expiring in December 2005. Total long-term debt increased to $5.16 billion, partly due to financing the GLT and BC Rail acquisitions.
- Accounting Policy Change: Under Canadian GAAP, the Company changed its property capitalization policy in 2004, which significantly improved reported operating income and net income compared to U.S. GAAP figures for the same period.
- Board Composition: The Board consists of 15 directors, 13 of whom are considered "unrelated" and "independent."