Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter ended March 31, 2015
Business Overview: CN operates a rail network spanning Canada and mid-America, connecting the Atlantic, Pacific, and Gulf of Mexico coasts. The company transports over $250 billion worth of goods annually across seven commodity groups.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenues | C$3,098 million | C$2,693 million | +15% |
| Operating Income | C$1,063 million | C$820 million | +30% |
| Net Income | C$704 million | C$623 million | +13% |
| Diluted EPS | C$0.86 | C$0.75 | +15% |
| Adjusted Diluted EPS | C$0.86 | C$0.66 | +30% |
| Operating Ratio | 65.7% | 69.6% | -3.9 pts |
| Free Cash Flow | C$521 million | C$494 million | +5% |
| Carloadings | 1,353 thousand | 1,239 thousand | +9% |
| Revenue Ton-Miles | 57,129 million | 53,334 million | +7% |
Liquidity and Debt:
- Cash and Cash Equivalents: C$178 million (March 31, 2015) vs. C$52 million (Dec 31, 2014).
- Restricted Cash: C$473 million pledged as collateral for letters of credit.
- Total Debt: C$9,403 million carrying amount (Fair value: C$11,022 million).
- Adjusted Debt-to-Total Capitalization: 42.2% (March 31, 2015).
- Adjusted Debt-to-Adjusted EBITDA: 1.68 times (Trailing twelve months).
Material Changes vs. Prior Period
Revenue Drivers:
- Foreign Exchange: A weaker Canadian dollar provided a positive translation impact on U.S.-dollar-denominated revenues.
- Volume Growth: Increases in Canadian grain/potash, intermodal, lumber, and frac sand volumes.
- Yield: Freight rate increases contributed to an 8% rise in revenue per revenue ton-mile.
- Offsets: Coal revenues declined 13% due to weaker global demand.
Expense Drivers:
- Increases: Higher labor costs, casualty/other expenses, and purchased services. Negative FX translation on U.S. expenses.
- Decreases: Fuel expenses dropped 23% (C$107 million) due to lower fuel prices.
Operational Efficiency: The operating ratio improved by 3.9 points to 65.7%, aided by milder winter conditions compared to the "polar vortex" of Q1 2014.
Guidance, Outlook, and Risks
Outlook:
- EPS Growth: Management affirms double-digit EPS growth for 2015 versus 2014 adjusted diluted EPS of C$3.76.
- Capital Program: Increased to C$2.7 billion (up C$100 million) to fund safety infrastructure. Includes a new C$500 million multi-year program for Western Canada feeder lines.
- Assumptions: North American industrial production growth of ~3%; U.S. housing starts ~1.2 million units; Crude oil (WTI) averaging US$50/barrel; CAD/USD exchange rate ~0.80.
Risks and Contingencies:
- Environmental: Aggregate accruals for environmental costs are C$150 million. C$35 million was accrued in Q1 2015 related to derailments.
- Legal: Reserves for personal injury and other claims total C$306 million.
- Regulatory: New Canadian regulations (Bill C-52) regarding crude oil liability insurance and tank car standards (TC-117). U.S. legislation regarding Positive Train Control (PTC) deadlines and tank car bans.
- Labor: Several tentative collective agreements were ratified in Q1 2015 (Teamsters, Unifor, SMART), reducing strike risk for the near term.
Investor Verification Checklist
- FX Sensitivity: Verify the impact of the CAD/USD exchange rate on future earnings, as a one-cent change impacts net income by approximately C$30 million annually.
- Coal Market Exposure: Monitor global coal demand trends, as this segment saw a 13% revenue decline in Q1 2015.
- Capital Expenditure Execution: Track the deployment of the increased C$2.7 billion capital budget, specifically the C$100 million allocation for Western Canada feeder lines.
- Regulatory Compliance Costs: Assess the financial impact of new Canadian and U.S. safety regulations regarding tank cars and PTC implementation.
- Adjusted vs. GAAP: Note that Q1 2014 results included a C$80 million gain on the sale of the Deux-Montagnes rail line; Q1 2015 results are comparable on an adjusted basis but exclude such one-time gains.