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, 2014
Release Date: January 27, 2015
CN is a major North American railroad transporting goods across Canada and the mid-United States. The company reported record full-year freight volumes for 2014, driven by a record Canadian grain crop, strong energy markets (crude oil and frac sand), and growth in intermodal and automotive sectors.
Key Financial Metrics
| Metric (in millions CAD) | Q4 2014 | Q4 2013 | Full Year 2014 | Full Year 2013 |
|---|---|---|---|---|
| Revenues | $3,207 | $2,745 | $12,134 | $10,575 |
| Operating Income | $1,260 | $967 | $4,624 | $3,873 |
| Net Income | $844 | $635 | $3,167 | $2,612 |
| Diluted EPS | $1.03 | $0.76 | $3.85 | $3.09 |
| Adjusted Diluted EPS | $1.03 | $0.76 | $3.76 | $3.06 |
| Free Cash Flow | $175 | $316 | $2,220 | $1,623 |
| Operating Ratio | 60.7% | 64.8% | 61.9% | 63.4% |
Balance Sheet Highlights (Dec 31, 2014):
- Total Assets: $31,792 million
- Total Liabilities: $18,322 million
- Long-term Debt: $7,865 million
- Cash and Cash Equivalents: $52 million
Material Changes vs. Prior Period
- Revenue Growth: Full-year revenues increased 15% to $12.1 billion. Growth was broad-based, with petroleum and chemicals (+21%), grain and fertilizers (+21%), and metals and minerals (+20%) leading the increase.
- Volume Expansion: Full-year carloadings rose 8% to 5.625 million, and revenue ton-miles increased 10% to 232.1 billion.
- Profitability: Operating income rose 19% for the full year. The operating ratio improved by 1.5 points to 61.9%, reflecting efficiency gains despite higher fuel and labor costs.
- Currency Impact: A weaker Canadian dollar positively impacted reported revenues (U.S.-denominated) but negatively impacted expenses. On a constant currency basis, full-year net income would have been $121 million lower.
- Unusual Items: Full-year 2014 net income included an $80 million pre-tax gain on the disposal of the Deux-Montagnes subdivision. Adjusted net income excludes this gain.
Guidance, Outlook, and Risks
2015 Outlook:
- Earnings: Management aims to deliver double-digit EPS growth in 2015 over the adjusted 2014 diluted EPS of $3.76.
- Capital Spending: Planned investment is approximately $2.6 billion, an increase of roughly $300 million from 2014. Approximately $1.3 billion is targeted for network safety and integrity.
- Dividend: The Board approved a 25% increase in the 2015 quarterly common-share dividend.
- Volume Assumptions: Total carload growth is assumed to be in the 3-4% range, with energy-related commodity shipments growing by approximately 75,000 carloads.
Key Assumptions:
- North American industrial production growth of 3-4%.
- U.S. housing starts of 1.2 million units.
- U.S. motor vehicle sales of 16.7 million units.
- Canadian dollar trading between $0.80 and $0.85 USD.
- Crude oil (WTI) averaging around $50 per barrel.
Risks:
- General economic and business conditions.
- Fluctuations in fuel prices, currency, and interest rates.
- Regulatory changes and environmental compliance.
- Operational disruptions due to severe weather, labor negotiations, or derailments.
Investor Verification Checklist
- Adjusted vs. GAAP: Verify the reconciliation of the $80 million gain on asset disposal excluded from adjusted EPS.
- Currency Sensitivity: Assess the impact of the weaker Canadian dollar on future earnings, as a significant portion of revenue is USD-denominated.
- Capital Allocation: Confirm the execution of the increased $2.6 billion capital program and its impact on free cash flow.
- Volume Drivers: Monitor the sustainability of energy (crude oil/frac sand) and grain volume growth, which were primary drivers of 2014 performance.
- Operating Ratio: Track the ability to maintain the improved operating ratio (61.9%) amidst rising fuel and labor costs.