CNI

Business Context and Reporting Period

Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended December 31, 2014
Business Overview: CN operates a rail network spanning Canada and mid-America, connecting the Atlantic, Pacific, and Gulf of Mexico coasts. The company manages its operations as a single business segment, transporting a diversified portfolio of commodities including petroleum, grain, coal, metals, forest products, intermodal, and automotive goods.

Key Financial Metrics (Year Ended Dec 31, 2014)

Note: All figures are in Canadian Dollars unless otherwise noted. The decrease in cash equivalents was primarily due to share repurchases and dividend payments.

Material Changes vs. Prior Period

• Revenue Growth: Driven by higher freight volumes (record Canadian grain crop, strong energy markets, new intermodal/automotive business), freight rate increases, and a favorable translation impact from a weaker Canadian dollar.
• Operating Expenses: Increased by 12% to $7,510 million, primarily due to higher fuel costs, increased labor and fringe benefits, purchased services, and the negative translation impact of the weaker Canadian dollar on US-denominated expenses.
• Operating Efficiency: The operating ratio improved by 1.5 percentage points to 61.9%, reflecting strong top-line growth outpacing expense increases.
• Unusual Items: Net income included an $80 million pre-tax gain ($72 million after-tax) from the disposal of the Deux-Montagnes subdivision. Adjusted net income for 2014 was $3,095 million.
• Shareholder Returns: The company repurchased 22.4 million shares for $1,505 million and paid dividends of $818 million ($1.00 per share).

Guidance, Outlook, and Risks

Management Commentary and Outlook

• 2015 Capital Program: CN plans to invest approximately $2.6 billion, with $1.3 billion targeted at track infrastructure, $500 million on equipment (including 90 new locomotives), and $800 million on growth initiatives.
• Dividend Increase: The Board approved a 25% increase in the quarterly dividend to $0.3125 per share for 2015.
• Share Repurchase: A new program allows for the repurchase of up to 28.0 million shares through October 2015.
• Operational Outlook: Management expects growth in energy-related commodities, intermodal traffic, and commodities tied to U.S. housing and automotive sales.

Risks and Contingencies

• Regulatory Compliance: Significant capital commitments remain for Positive Train Control (PTC) implementation (approx. US$550 million total) and grade separation projects related to the Elgin, Joliet and Eastern Railway acquisition.
• Pension Funding: A decrease in the discount rate from 4.73% to 3.87% increased the projected benefit obligation. The company expects 2015 pension cash contributions of approximately $125 million.
• Environmental Liabilities: The company has identified approximately 255 sites with potential remediation costs. Provisions totaled $114 million at year-end.
• Labor Negotiations: Collective agreements with several Canadian unions expired in late 2014; tentative agreements were reached in early 2015, but risks of work stoppages remain.

Key Facts for Investor Verification

• Adjusted Performance: Verify the impact of the $80 million gain on the disposal of the Deux-Montagnes subdivision on reported net income versus adjusted net income.
• Currency Sensitivity: Assess the impact of the weaker Canadian dollar, which provided a favorable translation impact on revenues but a negative impact on US-denominated expenses.
• Pension Assumptions: Review the sensitivity of pension obligations to the discount rate (3.87% in 2014 vs 4.73% in 2013) and the expected long-term rate of return (7.00%).
• Capital Expenditures: Confirm the allocation of the $2.6 billion 2015 capital program, specifically the portion dedicated to regulatory mandates like PTC.
• Liquidity Position: Note the reduction in unrestricted cash and cash equivalents from $214 million to $52 million, driven by significant capital returns to shareholders.