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, 2011
Business Overview: CN operates a single business segment spanning Canada and mid-America, connecting the Atlantic, Pacific, and Gulf of Mexico coasts. The company transports a diversified portfolio of commodities including petroleum, chemicals, grain, coal, metals, forest products, intermodal, and automotive goods. The financial statements are prepared in accordance with U.S. GAAP and expressed in Canadian dollars.
Key Financial Metrics (Year Ended Dec 31, 2011)
| Metric | 2011 (C$ Millions) | 2010 (C$ Millions) |
|---|---|---|
| Revenues | $9,028 | $8,297 |
| Operating Income | $3,296 | $3,024 |
| Net Income | $2,457 | $2,104 |
| Diluted Earnings Per Share | $5.41 | $4.48 |
| Operating Ratio | 63.5% | 63.6% |
| Operating Cash Flow | $2,976 | $2,999 |
| Free Cash Flow | $1,175 | $1,122 |
| Total Assets | $26,026 | $25,206 |
| Total Debt (Gross) | $7,431 | $6,923 |
| Long-Term Debt (Net) | $6,441 | $5,531 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 9% ($731 million) driven by higher freight volumes, a higher fuel surcharge (approx. $315 million), and freight rate increases. This was partially offset by the negative translation impact of a stronger Canadian dollar.
- Profitability: Net income rose 17% ($353 million). Diluted EPS increased 21% to $5.41. The operating ratio improved slightly by 0.1 points to 63.5%.
- Unusual Items (Gains on Disposal): 2011 results included significant non-operating gains:
- Lakeshore East: Sale of a segment of the Kingston subdivision resulted in a $288 million gain ($254 million after-tax).
- IC RailMarine Terminal: Sale of substantially all assets resulted in a $60 million gain ($38 million after-tax).
- Expense Increases: Operating expenses rose 9% ($459 million), primarily due to higher fuel costs ($364 million increase), purchased services, and labor costs. Casualty and other expenses decreased 25% due to lower environmental charges and favorable actuarial adjustments.
- Balance Sheet: Total assets increased by $820 million. A significant portion of the change in "Intangible and other assets" was a $995 million decrease related to the recognition of the funded status of pension plans. Total liabilities increased by $1.4 billion, largely due to pension liabilities and debt issuances.
Guidance, Outlook, and Risks
- 2012 Outlook: Management expects North American industrial production growth to slow to around 3%. The company anticipates moderate growth in automotive production and U.S. housing starts. Grain production is expected to be in-line with the 5-year average.
- Capital Expenditures: CN plans to invest approximately $1.75 billion in 2012, with over $1 billion targeted for track infrastructure to ensure safety and productivity. This includes implementation costs for Positive Train Control (PTC).
- Shareholder Returns: The Board approved a 15% increase in the quarterly dividend to $0.375 per share for 2012. A new share repurchase program was approved in October 2011 for up to 17.0 million shares.
- Pension Funding: In 2011, the company made voluntary contributions of $350 million to its pension plans. Cash contributions for 2012 are expected to range from $275 million to $575 million.
- Key Risks:
- Foreign Currency: Fluctuations in the CAD/USD exchange rate significantly impact reported results (estimated impact of $5M-$10M per 1-cent change).
- Regulatory: Ongoing regulatory reviews in Canada and the U.S. regarding rate regulation, safety (PTC implementation), and environmental compliance.
- Labor: Collective bargaining agreements with various unions in Canada and the U.S. are subject to renewal, with potential for work stoppages.
- Environmental: Liability for remediation of contaminated sites and potential costs from future accidents or regulatory changes.
Investor Verification Checklist
- Non-Recurring Gains: Verify the sustainability of earnings by excluding the $348 million in gains from property disposals (Lakeshore East and ICRMT) included in 2011 net income.
- Pension Liability: Review the impact of the $1.54 billion net actuarial loss recorded in 2011 on the pension funded status and future cash contribution requirements.
- Foreign Exchange Sensitivity: Assess the impact of the strengthening Canadian dollar on future revenue translation, as a significant portion of operations is USD-denominated.
- Capital Commitments: Confirm the timeline and cost certainty for the $193 million remaining implementation costs for Positive Train Control (PTC) required by 2015.
- Debt Maturity: Review the debt maturity schedule, noting $135 million due in 2012 and $512 million due in 2013, against available liquidity and credit facilities.