Business Context and Reporting Period
Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fiscal year ended December 31, 2010
Filing Date: February 9, 2011
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, chemicals, grain, coal, metals, forest products, intermodal, and automotive goods.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | 2010 (C$ Millions) | 2009 (C$ Millions) | Change |
|---|---|---|---|
| Revenues | 8,297 | 7,367 | +13% |
| Operating Income | 3,024 | 2,406 | +26% |
| Net Income | 2,104 | 1,854 | +13% |
| Diluted EPS | $4.48 | $3.92 | +14% |
| Operating Ratio | 63.6% | 67.3% | -3.7 pts |
| Operating Cash Flow | 2,999 | 2,279 | +31% |
| Free Cash Flow | 1,122 | 790 | +42% |
| Total Debt (Gross) | 6,923 | 7,317 | -5% |
| Cash and Equivalents | 490 | 352 | +39% |
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 12% increase in revenue ton miles (RTM) due to economic recovery, higher fuel surcharges (approx. $240 million impact), and freight rate increases. This was partially offset by the negative translation impact of a stronger Canadian dollar.
- Expense Management: Operating expenses rose 6% to $5,273 million, primarily due to higher fuel costs ($228 million increase), increased labor costs, and depreciation. However, the operating ratio improved by 3.7 points to 63.6%.
- Unusual Items:
- 2010: Included a $152 million pre-tax gain ($131 million after-tax) from the sale of the Oakville subdivision.
- 2009: Included gains of $226 million from property sales (Weston and Lower Newmarket subdivisions) and $49 million in acquisition-related costs for the Elgin, Joliet and Eastern Railway (EJ&E).
- Foreign Exchange: The stronger Canadian dollar negatively impacted reported net income by approximately $70 million in 2010.
Guidance, Outlook, and Risks
- 2011 Outlook: Management expects North American industrial production growth to slow to around 4%. The company anticipates moderate growth in housing and a weaker Canadian grain crop. Capital expenditures are planned at approximately $1.7 billion, with $1.0 billion targeted for track infrastructure.
- Dividends and Buybacks: The Board approved a 20% increase in the quarterly dividend to $0.3250 per share. A new share repurchase program was approved for up to 16.5 million shares through December 31, 2011.
- Key Risks:
- Regulatory: Ongoing oversight of the EJ&E acquisition by the Surface Transportation Board (STB) and potential new legislation regarding antitrust exemptions and safety (Positive Train Control implementation by 2015).
- Environmental: Liability for remediation at approximately 295 identified sites; potential for unknown future liabilities.
- Labor: Collective agreements with various unions are in place, but future negotiations carry strike risks.
- Pension Funding: The company made a voluntary $300 million contribution in 2010 to strengthen its main pension plan. Future contributions depend on actuarial valuations and market returns.
Investor Verification Checklist
- Constant Currency Performance: Verify organic growth rates by adjusting for the significant negative impact of the stronger Canadian dollar on US-denominated revenues.
- Property Sale Gains: Assess the sustainability of earnings by excluding the one-time $152 million gain from the Oakville subdivision sale in 2010.
- Capital Expenditure Commitments: Review the $1.7 billion planned capex for 2011, specifically the $220 million US cost for Positive Train Control (PTC) implementation.
- Pension Assumptions: Monitor the impact of the reduced expected long-term rate of return on plan assets (lowered from 7.75% to 7.50% effective Jan 1, 2011) on future net periodic benefit costs.
- Debt Maturities: Confirm liquidity coverage for $398 million in debt maturities due in 2011.