Business Context and Reporting Period
This Form 6-K filing, dated March 24, 2011, serves as a report of foreign issuer for Canadian National Railway Company (CN). The document primarily contains the Notice of Annual Meeting of Shareholders, the Management Information Circular, and the 2010 Annual Report. The financial data presented covers the fiscal year ended December 31, 2010. The filing announces the annual meeting scheduled for April 27, 2011, in Toronto, Ontario, to elect directors, appoint auditors, and hold an advisory vote on executive compensation.
Key Financial Metrics (Fiscal Year 2010)
| Metric | 2010 Value (CAD) | 2009 Value (CAD) |
|---|---|---|
| Revenues | $8,297 million | $7,367 million |
| Operating Income | $3,024 million | $2,406 million |
| Net Income | $2,104 million | $1,854 million |
| Diluted Earnings Per Share | $4.48 | $3.92 |
| Operating Ratio | 63.6% | 67.3% |
| Free Cash Flow | $1,122 million | $790 million |
| Total Assets | $25,206 million | $25,176 million |
| Total Long-Term Debt | $6,071 million | $6,461 million |
Material Changes Versus Prior Period
- Revenue Growth: Revenues increased 13% year-over-year, driven by higher freight volumes due to economic recovery, increased fuel surcharges, and freight rate increases. This was partially offset by the negative translation impact of a stronger Canadian dollar.
- Profitability: Operating income rose 26% to $3.024 billion. The operating ratio improved by 3.7 percentage points to 63.6%, reflecting strong volume growth absorbed at low incremental costs.
- Unusual Items:
- 2010: Included a $152 million gain on the sale of the Oakville subdivision.
- 2009: Included gains on the sale of the Weston and Lower Newmarket subdivisions ($226 million total) and $49 million in acquisition-related costs for the Elgin, Joliet and Eastern Railway (EJ&E).
- Debt Reduction: Total long-term debt decreased by approximately 5% to $6.071 billion, primarily due to repayments and the impact of the stronger Canadian dollar on US dollar-denominated debt.
Guidance, Outlook, and Management Commentary
- Leadership Transition: The filing highlights the smooth transition of leadership with Claude Mongeau serving as President and CEO since January 1, 2010. The Board expressed confidence in the new leadership team's strategic direction.
- Strategic Focus: Management emphasized "Operational and Service Excellence," focusing on end-to-end supply chain performance, customer engagement, and maintaining low incremental costs despite volume growth.
- Capital Allocation:
- Dividends: The Board approved a 20% increase in the quarterly dividend to $0.3250 per share (from $0.2700).
- Share Repurchases: A new share repurchase program was approved for up to 16.5 million shares for the year 2011.
- Capital Expenditures: CN plans to invest approximately $1.7 billion in 2011, with $1.0 billion targeted for track infrastructure.
- Risks and Contingencies:
- Environmental: CN has identified approximately 295 sites with potential environmental liabilities. The provision for specific environmental sites was $150 million as of December 31, 2010.
- Legal: Provisions for personal injury and other claims totaled $346 million ($200 million in Canada, $146 million in the U.S.).
- Regulatory: Ongoing regulatory oversight regarding the EJ&E acquisition and potential changes in economic regulation in both Canada and the U.S.
Important Facts for Investor Verification
- Executive Compensation: Verify the "Say on Pay" advisory vote results at the April 27, 2011 meeting, as this was a new initiative for the company.
- Share Ownership Guidelines: Confirm that Named Executive Officers (NEOs) continue to meet stock ownership guidelines (e.g., CEO required to hold 5x salary), as this is a key retention and alignment metric.
- Pension Funding: Monitor the funded status of the CN Pension Plan. While the 2008 valuation showed an excess, the company made a voluntary contribution of $300 million in 2010 to strengthen the plan. Future contributions depend on actuarial valuations required annually starting in 2011.
- Foreign Exchange Sensitivity: Verify the impact of the Canadian/US dollar exchange rate on future earnings, as a significant portion of revenues and expenses are US dollar-denominated. A one-cent change in the exchange rate impacts net income by approximately $5 million to $10 million annually.
- Environmental Liabilities: Review updates on the $150 million environmental provision and any new site identifications, as ultimate costs can vary based on regulatory changes and remediation techniques.