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, 2006
Release Date: January 23, 2007
Context: CN reported record annual revenues, operating ratio, and free cash flow for 2006. The company operates a transcontinental network spanning Canada and the mid-section of the United States.
Key Financial Metrics
| Metric | Q4 2006 | Q4 2005 | Full Year 2006 | Full Year 2005 |
|---|---|---|---|---|
| Revenues | C$1,942 million | C$1,886 million | C$7,716 million | C$7,240 million |
| Net Income (GAAP) | C$499 million | C$430 million | C$2,087 million | C$1,556 million |
| Adjusted Net Income | C$472 million | N/A | C$1,810 million | N/A |
| Diluted EPS (GAAP) | C$0.95 | C$0.78 | C$3.91 | C$2.77 |
| Adjusted Diluted EPS | C$0.90 | N/A | C$3.40 | N/A |
| Operating Ratio | 61.1% | 61.8% | 60.7% | 63.8% |
| Free Cash Flow | C$212 million | C$243 million | C$1,343 million | C$1,301 million |
| Operating Cash Flow | C$1,072 million | C$694 million | C$2,950 million | C$2,705 million |
| Long-term Debt | C$5,386 million (Year-end 2006) | |||
| Cash and Equivalents | C$179 million (Year-end 2006) |
Material Changes vs. Prior Period
- Revenue Growth: Full-year revenues increased 7% to a record C$7.716 billion, driven by strength in coal, grain, fertilizers, intermodal, and petroleum/chemicals. Q4 revenues rose 3%.
- Profitability: Full-year net income surged 34% to C$2.087 billion. Adjusted net income (excluding tax recoveries) increased 16%. Q4 net income rose 16%.
- Operating Efficiency: The annual operating ratio improved by 3.1 points to a record 60.7%. Q4 operating ratio improved by 0.7 points to 61.1%.
- Volume and Yield: Revenue ton-miles (RTM) increased 3% annually and 1% in Q4. Freight revenue per RTM (yield) increased 3% annually and 2% in Q4.
- Expense Drivers: Operating expenses rose 2% annually, primarily due to higher fuel costs (up 23% annually) and depreciation. This was partially offset by lower casualty expenses and favorable currency impacts on U.S. dollar-denominated costs.
- Currency Impact: A stronger Canadian dollar had an unfavorable translation impact of C$255 million on annual revenues and C$35 million on Q4 revenues. Conversely, it provided a favorable C$150 million impact on annual operating expenses.
Guidance, Outlook, and Risks
- Management Commentary: CEO E. Hunter Harrison stated 2006 was a strong year despite severe weather disruptions in Q4. The company is positioned for 2007 with adequate network capacity, locomotives, and freight cars to capture new traffic.
- Outlook: Management expects a moderate slowdown in the North American economy in the near term but anticipates positive economic conditions globally.
- Risks and Contingencies:
- Unusual Items: Results included a C$277 million deferred income tax recovery in 2006 (C$27 million in Q4) due to lower Canadian corporate tax rates and resolution of prior tax matters. Adjusted metrics exclude this item.
- Operational Risks: Severe weather, droughts, floods, and earthquakes could disrupt operations.
- Market Risks: Industry competition, fuel price volatility, currency fluctuations, and labor disruptions.
- Regulatory/Environmental: Compliance with environmental laws and potential claims or litigation.
Investor Verification Checklist
- Adjusted vs. GAAP: Verify the impact of the C$277 million deferred tax recovery on reported earnings versus adjusted earnings to assess core operational performance.
- Currency Sensitivity: Review the magnitude of the C$255 million revenue headwind from the strong Canadian dollar and its potential impact on future U.S. dollar-denominated revenue translation.
- Fuel Costs: Monitor the 23% increase in fuel expenses and the effectiveness of the fuel hedging program (active until Sept 30, 2006) in mitigating future price volatility.
- Capital Allocation: Note the C$1.483 billion spent on share repurchases in 2006 and the C$1.298 billion in property additions to evaluate future cash flow priorities.
- Accounting Changes: Confirm the impact of the adoption of SFAS No. 158 on pension liabilities and assets, which increased the pension asset by C$599 million on the balance sheet.