CNI

Business Context and Reporting Period

Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third quarter and nine months ended September 30, 2002
Business Overview: CN operates a major rail network spanning Canada and mid-America. The reporting period includes the full consolidation of Wisconsin Central Transportation Corporation (WC), acquired in October 2001. Results are presented in Canadian dollars under U.S. GAAP.

Key Financial Metrics (U.S. GAAP)

Note: 2001 figures are adjusted to exclude one-time items such as tax recoveries, special charges, and asset sales to ensure comparability.

Material Changes vs. Prior Period

• Revenue Growth: Q3 revenues increased 13% year-over-year, driven by the consolidation of WC revenues and strong performance in merchandise businesses (automotive, petroleum, intermodal, forest products). This offset a 15% decline in grain and fertilizers due to drought conditions in Western Canada.
• Profitability: Adjusted net income rose 12% in Q3 and 14% for the nine-month period. Operating income increased 13% in Q3.
• Operating Expenses: Expenses rose primarily due to WC consolidation, higher labor and fringe benefit costs, and equipment rents. These were partially offset by lower fuel costs.
• Volume: Total carloadings increased 14% in Q3 to 1,043 thousand. Revenue ton miles (RTM) grew 10% in the quarter.
• Operating Ratio: The operating ratio widened slightly to 67.8% in Q3 (from 67.5% in Q3 2001) and 69.8% for the nine months (from 69.4%), reflecting higher costs relative to revenue growth.

Guidance, Outlook, and Risks

• Outlook: Management remains cautious about near-term business prospects due to tough conditions in grain and coal businesses. However, the company expects to deliver improved results in 2003, driven by productivity improvements and growth in service-sensitive merchandise units.
• Capital Allocation:
  • Share Repurchase: On October 22, 2002, the Board approved a program to repurchase up to 13 million common shares through October 2003.
  • Dividends: Quarterly dividend increased to $0.215 per share.
  • Convertible Preferred: Conversion rights for 5.25% convertible preferred securities were terminated in July 2002, resulting in the issuance of approximately 6 million common shares.
• Risks and Contingencies:
  • Weather: Severe drought in Western Canada continues to weigh on grain revenues.
  • Legal/Environmental: Aggregate reserves for legal matters were $258 million (including $152 million for work-related injuries). Environmental accruals totaled $101 million.
  • Labor: Negotiations are ongoing with U.S. bargaining units; while no work action is anticipated, resolution risks remain.
  • Competition: Intense competition from trucking and barge transport, particularly for coal and grain.

Investor Verification Checklist

• WC Integration: Verify the extent of synergies realized from the Wisconsin Central acquisition versus the pro forma assumptions.
• Grain Outlook: Assess the duration and severity of the Western Canadian drought and its impact on the grain franchise recovery.
• Debt Maturity: Review the refinancing status of the $1 billion revolving credit facility and commercial paper program maturing in March 2003.
• Expense Trends: Monitor labor and fringe benefit costs, which increased significantly due to WC consolidation and wage adjustments.
• Pro Forma Comparisons: Distinguish between reported results and pro forma results (which assume WC was acquired Jan 1, 2001) to understand organic growth.