CNI

Business Context and Reporting Period

Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third quarter and nine months ended September 30, 2013
Business Overview: CN operates a rail network spanning Canada and mid-America, transporting goods ranging from resources to consumer goods. The company reported record quarterly revenues driven by strong energy markets, market share gains, and North American economic growth.

Key Financial Metrics

Note: Total Debt figure derived from Balance Sheet (Current portion $1,488 + Long-term $6,010). Q3 Free Cash Flow calculated as $341 million based on supplementary data.

Material Changes vs. Prior Period

• Revenue Growth: Q3 revenues increased 8% to a quarterly record of $2,698 million. This was driven by a 4% increase in revenue ton-miles and a 3% increase in carloadings.
  • Commodity Highlights: Petroleum and chemicals (+17%), Intermodal (+13%), and Metals and minerals (+11%) saw significant revenue growth. Grain and fertilizers (-3%) and Coal (-1%) declined.
• Profitability: Operating income rose 10% to $1,084 million. The operating ratio improved by 0.8 points to 59.8%.
  • Expense Drivers: Operating expenses increased 7%, primarily due to the negative translation impact of the weaker Canadian dollar on U.S.-denominated expenses, higher labor costs, and increased fuel surcharges.
• Currency Impact: The weaker Canadian dollar provided a positive translation impact on U.S.-denominated revenues. On a constant currency basis, Q3 net income would have been lower by $14 million.
• One-Time Items: Q3 2013 included a $19 million expense from a one-time deferred income tax adjustment. Q3 2012 included a $281 million gain on the disposal of the Bala-Oakville line, which significantly boosted prior-year adjusted earnings.

Guidance, Outlook, and Risks

• Outlook: CN maintains its full-year 2013 financial outlook issued in January 2013.
  • Capital Investment: Plans to invest approximately $2 billion in capital programs for 2013 (revised up from $1.9 billion), with $1.1 billion targeted for track infrastructure.
  • Assumptions: Forecasts 2-3% carload growth and pricing improvements above inflation. Assumes Canadian-U.S. exchange rate of C$0.95-C$1.00 and crude oil prices of US$90-$100 per barrel.
• Subsequent Events:
  • Stock Split: Approved a two-for-one common stock split effective November 29, 2013.
  • Share Repurchase: Approved a new program to repurchase up to 15.0 million shares (pre-split) through October 2014.
• Risks and Contingencies:
  • Legal: Aggregate reserves for personal injury and other claims were $321 million. The company faces potential environmental liabilities at approximately 280 sites, with $124 million accrued.
  • Operational: Risks include severe weather, labor negotiations, and regulatory changes (e.g., Positive Train Control implementation).

Investor Verification Checklist

• Adjusted EPS: Verify the reconciliation of GAAP Net Income ($705M) to Adjusted Net Income ($724M), which excludes a $19M tax expense and prior-year asset disposal gains.
• Currency Sensitivity: Assess the impact of the weakening Canadian dollar on future earnings, as a significant portion of revenue is U.S.-denominated.
• Capital Expenditures: Confirm the execution of the $2 billion capital plan, specifically the $1.1 billion allocation for track infrastructure.
• Debt Structure: Review the $7.5 billion total debt load and the utilization of the $800 million revolving credit facility and commercial paper program.
• Stock Split Impact: Monitor the adjustment of share counts and per-share data following the two-for-one split in November 2013.