CNI

Business Context and Reporting Period

Company: Canadian National Railway Company (CN)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended December 31, 2009
Filing Date: February 5, 2010
Business Overview: CN operates a single business segment spanning Canada and mid-America, connecting the Atlantic, Pacific, and Gulf of Mexico coasts. The company transports a diversified portfolio of commodities including petroleum, chemicals, grain, coal, metals, forest products, intermodal, and automotive goods.

Key Financial Metrics (Year Ended Dec 31, 2009)

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 13% to $7,367 million, primarily due to significantly lower freight volumes across almost all markets resulting from the North American and global economic recession. A reduction in the fuel surcharge (approx. $725 million) also contributed to the decline.
• Expense Reduction: Operating expenses decreased 11% to $4,961 million. This was driven by a 45% drop in fuel costs ($634 million decrease) and reduced purchased services/materials, partially offset by the negative translation impact of the weaker Canadian dollar on US dollar-denominated expenses.
• Operating Ratio: The operating ratio increased 1.4 points to 67.3%, reflecting the disproportionate impact of volume declines on fixed costs and the translation effects.
• Unusual Items Impacting 2009 Results:
  • Gains on Disposal: Included a $157 million gain on the sale of the Weston subdivision and a $69 million gain on the Lower Newmarket subdivision.
  • Acquisition Costs: Incurred $49 million in costs related to the acquisition of the Elgin, Joliet and Eastern Railway Company (EJ&E).
  • Tax Recovery: Recorded a deferred income tax recovery of $157 million, largely due to lower provincial corporate income tax rates.
• Balance Sheet: Total debt decreased by $1,450 million due to repayments and foreign exchange translation gains. Total assets decreased by $1,544 million, largely due to foreign exchange translation losses on US dollar-denominated properties.

Guidance, Outlook, and Risks

• Outlook: Management believes several markets may have hit bottom and anticipates a gradual recovery in traffic. The company remains focused on top-line growth through pricing-to-value strategies and productivity initiatives.
• Capital Spending: For 2010, CN plans to invest approximately $1.5 billion in capital programs, with close to $1 billion targeted for track infrastructure to ensure safety and improve network fluidity.
• Dividends and Buybacks: The Board approved a 7% increase in the quarterly dividend to $0.27 per share and a new share repurchase program for up to 15.0 million shares in 2010.
• Key Risks:
  • Economic Conditions: Continued weakness in global and North American economies affecting freight volumes.
  • Labor Negotiations: Ongoing negotiations with Canadian and U.S. unions; a strike by locomotive engineers occurred in Q4 2009 with minimal impact, but future work stoppages remain a risk.
  • Regulatory: Potential changes in economic regulation in the U.S. and Canada, including antitrust exemptions and safety mandates (e.g., Positive Train Control).
  • Environmental: Liability for remediation of contaminated sites and compliance with evolving environmental laws.
  • Foreign Exchange: Fluctuations in the CAD/USD exchange rate significantly impact reported revenues and expenses.

Investor Verification Checklist

• Volume Recovery: Monitor quarterly revenue ton miles (RTM) and carload data to confirm the anticipated gradual recovery in traffic volumes.
• Fuel Surcharge Effectiveness: Verify the company's ability to pass through fuel cost increases via surcharges as fuel prices stabilize or rise.
• Debt Maturity Profile: Review the schedule of debt maturities and the company's ability to refinance at favorable rates given the credit market environment.
• Acquisition Integration: Assess the operational and financial integration of the EJ&E acquisition and the realization of expected efficiencies.
• Pension Funding: Monitor the funded status of pension plans and the impact of interest rate changes on future contribution requirements.
• Regulatory Developments: Track legislative progress regarding U.S. railroad antitrust exemptions and safety regulations (PTC implementation).