Both of Canada’s major railways announced results for the period ended December 31, and for the first time in years, the effects of a sputtering economy became visible.
During the quarter, CN’s revenues declined 1.3 per cent to $3.166 billion, compared to the fourth quarter of 2014. Operating expenses as a percentage of revenues declined steeply from 60.7 per cent to 57.2 per cent. Net income rose 11.5 per cent to $941 million. Cash flow from operations increased by 13.9 per cent to $1.293 billion. “Free” cash flow, the amount remaining from operating cash flow after subtracting net investments made during the quarter and dividends paid to investors, rose to $405 million from negative $14 million.
During the year, CN repurchased 23.3 million shares at a cash cost of $1.742 billion. Shareholders’ equity rose from $13.470 billion as at the end of 2014 to $14.95 billion as at the end of 2015. As at the end of 2015, 58.9 per cent of CN’s total assets were financed by short-term and long-term debt, a slight deterioration over the year-end 2014 ratio of 57.5 per cent.
CP’s revenues declined to $1.69 billion during the quarter, down 4.2 per cent compared to the fourth quarter of 2014. At 58.8 per cent during the fourth quarter of 2015, operating expenses, as a percentage of revenues, matched performance during the fourth quarter of 2014, a remarkable achievement. Operating income decreased to $677 million from $708 million during the fourth quarter of 2014, and net income declined significantly from $451 million during the fourth quarter of 2014 to $319 million during the fourth quarter of 2015. Reduced income levels were mostly the result of higher employee expenses, significant increases in foreign exchange losses related to the company’s long term debt, and higher interest expenses. As a result of a re-measurement of the company’s pension and post-retirement benefits plan as at the end of 2015, the value of CP’s pension assets was increased by $791 million. Cash flow from operations declined from $657 million during the fourth quarter of 2014 to $623 million during the quarter just ended.
During the year, CP repurchased more than 13.5 million shares at a cash cost of almost $2.75 billion, representing $202.79 per share. Corporate repurchases of common shares enhance the all-important of “earnings per outstanding share”, which is frequently a driver of market value per share. However, such repurchases deplete cash and shareholders’ equity, both of which are important indicator of a corporation’s financial strength. Since CP’s operating cash flow was insufficient to finance required debt retirements, dividend payments and share repurchases, the company issued just over $2 billion of new long term debt. While share repurchases coupled with excellent operating results pushed CP’s net income per outstanding share to record levels, it was also the primary driver behind CP’s deteriorating balance sheet, with more than 75 per cent of its total assets having been financed by short and long term debt. By way of comparison, as at the end of 2014 total debt represented 66.1 per cent of the company’s assets.
For CN, the bright spot were automotive and forest products, which produced the largest revenue gains during the quarter (13 and 12 per cent respectively), based largely on increases in rail freight revenues per RTM. Revenue tonne miles declined by 5 per cent during the quarter, while freight revenue per revenue tonne mile increased by 5 per cent. Carloads fell by 8 per cent during the quarter, but freight revenues per carload were up by eight per cent.
During the fourth quarter, CP recorded 36.8 billion revenue tonne miles, representing a drop of almost 7 per cent compared to the fourth quarter of 2014. However, train miles decreased by just over 9 per cent to 8.4 million. Average train weights, train lengths and train speed all rose, indicating that CP managed to make the best of declining traffic volumes. For CP, the bright spots were fertilizers, sulphur, forest products and Canadian grain, while U.S. grain, potash, crude oil, metals and minerals as well as domestic intermodal all declined. Not surprisingly, freight revenues per revenue-tonne mile tended to be higher for freight categories whose volumes had grown, and lower for those that had declined. Overall, revenue tonne miles declined by seven per cent, while freight revenue per revenue tonne mile rose by three per cent. Total carloads declined by six per cent, but freight revenues per carload were up by two per cent.
During the quarter and the year, CP continued to make efficiency improvements, as outlined above, and also managed to decrease average dwell time significantly, in addition to increasing its fuel efficiency and labour productivity. For the year, increased productivity, coupled with increases in revenues per carload while maintaining strict cost control, led to record operating results at CP.
Similarly, CN continued to make steady improvements in rail freight revenue per RTM and per carload, terminal dwell time, train velocity and other categories.