Both of Canada’s major railways announced results for the period ended December 31 and, given the muted predictions that had been made of slow growth, the results were positive. Both carriers benefitted significantly from U.S. tax reforms enacted in December of 2017 which reduced U.S. federal statutory corporate income tax rate reductions from 35 per cent to 21 per cent, which resulted in sizeable U.S. income tax recoveries during the fourth quarter.
For the fourth quarter CN’s revenues were up 2.1 per cent, and for the year revenues were up by 8.3 per cent to a record $13.04 billion. However, operating income fell during the fourth quarter to $1.3 billion from $1.4 billion, resulting in an operating ratio of 60.4 per cent. For the year, CN’s operating income rose to a record $5.6 billion, resulting in an operating ratio of 57.4 per cent. Net income before taxes for the year rose 3.3 per cent to a record $5.1 billion. Cash flow from operations increased by 6.0 per cent to $5.5 billion. “Free” cash flow, the amount remaining from operating cash flow after subtracting net investments made during the year and dividends paid to investors, increased to $1.6 billion.
During the year, CN repurchased 20.9 million shares at a cash cost of $2.0 billion. Shareholders’ equity rose from $14.84 billion as at the end of 2016 to $16.66 billion as at the end of 2017. As at the end of 2017, 55.7 per cent of CN’s total assets were financed by short-term and long-term debt, a sharp improvement over the year-end 2016 ratio of 59.9 per cent.
CP’s revenues rebounded 5.2 per cent to $6.55 billion, from a depressed level of $6.23 billion during 2016. However, at 57.4 per cent, operating expenses, as a percentage of revenues, represented a modern-day record for CP, demonstrating that the management has gained a firm control over expense levels. In fact, during the fourth quarter, CP delivered its best ever quarterly operating ratio of 56.1 per cent. Net income before taxes during the year rose from $2.15 to $2.5 billion. Cash flow from operations rose from $2.1 billion in 2016 to $2.18 billion in 2017. “Free” cash flow declined from $768 billion in 2016 to $577 million in 2017.
During the year, CP repurchased 1.9 million shares at a cash cost of just over $381 million. CP’s balance sheet as of December 31, 2017 shows that 68 per cent of its total assets were been financed by short and long term debt. By way of comparison, as at the end of 2016 this number stood at 75.9 per cent.
During the past six years, CN’s revenues grew at a compound annual rate of 6.5 per cent, while those of CP grew at 4.0 per cent. However, whereas CN’s operating income grew at a rate of 9.2 per cent, CP’s accelerated at a rate of 19.3 per cent. In addition, CP’s rate of cash flow generation grew by a robust 27.5 per cent annually during those years. The essential difference between the two carriers was that whereas CN had a lengthy record of tight cost control, CP’s numbers did not really start to improve until 2013. However, starting in 2013 CP slashed operating expenses with a vengeance and actually produced an operating ratio in 2017 that was identical to CN’s (57.4 per cent). CP’s 2017 operating ratio was a record in its history, and its ability to equal CN in this important metric was also a first in its history.
For CN, the bright spots in 2017 were metals and minerals (revenues up 25 per cent), coal (revenues up 23 per cent), and intermodal (revenues up 12 percent). Revenue tonne miles increased by 11 per cent during the year, while freight revenue per revenue tonne mile declined slightly by 2 per cent in 2017. Total carloads increased by 10 per cent during the year, but freight revenues per carload during the year were down 2 per cent. For 2018, CN sees continued volume growth, and mid-single digit growth in earnings. Significantly, CN anticipates capital expenditures of $3.2 billion in 2018 aimed at increasing capacity, efficiency and safety.
During the year, CP recorded a 38 per cent gain in revenue tonne miles related to transportation of metals, minerals and consumer products, but recorded a 21 per cent loss in automotive. Its biggest categories, grain and coal remained essentially flat. Energy, chemicals and plastics showed a 12 per cent gain for the year. Total carloads were up 4 per cent over the year, with strong growth in metals, minerals and consumer products (31 per cent) and potash (18 per cent). For 2018, CP expects mid-single digit revenue growth.