Canadian National Railways

July 22, 2013

University of Calgary

Business Management “Mind Your Business”

Executive Summary

This report assesses CN’s quality as an employer and as an investment prospect. Mind Your Business used both primary and secondary research using publically available sources, with no contact with CN, its employees, or financial analysts, to complete this analysis.

CN is a public company with 22,000 employees, and has the longest railway system in North America. Industry circles consider CN an increasingly profitable business.

The Canadian Transportation Safety Board ensures CN abides by all laws and regulations. CN continually improves safety and environmental impact, which leads to better profits in the long run, particularly now that pipelines are becoming politically toxic in the eyes of the public. Recent environmental catastrophes such as the BP oil spill and the recent train explosion in Quebec, means CN must be careful with the public’s recent sensitivity to these types of environmental incidents that affect communities and their members.

The company focuses highly on corporate social responsibility, with environment, education, health & safety, and community as a top concern. Rail emits less greenhouse gas emissions than heavy trucks, and CN also funds sustainability programs. The company uses state-of-the-art technology to ensure safety while improving operations, emphasizing on engineering, mechanical, and asset management technology. In the communities in which CN operates, the company engages community members to ensure they are heard and so that its initiatives are in line with their concerns.

Building employee relationships with a diverse workforce starts with good hiring, including scholarship and internship programs, and continues with care and development of their human assets through great benefits and learning opportunities.

From a marketing standpoint, CN offers integrated transportation services, through various methods, and its network, agreements, protocols, and alliances provide its customers access to most of North America.

CN’s financial indicators such as revenue, net income, stock price, cash flow, and earnings per share all look great. CN Carries a lot of debt, but minimizes the amount of interest they pay. Future prospects look good as well, with external factors such as fuel costs and truck driver shortages making rail a better option, particularly in the face of company’s wanting to reduce their carbon footprint.

Overall, Mind Your Business finds that CN is excellent as both an investment and as a great place to work, particularly for new grads.

Table of Contents

Introduction 4 Company Overview 4 Government Impact 5 Social Trend 6 Ethics and Social Responsibility 7 Technology 8 Marketing 9 Stakeholders 10 Economics 12 Recommendations & Conclusion 13 Bibliography & Appendices 14

INTRODUCTION

Through comprehensive analysis, the purpose and objective of this report is to provide a solid foundation of information and metrics to ultimately conclude whether or not Canadian National Railway (CN) is a good employer, and to give a recommendation as to whether or not CN is a worthwhile investment.

Mind Your Business conducted extensive research using both primary and secondary resources, publically available investment information, and extensive media to provide our client with the most relevant and up-to-date information as possible, thereby maximizing the probability of a wise investment.

COMPANY OVERVIEW

Canadian National Railway Company, incorporated on June 6, 1919, is the longest railway system in North America, controlling more than 50,000 kilometres of track in Canada and the United States. Now called Canadian National (CN), the holdings of this former Crown corporation have expanded since the 1920s to include marine operations, hotels, and telecommunication resource industries (Tucker, n.d.). Today, the CN is a publicly traded company with 22,000 employees and market capitalization of $32 billion in 2011. CN was government-owned, having been a Canadian Crown corporation from its founding, to its privatization in 1995 (Wikipedia, n.d.).

CN was formed through the amalgamation of five financially-troubled railways from 1917 through 1923: The Grand Trunk, Grand Trunk Pacific, Intercolonial, Canadian Northern and National Transcontinental. From the early 1920s on, CN greatly assisted Canada’s development as a country by promoting community service in remote regions, developing a network of radio stations across Canada, and hauling millions of tons of freight and thousands of troops during the war (Tupper, n.d.) (Tucker, n.d.). In 1981, CN developed CN-owned mineral rights in Western Canada and amalgamated all of its trucking subsidiaries into CNX/CN Trucking. In February 1998, it purchased U.S. rail company Illinois Central Corp for $2.4 billion, making CN the fifth-largest railway in North America, and in 2003 purchased B.C. Rail for $1 billion CAD.

In April 2012, CN announced a plan to construct an 800-kilometre railway, running north from Sept-Îles in Quebec; the railway would support mining and other resource extraction in the Labrador Trough, and in September, CN announced the trial of locomotives fuelled by natural gas. Two SD-40 diesel-electric locomotives fuelled with 90% natural gas and 10% diesel are in service between Edmonton and Fort McMurray, Alberta (Wikipedia, n.d.).

CN does not show any sign of slowing down. This company is expanding, shedding and reshaping, and keeping its product fresh and profitable. CN is a leader in the use of radio-control for switching locomotives in yard. The company has been renowned within North American rail industry circles as the most-improved railroad in terms of productivity and low operating costs, acknowledging that the company is becoming increasingly profitable. Because of the rising popularity of ethanol, shuttle trains, and mineral commodities, CN Rail Service is increasing in popularity.

GOVERNMENT IMPACT

CN is directly impacted through government regulation. Since being privatized in 1995, CN has been a major shipper and mover of freight and railway transportation. CN owns and finances their own transportation right-of-way that is unique to other industries in Canada (Rail Facts, 2011). Regulated in Canada through the Transportation Safety Board (Rail Transportation, 2013), CN operates the 3rd largest railway network in the world with their principal competitor, Canadian Pacific Railway, as a partner (Rail, 2013).

The government’s role in the railway industry is to regulate and ensure railway companies follow all applicable laws and regulations. To increase profitability, the government facilitates the improvement of safety, leading to better quarterly profits and increased shareholder happiness (Rail Facts, 2011). CN, in conjunction with the appropriate levels of government, should continue to increase their ability to carry energy, especially in the current environment where pipelines are politically toxic (VanderKlippe, 2013).

SOCIAL TRENDS

With CN being primarily a freight railway, demographic changes do not affect CN’s business in a significant way as they would a passenger railway, since consumers themselves don’t factor into the company’s revenue or operations.

However, one major social trend CN has to be aware of is the public’s increasing sensitivity to environmental incidents, particularly oil spills. The Deepwater Horizon oil spill of 2010 (infamously known as the BP oil spill) was the largest oil spill in U.S. history (Kemsley, 2013) and received a proportionate amount of public backlash. Worldwide protests at BP gas stations and a “Boycott BP” Facebook group of over 300,000 members (Wheaton, 2010) partially explains the public concern with building oil pipelines in Western Canada, which could lead to environmental contamination in British Columbia. The percentage of surveyed Canadians who support the construction of new pipelines to West Coast ports dropped from 53% to 45% in the last year (Jang, 2013), indicating that the public becoming increasingly concerned with the environment.

How this pertains to CN is that there is a lot more pressure now to avoid incidents like the 2005 train derailment that spilled over 800,000 litres of oil in Alberta (CBC, 2009). While there was obviously a lot of negative publicity at the time, the current social trend of heightened awareness and concern for the environment would exacerbate the backlash of any future incidents.

The recent train derailment that lead to several devastating explosions at Lac-Mégantic, Quebec, causing unthinkable death and destruction to the town (CBC, 2013), also adds pressure to CN to ensure they don’t allow anything catastrophic to occur. It can be reasonably postulated that, if CN were to cause another major incident, an indictment on the entire railway industry could ensue, with CN at the focal point.

ETHICS AND SOCIAL RESPONSIBILITY

CN has a very robust corporate social responsibility (CSR) mandate. Its CSR cornerstones are environment, education, health and safety, and community.

CN promotes that rail emits a sixth of the greenhouse gas emissions than heavy trucks (CN, 2013). CN also funds organizations that support their environmental sustainability through the CN Stronger Communities Fund. One example includes EcoConnexions, which plants trees throughout the country. Although rail emits less greenhouse gas emissions and consumes less fuel, a railway does have a drastic effect on local ecosystems (Higgins. n.d).

It is important for CN to protect the safety of their employees, assets, customers and rail communities. CN conducts routine safety audits to ensure that their operations and their processes consistently meet their aggressive safety targets (CN, 2013). Rail travel is much safer than other forms of transportation, but when there is a train accident it is on a much larger scale than a motor vehicle accident. If a train is carrying certain chemicals or substances, it can be an environmental disaster. If the accident happens in a residential area, there can be huge loss of life, such as in the previously-mentioned accident at Lac-Mégantic. CN has an obligation to ensure that community safety is a top priority.

TECHNOLOGY

Technology is an important means of assuring safety, one of CN’s core values. CN relies on a wide range of leading, state-of-the-art track technology to minimize risks and run a safe railroad. According to their website, the plan is to invest approximately $1.9 billion in capital programs in the coming year, with a significant percentage invested in tracks and infrastructures to maintain a safe and fluid railway network. CN also plans to invest much into technologies that improve their operations, with emphasis on engineering, mechanical, and asset management technology (CN, 2013).

One important area of engineering development includes an ultrasonic rail flaw detector using new 3-D imaging technology to catch internal rail defects that could potentially lead to broken rails. CN is also developing a vehicle track interaction unit, which is an initiative to reduce the risk of main track accidents (CN, 2013).

CN’s mechanical investments include fleet renewal with fuel-efficient locomotives that improve safety and reliability in addition to reduce fuel consumption and exhaust emissions, thereby reducing greenhouse gas emissions. Also, as an alternative to diesel, continued testing on the use of natural gas for improved emissions and fuel efficiency aims improve understanding of the basic processes of refuelling, storage, and management of liquefied natural gas. Increased utilization of laser and strobe video technology in Wayside Inspection Systems better captures wheel profiles for analysis on wheel wear, and aids in other inspections on the locomotive and train car wheels.

Since 1998, SAP has become CN's asset management solution for managing finances, materials, people, mobile, mechanics, engineering, and fixed assets. SAP is an enterprise application software provider, and CN continues to work in collaboration with SAP to fine-tune applications to address industry-specific requirements in many areas, including warehousing, workforce management, and precision engineering (CN, 2013).

CN’s investment in technology will not only improve the operational safety of its equipment, but also ensure the safety of the employees, which is a major factor for potential employees and investors alike.

MARKETING

CN has been through one of the most remarkable transformations in Canadian business history to become a transportation industry leader today. CN is a full-fledged North American railway, serving customers across North America, reaching three coasts and beyond, and creating value for shareholders everywhere. It offers integrated transportation services such as rail, intermodal, trucking, freight forwarding and warehousing and distribution (CN, 2013). Forbes reported that “CN's network, and its co-production agreements, routing protocols, marketing alliances and interline agreements, provide CN customers access to all three North American Free Trade Agreement (NAFTA) nations” (Forbes, 2013).

During an interview with Harry Butler from the Journal of Commerce, Dan Bresolin, Marketing International for CN, explained CN’s marketing plans and preparations for growth. Bresolin indicated that CN listens to their customers, not only learning present and future needs, but also learning about the needs of their customers’ customers. This allows CN to forecast for future needs and expansions. CN is always looking for growth and offering more choices to its customers, and is also always upgrading and updating its distribution centre. The company concentrates on the whole supply chain: the door-to-door service concentrating on fast ocean transit to the ports, fast throughput at terminals, fast and reliable trains, and a good last-mile delivery (TPC, 2013).

CN claims a substantial savings by moving merchandise by railroads; using intermodal over trucking alone, its customers saved an average of $1,040 on fuel per container when shipping from Toronto to Vancouver.

CN clients range from corporations to single individuals. Clients can ship bulk, industrial, or consumer products; they can even ship single items. What it means to Canadian customers is being able to access most of the North American population, as well as worldwide markets. Customers can ship items that are heavy, wide, perishable, and hazardous. They can ship in greater quantities faster, further, and cheaper in a more environmentally friendly way.

STAKEHOLDERS

Two primary stakeholders for CN are their employees and the communities in which it operates. Important employee matters include work-life balance, fair compensation, and benefits that satisfy the physiological and safety needs. Other major considerations include opportunities for growth and personal development. Community stakeholders’ primary concerns centre around the environmental and safety matters that accompany the use of rail within the areas they call home.

For its part, CN puts a lot of effort into stakeholder engagement by conducting regular dialogue through formal and informal channels within their communities. The intention of these consultative dialogues is to develop programs and follow up on initiatives that benefit both parties, as well as communicating its performance. CN does recognize that a healthy environment for young people in these communities is essential and it actively contributes to organizations, programs, and initiatives that promote health and safety through an established “stronger communities fund.” These two-way communications also allow for cross-cultural training, safety awareness, and conflict resolution between CN employees and community members.

Part of CN’s vision is to create a great place to work. Aside from building positive relationships with its multi-generational workforce, CN focuses greatly on hiring the right fit and properly bringing new hires on-board. As part of its employee career growth and development plans, scholarship programs are in place for post-secondary education students who are enrolled in programs, relevant to CN’s core business. This includes disciplines such as transportation, mechanical, engineering, logistics, information technology, and more. Likewise, internship opportunities are made available to offer students hands-on, real-world experience, allowing them to contribute to ongoing projects and operations to develop an in-depth understanding of how their field of study relates to CN’s core business (CN, 2013).

Benefits that promote employee retention like health, vision and dental plans, basic life and accidental death and dismemberment insurance, and long-term disability are made available for most employees from their first day of employment. Access to a network of 24-hour day care facilities and employee and family assistance programs are some of the other benefits that are in place for CN employees (CN, 2013).

ECONOMICS

CN has consistently raised their overall sales revenue and net income during the past three years, as seen in Appendix A of this report. CN must have very good cash flow, as they have been buying back their stocks for the past three years in fairly large quantities, as shown in Appendix B. Normally when companies start buying back their own stock, it is in an attempt to retake control or to protect itself from a hostile takeover. CN’s earnings per share (EPS) has gone up nearly a dollar a year in this timeframe. There is a question as to whether the EPS is increasing because the business is profitable and the stock is desirable, or because shareholders are selling them back to CN in the stock re-purchase. Globe and Mail typically recommends holding the stock, and this consistency and steady progress makes it a good investment. Volume and closing price on July 1, 2013, shown in Appendix C.

Several external factors can affect the transportation industry. CN’s new Intermodal model, which uses rail, truck and vessels is the fastest growing part of CN’s business. This new way to ship allows CN to have access to over 75% of the US and almost all of the Canadian Markets (CN, n.d). Intermodal is changing the transportation landscape. As the price of fuel goes up, and with a looming truck driver shortage causing added issues, rail transportation will become more and more popular. Companies are also placing more focus on reducing their carbon footprint and rail is an easy way to do that.

Technology is also a big factor for CN as it strives to upgrade its railways and makes sure its truck fleet is as energy efficient as possible. Although CN is billions of dollars in debt, it has several interest-free, low-interest loans. The highest interest rate on any of CN’s loans is 7.7%, which is indicative of lenders’ willingness loan CN money and a sign of their confidence in its future success. Also, many of the interest-free loans are long-term government loans, which is a sign that the governments want CN to succeed and prosper.

RECOMMENDATIONS & CONCLUSION

Mind Your Business recommends that our client invests in CN stock. The company is growing, as seen in its rising stock price, and we feel it will only continue to grow in the future. With oil prices going up and with environmental concerns being more prevalent, CN is a cheaper and more environmentally friendly alternative to truck transportation. With increased focus on upgrading technology, a solid corporate social responsibility mandate, and new Intermodal model providing an end-to-end solution for clients, it appears as though CN has done the legwork for continued growth.
It is also Mind your Business’ opinion that CN would be a great employer for a U of C grad. CN provides great opportunities for growth and development, has a fair compensation and benefits package, and working in a growth industry should provide some job security. This makes CN a great investment and employment choice.

BIBLIOGRAPHY & APENDICIES

CN. (2013). About CN . Retrieved July 3, 2013, from http://www.cn.ca/en/about-cn/who-we-are.

Atlas of Alberta railways, (n.d.), The Canadian national railways, Retrieved June 17, 2013, http://railways.library.ualberta.ca/Chapters-10-1/

CBC News. (2009, May 25). CN fined $1.4 million for 2005 lake wabamun derailment. Retrieved from http://www.cbc.ca/news/canada/edmonton/story/2009/05/25/edmonton-cn-fines-wabamun.html

CBC News. (2013, July 10). 50 feared dead in lac-mégantic train derailment. Retrieved from http://www.cbc.ca/news/canada/montreal/story/2013/07/10/lac-megantic-quebec-train-explosion-investigation.html

CN (2013) Delivering Responsibly. Retrieved on July 2, 2013 from http://www.cn.ca/en/delivering-responsibly/safety

CN (2013) Our Business.Retrieved on July 2, 2013 from: http://www.cn.ca/en/our-business/our-network/intermodal-terminals

CN Annual Report. (2012) 2012 Annual Report Retrieved on June 28, 2013 from http://www.cn.ca/-/media/Files/Investors/Investor-Annual-Report/2012_FinancialsE.pdf

CN (2013) Careers – retrieved on 13th June, 2013 - http://www.cn.ca/en/careers

CN Sustainability report (2010) – retrieved June 1, 2013 - http://www.cn.ca/F3217079-57F1-42E1-998A-F3A1920126EE/FinalDownload/DownloadId-E1F7B6C934398AF639219F767CB0E4D9/F3217079-57F1-42E1-998A-F3A1920126EE/-/media/Files/Delivering%20Responsibility/Safety/Delivering_Resp_EN.pdf

CN (2013) Delivering responsibly – retrieved on June 10, 2013 http://www.cn.ca/en/delivering-responsibly/safety/technology

CN (2013) Delivering people responsibly – retrieved on June 11, 2013 - http://www.cn.ca/en/delivering-responsibly/people

CN (2013) Driving value through engagement – retrieved on June 10, 2013 - http://www.cn.ca/en/delivering-responsibly/driving-value-through-engagement

Globe and Mail (2013, July 2) Investor Markets Retrieved on July 2, 2013 from http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=CNR-T

Higgins, Charlie. (n.d) Environmental Problems Caused by Railways. eHow. Retrieved June30 from http://www.ehow.com/about_5434771_environmental-problems-caused-railways.html

Jang, B. (2013, May 30). Fewer canadians back plans for new oil pipelines to west coast ports: poll . Retrieved from http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/fewer-canadians-back-plans-for-new-oil-pipelines-to-west-coast-ports-poll/article12245904/

Railway Association of Canada . (2011). Rail Facts . Retrieved July 3, 2013, from http://www.railcan.ca/education/facts.

Kemsley, J. (2013, June 3). After the deepwater horizon disaster. Retrieved from http://cen.acs.org/articles/91/i22/Deepwater-Horizon-Disaster.html

Rail Transportation. (2013) Government of Canada: Transport Canada. Retrieved July 3, 2013, from http://www.tc.gc.ca/eng/rail-menu.htm.

Rail. (2013) Government of Canada: Transportation Safety Board of Canada. Retrieved on July 3, 2013, from http://www.tsb.gc.ca/eng/rail/.

SAP – Enterprise software: (n.d.) Retrieved on June 12, 2013 from http://en.wikipedia.org/wiki/SAP_AG

Globe and Mail (n.d) Technology Powering Business – Retrieved on June 10, 2013 http://v1.theglobeandmail.com/partners/free/hp/powering_business/4.html

TUCKER A., (n.d.), The Canadian encyclopedia, Canadian National Railways, Retrieved: 2013, June, http://thecanadianencyclopedia.com/articles/canadian-national-railways

TUPPER A., (n.d.), Crown Corporation, Retrieved: June 17, 2013, http://thecanadianencyclopedia.com/articles/crown-corporation

Wheaton, S. (2010, June 2). Protesters gather at bp gas stations. Retrieved from http://www.nytimes.com/2010/06/03/us/03boycott.html?_r=0

Wikipedia (n.d.), Canadian National Railway, Retrieved: June 15, 2013, http://en.wikipedia.org/wiki/Canadian_National_Railway

VanderKillpe, N. (2013) With pipelines under attack, railways lead race to move oil. The Globe and Mail. Retrieved July 3, 2013, from http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/with-pipelines-under-attack-railways-lead-race-to-move-oil/article7264773/?page=all.

APPENDIX A

Ratio Calculations Chart

|Ratio |Last Year (2012) |2 Years Ago (2011) |3 Years Ago (2010) |Industry Standard (2012) |
|Debt to Equity (D:E) |29.8 % |32.1% |27.6% |43% |
|Earnings Per Share (EPS) |$6.15 |$5.45 |$4.51 |$4.34 |
|Net Profit Margin |2.70 |2.72 |2.53 |0.849 |
|Return on Equity (ROE) |2.43 |2.50 |2.37 |0.09 |

• Industry Standard is Canadian Pacific as it is CN’s prime competitor.

APPENDIX B

CN share buy-back chart

|Share Buy-Back |2012 |2011 |2010 |
|# of Shares |16.9 million |19.9 million |15 million |
|$ Spent on Share buy-back |$1.4B |$1.4B |$9.13 M |

APPENDIX C

Volume and Closing Price
|Closing Price |Volume Sold |
|$97.87 |389,200 |

• On July 1, 2013