CN to expand network capacity

Demand for CN services have increased sharply

Canadian National Railway is prepared to spend a record $3.2 billion on capital expenditures this year, a move aimed at expanding network capacity in the face of increasing shipper demand.

In a Jan. 23 conference call with investors, CN president Luc Jobin said the company faced challenging operating conditions in the last three months of 2017, including service disruptions in key regions of the CN network and extremely cold conditions in December that resulted in shorter train lengths and reduced network fluidity.

Demand for CN services also increased sharply, highlighting the need for significant investments in 2018.

“On top of record workload levels, specifically in key segments such as Western Canada and the U.S. Midwest, we encountered in the quarter a series of outages on our main line and very cold December weather across the entire network,” Jobin said.

“Those conditions, while largely out of our control, nevertheless resulted in disruptions and put our network resiliency to the test.”

To address short-term network capacity issues, CN is expanding its locomotive fleet through short-term leasing arrangements.

Beyond that, the company will take a number of steps to expand network capacity, including:

• the acquisition of 200 new locomotives over the next three years, including 60 to come on line in 2018

• an expansion of the railway’s workforce with hiring throughout 2018 and 400 new conductors to become qualified in the next two months

• investments in new sidings and double track capacity, particularly in Western Canada and the company’s busy Edmonton to Chicago corridor

• additional investments in intermodal terminals and equipment to accommodate anticipated growth in that sector

“This investment and added resources will help us regain speed and prepare us for continued growth, notably in our high growth corridors,” said Mike Cory, the company’s executive vice-president and chief operating officer.

Despite difficult fourth quarter operating conditions cited by the company, CN executives reported increased revenues for the three-month period ending Dec. 31 and for the 2017 calendar year.

Fourth-quarter revenues were up two percent to $3.285 billion.

Full-year revenues were up eight percent to $13.041 billion.

On the strength of those numbers, the company’s board approved a 10 percent increase in CN’s quarterly cash dividend to 45.5 cents Canadian per share.

“CN grew faster than the economy and delivered strong financial results in 2017, said Ghislain Houle, the company’s chief financial officer.

“This performance supports our long-running ability to reward shareholders with consistent dividend growth.”

Fourth-quarter volumes at CN showed a nine percent reduction in carloads of bulk grain and fertilizer, a 12 percent increase in metals and minerals and a 20 percent increase in intermodal, relative to the fourth quarter of 2016.

Fourth quarter frack sand revenue was up 50 percent and revenue from international container movements was up 22 percent.

Chief marketing officer J.J. Ruest said demand and pricing for crude-by-rail shipments also increased in December, suggesting the railway is prepared to re-enter that market once network capacity initiatives take effect.

“We de-emphasized crude by rail volume in the last quarter to save network capacity for regulated Canadian grain, and we brought our crude business down by 30 percent for the time being,” Ruest said.

“However, since December, the crude price spread for western Canadian select (crude) … shot up in the US$25 to $30 per barrel range, creating a very favourable forward volume and pricing environment for crude by rail.”

Like rival railway Canadian Pacific Railway, CN said the Canadian grain harvest was larger than expected. Total harvest volumes were estimated at more than 70 million tonnes in 2017, exceeding the three-year average.

Movements of export grain carry-overs will continue into the second quarter of 2018.

Jobin said CN will remain focused on improving operational efficiencies and providing quality service to customers in all sectors.

“In 2018, we are adding new train crews and increasing our capital program to a record C$3.2 billion as we invest in locomotives and build additional capacity for resiliency,” he said.

“As the economic backdrop remains favourable in North America, we expect to see continued volume growth in 2018.”

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