CN reports Q3-2009 net income of C$461 million, or C$0.97 per diluted share,
compared with year-earlier net income of C$552 million, or C$1.16 per diluted
share
Third-quarter 2009 highlights
- Net income declined to C$461 million, or C$0.97 per diluted share, from
year-earlier net income of C$552 million, or C$1.16 per diluted share,
largely as a result of lower freight volumes stemming from depressed
North American and global economies.
- Revenues declined 18 per cent to C$1,845 million, carloads declined 15
per cent to 1,032 thousand, and revenue ton-miles declined 11 per cent.
- Operating expenses declined 18 per cent to C$1,156 million, reflecting
lower year-over-year fuel prices and cost-containment measures in
response to lower traffic.
- Operating income declined 18 per cent to C$689 million, while the
operating ratio was essentially flat at 62.7 per cent.
- Nine-month 2009 free cash flow increased to C$657 million from C$483
million generated during the comparable period of 2008. (1)
Net income for the third quarter of 2009 and third quarter of 2008 included deferred income tax recoveries of C$15 million, or C$0.03 per diluted share, and C$41 million, or C$0.09 per diluted share, respectively. The recoveries in both years resulted from the resolution of various income tax matters and adjustments related to tax filings of prior years. Excluding these items, adjusted third-quarter 2009 net income was C$446 million, or C$0.94 per diluted share, compared with year-earlier adjusted net income of C$511 million, or C$1.07 per diluted share, a reduction of 12 per cent in diluted earnings per share. (1)
The year-over-year increase in the U.S. dollar relative to the Canadian dollar affected the conversion of CN's U.S.-dollar-denominated revenues and expenses, increasing third-quarter 2009 net income by approximately C$15 million, or C$0.03 per diluted share.
E.
"The CN team continued to focus on cost containment and productivity improvements during Q3-2009. And the team delivered. We kept the operating ratio essentially flat at 62.7 per cent and made solid operational gains -- system train speeds improved again, rising 11 per cent year-over-year, while the average dwell time for freight cars in our classification yards across the railroad declined by nine per cent from a year earlier. Equally important, our accident rate improved by eight per cent over the same period of 2008.
"It appears that several of our markets may have hit bottom. Our productivity gains during 2009 position us well for the eventual recovery in traffic."
Third-quarter 2009 revenues, traffic volumes and expenses
The reduction in third-quarter 2009 revenues largely resulted from significantly lower freight volumes in almost all markets as a result of prevailing economic conditions in the North American and global economies; and the impact of a lower fuel surcharge due to year-over-year decreases in applicable fuel prices, as well as lower freight volumes. Partly offsetting these factors were the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues and freight rate increases.
All commodity groups saw revenue declines - metals and minerals (32 per cent), automotive (25 per cent), forest products (24 per cent), intermodal (20 per cent), petroleum and chemicals (11 per cent), coal (nine per cent), and grain and fertilizers (nine per cent).
Rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, decreased by nine per cent in the third quarter, largely due to the impact of a lower fuel surcharge and an increase in the average length of haul. These factors were partly offset by the positive translation impact of the weaker Canadian dollar and freight rate increases.
The 18 per cent decline in operating expenses was primarily due to lower fuel costs, reduced expenses for purchased services and material, and lower casualty and other expenses. These factors were partially offset by the negative translation impact of the weaker Canadian dollar on U.S.-dollar-denominated expenses.
--------------------
(1) Please see discussion and reconciliation of non-GAAP adjusted
performance measures in the attached supplementary schedule, Non-GAAP
Measures.
Forward-Looking Statements
This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risk, uncertainties and assumptions. Implicit in these statements, particularly in respect of long-term growth opportunities, is the Company's assumption that such growth opportunities are less affected by the current situation in the North American and global economies. The Company cautions that its assumptions may not materialize and that the current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. The Company cautions that its results could differ materially from those expressed or implied in such forward-looking statements. Important factors that could cause such differences include, but are not limited to, the effects of adverse general economic and business conditions, including the recession in the North American economy and the global economic contraction in 2009, industry competition, inflation, currency and interest rate fluctuations, changes in fuel prices, legislative and/or regulatory developments, compliance with environmental laws and regulations, actions by regulators, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, labor negotiations and disruptions, environmental claims, uncertainties of investigations, proceedings or other types of claims and litigation, risks and liabilities arising from derailments, and other risks detailed from time to time in reports filed by CN with securities regulators in
CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement.
CN - Canadian National Railway Company and its operating railway subsidiaries - spans
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF INCOME (U.S. GAAP)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions, except per share data)
Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
(Unaudited)
Revenues $ 1,845 $ 2,257 $ 5,485 $ 6,282
-------------------------------------------------------------------------
Operating expenses
Labor and fringe benefits 416 424 1,283 1,277
Purchased services and
material 227 268 771 836
Fuel 192 390 548 1,099
Depreciation and
amortization 191 177 593 528
Equipment rents 66 59 218 183
Casualty and other 64 95 319 285
-------------------------------------------------------------------------
Total operating expenses 1,156 1,413 3,732 4,208
-------------------------------------------------------------------------
Operating income 689 844 1,753 2,074
Interest expense (97) (92) (317) (265)
Other income (Note 3) 21 4 191 7
-------------------------------------------------------------------------
Income before income taxes 613 756 1,627 1,816
Income tax expense (Note 7) (152) (204) (355) (494)
-------------------------------------------------------------------------
Net income $ 461 $ 552 $ 1,272 $ 1,322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share
(Note 10)
Basic $ 0.98 $ 1.17 $ 2.71 $ 2.77
Diluted $ 0.97 $ 1.16 $ 2.69 $ 2.74
Weighted-average number
of shares
Basic 469.4 471.7 468.8 477.0
Diluted 473.8 477.1 473.1 482.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED BALANCE SHEET (U.S. GAAP)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions)
September December September
30 31 30
2009 2008 2008
-------------------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 233 $ 413 $ 288
Accounts receivable (Note 4) 849 913 657
Material and supplies 237 200 213
Deferred income taxes 70 98 69
Other 60 132 131
-------------------------------------------------------------------------
1,449 1,756 1,358
Properties 22,454 23,203 21,472
Intangible and other assets 1,849 1,761 2,134
-------------------------------------------------------------------------
Total assets $ 25,752 $ 26,720 $ 24,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and other $ 1,159 $ 1,386 $ 1,329
Current portion of long-term debt 89 506 449
-------------------------------------------------------------------------
1,248 1,892 1,778
Deferred income taxes 5,363 5,511 5,246
Other liabilities and deferred
credits 1,227 1,353 1,378
Long-term debt (Note 4) 6,511 7,405 6,264
Shareholders' equity:
Common shares 4,239 4,179 4,171
Accumulated other comprehensive
income (loss) (288) (155) 54
Retained earnings 7,452 6,535 6,073
-------------------------------------------------------------------------
11,403 10,559 10,298
-------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 25,752 $ 26,720 $ 24,964
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. GAAP)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions)
Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
(Unaudited)
Common shares(1)
Balance, beginning of
period $ 4,203 $ 4,208 $ 4,179 $ 4,283
Stock options
exercised and other 36 17 60 59
Share repurchase
programs (Note 4) - (54) - (171)
-------------------------------------------------------------------------
Balance, end of period $ 4,239 $ 4,171 $ 4,239 $ 4,171
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other
comprehensive income
(loss)
Balance, beginning of
period $ (207) $ (1) $ (155) $ (31)
Other comprehensive
income (loss):
Unrealized foreign
exchange gain (loss) on:
Translation of the net
investment in foreign
operations (552) 259 (884) 399
Translation of U.S.
dollar-denominated
long-term debt
designated as a hedge
of the net investment
in U.S. subsidiaries 541 (248) 863 (389)
Pension and other
postretirement benefit
plans (Note 6):
Amortization of prior
service cost included
in net periodic benefit
cost 1 6 2 18
Amortization of net
actuarial loss (gain)
included in net periodic
benefit cost (income) - - 1 (2)
-------------------------------------------------------------------------
Other comprehensive income
(loss) before income taxes (10) 17 (18) 26
Income tax recovery
(expense) (71) 38 (115) 59
-------------------------------------------------------------------------
Other comprehensive income
(loss) (81) 55 (133) 85
-------------------------------------------------------------------------
Balance, end of period $ (288) $ 54 $ (288) $ 54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings
Balance, beginning of
period $ 7,110 $ 5,902 $ 6,535 $ 5,925
Net income 461 552 1,272 1,322
Share repurchase
programs (Note 4) - (273) - (846)
Dividends (119) (108) (355) (328)
-------------------------------------------------------------------------
Balance, end of period $ 7,452 $ 6,073 $ 7,452 $ 6,073
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
(1) During the three and nine months ended September 30, 2009, the
Company issued 1.1 million and 1.9 million common shares,
respectively, as a result of stock options exercised. At September
30, 2009, the Company had 470.1 million common shares outstanding.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (U.S. GAAP)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(In millions)
Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
(Unaudited)
Operating activities
Net income $ 461 $ 552 $ 1,272 $ 1,322
Adjustments to reconcile
net income to net cash
provided from operating
activities:
Depreciation and
amortization 191 177 593 528
Deferred income taxes 96 73 146 187
Gain on disposal of
property (Note 3) - - (157) -
Other changes in:
Accounts receivable (31) 209 (2) (259)
Material and supplies 16 6 (33) (48)
Accounts payable and
other (51) (1) (192) (99)
Other current assets 45 (16) 86 35
Other (77) (43) (113) (135)
-------------------------------------------------------------------------
Cash provided from
operating activities 650 957 1,600 1,531
-------------------------------------------------------------------------
Investing activities
Property additions (342) (415) (838) (944)
Acquisitions, net of cash
acquired (Note 3) - - (373) -
Disposal of property
(Note 3) 7 - 157 -
Other, net 13 22 50 42
-------------------------------------------------------------------------
Cash used by investing
activities (322) (393) (1,004) (902)
-------------------------------------------------------------------------
Financing activities
Issuance of long-term debt 185 778 1,625 3,430
Reduction of long-term debt (611) (798) (2,070) (2,796)
Issuance of common shares
due to exercise of stock
options and related excess
tax benefits realized 34 14 49 48
Repurchase of common shares - (327) - (1,017)
Dividends paid (119) (108) (355) (328)
-------------------------------------------------------------------------
Cash used by financing
activities (511) (441) (751) (663)
-------------------------------------------------------------------------
Effect of foreign exchange
fluctuations on U.S.
dollar-denominated cash
and cash equivalents (15) 4 (25) 12
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (198) 127 (180) (22)
Cash and cash equivalents,
beginning of period 431 161 413 310
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 233 $ 288 $ 233 $ 288
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow
information
Net cash receipts from
customers and other $ 1,802 $ 2,391 $ 5,540 $ 6,025
Net cash payments for:
Employee services,
suppliers and other
expenses (925) (1,195) (3,257) (3,749)
Interest (107) (82) (306) (272)
Workforce reductions (5) (5) (13) (17)
Personal injury and
other claims (21) (18) (86) (62)
Pensions (57) (24) (85) (77)
Income taxes (37) (110) (193) (317)
-------------------------------------------------------------------------
Cash provided from
operating activities $ 650 $ 957 $ 1,600 $ 1,531
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 1 - Basis of presentation
In management's opinion, the accompanying unaudited Interim Consolidated Financial Statements and Notes thereto, expressed in Canadian dollars, and prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial statements, contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Canadian National Railway Company's (the Company) financial position as at
These unaudited Interim Consolidated Financial Statements and Notes thereto have been prepared using accounting policies consistent with those used in preparing the Company's 2008 Annual Consolidated Financial Statements, except as disclosed in Note 2 - Accounting change. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited Interim Consolidated Financial Statements and Notes thereto should be read in conjunction with the Company's Interim Management's Discussion and Analysis (MD&A) and the 2008 Annual Consolidated Financial Statements and Notes thereto.
These unaudited Interim Consolidated Financial Statements and Notes thereto were approved by the Company's Board of Directors and issued on
Note 2 - Accounting change
On
Note 3 - Acquisition and disposal of property
Acquisition of Elgin, Joliet and Eastern Railway Company
On
The Company and EJ&E had entered into the acquisition agreement on
The Company has accounted for the acquisition using the purchase method of accounting pursuant to the new requirements of FASB ASC 805 - Business combinations, which the Company adopted on
The following table summarizes the consideration paid for EJ&E and the estimated fair value of the assets acquired and liabilities assumed that were recognized at the acquisition date. The Company has not finalized its valuation of such assets and liabilities. As such, the fair value is subject to change, although no material change is anticipated.
At January 31, 2009
-------------------------------------------------------------------------
(In U.S. millions)
Consideration
Cash $ 300
-------------------------------------------------------------------------
Fair value of total consideration transferred $ 300
-------------------------------------------------------------------------
Recognized amounts of identifiable assets acquired
and liabilities assumed
Current assets $ 6
Other long-term assets 4
Property, plant and equipment 304
Current liabilities (4)
Other long-term liabilities (10)
-------------------------------------------------------------------------
Total identifiable net assets $ 300
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The amount of revenues and net income of EJ&E included in the Company's Consolidated Statement of Income from the acquisition date to
Disposal of Weston subdivision
In
Note 4 - Financing activities
Shelf prospectus and registration statement
In
Revolving credit facility
As at
Accounts receivable securitization
The Company has a five-year agreement, expiring in
Pursuant to the agreement, the Company sells an interest in its receivables and receives proceeds net of the required reserve as stipulated in the agreement. The required reserve represents an amount set aside to allow for possible credit losses and is recognized by the Company as retained interest and recorded in Other current assets in its Consolidated Balance Sheet. The eligible freight receivables as defined in the agreement may not include delinquent or defaulted receivables, or receivables that do not meet certain obligor-specific criteria, including concentrations in excess of prescribed limits with any one customer.
During 2009, proceeds from collections reinvested in the securitization program were approximately
As at
Share repurchase program
On
Note 5 - Stock plans
The Company has various stock-based incentive plans for eligible employees. A description of the plans is provided in Note 11 - Stock plans, to the Company's 2008 Annual Consolidated Financial Statements. For the three and nine months ended
Cash settled awards
Following approval by the Board of Directors in
The following table provides the 2009 activity for all cash settled awards:
-------------------------------------------------------------------------
Voluntary Incentive
RSUs Deferral Plan (VIDP)
---------------------- ------------------------
In millions Nonvested Vested Nonvested Vested
-------------------------------------------------------------------------
Outstanding at
December 31, 2008 1.3 0.9(1) 0.1 1.8
Granted 0.9 - - 0.1(2)
Transferred into plan - - - 0.1
Payout - (0.9) - (0.2)
-------------------------------------------------------------------------
Outstanding at
September 30, 2009 2.2 - 0.1 1.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes 0.1 million of 2004 time-vested RSUs.
(2) Includes the Company's match and dividends earned on original
deferred share units.
The following table provides valuation and expense information for all
cash settled awards:
-------------------------------------------------------------------------
In millions, unless
otherwise indicated RSUs (1) Vision(1) VIDP(2) Total
-------------------------------------------------------------------------
Year of 2003
grant 2009 2008 2007 2006 2004 2005 onwards
------ ------ ------ ------ ------ ------ -------
Stock-
based
compensa-
tion
expense
(recovery)
recognized
over
requisite
service
period
Nine
months
ended
September
30,
2009 $ 18 $ 4 $ 11 $ (2) N/A N/A $ 24 $ 55
Nine
months
ended
September
30,
2008 N/A $ 11 $ 1 $ 14 $ 3 $ 2 $ 8 $ 39
-------------------------------------------------------------------------
Liability
outstan-
ding
September
30,
2009 $ 18 $ 12 $ 20 $ - $ - N/A $ 98 $ 148
December
31,
2008 N/A $ 8 $ 9 $ 53 $ 3 $ - $ 88 $ 161
-------------------------------------------------------------------------
Fair
value
per
unit
September
30,
2009
($) $41.39 $32.88 $36.45 N/A N/A N/A $52.73 N/A
-------------------------------------------------------------------------
Fair
value
of
awards
vested
during
period
Nine
months
ended
September
30,
2009 $ - $ - $ - N/A N/A N/A $ 1 $ 1
Nine
months
ended
September
30,
2008 N/A $ - $ - $ - $ - $ - $ 2 $ 2
-------------------------------------------------------------------------
Nonvested
awards
at
September
30,
2009
Unrecog-
nized
compen-
sation
cost $ 13 $ 4 $ 1 N/A N/A N/A $ 2 $ 20
Remaining
recogni-
tion
period
(years) 2.25 1.25 0.25 N/A N/A N/A 3.25 N/A
-------------------------------------------------------------------------
Assump-
tions(3)
Stock
price
($) $52.73 $52.73 $52.73 N/A N/A N/A $52.73 N/A
Expected
stock
price
volati-
lity(4) 32% 36% 36% N/A N/A N/A N/A N/A
Expected
term
(years)
(5) 2.25 1.25 0.25 N/A N/A N/A N/A N/A
Risk-free
interest
rate(6) 1.42% 0.74% 0.22% N/A N/A N/A N/A N/A
Dividend
rate
($)(7) $ 1.01 $ 1.01 $ 1.01 N/A N/A N/A N/A N/A
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Compensation cost is based on the fair value of the awards at period-
end using the lattice-based valuation model that uses the assumptions
as presented herein.
(2) Compensation cost is based on intrinsic value.
(3) Assumptions used to determine fair value are at September 30, 2009.
(4) Based on the historical volatility of the Company's stock over a
period commensurate with the expected term of the award.
(5) Represents the remaining period of time that awards are expected to
be outstanding.
(6) Based on the implied yield available on zero-coupon government issues
with an equivalent term commensurate with the expected term of the
awards.
(7) Based on the annualized dividend rate.
Stock option awards
Following approval by the Board of Directors in
The following table provides the activity of stock option awards in 2009. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on
-------------------------------------------------------------------------
Options outstanding
-------------------------------------------------------------------------
Weighted- Weighted-
Number average average Aggregate
of exercise years to intrinsic
options price expiration value
-------------------------------------------------------------------------
In In
millions millions
-------------------------------------------------------------------------
Outstanding at December 31,
2008(1) 13.2 $ 29.05
Granted 1.2 $ 42.13
Exercised (1.9) $ 19.14
-------------------------------------------------------------------------
Outstanding at September 30,
2009(1) 12.5 $ 30.27 4.4 $ 281
-------------------------------------------------------------------------
Exercisable at September 30,
2009(1) 9.9 $ 26.53 3.4 $ 261
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Stock options with a U.S. dollar exercise price have been translated
to Canadian dollars using the foreign exchange rate in effect at the
balance sheet date.
The following table provides valuation and expense information for all
stock option awards:
-------------------------------------------------------------------------
In millions, unless otherwise indicated
-------------------------------------------------------------------------
Year of grant 2009 2008 2007 2006 2005 Total
------------------------------------------------------
Stock-based
compensation
expense
recognized
over requisite
service
period(1)
Nine months
ended
September 30,
2009 $ 8 $ 1 $ 1 $ 1 $ - $ 11
Nine months
ended
September 30,
2008 N/A $ 5 $ 2 $ 2 $ 2 $ 11
-------------------------------------------------------------------------
Fair value per
unit
At grant date ($) $12.60 $12.44 $13.36 $ 13.80 $ 9.19 N/A
-------------------------------------------------------------------------
Fair value of
awards vested
during period
Nine months ended
September 30,
2009 $ - $ 3 $ 3 $ 3 $ 3 $ 12
Nine months ended
September 30,
2008 N/A $ - $ 3 $ 3 $ 3 $ 9
-------------------------------------------------------------------------
Nonvested awards
at September 30,
2009
Unrecognized
compensation
cost $ 7 $ 3 $ 2 $ 1 $ - $ 13
Remaining
recognition
period (years) 3.3 2.3 1.3 0.3 - N/A
-------------------------------------------------------------------------
Assumptions
Grant price ($) $42.13 $48.51 $52.79 $ 51.51 $36.33 N/A
Expected stock
price
volatility(2) 39% 27% 24% 25% 25% N/A
Expected term
(years)(3) 5.3 5.3 5.2 5.2 5.2 N/A
Risk-free interest
rate(4) 1.97% 3.58% 4.12% 4.04% 3.50% N/A
Dividend rate
($)(5) $ 1.01 $ 0.92 $ 0.84 $ 0.65 $ 0.50 N/A
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Compensation cost is based on the grant date fair value using the
Black-Scholes option-pricing model that uses the assumptions at the
grant date.
(2) Based on the average of the historical volatility of the Company's
stock over a period commensurate with the expected term of the award
and the implied volatility from traded options on the Company's
stock.
(3) Represents the period of time that awards are expected to be
outstanding. The Company uses historical data to estimate option
exercise and employee termination, and groups of employees that have
similar historical exercise behavior are considered separately.
(4) Based on the implied yield available on zero-coupon government issues
with an equivalent term commensurate with the expected term of the
awards.
(5) Based on the annualized dividend rate.
Note 6 - Pensions and other postretirement benefits
For the three and nine months ended
(a) Components of net periodic benefit income for pensions
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
In millions 2009 2008 2009 2008
-------------------------------------------------------------------------
Service cost $ 21 $ 34 $ 65 $ 104
Interest cost 222 200 665 600
Expected return on plan
assets (252) (251) (756) (753)
Amortization of prior
service cost - 5 - 15
Recognized net actuarial
loss 1 - 4 -
-------------------------------------------------------------------------
Net periodic benefit
(income) $ (8) $ (12) $ (22) $ (34)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Components of net periodic benefit cost for other postretirement
benefits
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
In millions 2009 2008 2009 2008
-------------------------------------------------------------------------
Service cost $ - $ 1 $ 2 $ 3
Interest cost 4 4 12 12
Curtailment gain - (4) (3) (7)
Amortization of prior
service cost 1 1 2 3
Recognized net actuarial
gain (1) - (3) (2)
-------------------------------------------------------------------------
Net periodic benefit
cost $ 4 $ 2 $ 10 $ 9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In 2009, the Company expects to make total contributions of approximately
Note 7 - Income taxes
In 2009, the Company recorded a deferred income tax recovery of
In 2008, the Company recorded a deferred income tax recovery of
Note 8 - Major commitments and contingencies
A. Commitments
As at
B. Contingencies
The Company becomes involved, from time to time, in various legal actions, including actions brought on behalf of various purported classes of claimants and claims relating to personal injuries, occupational disease, and property damage, arising out of harm to individuals or property allegedly caused by, but not limited to, derailments or other accidents.
Employee injuries are governed by the workers' compensation legislation in each province whereby employees may be awarded either a lump sum or future stream of payments depending on the nature and severity of the injury. Accordingly, the Company accounts for costs related to employee work-related injuries based on actuarially developed estimates of the ultimate cost associated with such injuries, including compensation, health care and third-party administration costs. For all other legal actions, the Company maintains, and regularly updates on a case-by-case basis, provisions for such items when the expected loss is both probable and can be reasonably estimated based on currently available information.
Employee work-related injuries, including occupational disease claims, are compensated according to the provisions of the Federal Employers' Liability Act (FELA), which requires either the finding of fault through the U.S. jury system or individual settlements, and represent a major liability for the railroad industry. With limited exceptions where claims are evaluated on a case-by-case basis, the Company follows an actuarial-based approach and accrues the expected cost for personal injury and property damage claims and asserted and unasserted occupational disease claims, based on actuarial estimates of their ultimate cost. A comprehensive actuarial study is conducted on an annual basis, in the fourth quarter, by an independent actuarial firm for occupational disease claims and non-occupational disease claims. On an ongoing basis, management reviews and compares the assumptions inherent in the latest actuarial study with the current claim experience and, if required, adjustments to the liability are recorded. In the third quarter of 2009, the Company undertook a review of certain assumptions relating to occupational disease claims. As a result, the Company recorded a net reduction of
As at
Although the Company considers such provisions to be adequate for all its outstanding and pending claims, the final outcome with respect to actions outstanding or pending at
C. Environmental matters
The Company's operations are subject to numerous federal, provincial, state, municipal and local environmental laws and regulations in
Known existing environmental concerns
The Company has identified approximately 310 sites at which it is or may be liable for remediation costs, in some cases along with other potentially responsible parties, associated with alleged contamination and is subject to environmental clean-up and enforcement actions, including those imposed by the
The ultimate cost of addressing these known contaminated sites cannot be definitely established given that the estimated environmental liability for any given site may vary depending on the nature and extent of the contamination, the available clean-up techniques, the Company's share of the costs and evolving regulatory standards governing environmental liability. As a result, a liability is initially recorded when environmental assessments occur and/or remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used and the extent of the corrective action required, can be reasonably estimated. Adjustments to initial estimates are recorded as additional information becomes available.
The Company's provision for specific environmental sites is undiscounted, recorded net of insurance recoveries, and includes costs for remediation and restoration of sites, as well as significant monitoring costs. Environmental accruals, which are classified as Casualty and other in the Consolidated Statement of Income, include amounts for newly identified sites or contaminants as well as adjustments to initial estimates.
As at
Unknown existing environmental concerns
While the Company believes that it has identified the costs likely to be incurred for environmental matters in the next several years based on known information, newly discovered facts, changes in law, the possibility of spills and releases of hazardous materials into the environment and the Company's ongoing efforts to identify potential environment liabilities that may be associated with its properties may lead to future environmental investigations, which may result in the identification of additional environmental liabilities and related costs. The magnitude of such additional liabilities and the costs of complying with future environmental laws and containing or remediating contamination cannot be reasonably estimated due to many factors, including:
(i) the lack of specific technical information available with respect
to many sites;
(ii) the absence of any government authority, third-party orders, or
claims with respect to particular sites;
(iii) the potential for new or changed laws and regulations and for
development of new remediation technologies and uncertainty
regarding the timing of the work with respect to particular sites;
(iv) the ability to recover costs from any third parties with respect to
particular sites; and
therefore, the likelihood of any such costs being incurred or whether such costs would be material to the Company cannot be determined at this time. There can thus be no assurance that liabilities or costs related to environmental matters will not be incurred in the future, or will not have a material adverse effect on the Company's financial position or results of operations in a particular quarter or fiscal year, or that the Company's liquidity will not be adversely impacted by such liabilities or costs, although management believes, based on current information, that the costs to address environmental matters will not have a material adverse effect on the Company's financial condition or liquidity. Costs related to any unknown existing or future contamination will be accrued in the period in which they become probable and reasonably estimable.
D. Guarantees and indemnifications
In the normal course of business, the Company, including certain of its subsidiaries, enters into agreements that may involve providing certain guarantees or indemnifications to third parties and others, which may extend beyond the term of the agreement. These include, but are not limited to, residual value guarantees on operating leases, standby letters of credit and surety and other bonds, and indemnifications that are customary for the type of transaction or for the railway business.
The Company is required to recognize a liability for the fair value of the obligation undertaken in issuing certain guarantees on the date the guarantee is issued or modified. In addition, where the Company expects to make a payment in respect of a guarantee, a liability will be recognized to the extent that one has not yet been recognized.
(i) Guarantee of residual values of operating leases
The Company has guaranteed a portion of the residual values of certain of its assets under operating leases with expiry dates between 2009 and 2020, for the benefit of the lessor. If the fair value of the assets, at the end of their respective lease term, is less than the fair value, as estimated at the inception of the lease, then the Company must, under certain conditions, compensate the lessor for the shortfall. At
(ii) Other guarantees
The Company, including certain of its subsidiaries, has granted irrevocable standby letters of credit and surety and other bonds, issued by highly rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at
As at
(iii) General indemnifications
In the normal course of business, the Company has provided indemnifications, customary for the type of transaction or for the railway business, in various agreements with third parties, including indemnification provisions where the Company would be required to indemnify third parties and others. Indemnifications are found in various types of contracts with third parties which include, but are not limited to:
(a) contracts granting the Company the right to use or enter upon
property owned by third parties such as leases, easements, trackage
rights and sidetrack agreements;
(b) contracts granting rights to others to use the Company's property,
such as leases, licenses and easements;
(c) contracts for the sale of assets and securitization of accounts
receivable;
(d) contracts for the acquisition of services;
(e) financing agreements;
(f) trust indentures, fiscal agency agreements, underwriting agreements
or similar agreements relating to debt or equity securities of the
Company and engagement agreements with financial advisors;
(g) transfer agent and registrar agreements in respect of the Company's
securities;
(h) trust and other agreements relating to pension plans and other plans,
including those establishing trust funds to secure payment to certain
officers and senior employees of special retirement compensation
arrangements;
(i) pension transfer agreements;
(j) master agreements with financial institutions governing derivative
transactions; and
(k) settlement agreements with insurance companies or other third parties
whereby such insurer or third party has been indemnified for any
present or future claims relating to insurance policies, incidents or
events covered by the settlement agreements.
To the extent of any actual claims under these agreements, the Company maintains provisions for such items, which it considers to be adequate. Due to the nature of the indemnification clauses, the maximum exposure for future payments may be material. However, such exposure cannot be determined with certainty.
During the period, the Company has entered into various indemnification contracts with third parties for which the maximum exposure for future payments cannot be determined with certainty. As a result, the Company was unable to determine the fair value of these guarantees and accordingly, no liability was recorded. There are no recourse provisions to recover any amounts from third parties.
Note 9 - Fair value of financial instruments
Generally accepted accounting principles define the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which the carrying amounts are included in the Consolidated Balance Sheet under the following captions:
(i) Cash and cash equivalents, Accounts receivable, Other current assets,
Accounts payable and other:
The carrying amounts approximate fair value because of the short maturity of these instruments.
(ii) Other assets:
Investments: The Company has various equity investments for which the carrying value approximates the fair value, with the exception of certain cost investments for which the fair value was estimated based on the Company's proportionate share of the underlying net assets.
(iii) Long-term debt:
The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar debt instruments, as well as discounted cash flows using current interest rates for debt with similar terms, company rating, and remaining maturity.
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as at
In millions September 30, 2009 December 31, 2008
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Carrying Fair Carrying Fair
amount value amount value
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Financial assets
Investments $ 22 $ 112 $ 24 $ 127
Financial liabilities
Long-term debt
(including current
portion) $ 6,600 $ 7,519 $ 7,911 $ 8,301
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Note 10 - Earnings per share
The following table provides a reconciliation between basic and diluted earnings per share:
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Three months ended Nine months ended
September 30 September 30
In millions, except per ----------------------- ----------------------
share data 2009 2008 2009 2008
-------------------------------------------------------------------------
Net income $ 461 $ 552 $ 1,272 $ 1,322
Weighted-average shares
outstanding 469.4 471.7 468.8 477.0
Effect of stock options 4.4 5.4 4.3 5.6
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Weighted-average diluted
shares outstanding 473.8 477.1 473.1 482.6
Basic earnings per share $ 0.98 $ 1.17 $ 2.71 $ 2.77
Diluted earnings per
share $ 0.97 $ 1.16 $ 2.69 $ 2.74
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The weighted-average number of stock options that were not included in the calculation of diluted earnings per share, as their inclusion would have had an anti-dilutive impact, was 0.1 million and 0.5 million for the three and nine months ended
Note 11 - Comparative figures
Certain figures, previously reported in 2008, have been reclassified to conform with the basis of presentation adopted in 2009.
CANADIAN NATIONAL RAILWAY COMPANY
SELECTED RAILROAD STATISTICS(1) (U.S. GAAP)
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Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
(Unaudited)
Statistical operating data
Rail freight revenues
($ millions) 1,656 2,028 4,953 5,664
Gross ton miles (GTM)
(millions) 77,817 86,369 225,930 257,983
Revenue ton miles (RTM)
(millions) 40,487 45,346 118,043 135,569
Carloads (thousands) 1,032 1,217 2,914 3,537
Route miles (includes
Canada and the U.S.) 21,104 20,421 21,104 20,421
Employees (end of period) 21,579 22,569 21,579 22,569
Employees (average for the
period) 21,610 22,730 21,899 22,773
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Productivity
Operating ratio (%) 62.7 62.6 68.0 67.0
Rail freight revenue per
RTM (cents) 4.09 4.47 4.20 4.18
Rail freight revenue per
carload ($) 1,605 1,666 1,700 1,601
Operating expenses per
GTM (cents) 1.49 1.64 1.65 1.63
Labor and fringe benefits
expense per GTM (cents) 0.53 0.49 0.57 0.49
GTMs per average number of
employees (thousands) 3,601 3,800 10,317 11,328
Diesel fuel consumed
(U.S. gallons in millions) 79 92 244 287
Average fuel price
($/U.S. gallon) 2.19 3.84 2.05 3.55
GTMs per U.S. gallon of
fuel consumed 985 939 926 899
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Safety indicators
Injury frequency rate per
200,000 person hours(2) 2.10 2.13 1.68 1.80
Accident rate per million
train miles(2) 1.98 2.16 1.94 2.50
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Financial ratio
Debt to total capitalization
ratio (% at end of period) 36.7 39.5 36.7 39.5
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(1) Includes data relating to companies acquired as of the date of
acquisition.
(2) Based on Federal Railroad Administration (FRA) reporting criteria.
Certain statistical data and related productivity measures are based on
estimated data available at such time and are subject to change as more
complete information becomes available.
CANADIAN NATIONAL RAILWAY COMPANY
SUPPLEMENTARY INFORMATION (U.S. GAAP)
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Three months ended Nine months ended
September 30 September 30
-------------------------- ---------------------------
Variance Variance
Fav Fav
2009 2008 (Unfav) 2009 2008 (Unfav)
-------------------------------------------------------------------------
(Unaudited)
Revenues (millions
of dollars)
Petroleum and
chemicals 309 346 (11%) 958 987 (3%)
Metals and minerals 183 269 (32%) 539 713 (24%)
Forest products 291 383 (24%) 876 1,070 (18%)
Coal 128 140 (9%) 342 346 (1%)
Grain and
fertilizers 298 327 (9%) 985 1,001 (2%)
Intermodal 359 446 (20%) 996 1,190 (16%)
Automotive 88 117 (25%) 257 357 (28%)
----------------------------------- -----------------
Total rail freight
revenue 1,656 2,028 (18%) 4,953 5,664 (13%)
Other revenues 189 229 (17%) 532 618 (14%)
----------------------------------- -----------------
Total revenues 1,845 2,257 (18%) 5,485 6,282 (13%)
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Revenue ton miles
(millions)
Petroleum and
chemicals 7,470 8,272 (10%) 22,111 24,668 (10%)
Metals and
minerals 3,422 5,140 (33%) 9,487 13,971 (32%)
Forest products 7,288 8,715 (16%) 20,684 25,999 (20%)
Coal 4,343 4,159 4% 10,629 11,189 (5%)
Grain and
fertilizers 8,971 9,379 (4%) 29,578 31,915 (7%)
Intermodal 8,480 9,040 (6%) 24,064 25,795 (7%)
Automotive 513 641 (20%) 1,490 2,032 (27%)
----------------------------------- -----------------
40,487 45,346 (11%) 118,043 135,569 (13%)
Rail freight
revenue/RTM
(cents)
Total rail freight
revenue per RTM 4.09 4.47 (9%) 4.20 4.18 -
Commodity groups:
Petroleum and
chemicals 4.14 4.18 (1%) 4.33 4.00 8%
Metals and minerals 5.35 5.23 2% 5.68 5.10 11%
Forest products 3.99 4.39 (9%) 4.24 4.12 3%
Coal 2.95 3.37 (12%) 3.22 3.09 4%
Grain and
fertilizers 3.32 3.49 (5%) 3.33 3.14 6%
Intermodal 4.23 4.93 (14%) 4.14 4.61 (10%)
Automotive 17.15 18.25 (6%) 17.25 17.57 (2%)
----------------------------------- -----------------
Carloads (thousands)
Petroleum and
chemicals 132 139 (5%) 385 424 (9%)
Metals and minerals 189 287 (34%) 497 797 (38%)
Forest products 103 132 (22%) 303 395 (23%)
Coal 116 103 13% 313 280 12%
Grain and
fertilizers 121 137 (12%) 383 436 (12%)
Intermodal 333 370 (10%) 925 1,045 (11%)
Automotive 38 49 (22%) 108 160 (33%)
----------------------------------- -----------------
1,032 1,217 (15%) 2,914 3,537 (18%)
Rail freight
revenue/carload
(dollars)
Total rail freight
revenue per
carload 1,605 1,666 (4%) 1,700 1,601 6%
Commodity groups:
Petroleum and
chemicals 2,341 2,489 (6%) 2,488 2,328 7%
Metals and minerals 968 937 3% 1,085 895 21%
Forest products 2,825 2,902 (3%) 2,891 2,709 7%
Coal 1,103 1,359 (19%) 1,093 1,236 (12%)
Grain and
fertilizers 2,463 2,387 3% 2,572 2,296 12%
Intermodal 1,078 1,205 (11%) 1,077 1,139 (5%)
Automotive 2,316 2,388 (3%) 2,380 2,231 7%
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Such statistical data and related productivity measures are based on
estimated data available at such time and are subject to change as more
complete information becomes available.
CANADIAN NATIONAL RAILWAY COMPANY
NON-GAAP MEASURES - unaudited
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Adjusted performance measures
For the three and nine months ended
For the three and nine months ended
Management believes that adjusted net income and adjusted earnings per share are useful measures of performance that can facilitate period-to-period comparisons, as they exclude items that do not necessarily arise as part of the normal day-to-day operations of the Company and could distort the analysis of trends in business performance. The exclusion of such items in adjusted net income and adjusted earnings per share does not, however, imply that such items are necessarily non-recurring. These adjusted measures do not have any standardized meaning prescribed by GAAP and may, therefore, not be comparable to similar measures presented by other companies. The reader is advised to read all information provided in the Company's 2009 unaudited Interim Consolidated Financial Statements and Notes thereto. The following tables provide a reconciliation of net income and earnings per share, as reported for the three and nine months ended
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Three months ended Nine months ended
September 30, 2009 September 30, 2009
-------------------------- ----------------------------
In millions,
except per Adjust- Adjus- Repor- Adjust- Adjus-
share data Reported ments ted ted ments ted
-------------------------------------------------------------------------
Revenues $1,845 $ - $1,845 $ 5,485 $ - $5,485
Operating
expenses 1,156 - 1,156 3,732 (49) 3,683
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Operating income 689 - 689 1,753 49 1,802
Interest expense (97) - (97) (317) - (317)
Other income 21 - 21 191 (157) 34
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Income before
income taxes 613 - 613 1,627 (108) 1,519
Income tax
expense (152) (15) (167) (355) (55) (410)
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Net income $ 461 $ (15) $ 446 $ 1,272 $ (163) $1,109
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Operating ratio 62.7% 62.7% 68.0% 67.1%
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Basic earnings
per share $ 0.98 $(0.03) $ 0.95 $ 2.71 $(0.35) $ 2.36
Diluted earnings
per share $ 0.97 $(0.03) $ 0.94 $ 2.69 $(0.35) $ 2.34
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Three months ended Nine months ended
September 30, 2008 September 30, 2008
-------------------------- ----------------------------
In millions,
except per Adjust- Adjus- Repor- Adjust- Adjus-
share data Reported ments ted ted ments ted
-------------------------------------------------------------------------
Revenues $2,257 $ - $2,257 $ 6,282 $ - $6,282
Operating
expenses 1,413 - 1,413 4,208 - 4,208
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Operating income 844 - 844 2,074 - 2,074
Interest expense (92) - (92) (265) - (265)
Other income 4 - 4 7 - 7
-------------------------------------------------------------------------
Income before
income taxes 756 - 756 1,816 - 1,816
Income tax
expense (204) (41) (245) (494) (75) (569)
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Net income $ 552 $ (41) $ 511 $ 1,322 $ (75) $1,247
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Operating ratio 62.6% 62.6% 67.0% 67.0%
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Basic earnings
per share $ 1.17 $(0.09) $ 1.08 $ 2.77 $(0.16) $ 2.61
Diluted earnings
per share $ 1.16 $(0.09) $ 1.07 $ 2.74 $(0.16) $ 2.58
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Free cash flow
The Company generated
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Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
In millions 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided from
operating activities $ 650 $ 957 $ 1,600 $ 1,531
Cash used by investing
activities (322) (393) (1,004) (902)
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Cash provided before
financing activities 328 564 596 629
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Adjustments:
Change in accounts
receivable
securitization - (202) 68 170
Dividends paid (119) (108) (355) (328)
Acquisition of EJ&E - - 373 -
Effect of foreign
exchange fluctuations
on U.S. dollar-
denominated cash and
cash equivalents (15) 4 (25) 12
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Free cash flow $ 194 $ 258 $ 657 $ 483
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For further information: Media: Mark Hallman, Director, Communications & Public Affairs, (905) 669-3384; Investment Community: Robert Noorigian, Vice-President, Investor Relations, (514) 399-0052
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