CN reports Q1-2009 net income of C$424 million, or C$0.90 per diluted share, compared with net income of C$311 million or C$0.64 per share in 2008
First-quarter 2009 highlights
- Net income was C$424 million, or C$0.90 per diluted share, including
three items that generated net positive earnings of C$122 million
(C$0.26 per diluted share).
- Revenues declined four per cent from year-earlier levels to
C$1,859 million as a tough economic environment caused carloadings to
fall by 16 per cent.
- Operating expenses declined two per cent to C$1,378 million, driven by
lower fuel prices and management's quick response to lower workload.
- Operating income declined eight per cent to C$481 million, while the
operating ratio increased 1.2 points to 74.1 per cent.
- Free cash flow increased to C$207 million from C$61 million generated
in the comparable quarter of 2008.(1)
CN's first-quarter 2009 net income of C$424 million, or C$0.90 per diluted
share, included:
- A gain of C$157 million, or C$135 million after-tax (C$0.29 per diluted
share), from the sale of a railway corridor to GO Transit in Toronto.
- Expense of C$46 million, or C$28 million after-tax (C$0.06 per diluted
share), related to CN's acquisition of the principal rail lines of the
Elgin, Joliet and Eastern Railway Company (EJ&E), which closed on
Jan. 31, 2009; recorded pursuant to the adoption of a new accounting
policy for business combinations that became effective Jan. 1, 2009.
- A deferred income tax recovery of C$15 million (C$0.03 per diluted
share) resulting from the enactment of lower provincial corporate
income tax rates in Canada.
Excluding these items, adjusted first-quarter 2009 net income was
The strengthening of the U.S. dollar affected the conversion of the Company’s U.S. dollar-denominated revenues and expenses, increasing first-quarter 2009 net income by approximately
Net income for first-quarter 2008, which was also adversely affected by severe weather conditions, was
“Amid these challenges, the weakening of the Canadian dollar vis a vis the U.S. dollar was a shock absorber, and we remained focused on generating increased shareholder value through the sale of our
“While economic conditions remain uncertain for the foreseeable future, CN is focused on growth opportunities that extend beyond the business cycle and on continuing to deliver value to our customers.
“At the same time we are investing in the future. I am particularly proud that we completed the acquisition of the EJ&E during the quarter. The route-around-
Quarterly revenues, traffic volumes and expenses
The four per cent decline in CN’s first-quarter 2009 revenues was mainly due to significantly lower volumes in almost all markets as a result of current economic conditions in the North American and global economies, as well as a lower fuel surcharge resulting from year-over-year decreases in applicable fuel prices and reduced volumes. These factors were partly offset by the positive translation impact of the weaker Canadian dollar on U.S. dollar-denominated revenues, freight rate increases, and a positive change in traffic mix.
Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, decreased 14 per cent from the same quarter of 2008.
Rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned on a movement of a ton of freight over one mile, increased by 12 per cent from the same quarter of 2008, mainly due to the positive translation impact of the weaker Canadian dollar and freight rate increases that were partly offset by the impact of a lower fuel surcharge.
First-quarter carloadings declined 16 per cent to 954 thousand from 1,132 thousand in the year-earlier period.
The two per cent decline in operating expenses was mainly due to lower fuel costs and labor and fringe benefits expense that were partly offset by the negative translation impact of the weaker Canadian dollar on U.S. dollar-denominated expenses, as well as by higher casualty and other expense mainly due to EJ&E acquisition-related costs.
(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 current deep recession in the North American economy and the possibility of a global economic contraction in 2009, industry competition, inflation, currency fluctuations, changes in fuel prices, legislative and/or regulatory developments, compliance with environmental laws and regulations, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, labor disruptions, environmental claims, investigations or proceedings, other types of claims and litigation, and other risks detailed from time to time in reports filed by CN with securities regulators in
CN – Canadian National Railway Company and its operating railway subsidiaries – spans
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF INCOME (U.S. GAAP)
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(In millions, except per share data)
Three months ended
March 31
--------------------
2009 2008
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(Unaudited)
Revenues $1,859 $1,927
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Operating expenses
Labor and fringe benefits 454 461
Purchased services and material 291 285
Fuel 182 310
Depreciation and amortization 203 175
Equipment rents 82 64
Casualty and other 166 109
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Total operating expenses 1,378 1,404
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Operating income 481 523
Interest expense (112) (86)
Other income (loss) (Note 3) 161 (6)
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Income before income taxes 530 431
Income tax expense (106) (120)
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Net income $ 424 $ 311
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Earnings per share (Note 9)
Basic $ 0.91 $ 0.64
Diluted $ 0.90 $ 0.64
Weighted-average number of shares
Basic 468.3 482.8
Diluted 472.3 488.6
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See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED BALANCE SHEET (U.S. GAAP)
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(In millions)
March 31 December 31 March 31
2009 2008 2008
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(Unaudited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 349 $ 413 $ 334
Accounts receivable (Note 4) 940 913 621
Material and supplies 273 200 212
Deferred income taxes 77 98 67
Other 138 132 111
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1,777 1,756 1,345
Properties 23,947 23,203 20,754
Intangible and other assets 1,787 1,761 2,065
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Total assets $27,511 $26,720 $24,164
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Liabilities and shareholders' equity
Current liabilities:
Accounts payable and other $ 1,280 $ 1,386 $ 1,333
Current portion of long-term debt
(Note 4) 527 506 269
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1,807 1,892 1,602
Deferred income taxes 5,594 5,511 5,021
Other liabilities and deferred
credits 1,371 1,353 1,404
Long-term debt (Note 4) 7,836 7,405 6,064
Shareholders' equity:
Common shares 4,188 4,179 4,241
Accumulated other comprehensive
income (loss) (126) (155) 9
Retained earnings 6,841 6,535 5,823
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10,903 10,559 10,073
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Total liabilities and shareholders'
equity $27,511 $26,720 $24,164
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See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. GAAP)
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(In millions)
Three months ended
March 31
--------------------
2009 2008
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(Unaudited)
Common shares(1)
Balance, beginning of period $4,179 $4,283
Stock options exercised and other 9 23
Share repurchase programs (Note 4) - (65)
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Balance, end of period $4,188 $4,241
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Accumulated other comprehensive income (loss)
Balance, beginning of period $ (155) $ (31)
Other comprehensive income (loss):
Unrealized foreign exchange gain (loss) on:
Translation of the net investment in foreign
operations 251 187
Translation of U.S. dollar-denominated long-term
debt designated as a hedge of the net investment
in U.S. subsidiaries (258) (182)
Pension and other postretirement benefit plans:
Amortization of net actuarial gain included in net
periodic benefit cost - (1)
Amortization of prior service cost included in net
periodic benefit cost 1 6
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Other comprehensive income (loss) before income taxes (6) 10
Income tax recovery 35 30
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Other comprehensive income 29 40
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Balance, end of period $ (126) $ 9
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Retained earnings
Balance, beginning of period $6,535 $5,925
Net income 424 311
Share repurchase programs - (302)
Dividends (118) (111)
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Balance, end of period $6,841 $5,823
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See accompanying notes to unaudited consolidated financial statements.
(1) During the three months ended March 31, 2009, the Company issued
0.2 million common shares as a result of stock options exercised.
At March 31, 2009, the Company had 468.4 million common shares
outstanding.
CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (U.S. GAAP)
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(In millions)
Three months ended
March 31
--------------------
2009 2008
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(Unaudited)
Operating activities
Net income $ 424 $ 311
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 203 175
Deferred income taxes 10 25
Gain on disposal of property (Note 3) (157) -
Other changes in:
Accounts receivable 1 (235)
Material and supplies (53) (48)
Accounts payable and other (132) (59)
Other current assets 36 29
Other (14) (33)
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Cash provided from operating activities 318 165
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Investing activities
Property additions (187) (177)
Acquisitions, net of cash acquired (Note 3) (373) -
Disposal of property (Note 3) 110 -
Other, net 4 11
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Cash used by investing activities (446) (166)
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Financing activities
Issuance of long-term debt 1,440 1,055
Reduction of long-term debt (1,272) (580)
Issuance of common shares due to exercise of stock
options and related excess tax benefits realized 2 18
Repurchase of common shares - (367)
Dividends paid (118) (111)
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Cash provided from financing activities 52 15
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Effect of foreign exchange fluctuations on U.S.
dollar-denominated cash and cash equivalents 12 10
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Net increase (decrease) in cash and cash equivalents (64) 24
Cash and cash equivalents, beginning of period 413 310
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Cash and cash equivalents, end of period $ 349 $ 334
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Supplemental cash flow information
Net cash receipts from customers and other $1,904 $1,748
Net cash payments for:
Employee services, suppliers and other expenses (1,362) (1,339)
Interest (106) (100)
Workforce reductions (4) (6)
Personal injury and other claims (30) (26)
Pensions - (22)
Income taxes (84) (90)
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Cash provided from operating activities $ 318 $ 165
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See accompanying notes to unaudited consolidated financial statements.
CANADIAN NATIONAL RAILWAY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)
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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 Annual Consolidated Financial Statements and Notes thereto.
Note 2 – Accounting change
On
Note 3 – Acquisition and disposal of property
Acquisition of
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 SFAS # 141(R ), “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
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(In U.S. millions)
Consideration
Cash $ 300
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Fair value of total consideration transferred $ 300
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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)
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Total identifiable net assets $ 300
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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
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
During the first quarter of 2009, proceeds from collections reinvested in the securitization program were approximately
As at
Share repurchase program
During the first quarter of 2009, the Company did not repurchase any common shares under its current 25.0 million share repurchase program.
The Company has repurchased a total of 6.1 million common shares since
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 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:
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Voluntary Incentive
RSUs Deferral Plan (VIDP)
-------------------- ----------------------
In millions Nonvested Vested Nonvested Vested
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Outstanding at December
31, 2008 1.3 0.9(1) 0.1 1.8
Granted 0.8 - - -
Transferred into plan - - - 0.1
Payout - (0.9) - (0.1)
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Outstanding at March
31, 2009 2.1 - 0.1 1.8
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(1) Includes 0.1 million of 2004 time-vested RSUs.
The following table provides valuation and expense information for all
cash settled awards:
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In millions, unless
otherwise indicated RSUs(1) Vision(1) VIDP(2) Total
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Year of 2003
grant 2009 2008 2007 2006 2004 2005 onwards
------------------------------------ ----- -------
Stock-based
compensation
expense
(recovery)
recognized
over
requisite
service
period
Three
months
ended
March
31, 2009 $ 9 $ 1 $ - $ (2) N/A N/A $ - $ 8
Three
months
ended
March
31, 2008 N/A $ 7 $ 2 $ 4 $ 1 $ 3 $ 6 $ 23
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Liability
outstanding
March
31, 2009 $ 9 $ 9 $ 9 $ - $ - N/A $ 88 $ 115
December
31, 2008 N/A $ 8 $ 9 $ 53 $ 3 $ - $ 88 $ 161
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Fair value
per unit
March
31, 2009
($) $25.44 $21.20 $16.61 N/A N/A N/A $45.20 N/A
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Fair value
of awards
vested
during
period
Three
months
ended
March
31, 2009 $ - $ - $ - N/A N/A N/A $ 1 $ 1
Three
months
ended
March
31, 2008 N/A $ - $ - $ - $ - $ - $ 1 $ 1
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Nonvested
awards
at March
31, 2009
Unrecognized
compensation
cost $ 10 $ 4 $ 2 N/A N/A N/A $ 3 $ 19
Remaining
recognition
period
(years) 2.75 1.75 0.75 N/A N/A N/A 3.75 N/A
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Assumptions(3)
Stock
price($) $45.20 $45.20 $45.20 N/A N/A N/A $45.20 N/A
Expected
stock
price
volati-
lity(4) 29% 32% 37% N/A N/A N/A N/A N/A
Expected
term
(years)(5) 2.75 1.75 0.75 N/A N/A N/A N/A N/A
Risk-free
interest
rate(6) 1.28% 0.95% 0.53% N/A N/A N/A N/A N/A
Dividend
rate
($)(7) $ 1.01 $ 1.01 $ 1.01 N/A N/A N/A N/A N/A
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(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 March 31, 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
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Options outstanding
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Weighted- Weighted-
Number average average Aggregate
of exercise years to intrinsic
options price expiration value
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In In
millions millions
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Outstanding at December
31, 2008(1) 13.2 $29.05
Granted 1.2 $41.92
Exercised (0.2) $16.45
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Outstanding at March
31, 2009(1) 14.2 $30.67 4.6 $233
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Exercisable at March
31, 2009(1) 11.6 $26.51 3.7 $230
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(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:
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In millions, unless otherwise indicated
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Year of grant 2009 2008 2007 2006 2005 Total
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Stock-based compensation
expense recognized over
requisite service period(1)
Three months ended March
31, 2009 $ 5 $ - $ 1 $ 1 $ - $ 7
Three months ended March
31, 2008 N/A $ 3 $ 1 $ - $ 1 $ 5
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Fair value per unit
At grant date ($) $12.51 $12.44 $13.36 $13.80 $ 9.19 N/A
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Fair value of awards
vested during period
Three months ended March
31, 2009 $ - $ 3 $ 3 $ 3 $ 3 $ 12
Three months ended March
31, 2008 N/A $ - $ 3 $ 3 $ 3 $ 9
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Nonvested awards at March
31, 2009
Unrecognized compensation
cost $ 9 $ 4 $ 2 $ 1 $ - $ 16
Remaining recognition
period (years) 3.8 2.8 1.8 0.8 - N/A
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Assumptions
Grant price ($) $41.92 $48.51 $52.79 $51.51 $36.33 N/A
Expected stock price
volatility(2) 39% 27% 24% 25% 25% N/A
Expected term (years)(3) 5.3 5.3 5.2 5.2 5.2 N/A
Risk-free interest rate(4) 1.95% 3.58% 4.12% 4.04% 3.50% N/A
Dividend rate ($)(5) $ 1.01 $ 0.92 $ 0.84 $ 0.65 $ 0.50 N/A
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(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 months ended March 31, 2009 and 2008, the components of net
periodic benefit cost (income) for pensions and other postretirement benefits
were as follows:
(a) Components of net periodic benefit income for pensions
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Three months ended
March 31
--------------------
In millions 2009 2008
-------------------------------------------------------------------------
Service cost $ 22 $ 35
Interest cost 222 200
Expected return on plan assets (252) (251)
Amortization of prior service cost - 5
Recognized net actuarial loss 1 -
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Net periodic benefit income $ (7) $ (11)
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(b) Components of net periodic benefit cost for other postretirement
benefits
-------------------------------------------------------------------------
Three months ended
March 31
--------------------
In millions 2009 2008
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Service cost $ 1 $ 1
Interest cost 4 4
Curtailment gain (3) (2)
Amortization of prior service cost 1 1
Recognized net actuarial gain (1) (1)
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Net periodic benefit cost $ 2 $ 3
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In 2009, the Company expects to make total contributions of approximately
Note 7 – Income taxes
In the first quarter of 2009, the Company recorded a deferred income tax recovery of
In the first quarter of 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 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.
As 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 340 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 United States Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also known as the Superfund law, or analogous state laws. CERCLA and similar state laws, in addition to other similar Canadian and U.S. laws generally impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site, as well as those whose waste is disposed of at the site, without regard to fault or the legality of the original conduct. The Company has been notified that it is a potentially responsible party for study and clean-up costs at approximately 10 sites governed by the Superfund law (and analogous state laws) for which investigation and remediation payments are or will be made or are yet to be determined and, in many instances, is one of several potentially responsible parties.
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, is recorded net of potential and actual 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 costs and 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 material 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 remediation 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.
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 – Earnings per share
The following table provides a reconciliation between basic and diluted earnings per share:
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Three months ended
March 31
In millions, except --------------------
per share data 2009 2008
-------------------------------------------------------------------------
Net income $ 424 $ 311
Weighted-average shares outstanding 468.3 482.8
Effect of stock options 4.0 5.8
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Weighted-average diluted shares outstanding 472.3 488.6
Basic earnings per share $ 0.91 $ 0.64
Diluted earnings per share $ 0.90 $ 0.64
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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 1.1 million for the three months ended March 31,
2009, and 0.2 million for the corresponding period in 2008.
Note 10 - 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
March 31
--------------------
2009 2008
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(Unaudited)
Statistical operating data
Rail freight revenues ($ millions) 1,696 1,760
Gross ton miles (GTM) (millions) 73,557 84,327
Revenue ton miles (RTM) (millions) 38,691 44,959
Carloads (thousands) 954 1,132
Route miles (includes Canada and the U.S.) 21,104 20,421
Employees (end of period) 22,083 22,703
Employees (average for the period) 22,260 22,636
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Productivity
Operating ratio (%) 74.1 72.9
Rail freight revenue per RTM (cents) 4.38 3.91
Rail freight revenue per carload ($) 1,778 1,555
Operating expenses per GTM (cents) 1.87 1.66
Labor and fringe benefits expense per GTM (cents) 0.62 0.55
GTMs per average number of employees (thousands) 3,304 3,725
Diesel fuel consumed (U.S. gallons in millions) 85 99
Average fuel price ($/U.S. gallon) 1.98 3.02
GTMs per U.S. gallon of fuel consumed 865 852
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Safety indicators
Injury frequency rate per 200,000 person hours(2) 1.29 2.11
Accident rate per million train miles(2) 2.13 2.66
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Financial ratio
Debt to total capitalization ratio (% at end of period) 43.4 38.6
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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 March 31
---------------------------------
Variance
Fav
2009 2008 (Unfav)
-------------------------------------------------------------------------
(Unaudited)
Revenues (millions of dollars)
Petroleum and chemicals 340 319 7%
Metals and minerals 198 205 (3%)
Forest products 302 330 (8%)
Coal 103 99 4%
Grain and fertilizers 357 340 5%
Intermodal 319 351 (9%)
Automotive 77 116 (34%)
------------------------------------------------------------
Total rail freight revenue 1,696 1,760 (4%)
Other revenues 163 167 (2%)
------------------------------------------------------------
Total revenues 1,859 1,927 (4%)
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Revenue ton miles (millions)
Petroleum and chemicals 7,527 8,426 (11%)
Metals and minerals 3,252 4,091 (21%)
Forest products 6,614 8,458 (22%)
Coal 2,841 3,392 (16%)
Grain and fertilizers 10,558 11,829 (11%)
Intermodal 7,476 8,089 (8%)
Automotive 423 674 (37%)
------------------------------------------------------------
38,691 44,959 (14%)
Rail freight revenue/RTM (cents)
Total rail freight revenue per RTM 4.38 3.91 12%
Commodity groups:
Petroleum and chemicals 4.52 3.79 19%
Metals and minerals 6.09 5.01 22%
Forest products 4.57 3.90 17%
Coal 3.63 2.92 24%
Grain and fertilizers 3.38 2.87 18%
Intermodal 4.27 4.34 (2%)
Automotive 18.20 17.21 6%
------------------------------------------------------------
Carloads (thousands)
Petroleum and chemicals 128 145 (12%)
Metals and minerals 180 238 (24%)
Forest products 100 127 (21%)
Coal 90 87 3%
Grain and fertilizers 132 151 (13%)
Intermodal 292 327 (11%)
Automotive 32 57 (44%)
------------------------------------------------------------
954 1,132 (16%)
Rail freight revenue/carload (dollars)
Total rail freight revenue per carload 1,778 1,555 14%
Commodity groups:
Petroleum and chemicals 2,656 2,200 21%
Metals and minerals 1,100 861 28%
Forest products 3,020 2,598 16%
Coal 1,144 1,138 1%
Grain and fertilizers 2,705 2,252 20%
Intermodal 1,092 1,073 2%
Automotive 2,406 2,035 18%
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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
During the three 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 months ended
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2009 March 31, 2008
In millions, ---------------------------- ----------------------------
except per Adjust- Adjust-
share data Reported ments Adjusted Reported ments Adjusted
-------------------------------------------------------------------------
Revenues $ 1,859 $ - $ 1,859 $ 1,927 $ - $ 1,927
Operating
expenses 1,378 (46) 1,332 1,404 - 1,404
-------------------------------------------------------------------------
Operating
income 481 46 527 523 - 523
Interest
expense (112) - (112) (86) - (86)
Other income
(loss) 161 (157) 4 (6) - (6)
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Income before
income taxes 530 (111) 419 431 - 431
Income tax
expense (106) (11) (117) (120) (11) (131)
-------------------------------------------------------------------------
Net income $ 424 $ (122) $ 302 $ 311 $ (11) $ 300
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-------------------------------------------------------------------------
Operating
ratio 74.1% 71.7% 72.9% 72.9%
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Basic
earnings
per share $ 0.91 $ (0.26) $ 0.65 $ 0.64 $ (0.02) $ 0.62
Diluted
earnings
per share $ 0.90 $ (0.26) $ 0.64 $ 0.64 $ (0.02) $ 0.62
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Free cash flow
The Company generated
-------------------------------------------------------------------------
Three months ended
March 31
--------------------
In millions 2009 2008
-------------------------------------------------------------------------
Cash provided from operating activities $ 318 $ 165
Cash used by investing activities (446) (166)
-------------------------------------------------------------------------
Cash used before financing activities (128) (1)
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Adjustments:
Change in accounts receivable securitization 68 163
Dividends paid (118) (111)
Acquisition of EJ&E 373 -
Effect of foreign exchange fluctuations on U.S.
dollar-denominated cash and cash equivalents 12 10
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Free cash flow $ 207 $ 61
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SOURCE CN