News
Release dated October 21, 2008 entitled, "CN reports Q3-2008 net
income of C$552 million, or C$1.16 per
diluted
share, including deferred income tax recovery of
C$0.09".
|
|
Interim
Unaudited Consolidated Financial Statements and Notes thereto (U.S.
GAAP)
|
|
Management’s
Discussion and Analysis (U.S. GAAP)
|
|
Certificate
of CEO
|
|
5.
|
Certificate
of CFO
|
·
|
Diluted
earnings per share increased 21 per cent to
C$1.16.
|
·
|
Net
income increased 14 per cent to C$552
million.
|
·
|
Revenues
increased 12 per cent to C$2,257
million.
|
·
|
Operating
income increased 10 per cent to C$844 million, with the Company’s
operating ratio rising by six-tenths of one point to 62.6 per
cent.
|
Media
|
Investment
Community
|
Mark
Hallman
|
Robert
Noorigian
|
Director
|
Vice-President
|
Communications,
Media
|
Investor
Relations
|
(905)
669-3384
|
(514)
399-0052
|
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
|
||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||
(Unaudited)
|
|||||||||||
Revenues
|
$
|
2,257
|
$
|
2,023
|
$
|
6,282
|
$
|
5,956
|
|||
Operating
expenses
|
|||||||||||
Labor
and fringe benefits
|
424
|
446
|
1,277
|
1,361
|
|||||||
Purchased
services and material
|
268
|
247
|
836
|
786
|
|||||||
Fuel
|
390
|
251
|
1,099
|
719
|
|||||||
Depreciation
and amortization
|
177
|
165
|
528
|
504
|
|||||||
Equipment
rents
|
59
|
59
|
183
|
187
|
|||||||
Casualty
and other
|
95
|
87
|
285
|
259
|
|||||||
Total
operating expenses
|
1,413
|
1,255
|
4,208
|
3,816
|
|||||||
Operating
income
|
844
|
768
|
2,074
|
2,140
|
|||||||
Interest
expense
|
(92)
|
(78)
|
(265)
|
(251)
|
|||||||
Other
income
|
4
|
2
|
7
|
7
|
|||||||
Income
before income taxes
|
756
|
692
|
1,816
|
1,896
|
|||||||
Income tax expense (Note
7)
|
(204)
|
(207)
|
(494)
|
(571)
|
|||||||
Net
income
|
$
|
552
|
$
|
485
|
$
|
1,322
|
$
|
1,325
|
|||
Earnings per share (Note
8)
|
|||||||||||
Basic
|
$
|
1.17
|
$
|
0.97
|
$
|
2.77
|
$
|
2.62
|
|||
Diluted
|
$
|
1.16
|
$
|
0.96
|
$
|
2.74
|
$
|
2.59
|
|||
Weighted-average
number of shares
|
|||||||||||
Basic
|
471.7
|
499.7
|
477.0
|
505.0
|
|||||||
Diluted
|
477.1
|
506.4
|
482.6
|
512.1
|
|||||||
See
accompanying notes to unaudited consolidated financial
statements.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
CONSOLIDATED BALANCE
SHEET (U.S.
GAAP)
|
(In
millions)
|
September
30
|
December
31
|
September
30
|
||||||
2008
|
2007
|
2007
|
||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
288
|
$
|
310
|
$
|
214
|
||
Accounts
receivable (Note
3)
|
657
|
370
|
641
|
|||||
Material
and supplies
|
213
|
162
|
206
|
|||||
Deferred
income taxes
|
69
|
68
|
69
|
|||||
Other
|
131
|
138
|
316
|
|||||
1,358
|
1,048
|
1,446
|
||||||
Properties
|
21,472
|
20,413
|
19,883
|
|||||
Intangible
and other assets
|
2,134
|
1,999
|
1,576
|
|||||
Total
assets
|
$
|
24,964
|
$
|
23,460
|
$
|
22,905
|
||
Liabilities
and shareholders' equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued charges
|
$
|
1,252
|
$
|
1,282
|
$
|
1,205
|
||
Current
portion of long-term debt
|
449
|
254
|
293
|
|||||
Other
|
77
|
54
|
56
|
|||||
1,778
|
1,590
|
1,554
|
||||||
Deferred income taxes
(Note
7)
|
5,246
|
4,908
|
4,940
|
|||||
Other
liabilities and deferred credits
|
1,378
|
1,422
|
1,410
|
|||||
Long-term debt (Note
3)
|
6,264
|
5,363
|
5,342
|
|||||
Shareholders'
equity:
|
||||||||
Common
shares
|
4,171
|
4,283
|
4,359
|
|||||
Accumulated
other comprehensive income (loss)
|
54
|
(31)
|
(257)
|
|||||
Retained
earnings
|
6,073
|
5,925
|
5,557
|
|||||
10,298
|
10,177
|
9,659
|
||||||
Total
liabilities and shareholders' equity
|
$
|
24,964
|
$
|
23,460
|
$
|
22,905
|
||
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
|
|||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||
|
(Unaudited)
|
||||||||||
Common
shares (1)
|
|||||||||||
Balance,
beginning of period
|
$
|
4,208
|
$
|
4,417
|
$
|
4,283
|
$
|
4,459
|
|||
Stock
options exercised and other
|
17
|
16
|
59
|
83
|
|||||||
Share
repurchase programs (Note
3)
|
(54)
|
(74)
|
(171)
|
(183)
|
|||||||
Balance,
end of period
|
$
|
4,171
|
$
|
4,359
|
$
|
4,171
|
$
|
4,359
|
|||
|
|||||||||||
Accumulated
other comprehensive income (loss)
|
|||||||||||
Balance,
beginning of period
|
$
|
(1)
|
$
|
(180)
|
$
|
(31)
|
$
|
(44)
|
|||
Other
comprehensive income (loss):
|
|||||||||||
Unrealized
foreign exchange gain (loss) on:
|
|||||||||||
Translation
of the net investment in foreign operations
|
259
|
(381)
|
399
|
(914)
|
|||||||
Translation
of U.S. dollar-denominated long-term debt
|
|||||||||||
designated
as a hedge of the net investment in U.S. subsidiaries
|
(248)
|
328
|
(389)
|
766
|
|||||||
Pension and other
postretirement benefit plans (Note
5):
|
|||||||||||
Amortization
of net actuarial loss (gain) included in net
|
|||||||||||
periodic
benefit cost
|
-
|
13
|
(2)
|
38
|
|||||||
Amortization
of prior service cost included in net
|
|||||||||||
periodic
benefit cost
|
6
|
5
|
18
|
16
|
|||||||
Other
comprehensive income (loss) before income taxes
|
17
|
(35)
|
26
|
(94)
|
|||||||
Income
tax recovery (expense)
|
38
|
(42)
|
59
|
(119)
|
|||||||
Other
comprehensive income (loss)
|
55
|
(77)
|
85
|
(213)
|
|||||||
Balance,
end of period
|
$
|
54
|
$
|
(257)
|
$
|
54
|
$
|
(257)
|
|||
|
|||||||||||
Retained
earnings
|
|||||||||||
Balance,
beginning of period
|
$
|
5,902
|
$
|
5,554
|
$
|
5,925
|
$
|
5,409
|
|||
Adoption
of new accounting pronouncements (2)
|
-
|
-
|
-
|
95
|
|||||||
|
|||||||||||
Restated
balance, beginning of period
|
5,902
|
5,554
|
5,925
|
5,504
|
|||||||
Net
income
|
552
|
485
|
1,322
|
1,325
|
|||||||
Share
repurchase programs (Note
3)
|
(273)
|
(378)
|
(846)
|
(956)
|
|||||||
Dividends
|
(108)
|
(104)
|
(328)
|
(316)
|
|||||||
Balance,
end of period
|
$
|
6,073
|
$
|
5,557
|
$
|
6,073
|
$
|
5,557
|
|||
See
accompanying notes to unaudited consolidated financial statements.
|
(1)
|
During
the three and nine months ended September 30, 2008, the Company issued 0.7
million and 2.2 million common shares, respectively, as a result of stock
options exercised, and repurchased 6.0 million and 19.3 million common
shares, respectively, under its share repurchase programs. At
September 30, 2008, the Company had 468.1 million common shares
outstanding.
|
(2)
|
On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income
Taxes,” and early adopted the measurement date provisions of Statement of
Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R).” The application
of FIN No. 48 on January 1, 2007 had the effect of decreasing the net
deferred income tax liability and increasing Retained earnings by $98
million. The application of SFAS No. 158 on January 1, 2007 had
the effect of decreasing Retained earnings by $3
million.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
CONSOLIDATED STATEMENT
OF CASH FLOWS (U.S.
GAAP)
|
(In
millions)
|
Three
months ended
|
Nine
months ended
|
||||||||||
September
30
|
September
30
|
||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||
(Unaudited)
|
|||||||||||
Operating
activities
|
|||||||||||
Net
income
|
$
|
552
|
$
|
485
|
$
|
1,322
|
$
|
1,325
|
|||
Adjustments
to reconcile net income to net cash
|
|||||||||||
provided
from operating activities:
|
|||||||||||
Depreciation
and amortization
|
177
|
165
|
528
|
506
|
|||||||
Deferred
income taxes
|
73
|
75
|
187
|
125
|
|||||||
Other
changes in:
|
|||||||||||
Accounts
receivable
|
209
|
(252)
|
(259)
|
(38)
|
|||||||
Material
and supplies
|
6
|
(6)
|
(48)
|
(26)
|
|||||||
Accounts
payable and accrued charges
|
16
|
(65)
|
(110)
|
(471)
|
|||||||
Other
net current assets and liabilities
|
(33)
|
42
|
46
|
51
|
|||||||
Other
|
(43)
|
2
|
(135)
|
3
|
|||||||
Cash
provided from operating activities
|
957
|
446
|
1,531
|
1,475
|
|||||||
Investing
activities
|
|||||||||||
Property
additions
|
(415)
|
(350)
|
(944)
|
(897)
|
|||||||
Other,
net
|
22
|
14
|
42
|
26
|
|||||||
Cash
used by investing activities
|
(393)
|
(336)
|
(902)
|
(871)
|
|||||||
Financing
activities
|
|||||||||||
Issuance
of long-term debt
|
778
|
1,841
|
3,430
|
3,325
|
|||||||
Reduction
of long-term debt
|
(798)
|
(1,420)
|
(2,796)
|
(2,469)
|
|||||||
Issuance
of common shares due to exercise of stock
|
|||||||||||
options
and related excess tax benefits realized
|
14
|
14
|
48
|
73
|
|||||||
Repurchase
of common shares
|
(327)
|
(452)
|
(1,017)
|
(1,139)
|
|||||||
Dividends
paid
|
(108)
|
(104)
|
(328)
|
(316)
|
|||||||
Cash
used by financing activities
|
(441)
|
(121)
|
(663)
|
(526)
|
|||||||
Effect
of foreign exchange fluctuations on U.S. dollar-
|
|||||||||||
denominated
cash and cash equivalents
|
4
|
(16)
|
12
|
(43)
|
|||||||
Net
increase (decrease) in cash and cash equivalents
|
127
|
(27)
|
(22)
|
35
|
|||||||
Cash
and cash equivalents, beginning of period
|
161
|
241
|
310
|
179
|
|||||||
Cash
and cash equivalents, end of period
|
$
|
288
|
$
|
214
|
$
|
288
|
$
|
214
|
|||
Supplemental
cash flow information
|
|||||||||||
Net
cash receipts from customers and other
|
$
|
2,391
|
$
|
1,770
|
$
|
6,025
|
$
|
5,930
|
|||
Net
cash payments for:
|
|||||||||||
Employee
services, suppliers and other expenses
|
(1,195)
|
(1,090)
|
(3,749)
|
(3,344)
|
|||||||
Interest
|
(82)
|
(86)
|
(272)
|
(273)
|
|||||||
Workforce
reductions
|
(5)
|
(8)
|
(17)
|
(24)
|
|||||||
Personal
injury and other claims
|
(18)
|
(12)
|
(62)
|
(58)
|
|||||||
Pensions
|
(24)
|
(27)
|
(77)
|
(50)
|
|||||||
Income
taxes
|
(110)
|
(101)
|
(317)
|
(706)
|
|||||||
Cash
provided from operating activities
|
$
|
957
|
$
|
446
|
$
|
1,531
|
$
|
1,475
|
|||
See
accompanying notes to unaudited consolidated financial
statements.
|
|||||||||||
Certain
of the 2007 figures have been restated to conform to the 2008
presentation.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
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
September 30, 2008, December 31, 2007, and September 30, 2007, and its
results of operations, changes in shareholders’ equity and cash flows for
the three and nine months ended September 30, 2008 and 2007.
These
unaudited Interim Consolidated Financial Statements and Notes thereto have
been prepared using accounting policies consistent with those used in
preparing the Company’s 2007 Annual Consolidated Financial
Statements. 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.
|
In
September 2007, the Company and U.S. Steel Corporation (U.S. Steel), the
indirect owner of the EJ&E, announced an agreement under which CN
would acquire the principal lines of the EJ&E for a purchase price of
approximately U.S.$300 million. Under the terms of the
agreement, the Company will acquire substantially all of the railroad
assets and equipment of EJ&E, except those that support the Gary Works
site in northwest Indiana and the steelmaking operations of U.S.
Steel. The acquisition will be financed by debt and cash on
hand.
In accordance with the
terms of the agreement, the Company’s obligation to consummate the
acquisition is subject to the Company having obtained from the Surface
Transportation Board (STB) a final decision that approves the acquisition
and does not impose conditions that would significantly and adversely
affect the anticipated economic benefits of the acquisition to the
Company.
On November 26, 2007,
the STB accepted the Company’s application to consider the acquisition as
a minor transaction. The STB, however, is also requiring an
Environmental Impact Statement (EIS) for the transaction, and it has
indicated that its decision on the transaction, which otherwise would have
been required by governing law by April 25, 2008, will not be issued until
the EIS process is completed. The STB issued a draft EIS on July 25,
2008. CN, along with other parties, filed responsive comments
on the draft EIS on September 30, 2008.
With
the environmental review continuing and the
time for its completion uncertain, the
Company twice requested that the STB establish time limits on its review
and issue a final decision that, if the application were approved, would
enable the transaction to close by December 31, 2008, and thereby avoid a
significant risk that the transaction could be terminated under the
agreement. Upon the STB’s second denial of those requests, the
Company filed a petition on September 18, 2008 with the U.S. Court of
Appeals for the District of Columbia Circuit for an expedited ruling to
direct the STB to issue such a decision. If the transaction is
approved by the STB, the Company will account for the acquisition using
the purchase method of
accounting.
|
Shelf
prospectus and registration statement
In May
2008, the Company issued U.S.$325 million (Cdn$331 million) of 4.95% Notes
due 2014 and U.S.$325 million (Cdn$331 million) of 5.55% Notes due
2018. The debt offering was made under the Company’s current
shelf prospectus and registration statement. Accordingly, the
amount registered for offering under the shelf prospectus and registration
statement has been reduced to U.S.$1.85 billion. The Company
used the net proceeds of U.S.$643 million to repay a portion of its
commercial paper outstanding and to reduce its account receivable
securitization program.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
Revolving
credit facility
As at
September 30, 2008, the Company had letters of credit drawn on its U.S.$1
billion revolving credit facility, expiring in October 2011, of $176
million ($57 million as at December 31, 2007). The Company also
had total borrowings under its commercial paper program of $346 million,
of which $99 million was denominated in Canadian dollars and $247 million
was denominated in U.S. dollars (U.S.$232 million). The
weighted-average interest rate on these borrowings was
2.91%. As at December 31, 2007, total borrowings under the
Company’s commercial paper program were $122 million, of which $114
million was denominated in Canadian dollars and $8 million was denominated
in U.S. dollars (U.S.$8 million). The weighted-average interest
rate on these borrowings was 5.01%.
|
Accounts
receivable securitization
The
Company has a five-year agreement, expiring in May 2011, to sell an
undivided co-ownership interest for maximum cash proceeds of $600 million
in a revolving pool of freight receivables to an unrelated
trust. Pursuant to the agreement, the Company sells an interest
in its receivables and receives proceeds net of the retained interest as
stipulated in the agreement.
As at September 30,
2008, the Company had sold receivables that resulted in proceeds of $441
million under this program ($588 million at December 31, 2007), and
recorded retained interest of approximately 10% of this amount in Other
current assets (retained interest of approximately 10% recorded as at
December 31, 2007). As at September 30, 2008, the servicing
asset and liability were not
significant.
|
Share
repurchase programs
On July
21, 2008, the Board of Directors of the Company approved a new share
repurchase program which allows for the repurchase of up to 25.0 million
common shares between July 28, 2008 and July 20, 2009 pursuant to a normal
course issuer bid, at prevailing market prices or such other prices as may
be permitted by the Toronto Stock Exchange.
In the
third quarter of 2008, under this current share repurchase program, the
Company repurchased 6.0 million common shares for $327 million, at a
weighted-average price of $54.48 per share.
In the
second quarter of 2008, the Company ended its 33.0 million share
repurchase program, which began on July 26, 2007, repurchasing a total of
31.0 million common shares for $1,588 million, at a weighted-average price
of $51.22 per share. Of this amount, 13.3 million
common shares were repurchased in 2008 for $690 million, at a
weighted-average price of $51.91 per share.
|
Note
4 - Stock plans
The
Company has various stock-based incentive plans for eligible
employees. A description of the plans is provided in Note 12 –
Stock plans, to the Company’s 2007 Annual Consolidated Financial
Statements. For the three and nine months ended September 30, 2008, the
Company recorded total compensation expense for awards under all plans of
$16 million and $50 million, respectively, and $39 million and $112
million, respectively, for the same periods in 2007. The total
tax benefit recognized in income in relation to stock-based compensation
expense for the three and nine months ended September 30, 2008 was $5
million and $15 million, respectively, and $12 million and $33 million,
respectively, for the same periods in
2007.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
Cash
settled awards
Following
approval by the Board of Directors in January 2008, the Company granted
0.7 million restricted share units (RSUs) to designated management
employees entitling them to receive payout in cash based on the Company’s
share price. The RSUs granted by the Company are generally
scheduled for payout in cash after three years (“plan period”) and vest
upon the attainment of targets relating to return on invested capital over
the plan period and the Company’s share price during the last three months
of the plan period. As at September 30, 2008, 0.1 million RSUs
remained authorized for future issuance under this
plan.
|
The
following table provides the activity for all cash settled awards in
2008:
|
||||||||
RSUs
|
Vision
2008 Share Unit Plan (Vision)
|
Voluntary
Incentive Deferral Plan (VIDP)
|
||||||
In
millions
|
Nonvested
|
Vested
|
Nonvested
|
Vested
|
Nonvested
|
Vested
|
||
Outstanding
at December 31, 2007
|
1.6
|
0.9
|
0.8
|
-
|
0.2
|
1.9
|
||
Granted
|
0.7
|
-
|
-
|
-
|
-
|
-
|
||
Forfeited
|
(0.1)
|
-
|
-
|
-
|
-
|
-
|
||
Vested
during period
|
-
|
-
|
-
|
-
|
(0.1)
|
0.1
|
||
Payout
|
-
|
(0.9)
|
-
|
-
|
-
|
(0.2)
|
||
Outstanding
at September 30, 2008
|
2.2
|
-
|
0.8
|
-
|
0.1
|
1.8
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
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
|
||||||||||||||||||||
|
2003
|
|||||||||||||||||||||||
Year
of grant
|
2008
|
2007
|
2006
|
2005
|
2004
|
2005
|
onwards
|
|||||||||||||||||
|
||||||||||||||||||||||||
Stock-based
compensation expense
|
||||||||||||||||||||||||
recognized
over requisite service period
|
||||||||||||||||||||||||
Nine
months ended September 30, 2008
|
$
|
11
|
$
|
1
|
$
|
14
|
N/A
|
$
|
3
|
$
|
2
|
$
|
8
|
$
|
39
|
|||||||||
Nine
months ended September 30, 2007
|
N/A
|
$
|
17
|
$
|
19
|
$
|
19
|
$
|
5
|
$
|
13
|
$
|
30
|
$
|
103
|
|||||||||
|
||||||||||||||||||||||||
Liability
outstanding
|
||||||||||||||||||||||||
September
30, 2008
|
$
|
11
|
$
|
12
|
$
|
43
|
N/A
|
$
|
3
|
$
|
10
|
$
|
98
|
$
|
177
|
|||||||||
December
31, 2007
|
N/A
|
$
|
11
|
$
|
29
|
$
|
48
|
$
|
4
|
$
|
8
|
$
|
95
|
$
|
195
|
|||||||||
|
||||||||||||||||||||||||
Fair
value per unit
|
||||||||||||||||||||||||
September
30, 2008
|
$
|
32.12
|
$
|
31.63
|
$
|
46.40
|
N/A
|
$
|
50.78
|
$
|
14.66
|
$
|
50.78
|
N/A
|
||||||||||
|
||||||||||||||||||||||||
Fair
value of awards vested during period
|
||||||||||||||||||||||||
Nine
months ended September 30, 2008
|
$
|
-
|
$
|
-
|
$
|
-
|
N/A
|
$
|
-
|
$
|
-
|
$
|
2
|
$
|
2
|
|||||||||
Nine
months ended September 30, 2007
|
N/A
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
5
|
$
|
-
|
$
|
3
|
$
|
8
|
|||||||||
|
||||||||||||||||||||||||
Nonvested
awards at September 30, 2008
|
||||||||||||||||||||||||
Unrecognized
compensation cost
|
$
|
9
|
$
|
4
|
$
|
2
|
N/A
|
$
|
1
|
$
|
1
|
$
|
4
|
$
|
21
|
|||||||||
Remaining recognition
period (years)
|
2.25
|
1.25
|
0.25
|
N/A
|
0.25
|
0.25
|
3.25
|
N/A
|
||||||||||||||||
|
||||||||||||||||||||||||
Assumptions (3)
|
||||||||||||||||||||||||
Stock price ($)
|
$
|
50.78
|
$
|
50.78
|
$
|
50.78
|
N/A
|
$
|
50.78
|
$
|
50.78
|
$
|
50.78
|
N/A
|
||||||||||
Expected stock price
volatility (4)
|
22%
|
23%
|
26%
|
N/A
|
N/A
|
28%
|
N/A
|
N/A
|
||||||||||||||||
Expected term (years)
(5)
|
2.25
|
1.25
|
0.25
|
N/A
|
N/A
|
0.25
|
N/A
|
N/A
|
||||||||||||||||
Risk-free interest
rate (6)
|
2.59%
|
2.47%
|
1.65%
|
N/A
|
N/A
|
1.26%
|
N/A
|
N/A
|
||||||||||||||||
Dividend rate ($)
(7)
|
$
|
0.92
|
$
|
0.92
|
$
|
0.92
|
N/A
|
N/A
|
$
|
0.92
|
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, except for time-vested RSUs.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(2)
|
Compensation
cost is based on intrinsic value.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(3)
|
Assumptions
used to determine fair value are at September 30, 2008.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(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.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
Stock
option awards
Following
approval by the Board of Directors in January 2008, the Company granted
0.9 million conventional stock options to designated senior management
employees. The stock option plan allows eligible employees to acquire
common shares of the Company upon vesting at a price equal to the market
value of the common shares at the date of grant. The options
are exercisable during a period not exceeding 10 years. The
right to exercise options generally accrues over a period of four years of
continuous employment. Options are not generally exercisable
during the first 12 months after the date of grant. At
September 30, 2008, 13.5 million common shares remained authorized for
future issuances under this plan. The total number of options
outstanding at September 30, 2008, including conventional, performance and
performance-accelerated options, was 9.9
million, 0.2 million and 3.3 million,
respectively.
The
following table provides the activity of stock option awards in
2008. 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
September 30, 2008 at the Company’s closing stock price of
$50.78.
|
Options
outstanding
|
|||||||
Number
|
Weighted-average
|
Weighted-average
|
Aggregate
|
||||
of
options
|
exercise
price
|
years
to expiration
|
intrinsic
value
|
||||
In
millions
|
In
millions
|
||||||
Outstanding at December
31, 2007 (1)
|
14.7
|
$
|
24.55
|
||||
Granted
|
0.9
|
$
|
48.51
|
||||
Exercised
|
(2.2)
|
$
|
18.18
|
||||
Outstanding
at September 30, 2008 (1)
|
13.4
|
$
|
27.74
|
4.5
|
$
|
309
|
|
Exercisable
at September 30, 2008 (1)
|
11.0
|
$
|
23.47
|
3.8
|
$
|
300
|
|
(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.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
The
following table provides valuation and expense information for all stock
option awards:
|
|||||||||||||||||
|
|||||||||||||||||
In
millions, unless otherwise indicated
|
|||||||||||||||||
Year
of grant
|
|
2008
|
2007
|
2006
|
2005
|
Total
|
|||||||||||
|
|||||||||||||||||
Stock-based
compensation expense
|
|||||||||||||||||
recognized over
requisite service period (1)
|
|||||||||||||||||
Nine
months ended September 30, 2008
|
$
|
5
|
$
|
2
|
$
|
2
|
$
|
2
|
$
|
11
|
|||||||
Nine
months ended September 30, 2007
|
N/A
|
$
|
6
|
$
|
1
|
$
|
2
|
$
|
9
|
||||||||
|
|||||||||||||||||
Fair
value per unit
|
|
||||||||||||||||
At grant date ($)
|
$
|
12.44
|
$
|
13.36
|
$
|
13.80
|
$
|
9.19
|
N/A
|
||||||||
|
|||||||||||||||||
Fair
value of awards vested during period
|
|||||||||||||||||
Nine
months ended September 30, 2008
|
$
|
-
|
$
|
3
|
$
|
3
|
$
|
3
|
$
|
9
|
|||||||
Nine
months ended September 30, 2007
|
N/A
|
$
|
-
|
$
|
4
|
$
|
3
|
$
|
7
|
||||||||
|
|||||||||||||||||
Nonvested
awards at September 30, 2008
|
|||||||||||||||||
Unrecognized
compensation cost
|
$
|
6
|
$
|
3
|
$
|
2
|
$
|
1
|
$
|
12
|
|||||||
Remaining recognition
period (years)
|
3.3
|
2.3
|
1.3
|
0.3
|
N/A
|
||||||||||||
|
|||||||||||||||||
Assumptions (1)
|
|||||||||||||||||
Grant price ($)
|
$
|
48.51
|
$
|
52.79
|
$
|
51.51
|
$
|
36.33
|
N/A
|
||||||||
Expected stock price
volatility (2)
|
27%
|
24%
|
25%
|
25%
|
N/A
|
||||||||||||
Expected term (years)
(3)
|
5.3
|
5.2
|
5.2
|
5.2
|
N/A
|
||||||||||||
Risk-free interest rate
(4)
|
3.58%
|
4.12%
|
4.04%
|
3.50%
|
N/A
|
||||||||||||
Dividend rate ($)
(5)
|
$
|
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 historical volatility of the Company's stock over a period
commensurate with the expected term of the award.
|
||||||||||||||||
|
|||||||||||||||||
(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.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
Note
5 - Pensions and other postretirement benefits
For the
three and nine months ended September 30, 2008 and 2007, the components of
net periodic benefit cost (income) for pensions and other postretirement
benefits were as follows:
|
(a)
Components of net periodic benefit cost (income) for
pensions
|
||||||||||
Three
months ended
|
Nine
months ended
|
|||||||||
September
30
|
September
30
|
|||||||||
In
millions
|
2008
|
2007
|
2008
|
2007
|
||||||
Service
cost
|
$
|
34
|
$
|
38
|
$
|
104
|
$
|
114
|
||
Interest
cost
|
200
|
186
|
600
|
557
|
||||||
Expected
return on plan assets
|
(251)
|
(234)
|
(753)
|
(703)
|
||||||
Amortization
of prior service cost
|
5
|
5
|
15
|
15
|
||||||
Recognized
net actuarial loss
|
-
|
13
|
-
|
40
|
||||||
Net
periodic benefit cost (income)
|
$
|
(12)
|
$
|
8
|
$
|
(34)
|
$
|
23
|
||
(b)
Components of net periodic benefit cost for other postretirement
benefits
|
||||||||||
Three
months ended
|
Nine
months ended
|
|||||||||
September
30
|
September
30
|
|||||||||
In
millions
|
2008
|
2007
|
2008
|
2007
|
||||||
Service
cost
|
$
|
1
|
$
|
1
|
$
|
3
|
$
|
3
|
||
Interest
cost
|
4
|
4
|
12
|
11
|
||||||
Curtailment
gain
|
(4)
|
-
|
(7)
|
(3)
|
||||||
Amortization
of prior service cost
|
1
|
-
|
3
|
1
|
||||||
Recognized
net actuarial gain
|
-
|
-
|
(2)
|
(2)
|
||||||
Net
periodic benefit cost
|
$
|
2
|
$
|
5
|
$
|
9
|
$
|
10
|
In 2008, the Company
expects to make total contributions of approximately $130 million for all
its defined benefit plans, of which $77 million was disbursed as at
September 30, 2008 and includes $22 million relating to the 2007 funding
year.
|
A.
Commitments
As at
September 30, 2008, the Company had commitments to acquire railroad ties,
rail, freight cars, locomotives, and other equipment and services, as well
as outstanding information technology service contracts and licenses, at
an aggregate cost of $829 million ($952 million at December 31,
2007). The Company also has agreements with fuel suppliers to
purchase approximately 95% of the estimated remaining 2008 volume, 70% of
its anticipated 2009 volume, and 31% of its anticipated 2010 volume, at
market prices prevailing on the date of the
purchase.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
B.
Contingencies
In the
normal course of its operations, the Company becomes involved in various
legal actions, including actions brought on behalf of various classes of
claimants, and claims relating to personal injuries, occupational disease
and damage to property.
Canada
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.
United
States
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. 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, while an actuarial study is conducted on a
semi-annual basis for 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
September 30, 2008, the Company had aggregate reserves for personal injury
and other claims of $452 million, of which $108 million was recorded as a
current liability ($446 million, of which $102 million was recorded as a
current liability at December 31, 2007). 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 September 30, 2008, or with respect to future claims, cannot be
predicted with certainty, and therefore there can be no assurance that
their resolution will not have a material adverse effect on the Company’s
financial position or results of operations in a particular quarter or
fiscal year.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
C.
Environmental matters
The
Company’s operations are subject to numerous federal, provincial, state,
municipal and local environmental laws and regulations in Canada and the
United States concerning, among other things, emissions into the air;
discharges into waters; the generation, handling, storage, transportation,
treatment and disposal of waste, hazardous substances, and other
materials; decommissioning of underground and aboveground storage tanks;
and soil and groundwater contamination. A risk of environmental
liability is inherent in railroad and related transportation operations;
real estate ownership, operation or control; and other commercial
activities of the Company with respect to both current and past
operations. As a result, the Company incurs significant
compliance and capital costs, on an ongoing basis, associated with
environmental regulatory compliance and clean-up requirements in its
railroad operations and relating to its past and present ownership,
operation or control of real property.
The Company is subject
to environmental clean-up and enforcement actions. In
particular, the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (CERCLA), also known as the Superfund law, as
well as similar state laws generally impose joint and several liability
for clean-up and enforcement costs on current and former owners and
operators of a 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 19 sites governed by the Superfund law (and other similar
federal and 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.
While the Company
believes that it has identified the costs likely to be incurred in the
next several years, based on known information, for environmental matters,
the Company’s ongoing efforts to identify potential environmental concerns
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. The magnitude of such
additional liabilities and the costs of complying with environmental laws
and containing or remediating contamination cannot be reasonably estimated
due to:
(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 environmental
liabilities or costs. Although the effect on operating results and
liquidity cannot be reasonably estimated, management believes, based on
current information, that environmental matters will not have a material
adverse effect on the Company’s financial condition or competitive
position. Costs related to any future remediation will be accrued in the
year in which they become known.
As
at September 30, 2008, the Company had aggregate accruals for
environmental costs of $118 million, of which $28 million was recorded as
a current liability ($111 million, of which $28 million was recorded as a
current liability as at December 31,
2007).
|
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.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
(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 2008 and 2019, 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
September 30, 2008, the maximum exposure in respect of these guarantees
was $139 million. There are no recourse provisions to recover
any amounts from third parties.
(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 September 30, 2008, the maximum potential
liability under these guarantees was $491 million, of which $410 million
was for workers’ compensation and other employee benefits and $81 million
was for equipment under leases and other. During 2008, the Company has
granted guarantees for which no liability has been recorded, as they
relate to the Company’s future performance.
As at September 30,
2008, the Company had not recorded any additional liability with respect
to these guarantees, as the Company does not expect to make any additional
payments associated with these guarantees. The majority of the
guarantee instruments mature at various dates between 2008 and
2011.
(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.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (U.S.
GAAP)
|
Three
months ended
|
Nine
months ended
|
||||||||||
September
30
|
September
30
|
||||||||||
In
millions, except per share data
|
2008
|
2007
|
2008
|
2007
|
|||||||
Net
income
|
$
|
552
|
$
|
485
|
$
|
1,322
|
$
|
1,325
|
|||
Weighted-average
shares outstanding
|
471.7
|
499.7
|
477.0
|
505.0
|
|||||||
Effect
of stock options
|
5.4
|
6.7
|
5.6
|
7.1
|
|||||||
Weighted-average
diluted shares outstanding
|
477.1
|
506.4
|
482.6
|
512.1
|
|||||||
Basic
earnings per share
|
$
|
1.17
|
$
|
0.97
|
$
|
2.77
|
$
|
2.62
|
|||
Diluted
earnings per share
|
$
|
1.16
|
$
|
0.96
|
$
|
2.74
|
$
|
2.59
|
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 for both the three and nine
months ended September 30, 2008, and nil and 0.1 million, respectively,
for the corresponding periods in
2007.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
SELECTED RAILROAD
STATISTICS (1)
(U.S.
GAAP)
|
Three
months ended
|
Nine
months ended
|
||||
September
30
|
September
30
|
||||
2008
|
2007
|
2008
|
2007
|
||
(Unaudited)
|
|||||
Statistical
operating data
|
|||||
Rail
freight revenues ($ millions)
|
2,028
|
1,821
|
5,664
|
5,423
|
|
Gross
ton miles (GTM) (millions)
|
86,369
|
88,498
|
257,983
|
258,583
|
|
Revenue
ton miles (RTM) (millions)
|
45,346
|
46,481
|
135,569
|
136,997
|
|
Carloads
(thousands)
|
1,217
|
1,204
|
3,537
|
3,539
|
|
Route
miles (includes Canada and the U.S.)
|
20,421
|
20,219
|
20,421
|
20,219
|
|
Employees
(end of period)
|
22,569
|
22,834
|
22,569
|
22,834
|
|
Employees
(average for the period)
|
22,730
|
22,789
|
22,773
|
22,254
|
|
Productivity
|
|||||
Operating
ratio (%)
|
62.6
|
62.0
|
67.0
|
64.1
|
|
Rail
freight revenue per RTM (cents)
|
4.47
|
3.92
|
4.18
|
3.96
|
|
Rail
freight revenue per carload ($)
|
1,666
|
1,512
|
1,601
|
1,532
|
|
Operating
expenses per GTM (cents)
|
1.64
|
1.42
|
1.63
|
1.48
|
|
Labor
and fringe benefits expense per GTM (cents)
|
0.49
|
0.50
|
0.49
|
0.53
|
|
GTMs
per average number of employees (thousands)
|
3,800
|
3,883
|
11,328
|
11,620
|
|
Diesel
fuel consumed (U.S. gallons in millions)
|
92
|
96
|
287
|
290
|
|
Average
fuel price ($/U.S. gallon)
|
3.84
|
2.39
|
3.55
|
2.29
|
|
GTMs
per U.S. gallon of fuel consumed
|
939
|
922
|
899
|
892
|
|
Safety
indicators
|
|||||
Injury frequency rate
per 200,000 person hours (2)
|
2.1
|
2.2
|
1.8
|
1.8
|
|
Accident rate per
million train miles (2)
|
2.2
|
3.0
|
2.5
|
2.4
|
|
Financial
ratio
|
|||||
Debt to
total capitalization ratio (% at end of period)
|
39.5
|
36.8
|
39.5
|
36.8
|
|
(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)
|
Three
months ended September 30
|
Nine
months ended September 30
|
||||||
Variance
|
Variance
|
||||||
2008
|
2007
|
Fav
(Unfav)
|
2008
|
2007
|
Fav
(Unfav)
|
||
(Unaudited)
|
|||||||
Revenues
(millions of dollars)
|
|||||||
Petroleum
and chemicals
|
346
|
317
|
9%
|
987
|
920
|
7%
|
|
Metals
and minerals
|
269
|
208
|
29%
|
713
|
631
|
13%
|
|
Forest
products
|
383
|
392
|
(2%)
|
1,070
|
1,216
|
(12%)
|
|
Coal
|
140
|
99
|
41%
|
346
|
287
|
21%
|
|
Grain
and fertilizers
|
327
|
330
|
(1%)
|
1,001
|
961
|
4%
|
|
Intermodal
|
446
|
361
|
24%
|
1,190
|
1,020
|
17%
|
|
Automotive
|
117
|
114
|
3%
|
357
|
388
|
(8%)
|
|
Total
rail freight revenue
|
2,028
|
1,821
|
11%
|
5,664
|
5,423
|
4%
|
|
Other
revenues
|
229
|
202
|
13%
|
618
|
533
|
16%
|
|
Total
revenues
|
2,257
|
2,023
|
12%
|
6,282
|
5,956
|
5%
|
|
Revenue
ton miles (millions)
|
|||||||
Petroleum
and chemicals
|
8,272
|
8,369
|
(1%)
|
24,668
|
24,288
|
2%
|
|
Metals
and minerals
|
5,140
|
4,301
|
20%
|
13,971
|
12,414
|
13%
|
|
Forest
products
|
8,715
|
10,021
|
(13%)
|
25,999
|
30,652
|
(15%)
|
|
Coal
|
4,159
|
3,500
|
19%
|
11,189
|
10,344
|
8%
|
|
Grain
and fertilizers
|
9,379
|
11,241
|
(17%)
|
31,915
|
32,809
|
(3%)
|
|
Intermodal
|
9,040
|
8,339
|
8%
|
25,795
|
24,114
|
7%
|
|
Automotive
|
641
|
710
|
(10%)
|
2,032
|
2,376
|
(14%)
|
|
45,346
|
46,481
|
(2%)
|
135,569
|
136,997
|
(1%)
|
||
Rail
freight revenue / RTM (cents)
|
|||||||
Total
rail freight revenue per RTM
|
4.47
|
3.92
|
14%
|
4.18
|
3.96
|
6%
|
|
Commodity
groups:
|
|||||||
Petroleum
and chemicals
|
4.18
|
3.79
|
10%
|
4.00
|
3.79
|
6%
|
|
Metals
and minerals
|
5.23
|
4.84
|
8%
|
5.10
|
5.08
|
-
|
|
Forest
products
|
4.39
|
3.91
|
12%
|
4.12
|
3.97
|
4%
|
|
Coal
|
3.37
|
2.83
|
19%
|
3.09
|
2.77
|
12%
|
|
Grain
and fertilizers
|
3.49
|
2.94
|
19%
|
3.14
|
2.93
|
7%
|
|
Intermodal
|
4.93
|
4.33
|
14%
|
4.61
|
4.23
|
9%
|
|
Automotive
|
18.25
|
16.06
|
14%
|
17.57
|
16.33
|
8%
|
|
Carloads
(thousands)
|
|||||||
Petroleum
and chemicals
|
139
|
153
|
(9%)
|
424
|
448
|
(5%)
|
|
Metals
and minerals
|
287
|
257
|
12%
|
797
|
749
|
6%
|
|
Forest
products
|
132
|
147
|
(10%)
|
395
|
450
|
(12%)
|
|
Coal
|
103
|
90
|
14%
|
280
|
275
|
2%
|
|
Grain
and fertilizers
|
137
|
152
|
(10%)
|
436
|
439
|
(1%)
|
|
Intermodal
|
370
|
343
|
8%
|
1,045
|
978
|
7%
|
|
Automotive
|
49
|
62
|
(21%)
|
160
|
200
|
(20%)
|
|
1,217
|
1,204
|
1%
|
3,537
|
3,539
|
-
|
||
Rail
freight revenue / carload (dollars)
|
|||||||
Total
rail freight revenue per carload
|
1,666
|
1,512
|
10%
|
1,601
|
1,532
|
5%
|
|
Commodity
groups:
|
|||||||
Petroleum
and chemicals
|
2,489
|
2,072
|
20%
|
2,328
|
2,054
|
13%
|
|
Metals
and minerals
|
937
|
809
|
16%
|
895
|
842
|
6%
|
|
Forest
products
|
2,902
|
2,667
|
9%
|
2,709
|
2,702
|
-
|
|
Coal
|
1,359
|
1,100
|
24%
|
1,236
|
1,044
|
18%
|
|
Grain
and fertilizers
|
2,387
|
2,171
|
10%
|
2,296
|
2,189
|
5%
|
|
Intermodal
|
1,205
|
1,052
|
15%
|
1,139
|
1,043
|
9%
|
|
Automotive
|
2,388
|
1,839
|
30%
|
2,231
|
1,940
|
15%
|
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 MEASURE - unaudited
|
Free
cash flow
The
Company generated $258 million and $483 million of free cash flow for the
three and nine months ended September 30, 2008, compared to $142 million
and $193 million of free cash flow for the same periods in
2007. Free cash flow does not have any standardized meaning
prescribed by GAAP and may, therefore, not be comparable to similar
measures presented by other companies. The Company believes
that free cash flow is a useful measure of performance as it demonstrates
the Company’s ability to generate cash after the payment of capital
expenditures and dividends. The Company defines free cash flow
as cash provided from operating activities, excluding changes in the
accounts receivable securitization program and changes in cash and cash
equivalents resulting from foreign exchange fluctuations, less cash used
by investing activities and the payment of dividends, calculated as
follows:
|
Three
months ended
September
30
|
Nine
months ended
September
30
|
||||||||||
In
millions
|
2008
|
2007
|
2008
|
2007
|
|||||||
Cash
provided from operating activities
|
$
|
957
|
$
|
446
|
$
|
1,531
|
$
|
1,475
|
|||
Cash
used by investing activities
|
(393)
|
(336)
|
(902)
|
(871)
|
|||||||
Cash
provided before financing activities
|
564
|
110
|
629
|
604
|
|||||||
Adjustments:
|
|||||||||||
Change
in accounts receivable securitization
|
(202)
|
152
|
170
|
(52)
|
|||||||
Dividends
paid
|
(108)
|
(104)
|
(328)
|
(316)
|
|||||||
Effect
of foreign exchange fluctuations on U.S.
|
|||||||||||
dollar-denominated
cash and cash equivalents
|
4
|
(16)
|
12
|
(43)
|
|||||||
Free
cash flow
|
$
|
258
|
$
|
142
|
$
|
483
|
$
|
193
|
Management’s
discussion and analysis (MD&A) relates to the financial condition and
results of operations of Canadian National Railway Company, together with
its wholly-owned subsidiaries, collectively “CN” or “the
Company.” Canadian National Railway Company’s common shares are
listed on the Toronto and New York stock exchanges. Except
where otherwise indicated, all financial information reflected herein is
expressed in Canadian dollars and determined on the basis of United States
generally accepted accounting principles (U.S. GAAP). The
Company’s objective is to provide meaningful and relevant information
reflecting the Company’s financial condition and results of
operations. In certain instances, the Company may make
reference to certain non-GAAP measures that, from management’s
perspective, are useful measures of performance. The reader is
advised to read all information provided in the MD&A in conjunction
with the Company’s 2008 unaudited Interim Consolidated Financial
Statements and Notes thereto, as well as the 2007 Annual
MD&A.
|
Business
profile
CN is
engaged in the rail and related transportation business. CN’s network of
approximately 20,400 route miles of track spans Canada and mid-America,
connecting three coasts: the Atlantic, the Pacific and the Gulf of
Mexico. CN’s extensive network, in addition to co-production
arrangements, routing protocols, marketing alliances, and interline
agreements, provide CN customers access to all three North American Free
Trade Agreement (NAFTA) nations.
CN’s freight revenues
are derived from seven commodity groups representing a diversified and
balanced portfolio of goods transported between a wide range of origins
and destinations. This product and geographic diversity better positions
the Company to face economic fluctuations and enhances its potential for
growth opportunities. In 2007, no individual commodity group
accounted for more than 20% of revenues. From a geographic
standpoint, 19% of revenues came from United States (U.S.) domestic
traffic, 32% from transborder traffic, 23% from Canadian domestic traffic
and 26% from overseas traffic. The
Company originates approximately 87% of traffic moving along its network,
which allows it both to capitalize on service advantages and build on
opportunities to efficiently use
assets.
|
Corporate
organization
The
Company manages its rail operations in Canada and the United States as one
business segment. Financial information reported at this level,
such as revenues, operating income and cash flow from operations, is used
by the Company’s corporate management in evaluating financial and
operational performance and allocating resources across CN’s
network. The Company’s strategic initiatives, which drive its
operational direction, are developed and managed centrally by corporate
management and are communicated to its regional activity centers (the
Western Region, Eastern Region and Southern Region), whose role is to
manage the day-to-day service requirements of their respective
territories, control direct costs incurred locally, and execute the
corporate strategy and operating plan established by corporate
management.
See Note 16 – Segmented
information, to the Company’s 2007 Annual Consolidated Financial
Statements for additional information on the Company’s corporate
organization, as well as selected financial information by geographic
area.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Strategy
overview
CN’s
focus is on running a safe and efficient railroad. While remaining at the
forefront of the rail industry, CN’s goal is to be internationally
regarded as one of the best-performing transportation
companies.
CN’s commitment is to
create value for both its customers and shareholders. By providing quality
and cost-effective service, CN seeks to create value for its
customers. By striving for sustainable financial performance
through profitable growth, solid free cash flow and a high return on
investment, CN seeks to deliver increased shareholder
value.
CN has a unique business
model, which is anchored on five key principles: providing quality
service, controlling costs, focusing on asset utilization, committing to
safety, and developing people. “Precision
railroading” is at the core of CN’s business model. It is a highly
disciplined process whereby CN handles individual rail shipments according
to a specific trip plan and manages all aspects of railroad operations to
meet customer commitments efficiently and profitably.
Precision railroading
demands discipline to execute the trip plan, the relentless measurement of
results, and the use of such results to generate further execution
improvements. Precision railroading increases velocity,
improves reliability, lowers costs, enhances asset utilization and,
ultimately, helps the Company to grow the top line. It has been
a key contributor to CN’s earnings growth and improved
return.
The Company sees
long-term opportunities to grow the business and further improve
productivity. In Intermodal, the Prince Rupert Intermodal
Terminal, which opened in the fourth quarter of 2007, will allow CN to
leverage the potential of the container trade between Asia and North
America. In Bulk, the Company expects to continue to benefit
from increased resource demand, particularly as it relates to coal mine
expansions and global demand for potash. In Merchandise, the
Company sees growth potential for a number of commodities, particularly
pipes, machinery and equipment, condensate and other commodities
associated with oil and gas development in western Canada. The
Company considers that such growth opportunities extend beyond business
cycle considerations and, as such, are less affected by the current
situation in the North American and global economies. The current
situation in financial markets is adding a substantial amount of risk to
the North American economy, which is already experiencing recessionary
conditions, and to the global economy, which is already slowing
down. Under these circumstances, it is difficult to make a
projection in respect of business prospects for the next twelve to
eighteen months. In addition, the Company’s assumption is that
the risks outlined in the Business risks section of this MD&A will not
result in a material impact on its financial
statements.
The Company, on an
ongoing basis, also invests in various strategic initiatives to expand the
scope of its business. Some of these recent initiatives include the
proposed acquisition of the Elgin, Joliet and Eastern Railway Company
(EJ&E), which is pending approval by the U.S. Surface Transportation
Board (STB); the acquisition of short lines in Alberta to help oil sands
operators meet growing demand for energy; the development of CN WorldWide
International, the Company’s international freight-forwarding subsidiary,
with offices in Europe, China and the Americas; and the formation of CN
WorldWide North America, a new operating entity, to manage and expand the
scope and scale of the Company’s existing non-rail capabilities such as
warehousing and distribution, customs services, truck brokerage and supply
chain visibility tools across North America.
The
opportunities to further improve productivity extend across all functions
in the organization. In Transportation, the Company is aiming
to continue to increase productivity on the track and in the
yards. Train productivity is being improved through the use of
“distributed power” equipped locomotives, which allows the Company to run
longer, heavier trains, including in cold weather conditions, while
improving train handling, reducing train separations and ensuring the
overall safety of operations. This initiative, combined with CN’s
investments in longer sidings, can offer train-mile savings, allow for
long-train operations and reduce wear on rail and wheels. Yard throughput
is being improved through SmartYard, an innovative use of real-time
traffic information to sequence cars effectively and get them out on the
line more quickly in the face of constantly changing
conditions. In Engineering, the Company is continuously working
to increase the productivity of its field forces, through better use of
traffic information and the optimization of work scheduling, and as a
result, better management of its engineering forces on the
track. The Company also intends to maintain a solid focus on
reducing accidents and related costs, as well as costs for legal claims
and health care.
CN’s capital programs
support the Company’s commitment to the five key principles and its
ability to grow the business profitably. In 2008, CN plans to
invest approximately $1.5 billion on capital programs, of which over $1
billion is targeted towards track infrastructure to maintain a safe
railway and to improve the productivity and fluidity of the network, and
includes the replacement of rail, ties, and other track materials, bridge
improvements, as well as upgrades to the recently acquired rail assets of
the Athabasca Northern Railway (ANY). This amount also includes
funds for strategic initiatives, such as siding extensions to accommodate
container traffic from the Prince Rupert Intermodal Terminal, the upgrade
of the Company’s freight car classification yard in Memphis, Tennessee,
and additional enhancements to the track infrastructure in western Canada
to take advantage of growth prospects in North American trade with Asia
and in western Canada.
CN’s equipment spending,
targeted to reach approximately $140 million in 2008, is intended to
develop growth opportunities and to improve the quality of the fleet to
meet customer requirements. This amount includes the acquisition of new
fuel-efficient locomotives, as well as improvements to the existing
fleet. CN also expects to spend more than $300 million on
facilities to grow the business, including transloads and distribution
centers; on information technology to improve service and operating
efficiency; and on other projects to increase
productivity.
The Company’s commitment
to safety is reflected in the wide range of initiatives that CN is
pursuing and the size of its capital programs. Comprehensive
plans are in place to address safety, security, employee well-being and
environmental management. CN's Integrated Safety Plan is the
framework for putting safety at the center of its day-to-day
operations. This proactive plan is designed to minimize risk
and drive continuous improvement in the reduction of injuries and
accidents, is fully supported by senior management, and engages employees
at all levels of the organization.
Environmental protection
is also an integral part of CN’s day-to-day activities. A
combination of key resource people, training, policies, monitoring and
environmental assessments helps to ensure that the Company’s operations
comply with CN’s Environmental Policy, a copy of which is available on
CN’s website.
CN’s ability to develop
the best railroaders in the industry has been a key contributor to the
Company’s success. CN recognizes that without the right people – no matter
how good a service plan or business model a company may have – it will not
be able to fully execute. The Company is focused on recruiting the right
people, developing employees with the right skills, motivating them to do
the right thing, and training them to be the future leaders of the
Company.
The
forward-looking statements provided in the above section and in other
parts of this MD&A are subject to risks and uncertainties that could
cause actual results or performance to differ materially from those
expressed or implied in such statements and are based on certain factors
and assumptions which the Company considers reasonable, about events,
developments, prospects and opportunities that may not materialize or that
may be offset entirely or partially by other events and
developments. See the Business risks section of this MD&A
for assumptions and risk factors affecting such forward-looking
statements.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Financial
and statistical highlights
|
||||||||||
|
||||||||||
|
Three
months ended
September
30
|
Nine
months ended
September
30
|
||||||||
$
in millions, except per share data, or unless otherwise indicated
|
2008
|
2007
|
2008
|
2007
|
||||||
|
(Unaudited)
|
|||||||||
Financial
results
|
||||||||||
Revenues
|
$
|
2,257
|
$
|
2,023
|
$
|
6,282
|
$
|
5,956
|
||
Operating
income
|
$
|
844
|
$
|
768
|
$
|
2,074
|
$
|
2,140
|
||
Net
income (a)
|
$
|
552
|
$
|
485
|
$
|
1,322
|
$
|
1,325
|
||
|
||||||||||
Operating
ratio
|
62.6%
|
62.0%
|
67.0%
|
64.1%
|
||||||
|
||||||||||
Basic
earnings per share (a)
|
$
|
1.17
|
$
|
0.97
|
$
|
2.77
|
$
|
2.62
|
||
Diluted
earnings per share (a)
|
$
|
1.16
|
$
|
0.96
|
$
|
2.74
|
$
|
2.59
|
||
|
||||||||||
Dividend
declared per share
|
$
|
0.23
|
$
|
0.21
|
$
|
0.69
|
$
|
0.63
|
||
|
||||||||||
Financial
position
|
||||||||||
Total
assets
|
$
|
24,964
|
$
|
22,905
|
$
|
24,964
|
$
|
22,905
|
||
Total
long-term financial liabilities
|
$
|
12,888
|
$
|
11,692
|
$
|
12,888
|
$
|
11,692
|
||
Statistical operating
data and productivity measures (b)
|
||||||||||
Employees
(average
for the period)
|
22,730
|
22,789
|
22,773
|
22,254
|
||||||
Gross
ton miles (GTM) per average number of employees (thousands)
|
3,800
|
3,883
|
11,328
|
11,620
|
||||||
GTMs
per U.S. gallon of fuel consumed
|
939
|
922
|
899
|
892
|
||||||
|
||||||||||
(a)
|
The
three and nine months ended September 30, 2008 figures include a deferred
income tax recovery of $41 million ($0.09 per basic or diluted share) and
$75 million ($0.16 per basic or diluted share), respectively. The three
and nine months ended September 30, 2007 figures include a deferred income
tax recovery of $14 million ($0.03 per basic or diluted share) and $44
million ($0.09 per basic or diluted share), respectively. The
deferred income tax recoveries result mainly from the enactment of
corporate income tax rate changes in Canada and the resolution of various
income tax matters and adjustments related to tax filings of prior years
as further discussed herein.
|
|||||||||
|
||||||||||
(b)
|
Based
on estimated data available at such time and subject to change as more
complete information becomes
available.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Financial
results
Third
quarter and first nine months of 2008 compared to corresponding periods in
2007
Third
quarter 2008 net income increased by $67 million, or 14%, to $552 million,
when compared to the same period in 2007, with diluted earnings per share
rising 21% to $1.16.
Revenues for the third
quarter of 2008 increased by $234 million, or 12%, to $2,257 million, when
compared to the same period in 2007, mainly due to freight rate increases
and higher volumes in specific commodity groups, particularly intermodal,
metals and minerals, and coal. Partly offsetting these factors were
weakness in specific markets, particularly forest products, reduced grain
volumes as a result of depleted stockpiles and the impact of hurricanes on
traffic in the Southern U.S.
Operating expenses for
the three months ended September 30, 2008 increased by $158 million, or
13%, to $1,413 million, mainly due to higher fuel costs and purchased
services and material expenses, which were partly offset by lower labor
and fringe benefits expense.
The operating ratio,
defined as operating expenses as a percentage of revenues, was 62.6% in
the current quarter compared to 62.0% in the third quarter of 2007, a
0.6-point increase.
Net
income for the nine months ended September 30, 2008 was $1,322 million, a
decrease of $3 million, remaining relatively flat, when compared to the
same period in 2007, with diluted earnings per share rising 6% to
$2.74.
Revenues for the first
nine months of 2008 increased by $326 million, or 5%, to $6,282 million,
mainly due to freight rate increases and higher volumes in specific
commodity groups, particularly intermodal, metals and minerals, and coal,
which also reflect the negative impact of the United Transportation Union
(UTU) strike on first-quarter 2007 volumes. These gains were partly offset
by the translation impact of the stronger Canadian dollar on U.S.
dollar-denominated revenues, weakness in specific markets, particularly
forest products and automotive, the impact of harsh weather conditions
experienced in Canada and the U.S. Midwest during the first quarter of
2008 and reduced grain volumes as a result of depleted
stockpiles.
For the first nine
months of 2008, operating expenses increased by $392 million, or 10%, to
$4,208 million, mainly due to higher fuel costs and purchased services and
material expenses, which were partly offset by the translation impact of
the stronger Canadian dollar on U.S. dollar-denominated expenses and lower
labor and fringe benefits expense.
The nine-month operating
ratio was 67.0% in 2008, compared to 64.1% in 2007, a 2.9-point
increase.
The
Company’s results of operations in 2008 were affected by significant
weakness in certain markets due to the current economic environment and
severe weather conditions in the first quarter. The Company’s results of
operations in 2007 included the impact of a strike by 2,800 members of the
UTU in Canada for which the Company estimated the negative impact on
first-quarter 2007 operating income and net income to be approximately $50
million and $35 million, respectively ($0.07 per basic or diluted
share). The results for the first nine months of 2008 and 2007
include deferred income tax recoveries of $75 million ($0.16 per basic or
diluted share) and $44 million ($0.09 per basic or diluted share),
respectively, resulting mainly from the enactment of corporate income tax
rate changes in Canada and the resolution of various income tax matters
and adjustments related to tax filings of prior years.
Foreign
exchange fluctuations have also had an impact on the comparability of the
results of operations. The
fluctuation of the Canadian dollar relative to the U.S. dollar,
which affects the conversion of the Company’s U.S. dollar-denominated
revenues and expenses, has resulted in a minimal impact to net income in
the third quarter, and a reduction of approximately $55 million ($0.11 per
basic or diluted share) to net income in the first nine months of
2008.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Revenues
|
|||||||||||
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
In
millions, unless otherwise indicated
|
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
|||||
(Unaudited)
|
|||||||||||
Rail
freight revenues
|
$
|
2,028
|
$
|
1,821
|
11%
|
$
|
5,664
|
$
|
5,423
|
4%
|
|
Other
revenues
|
229
|
202
|
13%
|
618
|
533
|
16%
|
|||||
Total
revenues
|
$
|
2,257
|
$
|
2,023
|
12%
|
$
|
6,282
|
$
|
5,956
|
5%
|
|
Rail
freight revenues:
|
|||||||||||
Petroleum
and chemicals
|
$
|
346
|
$
|
317
|
9%
|
$
|
987
|
$
|
920
|
7%
|
|
Metals
and minerals
|
269
|
208
|
29%
|
713
|
631
|
13%
|
|||||
Forest
products
|
383
|
392
|
(2%)
|
1,070
|
1,216
|
(12%)
|
|||||
Coal
|
140
|
99
|
41%
|
346
|
287
|
21%
|
|||||
Grain
and fertilizers
|
327
|
330
|
(1%)
|
1,001
|
961
|
4%
|
|||||
Intermodal
|
446
|
361
|
24%
|
1,190
|
1,020
|
17%
|
|||||
Automotive
|
117
|
114
|
3%
|
357
|
388
|
(8%)
|
|||||
Total
rail freight revenues
|
$
|
2,028
|
$
|
1,821
|
11%
|
$
|
5,664
|
$
|
5,423
|
4%
|
|
Revenue ton miles (RTM)
(millions)
|
45,346
|
46,481
|
(2%)
|
135,569
|
136,997
|
(1%)
|
|||||
Rail freight revenue/RTM
(cents)
|
4.47
|
3.92
|
14%
|
4.18
|
3.96
|
6%
|
Revenues
for the quarter ended September 30, 2008 totaled $2,257 million compared
to $2,023 million in the same period in 2007, an increase of $234 million,
or 12%. Revenues for the first nine months of 2008 were $6,282
million, an increase of $326 million, or 5%, when compared to the same
period in 2007. The increase in the third quarter of 2008 was
mainly due to freight rate increases of $250 million, of which
approximately two-thirds was related to a higher fuel surcharge resulting
from year-over-year increases in applicable fuel prices; and higher
volumes in specific commodity groups, particularly intermodal, metals and
minerals, and coal. These gains were partly offset by weakness in specific
markets, particularly forest products, reduced grain volumes as a result
of depleted stockpiles and the impact of hurricanes on traffic in the
Southern U.S. The increase in the first nine months of 2008 was
mainly due to freight rate increases of $575 million, of which
approximately two-thirds was due to a higher fuel surcharge, and increased
volumes in specific commodity groups, particularly intermodal, metals and
minerals, and coal, which also reflect the negative impact of the UTU
strike on first-quarter 2007 volumes. These gains were partly offset by
the translation impact of the stronger Canadian dollar on U.S.
dollar-denominated revenues of $245 million, weakness in specific markets,
particularly forest products and automotive, the impact of harsh weather
conditions experienced in Canada and the U.S. Midwest during the first
quarter of 2008 and reduced grain volumes as a result of depleted
stockpiles.
Revenue ton miles (RTM),
measuring the relative weight and distance of rail freight transported by
the Company, decreased by 2% in the third quarter of 2008 and 1% for the
first nine months of 2008 when compared to the same periods in
2007. For the third quarter and first nine months of 2008, 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,
increased by 14% and 6%, respectively, when compared to the same periods
in 2007, mainly due to freight rate increases that were partially offset
by the translation impact of the stronger Canadian dollar in the
nine-month period.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Petroleum
and chemicals
|
|||||||||||
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
||||||
Revenues (millions)
|
$
|
346
|
$
|
317
|
9%
|
$
|
987
|
$
|
920
|
7%
|
|
RTMs (millions)
|
8,272
|
8,369
|
(1%)
|
24,668
|
24,288
|
2%
|
|||||
Revenue/RTM (cents)
|
4.18
|
3.79
|
10%
|
4.00
|
3.79
|
6%
|
Petroleum
and chemicals comprises a wide range of commodities, including chemicals,
sulfur, plastics, petroleum products and liquefied petroleum gas (LPG)
products. The primary markets for these commodities are within
North America, and as such, the performance of this commodity group is
closely correlated with the North American economy. Most of the
Company’s petroleum and chemicals shipments originate in the Louisiana
petrochemical corridor between New Orleans and Baton Rouge; in northern
Alberta, which is a major center for natural gas feedstock and world scale
petrochemicals and plastics; and in eastern Canadian regional
plants. These shipments are destined for customers in Canada,
the United States and overseas. Revenues for this
commodity group increased by $29 million, or 9%, for the third quarter and
$67 million, or 7%, for the first nine months of 2008 when compared to the
same periods in 2007. The increases in both the third quarter
and first nine months of 2008 were primarily driven by freight rate
increases. The increase in the third quarter was also due to
strong molten sulfur shipments to the U.S. due to high fertilizer demand,
longer haul traffic for petroleum-based fuels due to shortages in local
Canadian markets, and ongoing condensate opportunities into Western
Canada. These gains were partly offset by the impact of
hurricanes on traffic in the Southern U.S. and reduced plastic pellet
shipments. The increase in the first nine months of 2008 was
also due to increased molten sulfur volumes to the U.S., growth in
condensate shipments, and increased revenues of petroleum products due to
shifts in the market requiring products being sourced from longer
distances. Partly offsetting these gains was the translation
impact of the stronger Canadian dollar, reduced plastic pellet shipments,
and the impact of soft chemical markets. Revenue per revenue
ton mile increased by 10% in the third quarter and 6% in the first nine
months of 2008, mainly due to freight rate increases that were partially
offset by an increase in the average length of haul and the translation
impact of the stronger Canadian dollar in the nine-month
period.
|
Metals
and minerals
|
|||||||||||
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
||||||
Revenues (millions)
|
$
|
269
|
$
|
208
|
29%
|
$
|
713
|
$
|
631
|
13%
|
|
RTMs (millions)
|
5,140
|
4,301
|
20%
|
13,971
|
12,414
|
13%
|
|||||
Revenue/RTM (cents)
|
5.23
|
4.84
|
8%
|
5.10
|
5.08
|
-
|
The
metals and minerals commodity group consists primarily of nonferrous base
metals, concentrates, iron ore, steel, construction materials, machinery
and dimensional (large) loads. The Company provides unique rail
access to aluminum, mining, steel and iron ore producing regions, which
are among the most important in North America. This access,
coupled with the Company’s transload and port facilities, has made CN a
leader in the transportation of copper, lead, zinc, concentrates, iron
ore, refined metals and aluminum. Mining, oil and gas development and
non-residential construction are the key drivers for metals and
minerals. Revenues for this commodity group increased by $61
million, or 29%, for the third quarter and $82 million, or 13%, for the
first nine months of 2008 when compared to the same periods in
2007. The increases in both the third quarter and first nine
months of 2008 were mainly driven by freight rate
increases. The increase in the third quarter was also due to
strong shipments of commodities related to oil and gas development
including aggregates, frac sand, pipe and cement; strong volumes of flat
rolled products as the Company was able to take advantage of new
distribution patterns in Eastern Canada and the U.S. Midwest; and
continued strength in iron ore shipments due to strong
demand. Partly offsetting these gains were reduced shipments of
non-ferrous ore. The increase in the first nine months of 2008
was also related to greater volumes of flat rolled products, strength in
commodities related to oil and gas development, and continued momentum in
the volume of iron ore shipped. Partly offsetting these gains
were the translation impact of the stronger Canadian dollar and reduced
shipments of non-ferrous ore. Revenue per revenue ton mile
increased by 8% in the third quarter, mainly due to freight rate increases
that were partly offset by an increase in the average length of
haul. For the first nine months of 2008, revenue per revenue
ton mile were relatively flat mainly due to freight rate increases that
were offset by the translation impact of the stronger Canadian dollar and
an increase in the average length of
haul.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Forest
products
|
|||||||||||
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
||||||
Revenues (millions)
|
$
|
383
|
$
|
392
|
(2%)
|
$
|
1,070
|
$
|
1,216
|
(12%)
|
|
RTMs (millions)
|
8,715
|
10,021
|
(13%)
|
25,999
|
30,652
|
(15%)
|
|||||
Revenue/RTM (cents)
|
4.39
|
3.91
|
12%
|
4.12
|
3.97
|
4%
|
The
forest products commodity group includes various types of lumber, panels,
paper, wood pulp and other fibers such as logs, recycled paper and wood
chips. The Company has superior rail access to the western and eastern
Canadian fiber-producing regions, which are among the largest fiber source
areas in North America. In the United States, the Company is
strategically located to serve both the Midwest and southern U.S.
corridors with interline connections to other Class I railroads. The key
drivers for the various commodities are: for newsprint, advertising
lineage, non-print media and overall economic conditions, primarily in the
United States; for fibers (mainly wood pulp), the consumption of paper in
North American and offshore markets; and for lumber and panels, housing
starts and renovation activities in the United States. Although
demand for forest products can be cyclical, the Company’s geographical
advantages, unique access and product diversity tend to reduce the overall
impact of market fluctuations. Revenues for this commodity
group decreased by $9 million, or 2%, in the third quarter and $146
million, or 12%, in the first nine months of 2008 when compared to the
same periods in 2007. The decreases in the third quarter and
first nine months of 2008 were mainly due to reduced lumber and panel
shipments, which were affected by the decline in U.S. housing starts that
resulted in customer mill closures and production
curtailments. The decrease in revenues in the first nine months
of 2008 was also due to the translation impact of the stronger Canadian
dollar. During the third quarter and first nine months of 2008,
these factors were partly offset by freight rate increases and
higher volumes of logs and paper-related products. Revenue per
revenue ton mile increased by 12% in the third quarter and 4% for the
first nine months of 2008, mainly due to freight rate increases and a
positive change in traffic mix. For the nine-month period, these factors
were partially offset by the translation impact of the stronger Canadian
dollar.
|
Coal
|
|||||||||||
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
||||||
Revenues (millions)
|
$
|
140
|
$
|
99
|
41%
|
$
|
346
|
$
|
287
|
21%
|
|
RTMs (millions)
|
4,159
|
3,500
|
19%
|
11,189
|
10,344
|
8%
|
|||||
Revenue/RTM (cents)
|
3.37
|
2.83
|
19%
|
3.09
|
2.77
|
12%
|
The
coal commodity group consists primarily of thermal grades of bituminous
coal. Canadian thermal coal is delivered to power utilities
primarily in eastern Canada; while in the United States, thermal coal is
transported from mines served in southern Illinois, or from western U.S.
mines via interchange with other railroads, to major utilities in the
Midwest and southeast United States. The coal business also
includes the transport of Canadian metallurgical coal, which is largely
exported via terminals on the west coast of Canada to steel
producers. Revenues for this commodity group increased by $41
million, or 41%, for the third quarter and $59 million, or 21%, for the
first nine months of 2008 when compared to the same periods in
2007. The increases in both the third quarter and first nine
months of 2008 were mainly due to freight rate increases; increased
shipments of U.S. coal due to the startup of a new mine operation; strong
volumes of interline received coal; and strong production of petroleum
coke from Alberta. Partly offsetting these gains were decreased volumes
due to production issues at specific Canadian and U.S. coal mines, and the
translation impact of the stronger Canadian dollar affecting only the
nine-month period. Revenue per revenue ton mile increased by
19% in the third quarter and 12% in the first nine months of 2008, largely
due to freight rate increases and a positive change in traffic
mix. For the nine–month period, these factors were partly
offset by the translation impact of the stronger Canadian
dollar.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Grain
and fertilizers
|
|||||||||||
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
||||||
Revenues (millions)
|
$
|
327
|
$
|
330
|
(1%)
|
$
|
1,001
|
$
|
961
|
4%
|
|
RTMs (millions)
|
9,379
|
11,241
|
(17%)
|
31,915
|
32,809
|
(3%)
|
|||||
Revenue/RTM (cents)
|
3.49
|
2.94
|
19%
|
3.14
|
2.93
|
7%
|
The
grain and fertilizers commodity group depends primarily on crops grown and
fertilizers processed in western Canada and the U.S. Midwest. The grain
segment consists of three primary segments: food grains (mainly wheat,
oats and malting barley), feed grains (including feed barley, feed wheat,
and corn), and oilseeds and oilseed products (primarily canola seed, oil
and meal, and soybeans). Production of grain varies considerably from year
to year, affected primarily by weather conditions, seeded and harvested
acreage, the mix of grains produced and crop yields. Grain
exports are sensitive to the size and quality of the crop produced,
international market conditions and foreign government
policy. The majority of grain produced in western Canada and
moved by CN is exported via the ports of Vancouver, Prince Rupert and
Thunder Bay. Certain of these rail movements are subject to
government regulation and to a “revenue cap,” which effectively
establishes a maximum revenue entitlement that railways can
earn. In the U.S., grain grown in Illinois and Iowa is
exported, as well as transported to domestic processing facilities and
feed markets. The Company also serves major producers of potash
in Canada, as well as producers of ammonium nitrate, urea and other
fertilizers across Canada and the U.S. Revenues for this
commodity group decreased by $3 million, or 1%, for the third quarter and
increased by $40 million, or 4%, for the first nine months of 2008 when
compared to the same periods in 2007. The decrease in the third
quarter was primarily due to reduced grain volumes as a result of depleted
stockpiles and the impact of hurricanes on traffic in the Southern
U.S. These factors were partly offset by freight rate
increases, higher ethanol volumes due to the development of new facilities
and greater shipments of Canadian oats for export to the
U.S. Increased revenues for the first nine months of 2008 were
mainly due to freight rate increases, higher ethanol shipments, strong
demand for fertilizers, and increased movements of barley for
export. These gains were partially offset by reduced grain
volumes as a result of depleted stockpiles and the translation impact of
the stronger Canadian dollar. Revenue per revenue ton mile
increased by 19% in the third quarter and 7% in the first nine months of
2008, largely due to freight rate increases that were partially offset by
the translation impact of the stronger Canadian dollar affecting only the
nine-month period.
|
Intermodal
|
|||||||||||
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
||||||
Revenues (millions)
|
$
|
446
|
$
|
361
|
24%
|
$
|
1,190
|
$
|
1,020
|
17%
|
|
RTMs (millions)
|
9,040
|
8,339
|
8%
|
25,795
|
24,114
|
7%
|
|||||
Revenue/RTM (cents)
|
4.93
|
4.33
|
14%
|
4.61
|
4.23
|
9%
|
The
intermodal commodity group is comprised of two segments: domestic and
international. The domestic segment transports consumer
products and manufactured goods, operating through both retail and
wholesale channels, within domestic Canada, domestic U.S., Mexico and
transborder, while the international segment handles import and export
container traffic, directly serving the major ports of Vancouver, Prince
Rupert, Montreal, Halifax and New Orleans. The domestic segment
is driven by consumer markets, with growth generally tied to the
economy. The international segment is driven by North American
economic and trade conditions. Revenues for this commodity
group increased by $85 million, or 24%, for the third quarter and $170
million, or 17%, for the first nine months of 2008 when compared to the
same periods in 2007. The increases in the third quarter and
first nine months of 2008 were mainly due to freight rate increases;
higher volumes through the Port of Prince Rupert, which opened its
Intermodal terminal at the end of 2007, and the Port of Vancouver; and
higher Canadian retail and U.S. transborder traffic due to marketshare
gains. Partly offsetting these gains were lower volumes through the Port
of Halifax as various customers have rationalized their services; and the
translation impact of the stronger Canadian dollar that affected only the
nine-month period. Revenue per revenue ton mile increased by
14% in the third quarter mainly due to freight rate increases that were
partly offset by an increase in the average length of haul. Revenue per
revenue ton mile increased by 9% in the first nine months of 2008 mainly
due to freight rate increases that were partly offset by the translation
impact of the stronger Canadian
dollar.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Automotive
|
|||||||||||
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
2008
|
2007
|
%
Change
|
2008
|
2007
|
%
Change
|
||||||
Revenues (millions)
|
$
|
117
|
$
|
114
|
3%
|
$
|
357
|
$
|
388
|
(8%)
|
|
RTMs (millions)
|
641
|
710
|
(10%)
|
2,032
|
2,376
|
(14%)
|
|||||
Revenue/RTM (cents)
|
18.25
|
16.06
|
14%
|
17.57
|
16.33
|
8%
|
The
automotive commodity group moves both finished vehicles and parts
throughout North America, providing rail access to all vehicle assembly
plants in Canada; eight assembly plants in Michigan; and one in
Mississippi. The Company also serves more than 20 vehicle
distribution facilities in Canada and the U.S., as well as parts
production facilities in Michigan and Ontario. CN’s broad
coverage enables it to consolidate full trainloads of automotive traffic
for delivery to connecting railroads at key interchange points. The
Company serves shippers of import vehicles via the ports of Halifax and
Vancouver, and through interchange with other railroads. The
Company’s automotive revenues are closely correlated to automotive
production and sales in North America. Revenues for this
commodity group increased by $3 million, or 3%, for the third quarter and
decreased by $31 million, or 8%, for the first nine months of 2008 when
compared to the same periods in 2007. The third quarter of 2008
benefitted from freight rate increases and greater finished vehicle
traffic through CN-served ports. The third quarter and first
nine months of 2008 were adversely impacted by reduced volumes of domestic
finished vehicle and parts traffic resulting from customer production
curtailments and the translation impact of the stronger Canadian dollar
that affected only the nine-month period. The first nine months of 2008
was further impacted by a strike at a major customer’s parts supplier that
occurred in the second quarter of 2008. Revenue per revenue ton mile
increased by 14% for the third quarter and 8% for the first nine months of
2008, largely due to freight rate increases that were partly offset by an
increase in the average length of haul and the translation impact of the
stronger Canadian dollar affecting only the nine-month
period.
|
Other
revenues
Other
revenues include revenues from non-rail transportation services,
interswitching, and maritime operations. Other revenues
increased by $27 million, or 13%, for the third quarter and $85 million,
or 16%, for the first nine months of 2008, when compared to the same
periods in 2007, mainly due to an increase in non-rail transportation
services attributable to CN WorldWide activities, and higher
interswitching and optional service revenues. For the
nine-month period, these gains were partly offset by the translation
impact of the stronger Canadian
dollar.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Operating
expenses
In the
third quarter of 2008, operating expenses amounted to $1,413 million,
compared to $1,255 million in the same quarter of
2007. Operating expenses for the first nine months of 2008 were
$4,208 million, compared to $3,816 million in the same period of
2007. The increases of $158 million, or 13%, in the third
quarter and $392 million, or 10%, in the first nine months of 2008 were
mainly due to higher fuel costs and purchased services and material
expenses. Partly offsetting these factors were the translation
impact of the stronger Canadian dollar on U.S. dollar-denominated expenses
of approximately $145 million for the nine–month period, and lower labor
and fringe benefits expense. The first quarter 2007 UTU strike did not
have a significant impact on total operating expenses for the first nine
months of 2007.
|
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||||||||
%
Change
|
Percentage
of
revenues
|
%
Change
|
Percentage
of revenues
|
||||||||||||||
In
millions
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||
(Unaudited)
|
|||||||||||||||||
Labor
and fringe benefits
|
$
|
424
|
$
|
446
|
5%
|
18.8%
|
22.0%
|
$
|
1,277
|
$
|
1,361
|
6%
|
20.3%
|
22.9%
|
|||
Purchased
services and material
|
268
|
247
|
(9%)
|
11.9%
|
12.2%
|
836
|
786
|
(6%)
|
13.3%
|
13.2%
|
|||||||
Fuel
|
390
|
251
|
(55%)
|
17.3%
|
12.4%
|
1,099
|
719
|
(53%)
|
17.5%
|
12.1%
|
|||||||
Depreciation
and amortization
|
177
|
165
|
(7%)
|
7.8%
|
8.2%
|
528
|
504
|
(5%)
|
8.4%
|
8.5%
|
|||||||
Equipment
rents
|
59
|
59
|
-
|
2.6%
|
2.9%
|
183
|
187
|
2%
|
2.9%
|
3.1%
|
|||||||
Casualty
and other
|
95
|
87
|
(9%)
|
4.2%
|
4.3%
|
285
|
259
|
(10%)
|
4.6%
|
4.3%
|
|||||||
Total
operating expenses
|
$
|
1,413
|
$
|
1,255
|
(13%)
|
62.6%
|
62.0%
|
$
|
4,208
|
$
|
3,816
|
(10%)
|
67.0%
|
64.1%
|
Labor
and fringe benefits: Labor and fringe benefits expense includes
wages, payroll taxes, and employee benefits such as incentive
compensation, stock-based compensation, health and welfare, and pensions
and other postretirement benefits. Certain incentive and
stock-based compensation plans are based on financial and market
performance targets and the related expense is recorded in relation to the
attainment of such targets. Labor and fringe benefits expense
decreased by $22 million, or 5%, in the third quarter and $84 million, or
6%, in the first nine months of 2008 when compared to the same periods in
2007. The decreases in both the three- and nine-month periods
were mainly due to lower stock-based compensation expense, a reduction in
net periodic benefit cost for pensions, as well as the translation impact
of the stronger Canadian dollar that affected only the nine-month period.
Partly offsetting these factors were increases in annual wages and benefit
expenses, as well as higher workforce levels in the first half of
2008.
Purchased
services and material: Purchased services and material expense
primarily includes the costs of services purchased from outside
contractors, materials used in the maintenance of the Company’s track,
facilities and equipment, transportation and lodging for train crew
employees, utility costs and the net costs of operating facilities jointly
used by the Company and other railroads. These expenses
increased by $21 million, or 9%, in the third quarter and $50 million, or
6%, in the first nine months of 2008 when compared to the same periods in
2007. The
increases in both the three- and nine-month periods were mainly due to
higher costs for third-party non-rail transportation services and higher
repairs and maintenance expenses. Also affecting the nine-month
period were other costs incurred as a result of the harsh weather
conditions experienced in the first quarter of 2008. For the
nine-month period, these factors were partly offset by the translation
impact of the stronger Canadian dollar.
Fuel:
Fuel expense includes the cost of fuel consumed by locomotives, intermodal
equipment and other vehicles. These expenses increased by $139
million, or 55%, in the third quarter and $380 million, or 53%, in the
first nine months of 2008 when compared to the same periods in 2007. The
increases in both the three- and nine-month periods were primarily due to
an increase in the average price per U.S. gallon of fuel when compared to
the same periods of 2007, which was partly offset by the translation
impact of the stronger Canadian dollar, affecting only the nine-month
period.
Depreciation
and amortization: Depreciation
and amortization expense relates to the Company’s rail
operations. These expenses increased by $12 million, or 7%, in
the third quarter and $24 million, or 5%, in the first nine months of 2008
when compared to the same periods in 2007. The increases in
both the three- and nine-month periods were mainly due to the impact of
net capital additions and the adoption of new depreciation rates for
various asset classes (see the Critical accounting policies section of
this MD&A). For the nine-month period, these factors were partly
offset by the translation impact of the stronger Canadian
dollar.
Equipment
rents: Equipment rents expense includes rental expense for the use
of freight cars owned by other railroads or private companies and for the
short- or long-term lease of freight cars, locomotives and intermodal
equipment, net of rental income from other railroads for the use of the
Company’s cars and locomotives. These expenses remained flat
for the third quarter and decreased by $4 million, or 2%, in the first
nine months of 2008 when compared to the same periods in
2007. The decrease in the nine-month period was mainly due to
the translation impact of the stronger Canadian dollar as well as lower
lease expense. These factors were partly offset by increased
net car hire expense resulting mainly from a slowdown in online velocity
caused by the harsh weather conditions experienced in the first quarter of
2008, and new intermodal equipment online for the Prince Rupert
terminal.
Casualty
and other: Casualty and other expense includes expenses for
personal injuries, environmental, freight and property damage, insurance,
bad debt and operating taxes, as well as travel expenses. These
expenses increased by $8 million, or 9%, in the third quarter and $26
million, or 10%, in the first nine months of 2008 when compared to the
same periods in 2007. The increase in the third quarter was
mainly due to an increase in the environmental provision for specific
sites and remediation, higher bad debt expense, as well as a greater
expense for loss and damage claims. These factors were partly offset by a
lower expense for personal injury claims in Canada. The
increase in the nine-month period was due primarily to a higher expense
for U.S. personal injury claims mainly as a result of a significant
reduction in the accrual for such claims that was recorded in the second
quarter of 2007 following the mid-year actuarial valuation, as well as an
increase in the environmental provision and higher bad debt expense. Partly
offsetting these factors were lower loss and damage expense, particularly
in the second quarter, the translation impact of the stronger Canadian
dollar, lower legal settlements in the first quarter of 2008, and a lower
expense for personal injury claims in
Canada.
|
Other
Interest
expense: Interest expense increased by $14 million, or 18% , for
the third quarter and $14 million, or 6% for the first nine months of 2008
when compared to the same periods in 2007, mainly due to the impact of a
higher average debt balance that was partially offset by the translation
impact of the stronger Canadian dollar affecting only the nine-month
period.
|
Other
income: In
the third quarter and first nine months of 2008, the Company recorded
Other income of $4 million and $7 million, respectively, compared to $2
million and $7 million, respectively for the same periods in
2007. The increase of $2 million in the third quarter was
mainly due to higher income from other business activities and lower fees
related to the accounts receivable securitization program that were
partially offset by lower foreign exchange gains. In the nine-month
period, higher income from other business activities and lower fees
related to the accounts receivable securitization program were entirely
offset by lower foreign exchange gains and lower investment income as a
result of the disposal of the Company’s investment in English Welsh and
Scottish Railway (EWS) in the fourth quarter of
2007.
|
Income
tax expense: The Company recorded income tax expense of $204
million for the third quarter of 2008 compared to $207 million for the
same period in 2007. For the nine-month period ended September
30, 2008, income tax expense was $494 million compared to $571 million for
the same period in 2007. Included in the first nine months of 2008 and
2007 was a deferred income tax recovery of $75 million and $44 million,
respectively. Of the 2008 amount, $41 million, recorded in the
third quarter, resulted from the resolution of various income tax matters
and adjustments related to tax filings of prior years, $23 million,
recorded in the second quarter, was due to the enactment of lower
provincial corporate income tax rates and $11 million, recorded in the
first quarter, resulted from net capital losses arising from the
reorganization of a subsidiary. Of the 2007 amount, $14
million, recorded in the third quarter, resulted from net capital losses
arising from a reorganization of certain subsidiaries, and $30 million,
recorded in the second quarter, was due to the enactment of corporate
income tax rate changes in Canada. Excluding the deferred
income tax recoveries, the effective tax rate for the third quarter and
first nine months of 2008 was 32.4% and 31.3%, respectively, and 31.9% and
32.4%, respectively, in 2007.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Summary
of quarterly financial data –
unaudited
|
In
millions, except per share data
|
||||||||||||||||||
2008
|
2007
|
2006
|
||||||||||||||||
Quarters
|
Quarters
|
Quarter
|
||||||||||||||||
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
|||||||||||
Revenues
|
$
|
2,257
|
$
|
2,098
|
$
|
1,927
|
$
|
1,941
|
$
|
2,023
|
$
|
2,027
|
$
|
1,906
|
$
|
2,000
|
||
Operating
income
|
$
|
844
|
$
|
707
|
$
|
523
|
$
|
736
|
$
|
768
|
$
|
811
|
$
|
561
|
$
|
756
|
||
Net
income
|
$
|
552
|
$
|
459
|
$
|
311
|
$
|
833
|
$
|
485
|
$
|
516
|
$
|
324
|
$
|
499
|
||
Basic
earnings per share
|
$
|
1.17
|
$
|
0.96
|
$
|
0.64
|
$
|
1.70
|
$
|
0.97
|
$
|
1.02
|
$
|
0.64
|
$
|
0.97
|
||
Diluted
earnings per share
|
$
|
1.16
|
$
|
0.95
|
$
|
0.64
|
$
|
1.68
|
$
|
0.96
|
$
|
1.01
|
$
|
0.63
|
$
|
0.95
|
||
Dividend
declared per share
|
$
|
0.2300
|
$
|
0.2300
|
$
|
0.2300
|
$
|
0.2100
|
$
|
0.2100
|
$
|
0.2100
|
$
|
0.2100
|
$
|
0.1625
|
Revenues
generated by the Company during the year are influenced by seasonal
weather conditions, general economic conditions, cyclical demand for rail
transportation, and competitive forces in the transportation
marketplace. Operating expenses reflect the impact of freight
volumes, seasonal weather conditions, labor costs, fuel prices, and the
Company’s productivity initiatives. The continued fluctuations
in the Canadian dollar relative to the U.S. dollar have also affected the
conversion of the Company’s U.S. dollar-denominated revenues and expenses
and resulted in fluctuations in net income in the rolling eight quarters
presented above.
The Company’s quarterly
results included items that impacted the quarter-over-quarter
comparability of the results of operations as discussed below:
|
In
millions, except per share data
|
|||||||||||||||||||||||||||||||||
2008
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
Quarters
|
Quarters
|
Quarter
|
|||||||||||||||||||||||||||||||
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
||||||||||||||||||||||||||
Deferred income tax
recoveries
(a)
|
$
|
41
|
$
|
23
|
$
|
11
|
$
|
284
|
$
|
14
|
$
|
30
|
$
|
-
|
$
|
27
|
|||||||||||||||||
Gain on
sale of Central Station
|
|||||||||||||||||||||||||||||||||
Complex (after-tax)
(b)
|
-
|
-
|
-
|
64
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Gain on
sale of investment in
|
|||||||||||||||||||||||||||||||||
EWS (after-tax)
(c)
|
-
|
-
|
-
|
41
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
UTU strike
(after-tax)
(d)
|
-
|
-
|
-
|
-
|
-
|
-
|
(35)
|
-
|
|||||||||||||||||||||||||
Impact
on net income
|
$
|
41
|
$
|
23
|
$
|
11
|
$
|
389
|
$
|
14
|
$
|
30
|
$
|
(35)
|
$
|
27
|
|||||||||||||||||
Basic
earnings per share
|
$
|
0.09
|
$
|
0.05
|
$
|
0.02
|
$
|
0.79
|
$
|
0.03
|
$
|
0.06
|
$
|
(0.07)
|
$
|
0.05
|
|||||||||||||||||
Diluted
earnings per share
|
$
|
0.09
|
$
|
0.05
|
$
|
0.02
|
$
|
0.78
|
$
|
0.03
|
$
|
0.06
|
$
|
(0.07)
|
$
|
0.05
|
(a)
|
Deferred
income tax recoveries resulted mainly
from the enactment of corporate income tax rate changes in Canada and the
resolution of various income tax matters and adjustments related to tax
filings of prior years.
|
|||||||||||||||||||||||||||||
(b)
|
The
Company sold its Central Station Complex in Montreal for proceeds of $355
million before transaction costs. A gain of $92 million ($64
million after-tax) was recognized immediately in Other income
(loss).
|
|||||||||||||||||||||||||||||
(c)
|
The
Company sold its 32% ownership interest in EWS for cash proceeds of $114
million, resulting in a gain on disposition of the investment of $61
million ($41 million after-tax), which was recorded in Other income
(loss).
|
|||||||||||||||||||||||||||||
(d)
|
A
strike by 2,800 members of the UTU impacted first-quarter 2007 operating
income and net income by approximately $50 million and $35 million,
respectively.
|
|||||||||||||||||||||||||||||
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Liquidity
and capital resources
The
Company’s principal source of liquidity is cash generated from
operations. The Company uses its accounts receivable
securitization program and its commercial paper program, which is
backstopped by a portion of its U.S.$1 billion revolving credit facility,
to meet its short-term liquidity needs. Unprecedented
conditions in the financial markets have led to unsettled conditions in
the money market. To the extent that these conditions have
sporadically curtailed access to the commercial paper market for short
periods of time, the Company has fulfilled its funding requirements
through its accounts receivable securitization program. Should
conditions continue to deteriorate, the Company may choose to finance its
short-term liquidity needs by drawing on its revolving credit facility. In
addition, from time to time, the Company’s liquidity requirements can be
supplemented by the disposal of surplus properties and the monetization of
assets.
Operating
activities: Cash provided from operating activities for the three
and nine months ended September 30, 2008 was $957 million and $1,531
million, respectively, compared to $446 million and $1,475 million,
respectively, for the same periods in 2007. Net cash receipts
from customers and other were $6,025 million for the nine months ended
September 30, 2008, an increase of $95 million when compared to the same
period in 2007, mainly due to an increase in the proceeds received under
the Company’s accounts receivable securitization program, particularly in
the third quarter. Payments for employee services, suppliers
and other expenses were $3,749 million for the nine months ended September
30, 2008, an increase of $405 million when compared to the same period in
2007, principally due to higher payments for fuel and third-party non-rail
transportation services. Payments for income taxes in the first
nine months of 2008 were $317 million, a decrease of $389 million when
compared to the same period in 2007, mainly due to a final payment for
Canadian income taxes that was made in the first quarter of 2007, in
respect of the 2006 fiscal year. Also consuming cash in the
nine-month period ending September 30, 2008 were payments for interest,
workforce reductions and personal injury and other claims totaling $351
million, compared to $355 million for the same period in
2007. In the first nine months of 2008 and 2007, pension
contributions were $77 million, of which $22 million related to the 2007
funding year, and $50 million, respectively. There are
currently no specific requirements relating to working capital other than
in the normal course of business.
Investing
activities: Cash used by investing activities in the three and nine
months ended September 30, 2008 amounted to $393 million and $902 million,
respectively, compared to $336 million and $871 million, respectively, for
the comparable periods in 2007. The Company’s investing
activities in the first nine months of 2008 included property additions of
$944 million, an increase of $47 million when compared to the same period
in 2007. The following table details property additions for the
three and nine months ended September 30, 2008 and
2007:
|
Three
months ended
September
30
|
Nine
months ended
September
30
|
|||||||||
In
millions
|
2008
|
2007
|
2008
|
2007
|
||||||
Track
and roadway
|
$
|
350
|
$
|
294
|
$
|
781
|
$
|
715
|
||
Rolling
stock
|
15
|
30
|
83
|
88
|
||||||
Buildings
|
6
|
11
|
23
|
32
|
||||||
Information
technology
|
40
|
23
|
75
|
58
|
||||||
Other
|
6
|
7
|
28
|
27
|
||||||
Gross
property additions
|
417
|
365
|
990
|
920
|
||||||
Less: capital leases
(a)
|
2
|
15
|
46
|
23
|
||||||
Property
additions
|
$
|
415
|
$
|
350
|
$
|
944
|
$
|
897
|
||
(a)
|
During
the three and nine months ended September 30, 2008, the Company recorded
$2 million and $46 million, respectively, in assets it acquired through
equipment leases ($15 million and $23 million in the three and nine months
ended September 30, 2007, respectively), for which an equivalent amount
was recorded in debt.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
On an
ongoing basis, the Company invests in capital programs for the renewal of
the basic plant, the acquisition of rolling stock and other investments to
take advantage of growth opportunities and to improve the Company’s
productivity and the fluidity of its network. For 2008, the Company
expects to invest approximately $1.5 billion for its capital
programs.
|
Free
cash flow
The
Company generated $258 million and $483 million of free cash flow for the
three and nine months ended September 30, 2008, compared to $142 million
and $193 million of free cash flow for the same periods in
2007. Free cash flow does not have any standardized meaning
prescribed by GAAP and may, therefore, not be comparable to similar
measures presented by other companies. The Company believes
that free cash flow is a useful measure of performance as it demonstrates
the Company’s ability to generate cash after the payment of capital
expenditures and dividends. The Company defines free cash flow
as cash provided from operating activities, excluding changes in the
accounts receivable securitization program and changes in cash and cash
equivalents resulting from foreign exchange fluctuations, less cash used
by investing activities and the payment of dividends, calculated as
follows:
|
Three
months ended September 30
|
Nine
months ended September 30
|
||||||||||
In
millions
|
2008
|
2007
|
2008
|
2007
|
|||||||
Cash
provided from operating activities
|
$
|
957
|
$
|
446
|
$
|
1,531
|
$
|
1,475
|
|||
Cash
used by investing activities
|
(393)
|
(336)
|
(902)
|
(871)
|
|||||||
Cash
provided before financing activities
|
564
|
110
|
629
|
604
|
|||||||
Adjustments:
|
|||||||||||
Change
in accounts receivable securitization
|
(202)
|
152
|
170
|
(52)
|
|||||||
Dividends
paid
|
(108)
|
(104)
|
(328)
|
(316)
|
|||||||
Effect
of foreign exchange fluctuations on U.S.
|
|||||||||||
dollar-denominated
cash and cash equivalents
|
4
|
(16)
|
12
|
(43)
|
|||||||
Free
cash flow
|
$
|
258
|
$
|
142
|
$
|
483
|
$
|
193
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Financing
activities: Cash used by financing activities for the three and
nine months ended September 30, 2008 totaled $441 million and $663
million, respectively, compared to $121 million and $526 million,
respectively, for the same periods in 2007. In April 2008, the
Company repaid its U.S.$150 million 6.63% Notes, which came to maturity,
with cash on hand. In May 2008, the Company issued
U.S.$325 million (Cdn$331 million) of 4.95% Notes due 2014 and U.S.$325
million (Cdn$331 million) of 5.55% Notes due 2018. The Company
used the net proceeds of U.S.$643 million to repay a portion of its
commercial paper outstanding and reduce its accounts receivable
securitization program. In 2008 and 2007, issuances and
repayments of long-term debt related principally to the Company’s
commercial paper program.
Cash received from stock
options exercised during the quarters ended September 30, 2008 and 2007
was $12 million and $9 million, respectively, and the related tax benefit
realized upon exercise was $2 million and $5 million,
respectively. Cash received from stock options exercised during
the first nine months of 2008 and 2007 was $38 million and $57 million,
respectively, and the related tax benefit realized upon exercise was $10
million and $16 million, respectively.
During the first nine
months of 2008, the Company repurchased 19.3 million common shares for
$1,017 million (weighted-average price of $52.71 per share) under its
share repurchase programs: 6.0 million common shares in the third quarter
for $327 million (weighted-average price of $54.48 per share) under its
new 25.0 million share repurchase program and 13.3 million common shares
in the first half of 2008 for $690 million (weighted-average price of
$51.91 per share) under its previous 33.0 million share repurchase
program, which ended in the second quarter of 2008.
The Company paid a
quarterly dividend of $0.23 per share amounting to $108 million for the
third quarter and $328 million for the first nine months of 2008, compared
to $104 million and $316 million, respectively, at the rate of $0.21 per
share, for the same periods in 2007.
Credit
measures
Management
believes that the adjusted debt-to-total capitalization ratio is a useful
credit measure that aims to show the true leverage of the
Company. Similarly, adjusted debt-to-adjusted earnings before
interest, income taxes, depreciation and amortization (EBITDA) is another
useful credit measure because it reflects the Company’s ability to service
its debt. The
Company excludes Other income (loss) in the calculation of
EBITDA. However, since these measures do not have any
standardized meaning prescribed by GAAP, they may not be comparable to
similar measures presented by other companies and, as such, should not be
considered in isolation.
|
Adjusted
debt-to-total capitalization ratio
|
|||||||
September
30,
|
2008
|
2007
|
|||||
Debt-to-total
capitalization ratio (a)
|
39.5%
|
36.8%
|
|||||
Add: Present value of
operating lease commitments plus securitization financing (b)
|
3.7%
|
3.4%
|
|||||
Adjusted
debt-to-total capitalization ratio
|
43.2%
|
40.2%
|
|||||
Adjusted
debt-to-adjusted EBITDA
|
|||||||
$
in millions, unless otherwise indicated
|
Twelve
months ended
September
30,
|
2008
|
2007
|
||||
Debt
|
$
|
6,713
|
$
|
5,635
|
|||
Add: Present value of
operating lease commitments plus securitization financing (b)
|
1,116
|
868
|
|||||
Adjusted
debt
|
7,829
|
6,503
|
|||||
Operating
income
|
2,810
|
2,896
|
|||||
Add:
Depreciation and amortization
|
701
|
671
|
|||||
EBITDA
|
3,511
|
3,567
|
|||||
Add:
Deemed interest on operating leases
|
40
|
27
|
|||||
Adjusted
EBITDA
|
$
|
3,551
|
$
|
3,594
|
|||
Adjusted
debt-to-adjusted EBITDA
|
2.2
times
|
1.8
times
|
|||||
(a)
|
Debt-to-total
capitalization is calculated as total long-term debt plus current portion
of long-term debt divided by the sum of total debt plus total
shareholders’ equity.
|
||||||
(b)
|
The
operating lease commitments have been discounted using the Company’s
implicit interest rate for each of the periods
presented.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
The
Company has access to various financing arrangements:
Revolving
credit facility
The
Company’s U.S.$1 billion revolving credit facility, expiring in October
2011, is available for general corporate purposes, including back-stopping
the Company’s commercial paper program, and provides for borrowings at
various interest rates, including the Canadian prime rate, bankers’
acceptance rates, the U.S. federal funds effective rate and the London
Interbank Offer Rate, plus applicable margins. The credit facility
agreement has one financial covenant, which limits debt as a percentage of
total capitalization, and with which the Company is in
compliance. As at September 30, 2008, the Company had letters
of credit drawn on its revolving credit facility of $176 million ($57
million as at December 31, 2007).
Commercial
paper
The
Company has a commercial paper program, which is backed by a portion of
its revolving credit facility, enabling it to issue commercial paper up to
a maximum aggregate principal amount of $800 million, or the U.S. dollar
equivalent. Commercial paper debt is due within one year but is
classified as long-term debt, reflecting the Company’s intent and
contractual ability to refinance the short-term borrowings through
subsequent issuances of commercial paper or drawing down on the long-term
revolving credit facility. As at September 30, 2008, the
Company had total borrowings of $346 million, of which $99 million was
denominated in Canadian dollars and $247 million was denominated in U.S.
dollars (U.S.$232 million). The weighted-average interest rate
on these borrowings was 2.91%. As at December 31, 2007, the Company had
total borrowings of $122 million, of which $114 million was denominated in
Canadian dollars and $8 million was denominated in U.S. dollars (U.S.$8
million). The weighted-average interest rate on these
borrowings was 5.01%.
|
Shelf
prospectus and registration statement
At
September 30, 2008, the Company had U.S.$1.85 billion registered for
offering under its currently effective shelf prospectus and registration
statement.
All
forward-looking information provided in this section is subject to risks
and uncertainties and is based on assumptions about events and
developments that may not materialize or that may be offset entirely or
partially by other events and developments. See the Business risks section
of this MD&A for a discussion of assumptions and risk factors
affecting such forward-looking
statements.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Contractual
obligations
In the
normal course of business, the Company incurs contractual
obligations. The following table sets forth the Company’s
contractual obligations for the following items as at September 30,
2008:
|
In
millions
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
& thereafter
|
||||||||
Long-term debt
obligations (a)
|
$
|
5,565
|
$
|
-
|
$
|
319
|
$
|
-
|
$
|
771
|
$
|
-
|
$
|
4,475
|
|
Interest
on long-term debt obligations
|
5,896
|
81
|
326
|
312
|
310
|
275
|
4,592
|
||||||||
Capital lease
obligations (b)
|
1,639
|
39
|
172
|
109
|
176
|
83
|
1,060
|
||||||||
Operating lease
obligations (c)
|
833
|
40
|
143
|
121
|
98
|
76
|
355
|
||||||||
Purchase obligations
(d)
|
829
|
262
|
241
|
116
|
56
|
39
|
115
|
||||||||
Other
long-term liabilities reflected on
|
|||||||||||||||
the
balance sheet (e)
|
954
|
15
|
67
|
61
|
51
|
45
|
715
|
||||||||
Total
obligations
|
$
|
15,716
|
$
|
437
|
$
|
1,268
|
$
|
719
|
$
|
1,462
|
$
|
518
|
$
|
11,312
|
|
(a)
|
Presented
net of unamortized discounts, of which $835 million relates to
non-interest bearing Notes due in 2094, and excludes capital lease
obligations of $1,148 million which are included in “Capital lease
obligations.”
|
||||||||||||||
(b)
|
Includes
$1,148 million of minimum lease payments and $491 million of imputed
interest at rates ranging from 3.00% to 7.90%.
|
||||||||||||||
(c)
|
Includes
minimum rental payments for operating leases having initial non-cancelable
lease terms of one year or more. The Company also has operating
lease agreements for its automotive fleet with minimum one-year
non-cancelable terms for which its practice is to renew monthly
thereafter. The estimated annual rental payments for such
leases are approximately $30 million and generally extend over five
years.
|
||||||||||||||
(d)
|
Includes
commitments for railroad ties, rail, freight cars, locomotives and other
equipment and services, and outstanding information technology service
contracts and licenses.
|
||||||||||||||
(e)
|
Includes
expected payments for workers’ compensation, workforce reductions,
postretirement benefits other than pensions and environmental liabilities
that have been classified as contractual settlement
agreements.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Off
balance sheet arrangements
Accounts
receivable securitization program
The
Company has a five-year agreement, expiring in May 2011, to sell an
undivided co-ownership interest for maximum cash proceeds of $600 million
in a revolving pool of freight receivables to an unrelated
trust. Pursuant to the agreement, the Company sells an interest
in its receivables and receives proceeds net of the retained interest as
stipulated in the agreement.
The Company has retained
the responsibility for servicing, administering and collecting the
receivables sold. At September 30, 2008, the servicing asset
and liability were not significant. Subject to customary
indemnifications, the trust’s recourse is generally limited to the
receivables.
The Company accounted
for the accounts receivable securitization program as a sale, because
control over the transferred accounts receivable was
relinquished. Due to the relatively short collection period and
the high quality of the receivables sold, the fair value of the undivided
interest transferred to the trust approximated the book value
thereof.
The Company is subject
to customary reporting requirements for which failure to perform could
result in termination of the program. In addition, the trust is
subject to customary credit rating requirements, which if not met, could
also result in termination of the program. The Company monitors the
reporting requirements and is currently not aware of any trends, events or
conditions that could cause such termination.
The accounts receivable
securitization program provides the Company with readily available
short-term financing for general corporate use. Under the
agreement, the Company may change the level of receivables sold at any
time. In the event the program is terminated before its
scheduled maturity, the Company expects to meet its future payment
obligations through its various sources of financing, including its
revolving credit facility and commercial paper program, and/or access to
capital markets.
At September 30, 2008,
the Company had sold receivables that resulted in proceeds of $441 million
under the accounts receivable securitization program ($588 million at
December 31, 2007), and recorded the retained interest of approximately
10% of this amount in Other current assets (retained interest of
approximately 10% recorded at December 31,
2007).
|
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.
The nature of these
guarantees or indemnifications, the maximum potential amount of future
payments, the carrying amount of the liability, if any, and the nature of
any recourse provisions are disclosed in Note 6 – Major commitments and
contingencies, to the Company’s unaudited Interim Consolidated Financial
Statements.
|
Stock
plans
The
Company has various stock-based incentive plans for eligible
employees. A description of the plans is provided in Note 12 –
Stock plans, to the Company’s 2007 Annual Consolidated Financial
Statements. For the three and nine months ended September 30,
2008, the Company recorded total compensation expense for awards under all
stock-based compensation plans of $16 million and $50 million,
respectively, and $39 million and $112 million, respectively, for the same
periods in 2007. The total tax benefit recognized in income in
relation to stock-based compensation expense for the three and nine months
ended September 30, 2008, was $5 million and $15 million, respectively,
and $12 million and $33 million, respectively, for the same periods in
2007. Additional disclosures are provided in Note 4 – Stock
plans, to the Company’s unaudited Interim Consolidated Financial
Statements.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Financial
instruments
The
Company has limited involvement with derivative financial instruments and
does not use them for trading purposes. At September 30,
2008, the Company did not have any derivative financial instruments
outstanding. At September 30, 2008, Accumulated other
comprehensive income (loss) included an unamortized gain of $11 million,
$8 million after-tax ($11 million, $8 million after-tax at December 31,
2007) relating to treasury lock transactions settled in
2004.
|
Income
taxes
Payments
for income taxes
The
Company is required to make scheduled installment payments as prescribed
by the tax authorities. For the 2008 fiscal year, the Company
expects to pay approximately $450 million of taxes based on forecasted
2008 taxable income, of which $317 million was paid in the first nine
months of 2008 ($706 million in the first nine months of 2007, which
included $367 million paid in respect of the 2006 fiscal
year).
See the Business risks
section of this MD&A for a discussion of assumptions and risk factors
affecting such forward-looking statements.
Rate
enactments
In the
second quarter of 2008, the Company adjusted its deferred income tax
liability due to the enactment of lower corporate income tax rates in the
provinces of British Columbia and Manitoba. The Company
recorded a deferred income tax recovery of $23 million in the Consolidated
Statement of Income. In the second quarter of 2007, the Company
recorded a deferred income tax recovery of $30 million in the Consolidated
Statement of Income, resulting from the enactment of a lower federal
corporate income tax rate in
Canada.
|
Common
stock
Share
repurchase programs
On July
21, 2008, the Board of Directors of the Company approved a new share
repurchase program which allows for the repurchase of up to 25.0 million
common shares between July 28, 2008 and July 20, 2009 pursuant to a normal
course issuer bid, at prevailing market prices or such other prices as may
be permitted by the Toronto Stock Exchange.
In the
third quarter of 2008, under this current share repurchase program, the
Company repurchased 6.0 million common shares for $327 million, at a
weighted-average price of $54.48 per share.
In the
second quarter of 2008, the Company ended its 33.0 million share
repurchase program, which began on July 26, 2007, repurchasing a total of
31.0 million common shares for $1,588 million, at a weighted-average price
of $51.22 per share. Of this amount, 13.3 million common shares
were repurchased in 2008 for $690 million, at a weighted average price of
$51.91 per share.
|
Outstanding
share data
As at
October 21, 2008, the Company had 468.1 million common shares
outstanding.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Recent
accounting pronouncement
In
March 2008, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 161, “Disclosures
about Derivative Instruments and Hedging Activities – an amendment of FASB
Statement No. 133,” which prescribes disclosure requirements on how and
why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities” and its
related interpretations, and how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and
cash flows. The Standard is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. Comparative
disclosures for earlier periods at initial adoption is encouraged, but not
required.
|
Critical
accounting policies
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses
during the period, the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the
financial statements. On an ongoing basis, management reviews
its estimates based upon currently available
information. Actual results could differ from these
estimates. The Company’s policies for personal injury and other
claims, environmental claims, depreciation, pensions and other
postretirement benefits, and income taxes, require management’s more
significant judgments and estimates in the preparation of the Company’s
consolidated financial statements and, as such, are considered to be
critical. The discussion on the methodology and assumptions
underlying these critical accounting estimates, their effect on the
Company’s results of operations and financial position for the past three
years ended December 31, 2007, as well as the effect of changes to these
estimates, can be found on pages 48 to 53 of the Company’s 2007 Annual
Report. Such discussions have not changed except as they relate
to Depreciation as discussed herein.
In the
first quarter of 2008, the Company finalized a depreciation study of its
Canadian properties, plant and equipment held at December 31, 2007. As a
result of the study, the Company adopted new depreciation rates for
various classes of assets that resulted in a net increase in depreciation
expense of approximately $20 million on an annual basis, as calculated
using the asset base on December 31, 2007.
As at
September 30, 2008 and December 31 and September 30, 2007, the Company had
the following amounts outstanding relating to its critical accounting
estimates:
|
||||||||||
September
30
|
December
31
|
September
30
|
||||||||
In
millions
|
2008
|
2007
|
2007
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||||
Pension
asset
|
$
|
1,902
|
$
|
1,768
|
$
|
1,367
|
||||
Pension
liability
|
198
|
187
|
199
|
|||||||
Other
postretirement benefits liability
|
269
|
266
|
268
|
|||||||
Provision
for personal injury and other claims
|
452
|
446
|
500
|
|||||||
Provision
for environmental costs
|
118
|
111
|
109
|
|||||||
Net
deferred income tax provision
|
5,177
|
4,840
|
4,871
|
|||||||
Properties
|
21,472
|
20,413
|
19,883
|
Management
discusses the development and selection of the Company’s critical
accounting estimates with the Audit Committee of the Company’s Board of
Directors, and the Audit Committee has reviewed the Company’s related
disclosures.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Business
risks
Certain
information included in this report may be “forward-looking statements”
within the meaning of the United States Private Securities Litigation
Reform Act of 1995 and under Canadian securities laws. CN cautions that,
by their nature, forward-looking statements involve risks, uncertainties
and assumptions and implicit in these statements, particularly in respect
of long-term growth opportunities, are the Company’s assumptions that such
growth opportunities extend beyond business cycle considerations and, as
such, are less affected by the current situation in the North American and
global economies, and that its business risks described below will not
result in a material impact on its financial statements. The current
situation in financial markets is adding a substantial amount of risk to
the North American economy, which is already experiencing recessionary
conditions, and to the global economy, which is already slowing down.
Under these circumstances, it is difficult to make a projection in respect
of business prospects for the next twelve to eighteen months. These
assumptions, although considered reasonable by the Company at the time of
preparation, may not materialize. Such forward-looking statements are not
guarantees of future performance and involve known and unknown risks,
uncertainties and other factors which may cause the actual results or
performance of the Company or the rail industry to be materially different
from the outlook or any future results or performance implied by such
statements. Such factors include the specific risks set forth
below as well as other risks detailed from time to time in reports filed
by the Company with securities regulators in Canada and the United
States.
|
Competition
The
Company faces significant competition from a variety of carriers,
including Canadian Pacific Railway Company (CP) which operates the other
major rail system in Canada, serving most of the same industrial and
population centers as the Company; long distance trucking companies; and
in many markets, major U.S. railroads and other Canadian and U.S.
railroads. Competition is generally based on the quality and
reliability of services provided, price, and the condition and suitability
of carriers’ equipment. Competition is particularly intense in
eastern Canada where an extensive highway network and population centers,
located relatively close to one another, have encouraged significant
competition from trucking companies. In addition, much of the
freight carried by the Company consists of commodity goods that are
available from other sources in competitive markets. Factors
affecting the competitive position of suppliers of these commodities,
including exchange rates, could materially adversely affect the demand for
goods supplied by the sources served by the Company and, therefore, the
Company’s volumes, revenues and profit margins.
In addition to trucking
competition, and to a greater degree than other rail carriers, the
Company’s subsidiary, Illinois Central Railroad Company (ICRR), is
vulnerable to barge competition because its main routes are parallel to
the Mississippi River system. The use of barges for some
commodities, particularly coal and grain, often represents a lower cost
mode of transportation. Barge competition and barge rates are
affected by navigational interruptions from ice, floods and droughts,
which can cause widely fluctuating barge rates. The
ability of ICRR to maintain its market share of the available freight has
traditionally been affected by the navigational conditions on the
river.
The significant
consolidation of rail systems in the United States has resulted in larger
rail systems that are able to offer seamless services in larger market
areas and accordingly, compete effectively with the Company in certain
markets. This consolidation requires the Company to consider
arrangements or other initiatives that would similarly enhance its own
service. There can be no assurance that the Company will be
able to compete effectively against current and future competitors in the
railroad industry and that further consolidation within the railroad
industry will not adversely affect the Company’s competitive
position. No assurance can be given that competitive pressures
will not lead to reduced revenues, profit margins or
both.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Environmental
matters
The
Company’s operations are subject to numerous federal, provincial, state,
municipal and local environmental laws and regulations in Canada and the
United States concerning, among other things, emissions into the air;
discharges into waters; the generation, handling, storage, transportation,
treatment and disposal of waste, hazardous substances and other materials;
decommissioning of underground and aboveground storage tanks; and soil and
groundwater contamination. A risk of environmental liability is
inherent in railroad and related transportation operations; real estate
ownership, operation or control; and other commercial activities of the
Company with respect to both current and past operations. As a
result, the Company incurs significant compliance and capital costs, on an
ongoing basis, associated with environmental regulatory compliance
and clean-up requirements in its railroad operations and relating to
its past and present ownership, operation or control of real
property.
While the Company
believes that it has identified the costs likely to be incurred in the
next several years for environmental matters, based on known information,
the Company’s ongoing efforts to identify potential environmental concerns
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.
In railroad and related
transportation operations, it is possible that derailments, explosions or
other accidents may occur that could cause harm to human health or to the
environment. In addition, the Company is also exposed to potential
catastrophic liability risk, faced by the railroad industry generally, in
connection with the transportation of toxic-by-inhalation hazardous
materials such as chlorine and anhydrous ammonia, commodities that the
Company may be required to transport to the extent of its common carrier
obligations. As a result, the Company may incur costs in the
future, which may be material, to address any such harm, including costs
relating to the performance of clean-ups, environmental penalties and
remediation obligations, and compensatory or punitive damages relating to
harm to individuals or property.
The
ultimate cost of known contaminated sites cannot be definitively
established, and 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. Also,
additional contaminated sites yet unknown may be discovered or future
operations may result in accidental releases. For these
reasons, there can 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
environmental liabilities or costs.
|
Personal
injury and other claims
In the
normal course of its operations, the Company becomes involved in various
legal actions, including actions brought on behalf of various classes of
claimants and claims relating to personal injuries, occupational disease
and damage to property. The Company maintains provisions for
such items, which it considers to be adequate for all of its outstanding
or pending claims. The final outcome with respect to actions
outstanding or pending at September 30, 2008, or with respect to future
claims, cannot be predicted with certainty, and therefore there can be no
assurance that their resolution will not have a material adverse effect on
the Company’s financial position or results of operations in a particular
quarter or fiscal year.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Labor
negotiations
Canadian
workforce
As at
September 30, 2008, CN employed a total of 15,922 employees in Canada, of
which 12,298 were unionized employees.
As of October 2008, the
Company had in place labor agreements covering its entire Canadian
unionized workforce. The Company’s agreement with the UTU for
its Northern Quebec line expired on December 15, 2007. The
agreement remains in effect until the bargaining process has been
exhausted. Negotiations are ongoing to renew that collective
agreement, and neither party has requested conciliation
assistance. However, the Teamsters Canada Rail Conference
(TCRC) has filed an application to replace the UTU as the certified
bargaining agent for the conductors working in Northern Quebec. The Canada
Industrial Relations Board (CIRB) ordered a vote and the results, to
determine which union will be the bargaining agent for these employees,
are expected before October 31, 2008. The
TCRC also had filed an application to represent the conductors, trainmen
and yard coordinators (CTY) on other CN properties. After a
representation election, the CIRB issued an order on September 2, 2008
certifying the TCRC as the bargaining representative of the CTY group on
certain CN properties.
The Company’s collective
agreement covering employees working on the Mackenzie Northern Railway
expired on May 2, 2008. These employees are covered by a single
collective agreement but are represented by the TCRC, the Canadian Auto
Workers and the TCRC-Maintenance of Way Division. The TCRC had
filed an application with the CIRB, to displace the UTU and to represent
the conductors working on the Mackenzie Northern Railway
line. The application was granted on June 25, 2008. Notice to
bargain has been given by the TCRC and negotiations commenced on June 26,
2008. Neither party has requested conciliation assistance and
negotiations are on-going. The agreement remains in effect
until the bargaining process has been exhausted.
The Company’s collective
agreements with the TCRC, which represents locomotive engineers in one
bargaining unit, and rail traffic controllers, also known as train
dispatchers, in a separate bargaining unit, will expire on December 31,
2008. Formal notices to bargain were exchanged and negotiations
are scheduled to commence in October 2008.
On
September 22, 2008, the members of the Canadian National Railways Police
Association (CNRPA) ratified the renewal of their collective agreement
with the Company for a five-year term, through December 31,
2013.
There
can be no assurance that the Company will be able to renew and have its
collective agreements ratified without any strikes or lockouts or that the
resolution of these collective bargaining negotiations will not have a
material adverse effect on the Company’s financial position or results of
operations.
|
U.S.
workforce
As at
September 30, 2008, CN employed a total of 6,647 employees in the United
States, of which 5,634 were unionized employees.
As of October 2008, the
Company had in place agreements with bargaining units representing the
entire unionized workforce at Grand Trunk Western Railroad Company (GTW);
Duluth, Winnipeg and Pacific Railway Company (DWP); ICRR; companies owned
by CCP Holdings, Inc. (CCP); Duluth, Missabe & Iron Range Railway
Company (DMIR); Bessemer & Lake Erie Railroad Company (BLE); The
Pittsburgh and Conneaut Dock Company (PCD); and all but one of the unions
at companies owned by Wisconsin Central Transportation Corporation
(WC). The WC dispatchers became represented in May 2008 and are
currently in the process of negotiating their first
agreement. Agreements in place have various moratorium
provisions, ranging from 2004 to 2011, which preserve the status quo in
respect of given areas during the terms of such moratoriums. Several of
these agreements are currently under renegotiation.
The general approach to
labor negotiations by U.S. Class I
railroads is to bargain on a collective national basis. GTW,
DWP, ICRR, CCP, WC, DMIR, BLE and PCD have bargained on a local basis
rather than holding national, industry-wide negotiations because they
believe it results in agreements that better address both the employees’
concerns and preferences, and the railways’ actual operating
environment. However, local negotiations may not generate
federal intervention in a strike or lockout situation, since a dispute may
be localized. The Company believes the potential mutual
benefits of local bargaining outweigh the risks.
Negotiations are ongoing
with the bargaining units with which the Company does not have agreements
or settlements. Until new agreements are reached or the
processes of the Railway Labor Act have been exhausted, the terms and
conditions of existing agreements generally continue to
apply.
There
can be no assurance that there will not be any work action by any of the
bargaining units with which the Company is currently in negotiations or
that the resolution of these negotiations will not have a material adverse
effect on the Company’s financial position or results of
operations.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Regulation
The
Company’s rail operations in Canada are subject to (i) regulation as to
rate setting, level of service and network rationalization by the Canadian
Transportation Agency (the Agency) under the Canada Transportation Act
(the CTA), and (ii) safety regulation by the federal Minister of Transport
under the Railway Safety Act and certain other statutes. The
Company’s U.S. rail operations are subject to (i) economic regulation by
the STB and (ii) safety regulation by the Federal Railroad Administration
(FRA). As such, various Company business transactions must gain
prior regulatory approval, with attendant risks and uncertainties, and the
Company is subject to government oversight with respect to rate, service
and business practice issues. In particular, this includes the
STB’s current review of the Company’s proposed acquisition of the
principal lines of the EJ&E. In addition, the STB completed
a proceeding on January 26, 2007 in which it reviewed the practice of rail
carriers, including the Company and the majority of other large railroads
operating within the U.S., of assessing a fuel surcharge computed as a
percentage of the base rate for service. Following its review,
the STB directed carriers to change that practice and adjust their fuel
surcharge programs within 90 days on a basis more closely related to the
amount of fuel consumed on individual movements. The Company announced a
mileage-based fuel surcharge, effective April 26, 2007, to conform to the
STB’s decision. To make its rate dispute resolution procedures
more affordable and accessible to shippers, the STB also completed a
proceeding on September 5, 2007, in which it modified its rate guidelines
for handling medium-size and smaller rate disputes. The STB
also completed a proceeding on January 17, 2008 that changed the
methodology for calculating the cost of equity component of the industry
cost of capital that is used to determine carrier revenue adequacy and in
rate, abandonment and other regulatory proceedings. The Company
is also subject to a variety of health, safety, security, labor,
environmental and other regulations, all of which can affect its
competitive position and profitability.
The Company’s ownership
of the former Great Lakes Transportation vessels is subject to regulation
by the U.S. Coast Guard and the Department of Transportation, Maritime
Administration, which regulate the ownership and operation of vessels
operating on the Great Lakes and in U.S. coastal waters. While
recent Congressional legislation and Coast Guard rulemakings have not
adversely affected CN’s ownership of these vessels, no assurance can be
given that any future legislative or regulatory initiatives by the U.S.
federal government will not materially adversely affect the Company’s
operations or its competitive and financial position.
With respect to safety,
rail safety regulation in Canada is the responsibility of Transport Canada
(TC), which administers the Canadian Railway Safety Act, as well as the
rail portions of other safety-related statutes. In the U.S.,
rail safety regulation is the responsibility of the FRA, which administers
the Federal Railroad Safety Act, as well as the rail portions of other
safety statutes. In addition, safety matters related to
security are overseen by the Transportation Security Administration (TSA),
which is part of the U.S. Department of Homeland Security and the Pipeline
and Hazardous Materials Safety Administration (PHMSA), which, like the
FRA, is part of the U.S. Department of Transportation.
Following the coming
into force of the Transportation Amendment Act, the Agency issued two
decisions (interim and final) adjusting the index used to determine the
maximum railway revenue entitlement that railways can earn on the movement
of regulated grain produced in western Canada, to reflect costs incurred
by CN and CP for the maintenance of hopper cars. The final decision issued
in February 2008 was retroactive to August 2007. The Federal
Court of Appeal granted the Company leave to appeal the Agency decisions
and stayed their application pending appeal. As such, the Company does not
consider it necessary to accrue the retroactive component of the Agency’s
decision estimated to be approximately $20 million.
On December 14, 2006,
the federal government announced a full review of the Railway Safety
Act. Members of the panel appointed to conduct the review
submitted their report to the Minister of Transport in November
2007. On March 7, 2008, the Minister of Transport tabled the
Panel’s report in the House of Commons. The Report includes
more than 50 recommendations to improve rail safety in Canada but
concludes that the current framework of the Railway Safety Act is
sound. The recommendations propose amendments to the act in a
number of areas including governance, regulatory framework and proximity
issues. The Company will be participating in the Rail Safety
Advisory Committee to be created by the Minister of
Transport.
On October 29, 2007, the
Minister of Transport tabled Bill C-8, entitled An Act to amend the Canada
Transportation Act (railway transportation) extending the availability of
the Final Offer Arbitration recourse to groups of shippers and adding a
new shipper recourse to the Agency in respect of charges for incidental
services provided by a railway company other than transportation
services. The Bill became law on February 28,
2008. No assurance can be given that any current or future
legislative action by the federal government or other future government
initiatives will not materially adversely affect the Company's financial
position or results of operations.
On August 12, 2008, TC
announced the Terms of Reference for the Rail Freight Service
Review. This review, which will be conducted in two phases, is
expected to take up to 18 months to complete. The first phase involves
analytical review of data, which is expected to take approximately 12
months. Subsequently, the Minister of Transport will appoint a
three-person panel to undertake the second phase of the review, during
which it will review the analytical work, meet with stakeholders and
prepare a report making recommendations to the
Minister.
In
the United States, the House of Representatives (the House) and Senate
have passed legislation to reauthorize the Federal Railroad Safety Act
(H.R. 2095), which was signed into law by the President on
October 16, 2008. This comprehensive legislation covers a broad
range of safety issues, including fatigue management, positive train
control (PTC), grade crossings, bridge safety, and other
matters. Of particular note, the legislation requires all Class
I railroads and intercity passenger and commuter railroads to implement a
PTC system by December 31, 2015 on mainline track where intercity
passenger railroads and commuter railroads operate and where
toxic-by-inhalation (TIH) hazardous materials are
transported. The legislation also would cap the number of
on-duty and limbo time hours for certain rail employees on a monthly
basis. In addition to the safety provisions, the legislation
authorizes significant funding for Amtrak and includes provisions,
including penalties, to improve Amtrak’s on-time performance on the
infrastructure of host freight railroads. CN is currently evaluating the
financial and operating implications of this
legislation. Separate legislation passed by the House (H.R.
1401) in March 2007 included language that would have undermined much of
the federal preemption of state and local regulation of railroads; this
provision was modified in the final bill enacted into law to address
litigation issues related to rail safety incidents while retaining federal
preemption of rail safety regulations.
The
U.S. Congress has had under consideration for several years various pieces
of legislation that would increase federal economic regulation of the
railroad industry, and additional legislation was introduced in 2007 in
both Houses of Congress. In addition, the Senate Judiciary
Committee approved legislation in September 2007 (S. 772) to repeal the
railroad industry’s limited antitrust exemptions; the House Judiciary
Committee also approved comparable legislation (H.R.
1650). Legislation also was introduced in the House (H.R. 6707)
in August 2008 to expand the STB’s authority to review the environmental
impacts of “minor” rail mergers; the legislation would have applied
retroactively to any transaction that had not been approved by
the STB by August 1, 2008, including CN’s proposed acquisition of the
EJ&E. The legislation was approved by the House
Transportation & Infrastructure Committee and was considered by the
full House, where it was defeated on September 27, 2008. No
assurance can be provided that this or similar legislation will not be
reintroduced.
The
STB is authorized by statute to commence regulatory proceedings if it
deems them to be appropriate. No assurance can be given that
this or any future regulatory initiatives by the U.S. federal government
will not materially adversely affect the Company’s operations, or its
competitive and financial position.
The Company is subject
to statutory and regulatory directives in the United States addressing
homeland security concerns, as well as by regulation by the Canada Border
Services Agency (CBSA). In the U.S., these include border
security arrangements, pursuant to an agreement the Company and CP entered
into with U.S. Customs and Border Protection (CBP) and the
CBSA. These requirements include advance electronic
transmission of cargo information for U.S.-bound traffic and cargo
screening (including gamma ray and radiation screening), as well as U.S.
government-imposed restrictions on the transportation into the United
States of certain commodities. These also include participation
in CBP’s Customs-Trade Partnership Against Terrorism (C-TPAT) program and
designation as a low-risk carrier under CBSA’s Customs Self-Assessment
(CSA) program; in the third quarter of 2007, the Company successfully
completed the CBP C-TPAT validation process. In the fourth
quarter of 2003, the CBP issued regulations to extend advance notification
requirements to all modes of transportation and the U.S. Food and Drug
Administration promulgated interim final rules requiring advance
notification by all modes for certain food imports into the United States.
CBSA is also working on implementation of advance notification
requirements for Canadian-bound traffic. In 2006, the U.S.
Department of Agriculture (USDA) issued a proposed interim rule, which
would remove the current exemption from inspection for imported fruits and
vegetables grown in Canada and the exemptions for all transport modes from
the agricultural quarantine and inspection (AQI) user fee for traffic
entering the U.S. from Canada. The rule took effect for surface
modes on June 1, 2007.
The
Company has also worked with the Association of American Railroads to
develop and put in place an extensive industry-wide security plan to
address terrorism and security-driven efforts by state and local
governments seeking to restrict the routings of certain hazardous
materials. If such state and local routing restrictions were to
go into force, they would be likely to add to security concerns by
foreclosing the Company’s most optimal and secure transportation routes,
leading to increased yard handling, longer hauls, and the transfer of
traffic to lines less suitable for moving hazardous materials, while also
infringing upon the exclusive and uniform federal oversight over railroad
security matters. In addition to recommended security action items for the
rail transportation of TIH materials jointly announced by the TSA and the
FRA on June 23, 2006 and November 21, 2006, the PHMSA issued interim final
rules on April 16, 2008, that, beginning in 2009, will require carriers
operating in the U.S. to report annually the volume and route-specific
data for cars containing these commodities; conduct a safety and security
risk analysis for each used route; identify a commercially practicable
alternative route for each used route; and select for use the practical
route posing the least safety and security risk. The TSA has
also proposed regulations that would require rail carriers to provide upon
request, within one hour, location and shipping information on cars on
their networks containing TIH materials and certain radioactive or
explosive materials, and ensure the secure, attended transfer of all such
cars to and from shippers, receivers and other carriers. The TSA
regulations are expected to be issued in the fourth quarter of
2008. On April 1, 2008, the PHMSA also proposed regulations
that would revise standards to enhance the crashworthiness protection of
tank cars used to transport TIH and to limit the operating conditions of
such cars.
While the Company
will continue to work closely with the CBSA, CBP, and other Canadian and
U.S. agencies, as described above, no assurance can be given that these
and future decisions by the U.S., Canadian, provincial, state, or local
governments on homeland security matters, legislation on security matters
enacted by the U.S. Congress, or joint decisions by the industry in
response to threats to the North American rail network, will not
materially adversely affect the Company’s operations, or its competitive
and financial position.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Business
prospects and other risks
The
Company, like other railroads, is susceptible to changes in the economic
conditions of the industries and geographic areas that produce and consume
the freight it transports or the supplies it requires to
operate. In addition, many of the goods and commodities carried
by the Company experience cyclicality in demand. Many of the bulk
commodities the Company transports move offshore and are affected more by
global rather than North American economic conditions. As such,
prolonged negative changes in North American and global economic
conditions, that could result in a recession or industrial restructuring
and affect the producers and consumers of the commodities carried by the
Company, may have an adverse effect on the volume of rail shipments
carried by the Company, its results of operations, financial position,
and/or liquidity.
Overall return in the
capital markets and the level of interest rates affect the funded status
of the Company's pension plans, as calculated under generally accepted
accounting principles, as well as under a solvency or wind-up scenario as
required by the Canadian Institute of Actuaries. Adverse
changes with respect to pension plan returns and the level of interest
rates from the date of the last actuarial valuation may significantly
increase future pension contributions and could have a material adverse
effect on the Company’s results of operations. The Company’s
funding requirements, as well as the impact on the results of operations,
is determined upon completion of actuarial valuations, which are generally
required on a triennial basis.
Global as well as North
American trade conditions, including trade barriers on certain
commodities, may interfere with the free circulation of goods across
Canada and the United States.
Potential terrorist
actions can have a direct or indirect impact on the transportation
infrastructure, including railway infrastructure in North America, and
interfere with the free flow of goods. International conflicts
can also have an impact on the Company’s markets.
The
Company, like other railway companies in North America, may experience
demographic challenges in the employment levels of its
workforce. Changes in employee demographics, training
requirements and the availability of qualified personnel could negatively
impact the Company’s ability to meet demand for rail
service. The Company is monitoring employment levels to ensure
that there is an adequate supply of personnel to meet rail service
requirements. However, the Company’s efforts to attract and
retain qualified personnel may be hindered by increased demand in the job
market. No assurance can be given that the demographic
challenges will not materially adversely affect the Company’s operations
or its financial position.
The Company, like other
railroads, is susceptible to the volatility of fuel prices due to changes
in the economy or supply disruptions. Rising fuel prices could
materially adversely affect the Company’s expenses. As such, CN
has implemented a fuel surcharge program with a view of offsetting the
impact of rising fuel prices. The surcharge applied to
customers is determined in the second calendar month prior to the month in
which it is applied, and is calculated using the average monthly price of
West-Texas Intermediate crude oil (WTI) for revenue-based tariffs and
On-Highway Diesel (OHD) for mileage-based tariffs. No assurance
can be given that continued increases in fuel prices or supply disruptions
will not materially adversely affect the Company’s operations or its
financial position.
The Company conducts its
business in both Canada and the U.S. and as a result, is affected by
currency fluctuations. Based on the Company’s current
operations, the estimated annual impact on net income of a year-over-year
one-cent change in the Canadian dollar relative to the U.S. dollar is
approximately $10 million. Changes in the exchange rate between
the Canadian dollar and other currencies (including the U.S. dollar) make
the goods transported by the Company more or less competitive in the world
marketplace and thereby further affect the Company’s revenues and
expenses.
In order to grow the
business, the Company implements strategic initiatives to expand the scope
and scale of existing rail and non-rail operations. CN
WorldWide International, the Company’s international freight-forwarding
subsidiary, was formed to leverage existing non-rail
capabilities. This subsidiary operates in a highly competitive
market and no assurance can be given that the expected benefits will be
realized given the nature and intensity of the competition in that
market.
In addition to the
inherent risks of the business cycle, the Company’s operations are
occasionally susceptible to severe weather conditions, which can disrupt
operations and service for the railroad as well as disrupt operations for
the Company’s customers.
Generally
accepted accounting principles require the use of historical cost as the
basis of reporting in financial statements. As a result, the
cumulative effect of inflation, which has significantly increased asset
replacement costs for capital-intensive companies such as CN, is not
reflected in operating expenses. Depreciation charges on an
inflation-adjusted basis, assuming that all operating assets are replaced
at current price levels, would be substantially greater than historically
reported amounts.
|
CANADIAN
NATIONAL RAILWAY COMPANY
|
MANAGEMENT’S DISCUSSION
AND ANALYSIS (U.S.
GAAP)
|
Controls
and procedures
The
Company’s Chief Executive Officer and its Chief Financial Officer, after
evaluating the effectiveness of the Company’s “disclosure controls and
procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as
of September 30, 2008, have concluded that the Company’s disclosure
controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated
subsidiaries would have been made known to them.
During
the third quarter ending September 30, 2008, there was no change in the
Company’s internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company’s
internal control over financial
reporting.
|
Additional
information, including the Company’s 2007 Annual Information Form (AIF)
and Form 40-F, as well as the Company’s Notice of Intention to Make a
Normal Course Issuer Bid, may be found on SEDAR at www.sedar.com
and on EDGAR at www.sec.gov,
respectively. Copies of such documents may be obtained by
contacting the Corporate Secretary’s office.
Montreal,
Canada
October
21, 2008
|
(1)
|
I
have reviewed this report on Form 6-K of Canadian National Railway
Company;
|
(2)
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
(3)
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
(4)
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
(5)
|
The
registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
functions):
|
(a)
|
All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and
|
(b)
|
Any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal control over financial
reporting.
|
(1)
|
I
have reviewed this report on Form 6-K of Canadian National Railway
Company;
|
(2)
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
(3)
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
(4)
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
(5)
|
The
registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
functions):
|
(a)
|
All significant deficiencies and
material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and
|
(b)
|
Any fraud, whether or not
material, that involves management or other employees who have a
significant role in the registrant's internal control over financial
reporting.
|
Canadian
National Railway Company
|
|||||
Date: October
23, 2008
|
By:
|
/s/
Cristina Circelli
|
|||
Name:
|
Cristina
Circelli
|
||||
Title:
|
Deputy
Corporate Secretary and
General Counsel
|