Form
20-F
|
Form
40-F X
|
Yes
|
No X
|
Yes
|
No X
|
Yes
|
No X
|
Management
is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial
reporting is a process designed 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. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.
Management has assessed the
effectiveness of the Company's internal control over financial reporting
as of December 31, 2008 using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework. Based on this assessment, management has
determined that the Company's internal control over financial reporting
was effective as of December 31, 2008.
KPMG LLP, an independent
registered public accounting firm, has issued an unqualified audit report
on the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008 and has also expressed an unqualified
opinion on the Company's 2008 consolidated financial statements as stated
in their Reports of Independent Registered Public Accounting Firm dated
February 5, 2009.
(s)
E. Hunter Harrison
President
and Chief Executive Officer
February
5, 2009
(s)
Claude Mongeau
Executive
Vice-President and Chief Financial Officer
February
5, 2009
|
To
the Board of Directors and Shareholders of the Canadian National Railway
Company:
We
have audited the accompanying consolidated balance sheets of the Canadian
National Railway Company (the “Company”) as of December 31, 2008 and 2007,
and the related consolidated statements of income, comprehensive income,
changes in shareholders’ equity and cash flows for each of the years in
the three-year period ended December 31, 2008. These consolidated
financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with Canadian generally accepted
auditing standards and with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In
our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 2008, in conformity with generally accepted
accounting principles in the United States.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control
over financial reporting as of December 31, 2008, based on criteria
established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”),
and our report dated February 5, 2009 expressed an unqualified opinion on
the effectiveness of the Company’s internal control over financial
reporting.
(s)
KPMG LLP*
Chartered
Accountants
Montreal,
Canada
February
5, 2009
|
*
CA Auditor permit no. 23443
|
KPMG
LLP is a Canadian limited liability partnership and a member firm of the
KPMG network of independent member firms affiliated with KPMG
International, a Swiss cooperative.
KPMG
Canada provides services to KPMG
LLP.
|
Report
of Independent Registered Public Accounting Firm
|
To
the Board of Directors and Shareholders of the Canadian National Railway
Company:
We
have audited the Canadian National Railway Company’s (the “Company”)
internal control over financial reporting as of December 31, 2008, based
on the criteria established in Internal Control -Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). The Company's management is responsible for
maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company's internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
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. A
company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on
the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may
deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal Control -Integrated Framework issued
by the COSO.
We
also have audited, in accordance with Canadian generally accepted auditing
standards and with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the
Company as of December 31, 2008 and 2007, and the related consolidated
statements of income, comprehensive income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2008, and our report dated February 5, 2009 expressed an
unqualified opinion on those consolidated financial
statements.
(s)
KPMG LLP*
Chartered
Accountants
|
||
Montreal,
Canada
February
5, 2009
*CA
Auditor permit no. 23443
|
KPMG
LLP is a Canadian limited liability partnership and a member firm of the
KPMG network of independent member firms affiliated with KPMG
International, a Swiss cooperative.
KPMG
Canada provides services to KPMG
LLP.
|
In millions,
except per share data
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
|||||||
Revenues
|
$
|
8,482
|
$
|
7,897
|
$
|
7,929
|
|||||
Operating expenses
|
|||||||||||
Labor
and fringe benefits
|
1,674
|
1,701
|
1,823
|
||||||||
Purchased
services and material
|
1,137
|
1,045
|
1,027
|
||||||||
Fuel
|
1,403
|
1,026
|
892
|
||||||||
Depreciation
and amortization
|
725
|
677
|
650
|
||||||||
Equipment
rents
|
262
|
247
|
198
|
||||||||
Casualty
and other
|
387
|
325
|
309
|
||||||||
Total
operating expenses
|
5,588
|
5,021
|
4,899
|
||||||||
Operating
income
|
2,894
|
2,876
|
3,030
|
||||||||
Interest
expense
|
(375)
|
(336)
|
(312)
|
||||||||
Other
income (Note
13)
|
26
|
166
|
11
|
||||||||
Income before income
taxes
|
2,545
|
2,706
|
2,729
|
||||||||
Income
tax expense (Note
14)
|
(650)
|
(548)
|
(642)
|
||||||||
Net income
|
$
|
1,895
|
$
|
2,158
|
$
|
2,087
|
|||||
Earnings
per share (Note 16)
|
|||||||||||
Basic
|
$
|
3.99
|
$
|
4.31
|
$
|
3.97
|
|||||
Diluted
|
$
|
3.95
|
$
|
4.25
|
$
|
3.91
|
|||||
Weighted-average number of
shares
|
|||||||||||
Basic
|
474.7
|
501.2
|
525.9
|
||||||||
Diluted
|
480.0
|
508.0
|
534.3
|
||||||||
See
accompanying notes to consolidated financial statements.
|
Consolidated Statement of
Comprehensive Income U.S. GAAP
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
|||||
Net
income
|
$
|
1,895
|
$
|
2,158
|
$
|
2,087
|
|||
Other comprehensive income
(loss) (Note
19):
|
|||||||||
Unrealized
foreign exchange gain (loss) on:
|
|||||||||
Translation
of the net investment in foreign operations
|
1,259
|
(1,004)
|
32
|
||||||
Translation
of U.S. dollar-denominated long-term debt designated as
|
|||||||||
a
hedge of the net investment in U.S. subsidiaries
|
(1,266)
|
788
|
(33)
|
||||||
Pension
and other postretirement benefit plans (Note
12):
|
|||||||||
Net
actuarial gain (loss) arising during the period
|
(452)
|
391
|
-
|
||||||
Prior
service cost arising during the period
|
(3)
|
(12)
|
-
|
||||||
Amortization
of net actuarial loss (gain) included in net periodic benefit
cost
|
(2)
|
49
|
-
|
||||||
Amortization
of prior service cost included in net periodic benefit
cost
|
21
|
21
|
-
|
||||||
Minimum
pension liability adjustment
|
-
|
-
|
1
|
||||||
Derivative
instruments (Note
18):
|
-
|
(1)
|
(57)
|
||||||
Other
comprehensive income (loss) before income taxes
|
(443)
|
232
|
(57)
|
||||||
Income
tax recovery (expense) on Other comprehensive income
(loss)
|
319
|
(219)
|
(179)
|
||||||
Other
comprehensive income (loss)
|
(124)
|
13
|
(236)
|
||||||
Comprehensive
income
|
$
|
1,771
|
$
|
2,171
|
$
|
1,851
|
|||
See
accompanying notes to consolidated financial statements.
|
Consolidated Balance
Sheet
U.S. GAAP
|
In
millions
|
December
31,
|
2008
|
2007
|
|||
Assets
|
||||||
Current
assets
|
||||||
Cash
and cash equivalents
|
$
|
413
|
$
|
310
|
||
Accounts
receivable (Note
4)
|
913
|
370
|
||||
Material
and supplies
|
200
|
162
|
||||
Deferred
income taxes (Note
14)
|
98
|
68
|
||||
Other
|
132
|
138
|
||||
1,756
|
1,048
|
|||||
Properties
(Note
5)
|
23,203
|
20,413
|
||||
Intangible
and other assets (Note
6)
|
1,761
|
1,999
|
||||
Total
assets
|
$
|
26,720
|
$
|
23,460
|
||
Liabilities
and shareholders’ equity
|
||||||
Current
liabilities
|
||||||
Accounts
payable and other (Note
7)
|
$
|
1,386
|
$
|
1,336
|
||
Current
portion of long-term debt (Note
9)
|
506
|
254
|
||||
1,892
|
1,590
|
|||||
Deferred
income taxes (Note
14)
|
5,511
|
4,908
|
||||
Other
liabilities and deferred credits (Note
8)
|
1,353
|
1,422
|
||||
Long-term
debt (Note
9)
|
7,405
|
5,363
|
||||
Shareholders’
equity
|
||||||
Common
shares (Note
10)
|
4,179
|
4,283
|
||||
Accumulated
other comprehensive loss (Note
19)
|
(155)
|
(31)
|
||||
Retained
earnings
|
6,535
|
5,925
|
||||
10,559
|
10,177
|
|||||
Total
liabilities and shareholders’ equity
|
$
|
26,720
|
$
|
23,460
|
||
On
Behalf of the Board:
|
||||||
David G.
McLean
|
E.
Hunter Harrison
|
|||||
Director
|
Director
|
|||||
See
accompanying notes to consolidated financial
statements.
|
Consolidated Statement of Changes
in Shareholders’
Equity
U.S. GAAP
|
Issued
and
|
Accumulated
|
||||||||||||
outstanding
|
other
|
Total
|
|||||||||||
common
|
Common
|
comprehensive
|
Retained
|
shareholders’
|
|||||||||
In
millions
|
shares
|
shares
|
loss
|
earnings
|
equity
|
||||||||
Balances
at December 31, 2005
|
536.8
|
$
|
4,580
|
$
|
(222)
|
$
|
4,891
|
$
|
9,249
|
||||
Net
income
|
-
|
-
|
-
|
2,087
|
2,087
|
||||||||
Stock
options exercised and other (Notes 10,
11)
|
5.1
|
133
|
-
|
-
|
133
|
||||||||
Share
repurchase programs (Note
10)
|
(29.5)
|
(254)
|
-
|
(1,229)
|
(1,483)
|
||||||||
Other
comprehensive loss (Note
19)
|
-
|
-
|
(236)
|
-
|
(236)
|
||||||||
Adjustment
to Accumulated other comprehensive
|
|||||||||||||
loss
(Note
2)
|
-
|
-
|
414
|
-
|
414
|
||||||||
Dividends
($0.65 per share)
|
-
|
-
|
-
|
(340)
|
(340)
|
||||||||
Balances at December 31,
2006
|
512.4
|
4,459
|
(44)
|
5,409
|
9,824
|
||||||||
Adoption
of accounting pronouncements (Note
2)
|
-
|
-
|
-
|
95
|
95
|
||||||||
Restated
balance, beginning of year
|
512.4
|
4,459
|
(44)
|
5,504
|
9,919
|
||||||||
Net
income
|
-
|
-
|
-
|
2,158
|
2,158
|
||||||||
Stock
options exercised and other (Notes 10,
11)
|
3.0
|
89
|
-
|
-
|
89
|
||||||||
Share
repurchase programs (Note
10)
|
(30.2)
|
(265)
|
-
|
(1,319)
|
(1,584)
|
||||||||
Other
comprehensive income (Note
19)
|
-
|
-
|
13
|
-
|
13
|
||||||||
Dividends
($0.84 per share)
|
-
|
-
|
-
|
(418)
|
(418)
|
||||||||
Balances at December 31,
2007
|
485.2
|
4,283
|
(31)
|
5,925
|
10,177
|
||||||||
Net
income
|
-
|
-
|
-
|
1,895
|
1,895
|
||||||||
Stock
options exercised and other (Notes 10,
11)
|
2.4
|
68
|
-
|
-
|
68
|
||||||||
Share
repurchase programs (Note
10)
|
(19.4)
|
(172)
|
-
|
(849)
|
(1,021)
|
||||||||
Other
comprehensive loss (Note
19)
|
-
|
-
|
(124)
|
-
|
(124)
|
||||||||
Dividends
($0.92 per share)
|
-
|
-
|
-
|
(436)
|
(436)
|
||||||||
Balances at December 31,
2008
|
468.2
|
$
|
4,179
|
$
|
(155)
|
$
|
6,535
|
$
|
10,559
|
||||
See
accompanying
notes to consolidated financial statements.
|
Consolidated Statement of Cash
Flows
U.S. GAAP
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
|||||
Operating
activities
|
|||||||||
Net
income
|
$
|
1,895
|
$
|
2,158
|
$
|
2,087
|
|||
Adjustments
to reconcile net income to net cash
|
|||||||||
provided
from operating activities:
|
|||||||||
Depreciation
and amortization
|
725
|
678
|
653
|
||||||
Deferred
income taxes (Note
14)
|
230
|
(82)
|
3
|
||||||
Gain
on sale of Central Station Complex (Note
5)
|
-
|
(92)
|
-
|
||||||
Gain
on sale of investment in English Welsh and Scottish Railway (Note
6)
|
-
|
(61)
|
-
|
||||||
Other
changes in:
|
|||||||||
Accounts
receivable (Note
4)
|
(432)
|
229
|
(17)
|
||||||
Material
and supplies
|
(23)
|
18
|
(36)
|
||||||
Accounts
payable and other
|
(127)
|
(396)
|
194
|
||||||
Other
current assets
|
37
|
84
|
61
|
||||||
Other
|
(274)
|
(119)
|
6
|
||||||
Cash
provided from operating activities
|
2,031
|
2,417
|
2,951
|
||||||
Investing
activities
|
|||||||||
Property
additions
|
(1,424)
|
(1,387)
|
(1,298)
|
||||||
Acquisitions,
net of cash acquired (Note
3)
|
(50)
|
(25)
|
(84)
|
||||||
Sale
of Central Station Complex (Note
5)
|
-
|
351
|
-
|
||||||
Sale
of investment in English Welsh and Scottish Railway (Note
6)
|
-
|
114
|
-
|
||||||
Other,
net
|
74
|
52
|
33
|
||||||
Cash
used by investing activities
|
(1,400)
|
(895)
|
(1,349)
|
||||||
Financing
activities
|
|||||||||
Issuance
of long-term debt
|
4,433
|
4,171
|
3,308
|
||||||
Reduction
of long-term debt
|
(3,589)
|
(3,589)
|
(3,089)
|
||||||
Issuance
of common shares due to exercise of stock options and
|
|||||||||
related
excess tax benefits realized (Note
11)
|
54
|
77
|
120
|
||||||
Repurchase
of common shares (Note
10)
|
(1,021)
|
(1,584)
|
(1,483)
|
||||||
Dividends
paid
|
(436)
|
(418)
|
(340)
|
||||||
Cash
used by financing activities
|
(559)
|
(1,343)
|
(1,484)
|
||||||
Effect
of foreign exchange fluctuations on U.S. dollar-
|
|||||||||
denominated
cash and cash equivalents
|
31
|
(48)
|
(1)
|
||||||
Net
increase in cash and cash equivalents
|
103
|
131
|
117
|
||||||
Cash
and cash equivalents, beginning of year
|
310
|
179
|
62
|
||||||
Cash
and cash equivalents, end of year
|
$
|
413
|
$
|
310
|
$
|
179
|
|||
Supplemental
cash flow information
|
|||||||||
Net
cash receipts from customers and other
|
$
|
8,012
|
$
|
8,139
|
$
|
7,946
|
|||
Net
cash payments for:
|
|||||||||
Employee
services, suppliers and other expenses
|
(4,920)
|
(4,323)
|
(4,130)
|
||||||
Interest
|
(396)
|
(340)
|
(294)
|
||||||
Workforce
reductions (Note
8)
|
(22)
|
(31)
|
(45)
|
||||||
Personal
injury and other claims (Note
17)
|
(91)
|
(86)
|
(107)
|
||||||
Pensions
(Note
12)
|
(127)
|
(75)
|
(112)
|
||||||
Income
taxes (Note
14)
|
(425)
|
(867)
|
(307)
|
||||||
Cash
provided from operating activities
|
$
|
2,031
|
$
|
2,417
|
$
|
2,951
|
|||
See
accompanying notes to consolidated financial statements.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Canadian
National Railway Company, together with its wholly owned subsidiaries,
collectively “CN” or “the Company,” is engaged in the rail and related
transportation business. CN spans Canada and mid-America, from the
Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of
Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans and Mobile,
Alabama, and the key cities of Toronto, Buffalo, Chicago, Detroit, Duluth,
Minnesota/Superior, Wisconsin, Green Bay, Wisconsin, Minneapolis/St. Paul,
Memphis, St. Louis, and Jackson, Mississippi, with connections to all
points in North America. CN’s freight revenues are derived from the
movement of a diversified and balanced portfolio of goods, including
petroleum and chemicals, grain and fertilizers, coal, metals and minerals,
forest products, intermodal and
automotive.
|
1
– Summary of significant accounting policies
These
consolidated financial statements are expressed in Canadian dollars,
except where otherwise indicated, and have been prepared in accordance
with United States generally accepted accounting principles (U.S. GAAP).
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, including those related to personal injury and other claims,
environmental claims, depreciation, pensions and other postretirement
benefits, and income taxes, based upon currently available
information. Actual results could differ from these
estimates.
A.
Principles of consolidation
These
consolidated financial statements include the accounts of all
subsidiaries. The Company’s investments in which it has significant
influence are accounted for using the equity method and all other
investments are accounted for using the cost method.
B.
Revenues
Freight
revenues are recognized using the percentage of completed service method
based on the transit time of freight as it moves from origin to
destination. Costs associated with movements are recognized as the service
is performed. Revenues are presented net of taxes collected from customers
and remitted to governmental authorities.
C.
Foreign exchange
All
of the Company’s United States (U.S.) operations are self-contained
foreign entities with the U.S. dollar as their functional currency.
Accordingly, the U.S. operations’ assets and liabilities are translated
into Canadian dollars at the rate in effect at the balance sheet date and
the revenues and expenses are translated at average exchange rates during
the year. All adjustments resulting from the translation of the foreign
operations are recorded in Other comprehensive income (loss) (see Note
19).
The Company designates the U.S.
dollar-denominated long-term debt of the parent company as a foreign
exchange hedge of its net investment in U.S. subsidiaries. Accordingly,
unrealized foreign exchange gains and losses, from the dates of
designation, on the translation of the U.S. dollar-denominated long-term
debt are also included in Other comprehensive income (loss).
D.
Cash and cash equivalents
Cash
and cash equivalents include highly liquid investments purchased three
months or less from maturity and are stated at cost, which approximates
market value.
E.
Accounts receivable
Accounts
receivable are recorded at cost net of billing adjustments and an
allowance for doubtful accounts. The allowance for doubtful accounts is
based on expected collectability and considers historical experience as
well as known trends or uncertainties related to account
collectability. Any gains or losses on the sale of accounts
receivable are calculated by comparing the carrying amount of the accounts
receivable sold to the total of the cash proceeds on sale and the fair
value of the retained interest in such receivables on the date of
transfer. Costs related to the sale of accounts receivable are recognized
in earnings in the period incurred.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Asset
class
|
Annual
rate
|
Track
and roadway
|
2%
|
Rolling
stock
|
3%
|
Buildings
|
2%
|
Information
technology
|
15%
|
Other
|
7%
|
The Company follows the group
method of depreciation for railroad properties and, as such, conducts
comprehensive depreciation studies on a periodic basis to assess the
reasonableness of the lives of properties based upon current information
and historical activities. Changes in estimated useful lives are accounted
for prospectively. In 2008, the Company completed a
depreciation study of its Canadian properties, plant and equipment,
resulting in an increase in depreciation expense of $20 million for the
year ended December 31, 2008 compared to the same period in
2007. In 2007, the Company completed a depreciation study for
all of its U.S. assets, for which there was no significant impact on
depreciation expense.
I.
Intangible assets
Intangible
assets relate to customer contracts and relationships assumed through past
acquisitions and are being amortized on a straight-line basis over 40 to
50 years.
J.
Pensions
Pension
costs are determined using actuarial methods. Net periodic
benefit cost is charged to income and includes:
(i) the
cost of pension benefits provided in exchange for employees’ services
rendered during the year,
(ii) the interest
cost of pension obligations,
(iii) the expected
long-term return on pension fund assets,
(iv) the
amortization of prior service costs and amendments over the expected
average remaining service life of the employee
group covered by the plans, and
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
2
– Accounting changes
2007
Income
taxes
On
January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48,
“Accounting for Uncertainty in Income Taxes,” which prescribes the
criteria for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification,
interest and penalties, disclosure, and transition. 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. Disclosures prescribed by FIN No. 48 are presented
in Note 14 – Income taxes.
Pensions
and other postretirement benefits
On
January 1, 2007, pursuant to 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 Company early adopted
the requirement to measure the defined benefit plan assets and the
projected benefit obligation as of the date of the fiscal year-end
statement of financial position for its U.S. plans. The Company
elected to use the 15-month transition method, which allowed for the
extrapolation of net periodic benefit cost based on the September 30, 2006
measurement date to the fiscal year-end date of December 31,
2007. As a result, the Company recorded a reduction of $3
million to Retained earnings at January 1, 2007, which represented the net
periodic benefit cost pursuant to the actuarial valuation attributable to
the period between the early measurement date of September 30, 2006 and
January 1, 2007 (the date of adoption).
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Acquisition of Elgin, Joliet and
Eastern Railway Company (EJ&E) – Subsequent event
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 the
Company 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 would 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 Company has received all
necessary regulatory approvals, including the U.S. Surface Transportation
Board (STB) ruling rendered on December 24, 2008. On January
31, 2009, the Company completed its acquisition of the EJ&E for a
purchase price of U.S.$300 million, paid with cash on hand.
Over the next few years, the
Company has committed to spend approximately U.S.$100 million for
infrastructure improvements and over U.S.$60 million under a series of
mitigation agreements with individual communities, as well as under a
comprehensive voluntary mitigation program that addresses municipalities’
concerns raised during the regulatory approval
process. Expenditures for additional STB-imposed mitigation are
being currently evaluated by the Company.
The Company accounted for the
acquisition using the purchase method of accounting pursuant to SFAS No.
141(R), “Business Combinations,” which became effective for acquisitions
closing on or after January 1, 2009 (see Note 1 (Q) Recent accounting
pronouncements).
|
2008
The
Company acquired the three principal railway subsidiaries of the Quebec
Railway Corp. (QRC) and a QRC rail-freight ferry operation for a total
acquisition cost of $50 million, paid with cash on hand. The acquisition
includes:
(i)
Chemin de fer de la Matapedia et du Golfe, a 221-mile short-line
railway,
(ii) New
Brunswick East Coast Railway, a 196-mile short-line railway,
(iii) Ottawa
Central Railway, a 123-mile short-line railway, and
(iv) Compagnie de
gestion de Matane Inc., a rail ferry which provides shuttle boat-rail
freight service.
2007
The Company acquired the rail
assets of Athabasca Northern Railway (ANY) for $25 million, with a planned
investment of $135 million in rail line upgrades over a three-year period.
2006
The
Company acquired the following three entities for a total acquisition cost
of $84 million, paid with cash on hand:
(i) Alberta
short-line railways, composed of the 600-mile Mackenzie Northern Railway,
the 118-mile Lakeland &
Waterways Railway and the
21-mile Central Western Railway,
(ii) Savage
Alberta Railway, Inc., a 345-mile short-line railway, and
(iii) the remaining 51%
of SLX Canada Inc., a company engaged in equipment leasing in which the
Company
previously had a 49%
interest that had been consolidated.
All
acquisitions were accounted for using the purchase method of accounting.
As such, the Company’s consolidated financial statements include the
assets, liabilities and results of operations of the acquired entities
from the dates of acquisition.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
In
millions
|
December
31,
|
2008
|
2007
|
||||
Freight
|
$
|
673
|
$
|
146
|
|||
Non-freight
|
266
|
251
|
|||||
939
|
397
|
||||||
Allowance
for doubtful accounts
|
(26)
|
(27)
|
|||||
$
|
913
|
$
|
370
|
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. The trust is a
multi-seller trust and the Company is not the primary beneficiary. The
trust was established in Ontario in 1994 by a Canadian bank to acquire
receivables and interests in other financial assets from a variety of
originators. Funding for the acquisition of these assets is
customarily through the issuance of asset-backed commercial paper
notes. The notes are secured by, and recourse is limited to,
the assets purchased using the proceeds of the notes. At
December 31, 2008, the trust held interests in 16 pools of assets and had
notes outstanding of $3.3 billion. Pursuant to the agreement, the Company
sells an interest in its receivables and receives proceeds net of the
required reserve as stipulated in the agreement. The required reserve
represents an amount set aside to allow for possible credit losses and is
recognized by the Company as a retained interest and recorded in Other
current assets in its Consolidated Balance Sheet. The eligible freight
receivables as defined in the agreement may not include delinquent or
defaulted receivables, or receivables that do not meet certain
obligor-specific criteria, including concentrations in excess of
prescribed limits with any one customer.
The Company has retained the
responsibility for servicing, administering and collecting the receivables
sold and receives no fee for such ongoing servicing responsibilities. The
average servicing period is approximately one month. In 2008,
proceeds from collections reinvested in the securitization program were
approximately $3.3 billion. At December 31, 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. As such, no gain or loss
was recorded.
The Company is subject to
customary requirements that include reporting requirements as well as
compliance to specified ratios, 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 its
requirements and is currently not aware of any trends, events or
conditions that could cause such termination.
At December 31, 2008, the
Company had sold receivables that resulted in proceeds of $71 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). The fair value of the retained interest approximated
carrying value as a result of the short collection cycle and negligible
credit losses.
Other income included $10 million
in 2008, $24 million in 2007 and $12 million in 2006, for costs related to
the agreement, which fluctuate with changes in prevailing interest rates
(see Note 13). These costs include interest, program fees and
fees for unused committed
availability.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
In
millions
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||||
Accumulated
|
Accumulated
|
|||||||||||||||||
Cost
|
depreciation
|
Net
|
Cost
|
depreciation
|
Net
|
|||||||||||||
Track
and roadway (1)
|
$
|
24,724
|
$
|
6,643
|
$
|
18,081
|
$
|
22,020
|
$
|
6,433
|
$
|
15,587
|
||||||
Rolling
stock
|
4,833
|
1,585
|
3,248
|
4,702
|
1,606
|
3,096
|
||||||||||||
Buildings
|
1,253
|
541
|
712
|
1,105
|
498
|
607
|
||||||||||||
Information
technology
|
739
|
187
|
552
|
667
|
131
|
536
|
||||||||||||
Other
|
957
|
347
|
610
|
829
|
242
|
587
|
||||||||||||
$
|
32,506
|
$
|
9,303
|
$
|
23,203
|
$
|
29,323
|
$
|
8,910
|
$
|
20,413
|
|||||||
Capital
leases included in properties
|
||||||||||||||||||
Track
and roadway (1)
|
$
|
418
|
$
|
2
|
$
|
416
|
$
|
418
|
$
|
2
|
$
|
416
|
||||||
Rolling
stock
|
1,335
|
287
|
1,048
|
1,287
|
245
|
1,042
|
||||||||||||
Buildings
|
109
|
7
|
102
|
109
|
4
|
105
|
||||||||||||
Information
technology
|
3
|
-
|
3
|
1
|
-
|
1
|
||||||||||||
Other
|
122
|
30
|
92
|
121
|
27
|
94
|
||||||||||||
$
|
1,987
|
$
|
326
|
$
|
1,661
|
$
|
1,936
|
$
|
278
|
$
|
1,658
|
|||||||
(1)
|
Includes
the cost of land of $1,827 million and $1,530 million as at December 31,
2008 and 2007, respectively, of which $108 million was for right-of-way
access and was recorded as a capital lease in both
years. Following a review in 2008 of its asset classifications,
the Company decreased the amounts of capital leases included in properties
and has presented them as owned.
|
|||||||||||||||||
Sale
of Central Station Complex
In
November 2007, the Company finalized an agreement with Homburg Invest
Inc., to sell its Central Station Complex in Montreal for proceeds of $355
million before transaction costs. Under the agreement, the
Company entered into long-term arrangements to lease back its corporate
headquarters building and the Central Station railway passenger
facilities. The transaction resulted in a gain on disposition
of $222 million, including amounts related to the corporate headquarters
building and the Central Station railway passenger facilities, which are
being deferred and amortized over their respective lease
terms. A gain of $92 million ($64 million after-tax) was
recognized immediately in Other income (see Note
13).
|
In
millions
|
December
31,
|
2008
|
2007
|
|||
Pension
asset (Note
12)
|
$
|
1,522
|
$
|
1,768
|
||
Investments
(A)
|
24
|
24
|
||||
Other
receivables
|
83
|
106
|
||||
Intangible
assets (B)
|
65
|
54
|
||||
Other
|
67
|
47
|
||||
$
|
1,761
|
$
|
1,999
|
A.
Investments
As
at December 31, 2008, the Company had $20 million ($17 million at December
31, 2007) of investments accounted for under the equity method and $4
million ($7 million at December 31, 2007) of investments accounted for
under the cost method.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
In
millions
|
December
31,
|
2008
|
2007
|
|||
Trade
payables
|
$
|
413
|
$
|
457
|
||
Payroll-related
accruals
|
237
|
234
|
||||
Accrued
charges
|
232
|
146
|
||||
Accrued
interest
|
123
|
118
|
||||
Personal
injury and other claims provision
|
118
|
102
|
||||
Income
and other taxes
|
75
|
123
|
||||
Environmental
provisions
|
30
|
28
|
||||
Other
postretirement benefits liability
|
19
|
18
|
||||
Workforce
reduction provisions
|
17
|
19
|
||||
Other
|
122
|
91
|
||||
$
|
1,386
|
$
|
1,336
|
In
millions
|
December
31,
|
2008
|
2007
|
|||
Personal
injury and other claims provisions, net of current portion
|
$
|
336
|
$
|
344
|
||
Other
postretirement benefits liability, net of current portion (Note
12)
|
241
|
248
|
||||
Pension
liability (Note
12)
|
237
|
187
|
||||
Environmental
provisions, net of current portion
|
95
|
83
|
||||
Workforce
reduction provisions, net of current portion (A)
|
39
|
53
|
||||
Deferred
credits and other
|
405
|
507
|
||||
$
|
1,353
|
$
|
1,422
|
A.
Workforce reduction provisions
The
workforce reduction provisions, which relate to job reductions of prior
years, including job reductions from the integration of acquired
companies, are mainly comprised of payments related to severance, early
retirement incentives and bridging to early retirement, the majority of
which will be disbursed within the next four years. In 2008, net charges
and adjustments increased the provisions by $6 million ($6 million for the
year ended December 31, 2007). Payments have reduced the
provisions by $22 million for the year ended December 31, 2008 ($31
million for the year ended December 31, 2007). As at December
31, 2008, the aggregate provisions, including the current portion,
amounted to $56 million ($72 million as at December 31,
2007).
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
|
U.S.
dollar-denominated amount
|
|||||||||||
|
December
31,
|
|||||||||||
In
millions
|
Maturity
|
2008
|
2007
|
|||||||||
Debentures
and notes: (A)
|
||||||||||||
|
||||||||||||
Canadian
National series:
|
||||||||||||
4.25%
|
5-year
notes (B)
|
Aug.
1, 2009
|
$
|
300
|
$
|
365
|
$
|
297
|
||||
6.38%
|
10-year
notes (B)
|
Oct.
15, 2011
|
400
|
487
|
397
|
|||||||
4.40%
|
10-year
notes (B)
|
Mar.
15, 2013
|
400
|
487
|
397
|
|||||||
4.95%
|
6-year
notes (B)
|
Jan.
15, 2014
|
325
|
396
|
-
|
|||||||
5.80%
|
10-year
notes (B)
|
June
1, 2016
|
250
|
305
|
248
|
|||||||
5.85%
|
10-year
notes (B)
|
Nov.
15, 2017
|
250
|
305
|
248
|
|||||||
5.55%
|
10-year
notes (B)
|
May
15, 2018
|
325
|
396
|
-
|
|||||||
6.80%
|
20-year
notes (B)
|
July
15, 2018
|
200
|
244
|
198
|
|||||||
7.63%
|
30-year
debentures
|
May
15, 2023
|
150
|
183
|
149
|
|||||||
6.90%
|
30-year
notes (B)
|
July
15, 2028
|
475
|
578
|
471
|
|||||||
7.38%
|
30-year
debentures (B)
|
Oct.
15, 2031
|
200
|
244
|
198
|
|||||||
6.25%
|
30-year
notes (B)
|
Aug.
1, 2034
|
500
|
609
|
496
|
|||||||
6.20%
|
30-year
notes (B)
|
June
1, 2036
|
450
|
548
|
446
|
|||||||
6.71%
|
Puttable
Reset Securities PURSSM
(B)
|
July
15, 2036
|
250
|
305
|
248
|
|||||||
6.38%
|
30-year
debentures (B)
|
Nov.
15, 2037
|
300
|
365
|
297
|
|||||||
|
||||||||||||
Illinois
Central series:
|
||||||||||||
6.63%
|
10-year
notes
|
June
9, 2008
|
20
|
-
|
20
|
|||||||
5.00%
|
99-year
income debentures
|
Dec.
1, 2056
|
7
|
9
|
7
|
|||||||
7.70%
|
100-year
debentures
|
Sept.
15, 2096
|
125
|
152
|
124
|
|||||||
|
||||||||||||
Wisconsin
Central series:
|
||||||||||||
6.63%
|
10-year
notes
|
April
15, 2008
|
150
|
-
|
149
|
|||||||
|
5,978
|
4,390
|
||||||||||
BC
Rail series:
|
||||||||||||
Non-interest
bearing 90-year subordinated notes (C)
|
July
14, 2094
|
-
|
842
|
842
|
||||||||
Total
debentures and notes
|
6,820
|
5,232
|
||||||||||
Other:
|
|
|||||||||||
Commercial
paper (D) (E)
|
626
|
122
|
||||||||||
Capital
lease obligations and other (F)
|
1,320
|
1,114
|
||||||||||
Total other
|
1,946
|
1,236
|
||||||||||
|
8,766
|
6,468
|
||||||||||
Less:
|
|
|||||||||||
Net
unamortized discount
|
855
|
851
|
||||||||||
Total debt
|
7,911
|
5,617
|
||||||||||
|
||||||||||||
Less:
|
|
|||||||||||
Current
portion of long-term debt
|
506
|
254
|
||||||||||
|
$
|
7,405
|
$
|
5,363
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
A. The Company’s
debentures, notes and revolving credit facility are
unsecured.
B. These debt
securities are redeemable, in whole or in part, at the option of the
Company, at any time, at the greater of par and a formula price based on
interest rates prevailing at the time of redemption.
C. The Company records
these notes as a discounted debt of $7 million, using an imputed interest
rate of 5.75%. The discount of $835 million is included in the
net unamortized discount.
D. The Company has a
U.S.$1 billion revolving credit facility expiring in October 2011. The
credit facility 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 December 31, 2008, the Company had no
outstanding borrowings under its revolving credit facility (nil as at
December 31, 2007) and had letters of credit drawn of $181 million ($57
million as at December 31, 2007).
E. 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 December 31, 2008, the Company
had total borrowings of $626 million, of which $256 million was
denominated in Canadian dollars and $370 million was denominated in U.S.
dollars (U.S.$303 million). The weighted-average interest rate
on these borrowings was 2.42%. 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%.
F. During 2008, the
Company recorded $117 million in assets acquired through equipment leases
($301 million in 2007, of which $211 million related to assets acquired
through equipment leases and $90 million to a leaseback of the Central
Station Complex as described in Note 5), for which $121 million was
recorded in debt.
Interest rates for capital lease
obligations range from approximately 2.1% to 7.9% with maturity dates in
the years 2009 through 2037. The imputed interest on these leases amounted
to $525 million
as at December 31, 2008 and $515 million as at December 31,
2007.
The capital lease obligations are
secured by properties with a net carrying amount of $1,245 million as at
December 31, 2008 and $1,241 million as at December 31, 2007.
G.
Long-term debt maturities, including repurchase arrangements and
capital lease repayments on debt outstanding as at December 31, 2008, for
the next five years and thereafter, are as
follows:
|
In
millions
|
||||
2009 (1)
|
$
|
506
|
||
2010
|
95
|
|||
2011
|
1,248
|
|||
2012
|
39
|
|||
2013
|
581
|
|||
2014
and thereafter
|
5,442
|
|||
(1)
|
Includes
$139 million of capital lease
obligations.
|
H. The aggregate amount
of debt payable in U.S. currency as at December 31, 2008 was U.S.$6,069
million (Cdn$7,392 million) and U.S.$5,280 million (Cdn$5,234 million) as
at December 31, 2007.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
10
– Capital stock
A.
Authorized capital stock
The
authorized capital stock of the Company is as follows:
· Unlimited
number of Common Shares, without par value
· Unlimited
number of Class A Preferred Shares, without par value, issuable in
series
· Unlimited
number of Class B Preferred Shares, without par value, issuable in
series
B.
Issued and outstanding common shares
During
2008, the Company issued 2.4 million shares (3.0 million shares in 2007
and 5.1 million shares in 2006) related to stock options
exercised. The total number of common shares issued and
outstanding was 468.2 million
as at December 31, 2008.
C.
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.
As
at December 31, 2008, under this current share repurchase program, the
Company repurchased 6.1 million common shares for $331 million, at a
weighted-average price of $54.42 per share.
In
June 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 and 17.7 million common shares were repurchased in 2007
for $897 million, at a weighted-average price of $50.70 per
share.
|
The
Company has various stock-based incentive plans for eligible
employees. A description of the Company’s major plans is
provided below:
A. Employee
Share Investment Plan
The
Company has an Employee Share Investment Plan (ESIP) giving eligible
employees the opportunity to subscribe for up to 10% of their gross
salaries to purchase shares of the Company’s common stock on the open
market and to have the Company invest, on the employees’ behalf, a further
35% of the amount invested by the employees, up to 6% of their gross
salaries.
The number of participants
holding shares at December 31, 2008 was 14,114 (13,385 at December 31,
2007 and 12,590 at December 31, 2006). The total number of ESIP shares
purchased on behalf of employees, including the Company’s contributions,
was 1.5 million in 2008 and 1.3 million in each of 2007 and 2006,
resulting in a pre-tax charge to income of $18 million, $16 million and
$15 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
B. Stock-based
compensation plans
Compensation
cost for awards under all stock-based compensation plans was $27 million,
$62 million and $79 million for the years ended December 31, 2008, 2007
and 2006, respectively. The total tax benefit recognized in
income in relation to stock-based compensation expense for the years ended
December 31, 2008, 2007 and 2006 was $7 million, $23 million and $22
million, respectively.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
The
following table provides the 2008 activity for all cash settled
awards:
|
|||||||||
RSUs
|
Vision
|
VIDP
|
|||||||
In
millions
|
Nonvested
|
Vested
|
Nonvested
|
Vested
|
Nonvested
|
Vested
|
|||
Outstanding
at December 31, 2007
|
1.6
|
0.9
|
(1)
|
0.8
|
-
|
0.2
|
1.9
|
||
Granted
|
0.7
|
-
|
-
|
-
|
-
|
-
|
|||
Forfeited
|
(0.1)
|
-
|
-
|
-
|
-
|
-
|
|||
Vested
during period
|
(0.9)
|
0.9
|
-
|
-
|
(0.1)
|
0.1
|
|||
Payout
|
-
|
(0.9)
|
-
|
-
|
-
|
(0.2)
|
|||
Cancelled
|
-
|
-
|
(0.8)
|
-
|
-
|
-
|
|||
Outstanding
at December 31, 2008
|
1.3
|
0.9
|
(1)
|
-
|
-
|
0.1
|
1.8
|
||
(1)
Includes 0.1 million of 2004 time-vested RSUs.
|
Notes to 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 (recovery)
|
||||||||||||||||||||||||
recognized
over requisite service period
|
||||||||||||||||||||||||
Year
ended December 31, 2008
|
$
|
8
|
$
|
(2)
|
$
|
24
|
N/A
|
$
|
3
|
$
|
(10)
|
$
|
(10)
|
$
|
13
|
|||||||||
Year
ended December 31, 2007
|
N/A
|
$
|
11
|
$
|
8
|
$
|
14
|
$
|
5
|
$
|
2
|
$
|
11
|
$
|
51
|
|||||||||
Year
ended December 31, 2006
|
N/A
|
N/A
|
$
|
21
|
$
|
19
|
$
|
6
|
$
|
8
|
$
|
11
|
$
|
65
|
||||||||||
|
||||||||||||||||||||||||
Liability
outstanding
|
||||||||||||||||||||||||
December
31, 2008
|
$
|
8
|
$
|
9
|
$
|
53
|
N/A
|
$
|
3
|
$
|
-
|
$
|
88
|
$
|
161
|
|||||||||
December
31, 2007
|
N/A
|
$
|
11
|
$
|
29
|
$
|
48
|
$
|
4
|
$
|
8
|
$
|
95
|
$
|
195
|
|||||||||
|
||||||||||||||||||||||||
Fair
value per unit
|
||||||||||||||||||||||||
December
31, 2008 (3)
|
$
|
20.95
|
$
|
16.53
|
$
|
44.78
|
N/A
|
$
|
42.47
|
$
|
-
|
$
|
44.78
|
N/A
|
||||||||||
|
||||||||||||||||||||||||
Fair
value of awards vested during period
|
||||||||||||||||||||||||
Year
ended December 31, 2008
|
$
|
-
|
$
|
-
|
$
|
53
|
N/A
|
$
|
3
|
$
|
-
|
$
|
4
|
$
|
60
|
|||||||||
Year
ended December 31, 2007
|
N/A
|
$
|
-
|
$
|
1
|
$
|
48
|
$
|
9
|
$
|
-
|
$
|
5
|
$
|
63
|
|||||||||
Year
ended December 31, 2006
|
N/A
|
N/A
|
$
|
-
|
$
|
-
|
$
|
4
|
$
|
-
|
$
|
5
|
$
|
9
|
||||||||||
|
||||||||||||||||||||||||
Nonvested
awards at December 31, 2008
|
||||||||||||||||||||||||
Unrecognized
compensation cost
|
$
|
5
|
$
|
2
|
$
|
-
|
N/A
|
$
|
-
|
N/A
|
$
|
3
|
$
|
10
|
||||||||||
Remaining
recognition period (years)
|
2.0
|
1.0
|
N/A
|
N/A
|
N/A
|
N/A
|
3.0
|
N/A
|
||||||||||||||||
|
||||||||||||||||||||||||
Assumptions (4)
|
||||||||||||||||||||||||
Stock
price ($)
|
$
|
44.78
|
$
|
44.78
|
$
|
44.78
|
N/A
|
$
|
42.47
|
N/A
|
$
|
44.78
|
N/A
|
|||||||||||
Expected
stock price volatility (5)
|
29%
|
33%
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||||||
Expected
term (years)
(6)
|
2.0
|
1.0
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||||||
Risk-free
interest rate (years)
(7)
|
1.09%
|
0.85%
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||||||
Dividend
rate ($) (8)
|
$
|
0.92
|
$
|
0.92
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||||
|
||||||||||||||||||||||||
(1)
|
Compensation
cost is based on the fair value of the awards at period-end using the
lattice-based valuation model that uses the assumptions as presented
herein, except for time-vested RSUs.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(2)
|
Compensation
cost is based on intrinsic value.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(3)
|
2004
RSUs calculated based on the Company's average share price during the
20-day period ending on December 31, 2008.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(4)
|
Assumptions
used to determine fair value are at December 31, 2008.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(5)
|
Based
on the historical volatility of the Company's stock over a period
commensurate with the expected term of the award.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(6)
|
Represents
the remaining period of time that awards are expected to be
outstanding.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(7)
|
Based
on the implied yield available on zero-coupon government issues with an
equivalent term commensurate with the expected term of the
awards.
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
(8)
|
Based
on the annualized dividend rate.
|
(ii)
Stock option awards
The
Company has stock option plans for 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 granting. 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 December 31, 2008, 13.5 million common shares remained
authorized for future issuances under these
plans.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Options
outstanding
|
Nonvested
options
|
|||||||
Weighted-
|
Weighted-
|
|||||||
Number
of
|
average
|
Number
of
|
average
grant
|
|||||
options
|
exercise
price
|
options
|
date
fair value
|
|||||
In
millions
|
In
millions
|
|||||||
Outstanding
at December 31, 2007 (1)
|
14.7
|
$
|
24.55
|
2.3
|
$
|
12.34
|
||
Granted
|
0.9
|
$
|
48.51
|
0.9
|
$
|
12.44
|
||
Exercised
|
(2.4)
|
$
|
18.59
|
N/A
|
N/A
|
|||
Vested
|
N/A
|
N/A
|
(0.8)
|
$
|
11.81
|
|||
Outstanding at December 31,
2008 (1)
|
13.2
|
$
|
29.05
|
2.4
|
$
|
12.54
|
||
Exercisable at December 31,
2008 (1)
|
10.8
|
$
|
24.08
|
N/A
|
N/A
|
|||
(1)
|
Stock
options with a U.S. dollar exercise price have been translated to Canadian
dollars using the foreign exchange rate in effect at the balance sheet
date.
|
The
following table provides the number of stock options outstanding and
exercisable as at December 31, 2008 by range of exercise price and their
related intrinsic value, and for options outstanding, the weighted-average
years to expiration. 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 December 31, 2008 at the Company’s closing stock price of
$44.78.
|
Options
outstanding
|
Options
exercisable
|
||||||||||||||||||||
Range
of exercise prices
|
Number
of options
|
Weighted-average
years to expiration
|
Weighted-average
exercise price
|
Aggregate
intrinsic value
|
Number
of options
|
Weighted-average
exercise price
|
Aggregate
intrinsic value
|
||||||||||||||
In
millions
|
In
millions
|
In
millions
|
In
millions
|
||||||||||||||||||
$
|
11.42
|
-
|
$
|
13.18
|
0.9
|
1.1
|
$
|
11.68
|
$
|
29
|
0.9
|
$
|
11.68
|
$
|
29
|
||||||
$
|
13.54
|
-
|
$
|
19.83
|
1.8
|
1.9
|
$
|
16.49
|
51
|
1.8
|
$
|
16.49
|
51
|
||||||||
$
|
20.27
|
-
|
$
|
27.07
|
6.5
|
3.5
|
$
|
23.00
|
141
|
6.5
|
$
|
23.00
|
141
|
||||||||
$
|
35.26
|
-
|
$
|
42.24
|
1.2
|
6.1
|
$
|
35.90
|
11
|
0.9
|
$
|
35.90
|
8
|
||||||||
$
|
45.18
|
-
|
$
|
65.67
|
2.8
|
8.0
|
$
|
54.00
|
-
|
0.7
|
$
|
53.55
|
-
|
||||||||
Balance
at December 31, 2008 (1)
|
13.2
|
4.3
|
$
|
29.05
|
$
|
232
|
10.8
|
$
|
24.08
|
$
|
229
|
||||||||||
(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. As at December 31, 2008, the total number of in-the-money stock
options outstanding was 10.4 million with a weighted-average exercise
price of $22.40. The weighted-average years to expiration of
exercisable stock options is 3.5
years.
|
Notes to 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
|
Prior
to 2005
|
Total
|
|||||||||||||
|
||||||||||||||||||||
Stock-based compensation
expense
|
||||||||||||||||||||
recognized
over requisite service period (1)
|
||||||||||||||||||||
Year
ended December 31, 2008
|
$
|
7
|
$
|
2
|
$
|
2
|
$
|
3
|
$
|
-
|
$
|
14
|
||||||||
Year
ended December 31, 2007
|
N/A
|
$
|
6
|
$
|
2
|
$
|
3
|
$
|
-
|
$
|
11
|
|||||||||
Year
ended December 31, 2006
|
N/A
|
N/A
|
$
|
8
|
$
|
3
|
$
|
3
|
$
|
14
|
||||||||||
|
||||||||||||||||||||
Fair
value per unit
|
|
|||||||||||||||||||
At
grant date ($)
|
$
|
12.44
|
$
|
13.36
|
$
|
13.80
|
$
|
9.19
|
$
|
8.61
|
N/A
|
|||||||||
|
||||||||||||||||||||
Fair value of awards vested during period
|
||||||||||||||||||||
Year
ended December 31, 2008
|
$
|
-
|
$
|
3
|
$
|
3
|
$
|
3
|
$
|
-
|
$
|
9
|
||||||||
Year
ended December 31, 2007
|
N/A
|
$
|
-
|
$
|
4
|
$
|
3
|
$
|
-
|
$
|
7
|
|||||||||
Year
ended December 31, 2006
|
N/A
|
N/A
|
$
|
-
|
$
|
3
|
$
|
34
|
$
|
37
|
||||||||||
|
||||||||||||||||||||
Nonvested
awards at December 31, 2008
|
||||||||||||||||||||
Unrecognized
compensation cost
|
$
|
4
|
$
|
3
|
$
|
2
|
$
|
-
|
$
|
-
|
$
|
9
|
||||||||
Remaining
recognition period (years)
|
3.1
|
2.1
|
1.1
|
0.1
|
-
|
N/A
|
||||||||||||||
|
||||||||||||||||||||
Assumptions
|
||||||||||||||||||||
Grant
price ($)
|
$
|
48.51
|
$
|
52.79
|
$
|
51.51
|
$
|
36.33
|
$
|
23.59
|
N/A
|
|||||||||
Expected
stock price volatility (2)
|
27%
|
24%
|
25%
|
25%
|
30%
|
N/A
|
||||||||||||||
Expected
term (years)
(3)
|
5.3
|
5.2
|
5.2
|
5.2
|
6.2
|
N/A
|
||||||||||||||
Risk-free
interest rate (4)
|
3.58%
|
4.12%
|
4.04%
|
3.50%
|
5.13%
|
N/A
|
||||||||||||||
Dividend
rate ($) (5)
|
$
|
0.92
|
$
|
0.84
|
$
|
0.65
|
$
|
0.50
|
$
|
0.30
|
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.
|
The
following table provides information related to options exercised during
the years ended December 31, 2008, 2007 and 2006:
|
|||||||||
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
|||||
Total
intrinsic value
|
$
|
81
|
$
|
105
|
$
|
156
|
|||
Cash
received upon exercise of options
|
$
|
44
|
$
|
61
|
$
|
101
|
|||
Related
tax benefits realized
|
$
|
10
|
$
|
16
|
$
|
19
|
(iii)
Stock price volatility
Compensation
cost for the Company’s RSU plans is based on the fair value of the awards
at period end using the lattice-based valuation model for which a primary
assumption is the Company’s share price. In addition, the Company’s
liability for the VIDP is marked-to-market at period-end and, as such, is
also reliant on the Company’s share price. Fluctuations in the Company’s
share price cause volatility to stock-based compensation expense as
recorded in earnings.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
12
– Pensions and other postretirement benefits
The
Company has various retirement benefit plans under which substantially all
of its employees are entitled to benefits at retirement age, generally
based on compensation and length of service and/or
contributions. The Company also has a postretirement benefit
plan which provides life insurance, medical benefits and free rail travel
benefits during retirement. These benefits are funded as they become due.
The information in the tables that follow pertains to all such plans.
However, the following descriptions relate solely to the Company’s main
pension plan, the CN Pension Plan (the Plan), unless otherwise
specified.
A. Description
of the Plan
The
Plan is a contributory defined benefit pension plan that covers the
majority of CN employees. It provides for pensions based mainly on years
of service and final average pensionable earnings and is generally
applicable from the first day of employment. Indexation of pensions is
provided after retirement through a gain/loss sharing mechanism, subject
to guaranteed minimum increases. An independent trust company is the
Trustee of the Canadian National Railways Pension Trust Funds (CN Pension
Trust Funds). As Trustee, the trust company performs certain duties, which
include holding legal title to the assets of the CN Pension Trust Funds
and ensuring that the Company, as Administrator, complies with the
provisions of the Plan and the related legislation. The Company utilizes a
measurement date of December 31 for the Plan.
B. Funding
policy
Employee
contributions to the Plan are determined by the plan
rules. Company contributions are in accordance with the
requirements of the Government of Canada legislation, The Pension Benefits Standards
Act, 1985, and are determined by actuarial valuations conducted at
least on a triennial basis. These valuations are made in accordance with
legislative requirements and with the recommendations of the Canadian
Institute of Actuaries for the valuation of pension plans. The
latest actuarial valuation of the Plan was conducted as at December 31,
2007 and indicated a funding excess. Based on this actuarial
valuation, total contributions for all of the Company’s pension plans are
expected to be approximately $130 million in each of 2009 and
2010. All of the Company’s contributions are expected to be in
the form of cash.
C. Description
of fund assets
The
assets of the Plan are accounted for separately in the CN Pension Trust
Funds and consist of cash and short-term investments, bonds, mortgages,
Canadian and foreign equities, real estate, and other
assets. The assets of the Plan have a fair market value of
$12,940 million as at December 31, 2008 ($15,208 million at December 31,
2007). The Plan’s target percentage allocation and
weighted-average asset allocations as at December 31, 2008 and 2007, by
asset category are as follows:
|
Target
|
December
31,
|
|||
Plan
assets by category
|
allocation
|
2008
|
2007
|
|
Equity
securities
|
53%
|
41%
|
51%
|
|
Debt
securities
|
40%
|
39%
|
34%
|
|
Real
estate
|
4%
|
2%
|
2%
|
|
Other
|
3%
|
18%
|
13%
|
|
100%
|
100%
|
100%
|
||
Notes to Consolidated Financial
Statements
U.S. GAAP
|
The Company follows a
disciplined investment strategy, which limits concentration of investments
by asset class, foreign currency, sector or company. The
Investment Committee of the Board of Directors has approved an investment
policy that establishes long-term asset mix targets based on a review of
historical returns achieved by worldwide investment markets. Investment
managers may deviate from these targets but their performance is evaluated
in relation to the market performance of the target mix. The Company does
not anticipate the long-term return on plan assets to fluctuate materially
from related capital market indices. The Investment Committee
reviews investments regularly with specific approval required for major
investments in illiquid securities. The policy also permits the
use of derivative financial instruments to implement asset mix decisions
or to hedge existing or anticipated exposures. The Plan does
not invest in the securities of the Company or its
subsidiaries.
|
(i)
Obligations and funded status
|
|||||||||||||
Pensions
|
Other
postretirement benefits
|
||||||||||||
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2008
|
2007
|
||||||||
Change
in benefit obligation
|
|||||||||||||
Benefit
obligation at beginning of year
|
$
|
14,419
|
$
|
14,545
|
$
|
266
|
$
|
286
|
|||||
Amendments
|
-
|
-
|
6
|
12
|
|||||||||
Adoption
of SFAS No. 158 measurement date provision (Note
2)
|
-
|
3
|
-
|
2
|
|||||||||
Interest
cost
|
801
|
742
|
15
|
15
|
|||||||||
Actuarial
gain
|
(2,274)
|
(195)
|
(23)
|
(7)
|
|||||||||
Service
cost
|
136
|
150
|
4
|
5
|
|||||||||
Curtailment
gain
|
-
|
-
|
(13)
|
(9)
|
|||||||||
Plan
participants’ contributions
|
52
|
54
|
-
|
-
|
|||||||||
Foreign
currency changes
|
45
|
(33)
|
23
|
(21)
|
|||||||||
Benefit
payments and transfers
|
(853)
|
(847)
|
(18)
|
(17)
|
|||||||||
Benefit
obligation at end of year
|
$
|
12,326
|
$
|
14,419
|
$
|
260
|
$
|
266
|
|||||
Component
representing future salary increases
|
(397)
|
(618)
|
-
|
-
|
|||||||||
Accumulated
benefit obligation at end of year
|
$
|
11,929
|
$
|
13,801
|
$
|
260
|
$
|
266
|
|||||
Change
in plan assets
|
|||||||||||||
Fair
value of plan assets at beginning of year
|
$
|
16,000
|
$
|
15,625
|
$
|
-
|
$
|
-
|
|||||
Employer
contributions
|
127
|
75
|
-
|
-
|
|||||||||
Plan
participants’ contributions
|
52
|
54
|
-
|
-
|
|||||||||
Foreign
currency changes
|
27
|
(26)
|
-
|
-
|
|||||||||
Actual
return on plan assets
|
(1,742)
|
1,119
|
-
|
-
|
|||||||||
Benefit
payments and transfers
|
(853)
|
(847)
|
-
|
-
|
|||||||||
Fair
value of plan assets at end of year
|
$
|
13,611
|
$
|
16,000
|
-
|
-
|
|||||||
Funded
(unfunded) status (Excess of fair value of plan assets
over
|
|||||||||||||
benefit
obligation at end of year)
|
$
|
1,285
|
$
|
1,581
|
$
|
(260)
|
$
|
(266)
|
|||||
Measurement
date for all plans is December 31.
|
|||||||||||||
(ii)
Amounts recognized in the Consolidated Balance Sheet
|
|||||||||||||
Pensions
|
Other
postretirement benefits
|
||||||||||||
In
millions
|
December
31,
|
2008
|
2007
|
2008
|
2007
|
||||||||
Noncurrent
assets (Note
6)
|
$
|
1,522
|
$
|
1,768
|
$
|
-
|
$
|
-
|
|||||
Current
liabilities (Note
7)
|
-
|
-
|
(19)
|
(18)
|
|||||||||
Noncurrent
liabilities (Note
8)
|
(237)
|
(187)
|
(241)
|
(248)
|
|||||||||
Total
amount recognized
|
$
|
1,285
|
$
|
1,581
|
$
|
(260)
|
$
|
(266)
|
|||||
Notes to Consolidated Financial
Statements
U.S. GAAP
|
(iii)
Amounts recognized in Accumulated other comprehensive loss (Note
19)
|
|||||||||||||
Pensions
|
Other
postretirement benefits
|
||||||||||||
In
millions
|
December
31,
|
2008
|
2007
|
2008
|
2007
|
||||||||
Net
actuarial gain
|
$
|
551
|
$
|
1,039
|
$
|
61
|
$
|
27
|
|||||
Prior
service cost
|
$
|
-
|
$
|
(19)
|
$
|
(9)
|
$
|
(8)
|
|||||
(iv)
Information for the pension plan with an accumulated benefit obligation in
excess of plan assets
|
|||||||||||||
Pensions
|
Other
postretirement benefits
|
||||||||||||
In
millions
|
December
31,
|
2008
|
2007
|
2008
|
2007
|
||||||||
Projected
benefit obligation
|
$
|
365
|
$
|
266
|
N/A
|
N/A
|
|||||||
Accumulated
benefit obligation
|
$
|
327
|
$
|
229
|
N/A
|
N/A
|
|||||||
Fair
value of plan assets
|
$
|
128
|
$
|
79
|
N/A
|
N/A
|
|||||||
(v)
Components of net periodic benefit cost (income)
|
||||||||||||||||||||
Pensions
|
Other
postretirement benefits
|
|||||||||||||||||||
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||
Service
cost
|
$
|
136
|
$
|
150
|
$
|
146
|
$
|
4
|
$
|
5
|
$
|
4
|
||||||||
Interest
cost
|
801
|
742
|
713
|
15
|
15
|
16
|
||||||||||||||
Curtailment
gain
|
-
|
-
|
-
|
(7)
|
(4)
|
-
|
||||||||||||||
Expected
return on plan assets
|
(1,004)
|
(935)
|
(903)
|
-
|
-
|
-
|
||||||||||||||
Amortization
of prior service cost
|
19
|
19
|
19
|
2
|
2
|
2
|
||||||||||||||
Recognized
net actuarial loss (gain)
|
-
|
53
|
91
|
(2)
|
(4)
|
(5)
|
||||||||||||||
Net
periodic benefit cost (income)
|
$
|
(48)
|
$
|
29
|
$
|
66
|
$
|
12
|
$
|
14
|
$
|
17
|
||||||||
The
estimated prior service cost and net actuarial loss for defined benefit
pension plans that will be amortized from Accumulated other comprehensive
loss into net periodic benefit cost over the next fiscal year are nil and
$6 million, respectively.
|
||||||||||||||||||||
The
estimated prior service cost and net actuarial gain for other
postretirement benefits that will be amortized from Accumulated other
comprehensive loss into net periodic benefit cost over the next fiscal
year are $2 million and $4 million, respectively.
|
||||||||||||||||||||
(vi)
Weighted-average assumptions used in accounting for pensions and other
postretirement benefits
|
||||||||||||||||||||
Pensions
|
Other
postretirement benefits
|
|||||||||||||||||||
December
31,
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||
To
determine benefit obligation
|
||||||||||||||||||||
Discount
rate
|
7.42%
|
5.53%
|
5.12%
|
6.84%
|
5.84%
|
5.44%
|
||||||||||||||
Rate
of compensation increase
|
3.50%
|
3.50%
|
3.50%
|
3.50%
|
3.50%
|
3.50%
|
||||||||||||||
To
determine net periodic benefit cost
|
||||||||||||||||||||
Discount
rate
|
5.53%
|
5.12%
|
5.00%
|
5.84%
|
5.44%
|
5.30%
|
||||||||||||||
Rate
of compensation increase
|
3.50%
|
3.50%
|
3.75%
|
3.50%
|
3.50%
|
3.75%
|
||||||||||||||
Expected
return on plan assets
|
8.00%
|
8.00%
|
8.00%
|
N/A
|
N/A
|
N/A
|
||||||||||||||
Notes to Consolidated Financial
Statements
U.S. GAAP
|
To develop its expected long-term
rate of return assumption used in the calculation of net periodic benefit
cost applicable to the market-related value of assets, the Company
considers its past experience and future estimates of long-term investment
returns, the expected composition of the plans' assets as well as the
expected long-term market returns in the future.
Effective January 1, 2009, the
Company will reduce the expected long-term rate of return on plan assets
from 8.00% to 7.75% to reflect management's current view of long-term
investment returns. The effect of this change in management's assumption
will be to decrease net periodic benefit income in 2009 by
approximately $17 million.
|
||||||||||||||||||||||
The Company has elected to use a
market-related value of assets, whereby realized and unrealized
gains/losses and appreciation/depreciation in the value of the investments
are recognized over a period of five years, while investment income is
recognized immediately.
|
||||||||||||||||||||||
(vii)Health care cost trend
rate for other postretirement benefits
|
||||||||||||||||||||||
For
measurement purposes, increases in the per capita cost of covered health
care benefits were assumed to be 12% for each of 2008 and
2009. It is assumed that the rate will decrease gradually to
4.5% in 2028 and remain at that level thereafter.
|
||||||||||||||||||||||
Assumed health care costs have a
significant effect on the amounts reported for the health care
plan. A one-percentage-point change in the assumed health care
cost trend would have the following effect:
|
||||||||||||||||||||||
In
millions
|
One-percentage-point
|
|||||||||||||||||||||
Increase
|
Decrease
|
|||||||||||||||||||||
Effect
on total service and interest costs
|
$
|
1
|
$
|
(1)
|
||||||||||||||||||
Effect
on benefit obligation
|
$
|
16
|
$
|
(14)
|
||||||||||||||||||
(viii)
Estimated future benefit payments
|
||||||||||||||||||||||
In
millions
|
Pensions
|
Other
postretirement benefits
|
||||||||||||||||||||
2009
|
$
|
894
|
$
|
20
|
||||||||||||||||||
2010
|
922
|
21
|
||||||||||||||||||||
2011
|
952
|
21
|
||||||||||||||||||||
2012
|
980
|
21
|
||||||||||||||||||||
2013
|
1,005
|
22
|
||||||||||||||||||||
Years
2014 to 2018
|
5,363
|
123
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
||||||
Gain
on disposal of properties
|
$
|
22
|
$
|
14
|
$
|
16
|
||||
Gain
on disposal of Central Station Complex (Note
5)
|
-
|
92
|
-
|
|||||||
Gain
on disposal of investment in EWS (Note
6)
|
-
|
61
|
-
|
|||||||
Equity
in earnings of EWS (Note
6)
|
-
|
5
|
(6)
|
|||||||
Net
real estate costs
|
(10)
|
(6)
|
(12)
|
|||||||
Costs
related to the Accounts receivable securitization program (Note 4)
|
(10)
|
(24)
|
(12)
|
|||||||
Foreign
exchange gain (loss)
|
(14)
|
24
|
18
|
|||||||
Other
|
38
|
-
|
7
|
|||||||
$
|
26
|
$
|
166
|
$
|
11
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
The
Company’s consolidated effective income tax rate differs from the Canadian
statutory Federal tax rate. The reconciliation of income tax
expense is as follows:
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
||||||
Federal
tax rate
|
19.5%
|
22.1%
|
22.1%
|
|||||||
Income
tax expense at the statutory Federal tax rate
|
$
|
(496)
|
$
|
(598)
|
$
|
(603)
|
||||
Income
tax (expense) recovery resulting from:
|
||||||||||
Provincial
and other taxes
|
(304)
|
(318)
|
(354)
|
|||||||
Deferred
income tax adjustments due to rate enactments
|
23
|
317
|
228
|
|||||||
Other
(1)
|
127
|
51
|
87
|
|||||||
Income
tax expense
|
$
|
(650)
|
$
|
(548)
|
$
|
(642)
|
||||
Cash
payments for income taxes
|
$
|
425
|
$
|
867
|
$
|
307
|
||||
(1)
|
Comprises
adjustments relating to the resolution of matters pertaining to prior
years' income taxes, including net recognized tax benefits, and other
items.
|
The
following table provides tax information for Canada and the United
States:
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
||||||
Income
before income taxes
|
||||||||||
Canada
|
$
|
1,976
|
$
|
1,983
|
$
|
2,009
|
||||
U.S.
|
569
|
723
|
720
|
|||||||
$
|
2,545
|
$
|
2,706
|
$
|
2,729
|
|||||
Current
income tax expense
|
||||||||||
Canada
|
$
|
(316)
|
$
|
(418)
|
$
|
(440)
|
||||
U.S.
|
(104)
|
(212)
|
(199)
|
|||||||
$
|
(420)
|
$
|
(630)
|
$
|
(639)
|
|||||
Deferred
income tax recovery (expense)
|
||||||||||
Canada
|
$
|
(153)
|
$
|
141
|
$
|
102
|
||||
U.S.
|
(77)
|
(59)
|
(105)
|
|||||||
$
|
(230)
|
$
|
82
|
$
|
(3)
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Significant
components of deferred income tax assets and liabilities are as
follows:
|
In
millions
|
December
31,
|
2008
|
2007
|
|||
Deferred
income tax assets
|
||||||
Workforce
reduction provisions
|
$
|
16
|
$
|
22
|
||
Personal
injury claims and other reserves
|
177
|
146
|
||||
Other
postretirement benefits liability
|
87
|
85
|
||||
Losses
and tax credit carryforwards
|
48
|
24
|
||||
328
|
277
|
|||||
Deferred
income tax liabilities
|
||||||
Net
pension asset
|
352
|
429
|
||||
Properties
and other
|
5,389
|
4,688
|
||||
5,741
|
5,117
|
|||||
Total
net deferred income tax liability
|
$
|
5,413
|
$
|
4,840
|
||
Total
net deferred income tax liability
|
||||||
Canada
|
$
|
2,113
|
$
|
2,191
|
||
U.S.
|
3,300
|
2,649
|
||||
$
|
5,413
|
$
|
4,840
|
|||
Total
net deferred income tax liability
|
$
|
5,413
|
$
|
4,840
|
||
Net
current deferred income tax asset
|
98
|
68
|
||||
Long-term
deferred income tax liability
|
$
|
5,511
|
$
|
4,908
|
It
is more likely than not that the Company will realize the majority of its
deferred income tax assets from the generation of future taxable income,
as the payments for provisions, reserves and accruals are made and losses
and tax credit carryforwards are utilized. At December 31,
2008, the Company had approximately $20 million in operating loss
carryforwards available to reduce future taxable income. The
Company has not recognized a deferred tax asset ($150 million at December
31, 2008) on the foreign exchange loss recorded in Accumulated other
comprehensive loss on its permanent investment in U.S. rail subsidiaries,
as the Company does not expect this temporary difference to reverse in the
foreseeable future.
The Company recognized tax
credits of $4 million in each of 2008, 2007 and 2006 for eligible research
and development expenditures, which reduced the cost of
properties.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
In
millions
|
|||
Gross
unrecognized tax benefits as at January 1, 2008
|
$
|
158
|
|
Additions:
|
|||
Tax
positions related to the current year
|
2
|
||
Tax
positions related to prior years
|
11
|
||
Interest
accrued on tax positions
|
6
|
||
Deductions:
|
|||
Tax
positions related to prior years
|
(31)
|
||
Interest
accrued on tax positions
|
(30)
|
||
Settlements
|
(37)
|
||
Gross
unrecognized tax benefits as at December 31, 2008
|
$
|
79
|
|
Adjustments
to reflect tax treaties and other arrangements
|
(38)
|
||
Net
unrecognized tax benefits as at December 31, 2008
|
$
|
41
|
At
December 31, 2008, the total amount of gross unrecognized tax benefits was
$79 million, before considering tax treaties and other arrangements
between taxation authorities, of which $19 million related to accrued
interest and penalties. If recognized, all of the net
unrecognized tax benefits would affect the effective tax
rate.
It
is expected that the amount of unrecognized tax benefits will change in
the next twelve months; however, the Company does not expect the change to
have a significant impact on the results of operations or the financial
position of the Company.
The
Company recognizes interest accrued and penalties related to unrecognized
tax benefits in Income tax expense in the Company’s Consolidated Statement
of Income.
In
Canada, the federal income tax returns filed for the years 2004 to 2007
and the provincial income tax returns filed for the years 2003 to 2007
remain subject to examination by the taxation authorities. In
the U.S., the income tax returns filed for the years 2004 to 2007 remain
subject to examination by the taxation
authorities.
|
The
Company manages its operations as one business segment over a single
network that spans vast geographic distances and territories, with
operations in Canada and the United States. Financial
information reported at this level, such as revenues, operating income,
and cash flow from operations, is used by corporate management, including
the Company’s chief operating decision-maker, 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). Corporate management is responsible for, among others,
CN’s marketing strategy, the management of large customer accounts,
overall planning and control of infrastructure and rolling stock, the
allocation of resources, and other functions such as financial planning,
accounting and treasury.
The role of each region is to
manage the day-to-day service requirements within their respective
territories and control direct costs incurred locally. Such cost control
is required to ensure that pre-established efficiency standards set at the
corporate level are met. The regions execute the overall
corporate strategy and operating plan established by corporate management,
as their management of throughput and control of direct costs does not
serve as the platform for the Company’s decision-making
process. Approximately 91% of the Company’s freight revenues
are from national accounts for which freight traffic spans North America
and touches various commodity groups. As a result, the Company does not
manage revenues on a regional basis since a large number of the movements
originate in one region and pass through and/or terminate in another
region.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
||||||
Revenues
|
||||||||||
Canada
|
$
|
5,632
|
$
|
5,265
|
$
|
5,293
|
||||
U.S.
|
2,850
|
2,632
|
2,636
|
|||||||
$
|
8,482
|
$
|
7,897
|
$
|
7,929
|
|||||
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
||||||
Net
income
|
||||||||||
Canada
|
$
|
1,507
|
$
|
1,706
|
$
|
1,671
|
||||
U.S.
|
388
|
452
|
416
|
|||||||
$
|
1,895
|
$
|
2,158
|
$
|
2,087
|
|||||
In
millions
|
December
31,
|
2008
|
2007
|
|||||||
Properties
|
||||||||||
Canada
|
$
|
12,377
|
$
|
11,777
|
||||||
U.S.
|
10,826
|
8,636
|
||||||||
$
|
23,203
|
$
|
20,413
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
16
– Earnings per share
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
|||||||
Basic
earnings per share
|
$
|
3.99
|
$
|
4.31
|
$
|
3.97
|
||||
Diluted
earnings per share
|
$
|
3.95
|
$
|
4.25
|
$
|
3.91
|
||||
The following table
provides a reconciliation between basic and diluted earnings per
share:
|
||||||||||
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
||||||
Net
income
|
$
|
1,895
|
$
|
2,158
|
$
|
2,087
|
||||
Weighted-average
shares outstanding
|
474.7
|
501.2
|
525.9
|
|||||||
Effect
of stock options
|
5.3
|
6.8
|
8.4
|
|||||||
Weighted-average
diluted shares outstanding
|
480.0
|
508.0
|
534.3
|
For the years ended December 31,
2008, 2007 and 2006, 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,
were 0.3 million, 0.1 million and 0.2 million,
respectively.
|
A.
Leases
The
Company has operating and capital leases, mainly for locomotives, freight
cars and intermodal equipment. Of the capital leases, many
provide the option to purchase the leased items at fixed values during or
at the end of the lease term. As at December 31, 2008, the
Company’s commitments under these operating and capital leases were $876
million and $1,837 million, respectively. Minimum rental payments for
operating leases having initial non-cancelable lease terms of one year or
more and minimum lease payments for capital leases in each of the next
five years and thereafter are as
follows:
|
In
millions
|
Operating
|
Capital
|
|||
2009
|
$
|
166
|
$
|
207
|
|
2010
|
134
|
158
|
|||
2011
|
112
|
199
|
|||
2012
|
87
|
96
|
|||
2013
|
65
|
145
|
|||
2014
and thereafter
|
312
|
1,032
|
|||
$
|
876
|
1,837
|
|||
Less:
imputed interest on capital leases at rates ranging from approximately
2.1% to 7.9%
|
525
|
||||
Present
value of minimum lease payments included in debt
|
$
|
1,312
|
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.
Rent expense for all operating
leases was $202 million, $207 million and $202 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Contingent
rentals and sublease rentals were not
significant.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
B.
Other commitments
As
at December 31, 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 $1,006 million. The Company
also has agreements with fuel suppliers to purchase approximately 82% of
the estimated remaining 2009 volume and 32% of its anticipated 2010
volume, at market prices prevailing on the date of the
purchase.
|
C.
Contingencies
The
Company becomes involved, from time to time, in various legal actions
seeking compensatory, and occasionally punitive damages, including actions
brought on behalf of various purported classes of claimants and claims
relating to personal injuries, occupational disease, and property damage,
arising out of harm to individuals or property allegedly caused by
derailments or other accidents.
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.
At December 31, 2008, 2007 and
2006, the Company’s provision for personal injury and other claims in
Canada was as follows:
|
In
millions
|
2008
|
2007
|
2006
|
||||||
Balance
January 1
|
$
|
196
|
$
|
195
|
$
|
205
|
|||
Accruals
and other
|
42
|
41
|
60
|
||||||
Payments
|
(49)
|
(40)
|
(70)
|
||||||
Balance
December 31
|
$
|
189
|
$
|
196
|
$
|
195
|
|||
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.
In 2008, 2007 and 2006, the
Company recorded net reductions to its provision for U.S. personal injury
and other claims pursuant to the results of external actuarial studies of
$28 million, $97 million and $62 million, respectively. The reductions
were mainly attributable to decreases in the Company’s estimates of
unasserted claims and costs related to asserted claims as a result of its
ongoing risk mitigation strategy focused on prevention, mitigation of
claims and containment of injuries, lower settlements for existing claims
and reduced severity relating to non-occupational disease
claims.
Due to the inherent uncertainty
involved in projecting future events related to occupational diseases,
which include but are not limited to, the number of expected claims, the
average cost per claim and the legislative and judicial environment, the
Company’s future obligations may differ from current amounts
recorded.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
In
millions
|
2008
|
2007
|
2006
|
||||||
Balance
January 1
|
$
|
250
|
$
|
407
|
$
|
452
|
|||
Accruals
and other
|
57
|
(111)
|
(8)
|
||||||
Payments
|
(42)
|
(46)
|
(37)
|
||||||
Balance
December 31
|
$
|
265
|
$
|
250
|
$
|
407
|
|||
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 December 31, 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.
|
D.
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.
Known
existing environmental concerns
The
Company has identified approximately 345 sites at which it is or may be
liable for remediation costs, in some cases along with other potentially
responsible parties, including those imposed by the United States Federal
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA), also known as the Superfund law. CERCLA and
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, as well as those whose waste is disposed of at the site,
without regard to fault or the legality of the original
conduct. The Company has been notified that it is a potentially
responsible party for study and clean-up costs at approximately 10 sites
governed by the Superfund law for which investigation and remediation
payments are or will be made or are yet to be determined and, in many
instances, is one of several potentially responsible
parties. The ultimate cost of addressing these known
contaminated sites cannot be definitely established, given that the
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. A liability is initially
recorded when environmental assessments occur and/or remedial efforts are
probable, and when the costs, based on a specific plan of action in terms
of the technology to be used and the extent of the corrective action
required, can be reasonably estimated. Adjustments to initial
estimates are recorded as additional information becomes
available.
The Company’s provision for
specific environmental sites is undiscounted, is recorded net of potential
and actual insurance recoveries, and includes costs for remediation and
restoration of sites, as well as significant monitoring
costs. Environmental accruals, which are classified as Casualty
and other in the Consolidated Statement of Income, include amounts for
newly identified sites or contaminants as well as adjustments to initial
estimates. In 2005, the Company had incurred a liability
related to a derailment at Wabamun Lake, Alberta. Over the last
three years, this liability was adjusted for additional environmental and
legal claims and reduced by payments made pursuant to the clean-up
performed. At December 31, 2008, the majority of the clean-up
work has been completed and the remaining costs are expected to be
minimal. At December 31, 2008, the Company has an amount
receivable for the remaining estimated recoveries from the Company’s
insurance carriers who covered substantially all expenses related to the
derailment above the self-insured retention of $25 million, which was
recorded in operating expenses in
2005.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
In
millions
|
2008
|
2007
|
2006
|
||||||
Balance
January 1
|
$
|
111
|
$
|
131
|
$
|
124
|
|||
Accruals
and other
|
29
|
(1)
|
17
|
||||||
Payments
|
(15)
|
(19)
|
(10)
|
||||||
Balance
December 31
|
$
|
125
|
$
|
111
|
$
|
131
|
The
Company anticipates that the majority of the liability at December 31,
2008 will be paid out over the next five years. However, some costs may be
paid out over a longer period. No individual site is considered
to be material. Based on the information currently available,
the Company considers its provisions to be adequate.
Unknown
existing environmental concerns
While
the Company believes that it has identified the costs likely to be
incurred for environmental matters in the next several years, based on
known information, newly discovered facts, changes in law, the possibility
of spills and releases of hazardous materials into the environment and the
Company’s ongoing efforts to identify potential environmental liabilities
that may be associated with its properties may result in the
identification of additional environmental liabilities and related costs.
The magnitude of such additional liabilities and the costs of complying
with future environmental laws and containing or remediating contamination
cannot be reasonably estimated due to many factors,
including:
(i) the
lack of specific technical information available with respect to many
sites;
(ii) the
absence of any government authority, third-party orders, or claims with
respect to particular sites;
(iii) the
potential for new or changed laws and regulations and for development of
new remediation
technologies and
uncertainty regarding the timing of the work with respect to particular
sites;
(iv) the
ability to recover costs from any third parties with respect to particular
sites; and
therefore,
the likelihood of any such costs being incurred or whether such costs
would be material to the Company cannot be determined at this time. There
can thus be no assurance that liabilities or costs related to
environmental matters will not be incurred in the future, or will not have
a material adverse effect on the Company’s financial position or results
of operations in a particular quarter or fiscal year, or that the
Company’s liquidity will not be adversely impacted by such liabilities or
costs, although management believes, based on current information, that
the costs to address environmental matters will not have a material
adverse effect on the Company’s financial condition or liquidity. Costs
related to any unknown existing or future contamination will be accrued in
the period in which they become probable and reasonably
estimable.
Future
occurrences
In
railroad and related transportation operations, it is possible that
derailments or other accidents, including spills and releases of hazardous
materials, may occur that could cause harm to human health or to the
environment. As a result, the Company may incur costs in the
future, which may be material,
to address any such harm, compliance with laws and other risks, including
costs relating to the performance of clean-ups, payment of environmental
penalties and remediation obligations, and damages relating to harm to
individuals or property.
Regulatory
compliance
The
Company may incur significant capital and operating costs 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. Operating expenses
amounted to $10 million in 2008 ($10 million in 2007 and $10 million in
2006). In addition, based on the results of its operations and
maintenance programs, as well as ongoing environmental audits and other
factors, the Company plans for specific capital improvements on an annual
basis. Certain of these improvements help ensure facilities, such as
fuelling stations and wastewater and storm water treatment systems, comply
with environmental standards and include new
construction and the updating of existing systems and/or
processes. Other capital expenditures relate to assessing and
remediating certain impaired properties. The Company’s
environmental capital expenditures amounted to $9 million in 2008, $14
million in 2007 and $18 million in 2006. The Company expects to incur
capital expenditures relating to environmental matters of approximately
$17 million in 2009, $14 million in 2010 and $13 million in
2011.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
E.
Guarantees and indemnifications
In
the normal course of business, the Company, including certain of its
subsidiaries, enters into agreements that may involve providing certain
guarantees or indemnifications to third parties and others, which may
extend beyond the term of the agreement. These include, but are
not limited to, residual value guarantees on operating leases, standby
letters of credit and surety and other bonds, and indemnifications that
are customary for the type of transaction or for the railway
business.
The Company is required to
recognize a liability for the fair value of the obligation undertaken in
issuing certain guarantees on the date the guarantee is issued or
modified. In addition, where the Company expects to make a
payment in respect of a guarantee, a liability will be recognized to the
extent that one has not yet been recognized.
(i)
Guarantee of residual values of operating leases
The
Company has guaranteed a portion of the residual values of certain of its
assets under operating leases with expiry dates between 2009 and 2020, for
the benefit of the lessor. If the fair value of the assets, at
the end of their respective lease term, is less than the fair value, as
estimated at the inception of the lease, then the Company must, under
certain conditions, compensate the lessor for the shortfall. At
December 31, 2008, the maximum exposure in respect of these guarantees was
$164 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 December 31, 2008, the maximum potential
liability under these guarantees was $500 million, of which $415 million
was for workers’ compensation and other employee benefits and $85 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 December 31, 2008, 2007
and 2006, 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 2009
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
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
A.
Risk management
In
the normal course of business, the Company is exposed to various risks
such as credit risk, commodity price risk, interest rate risk, foreign
currency risk, and liquidity risk. To manage these risks, the Company
follows a financial risk management framework, which is monitored and
approved by the Company’s Audit Committee, with a goal of maintaining a
strong balance sheet, optimizing earnings per share and free cash flow,
financing its operations at an optimal cost of capital and preserving its
liquidity. The Company has limited involvement with derivative financial
instruments in the management of its risks and does not use them for
trading purposes. At December 31, 2008, the Company did not have any
derivative financial instruments outstanding.
(i)
Credit risk
In
the normal course of business, the Company monitors the financial
condition and credit limits of its customers and reviews the credit
history of each new customer. Although, the Company believes
there are no significant concentrations of credit risk, the current
economic conditions in the market have resulted in an increase in the
Company’s credit risk. To manage its credit risk, the Company’s
focus is on keeping the average daily sales outstanding within a
reasonable range, working with customers to ensure timely payments, and in
certain cases, requiring financial security through letters of
credit.
(ii)
Fuel
The
Company is exposed to commodity risk related to purchases of fuel and the
potential reduction in net income due to increases in the price of diesel.
The impact of variable fuel expense is mitigated substantially through the
Company’s fuel surcharge program which apportions incremental changes in
fuel prices to shippers within agreed upon guidelines. While this program
provides effective coverage, residual exposure remains given that fuel
price risk cannot be completely mitigated due to timing and given the
volatility in the market. As such, the Company may enter into derivative
instruments to mitigate such risk when considered
appropriate.
The Company had a hedging program
which called for entering into swap positions on crude and heating oil to
cover a target percentage of future fuel consumption up to two years in
advance. However, no additional swap positions were entered
into since September 2004. As such, the Company terminated this
program in late 2006.
Since the changes in the fair
value of the swap positions were highly correlated to changes in the price
of fuel, the hedges were accounted for as cash flow hedges, whereby the
effective portion of the cumulative change in the market value of the
derivative instruments had been recorded in Accumulated other
comprehensive loss.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
B.
Fair value of financial instruments
Generally
accepted accounting principles define the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The Company uses the
following methods and assumptions to estimate the fair value of each class
of financial instruments for which the carrying amounts are included in
the Consolidated Balance Sheet under the following captions:
(i)
Cash and cash equivalents, Accounts receivable, Other current assets,
Accounts payable and accrued charges, and Other current
liabilities:
The
carrying amounts approximate fair value because of the short maturity of
these instruments.
(ii)
Other assets:
Investments:
The Company has various equity investments for which the carrying value
approximates the fair value, with the exception of certain cost
investments for which the fair value was estimated based on the Company’s
proportionate share of its net assets.
(iii)
Long-term debt:
The
fair value of the Company’s long-term debt is estimated based on the
quoted market prices for the same or similar debt instruments, as well as
discounted cash flows using current interest rates for debt with similar
terms, company rating, and remaining maturity.
The
following table presents the carrying amounts and estimated fair values of
the Company’s financial instruments as at December 31, 2008 and 2007 for
which the carrying values on the Consolidated Balance Sheet are different
from their fair values:
|
In
millions
|
December
31, 2008
|
December
31, 2007
|
||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||
amount
|
value
|
amount
|
value
|
|||||||
Financial
assets
|
||||||||||
Investments
|
$
|
24
|
$
|
127
|
$
|
24
|
$
|
95
|
||
Financial
liabilities
|
||||||||||
Long-term
debt (including current portion)
|
$
|
7,911
|
$
|
8,301
|
$
|
5,617
|
$
|
5,850
|
||
Notes
to Consolidated Financial
Statements U.S. GAAP
|
The
components of Accumulated other comprehensive loss are as
follows:
|
In
millions
|
December
31,
|
2008
|
2007
|
||||
Unrealized
foreign exchange loss
|
$
|
(575)
|
$
|
(762)
|
|||
Pension
and other postretirement benefit plans
|
412
|
723
|
|||||
Derivative
instruments
|
8
|
8
|
|||||
Accumulated
other comprehensive loss
|
$
|
(155)
|
$
|
(31)
|
The
components of Other comprehensive income (loss) and the related tax
effects are as follows:
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
||||||||
Accumulated
other comprehensive loss - Balance at January 1
|
$
|
(31)
|
$
|
(44)
|
$
|
(222)
|
||||||
Other
comprehensive income (loss):
|
||||||||||||
Unrealized
foreign exchange income (loss) (net of income tax
(expense)
|
187
|
(307)
|
(198)
|
|||||||||
recovery
of $194, $(91), and $(197), for 2008, 2007 and 2006,
respectively)
|
||||||||||||
Pension
and other postretirement benefit plans
|
||||||||||||
(net
of income tax (expense) recovery of $125, $(129), and nil,
|
||||||||||||
for
2008, 2007 and 2006, respectively) (Note
12)
|
(311)
|
320
|
1
|
|||||||||
Derivative
instruments (net of income tax recovery of nil, $1, and $18,
|
||||||||||||
for
2008, 2007 and 2006, respectively) (Note
18)
|
-
|
-
|
(39)
|
|||||||||
Other
comprehensive income (loss)
|
(124)
|
13
|
(236)
|
|||||||||
|
||||||||||||
Adjustment
to reflect the funded status of benefit plans (Note
2):
|
||||||||||||
Net
actuarial gain (net of income tax expense of $(200) for 2006)
|
-
|
-
|
434
|
|||||||||
Prior
service cost (net of income tax recovery of $14 for 2006)
|
-
|
-
|
(31)
|
|||||||||
Reversal
of minimum pension liability adjustment (net of income
|
||||||||||||
tax
expense of $(6) for 2006)
|
-
|
-
|
11
|
|||||||||
Accumulated
other comprehensive loss - Balance at December 31
|
$
|
(155)
|
$
|
(31)
|
$
|
(44)
|
20
– Comparative figures
Certain
figures, previously reported in 2007 and 2006, have been reclassified to
conform with the basis of presentation adopted in
2008.
|
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 Annual Consolidated Financial Statements and Notes
thereto.
|
Business
profile
CN
is engaged in the rail and related transportation business. CN’s network
of approximately 21,000 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, and its 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 2008, no individual commodity group
accounted for more than 19% of revenues. From a geographic
standpoint, 19% of revenues came from United States (U.S.) domestic
traffic, 31% from transborder traffic, 24% from Canadian domestic traffic
and 26% from overseas traffic. The
Company is the originating carrier for 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 15 – Segmented
information, to the Company’s 2008 Annual Consolidated Financial
Statements for additional information on the Company’s corporate
organization, as well as selected financial information by geographic
area.
|
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.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
F Financial
outlook
During
the year, the Company issued and updated its financial
outlook. The 2008 actual results are in line with the latest
financial outlook as disclosed by the
Company.
|
Financial
and statistical highlights
|
||||||||
|
||||||||
$
in millions, except per share data, or unless otherwise indicated
|
2008
|
2007
|
2006
|
|||||
|
||||||||
Financial results
|
||||||||
Revenues
|
$
|
8,482
|
$
|
7,897
|
$
|
7,929
|
||
Operating
income
|
$
|
2,894
|
$
|
2,876
|
$
|
3,030
|
||
Net
income (a)
(b)
|
$
|
1,895
|
$
|
2,158
|
$
|
2,087
|
||
|
||||||||
Operating
ratio
|
65.9%
|
63.6%
|
61.8%
|
|||||
|
||||||||
Basic
earnings per share (a)(
b)
|
$
|
3.99
|
$
|
4.31
|
$
|
3.97
|
||
Diluted
earnings per share (a)
(b)
|
$
|
3.95
|
$
|
4.25
|
$
|
3.91
|
||
|
||||||||
Dividend
declared per share
|
$
|
0.92
|
$
|
0.84
|
$
|
0.65
|
||
|
||||||||
Financial
position
|
||||||||
Total
assets
|
$
|
26,720
|
$
|
23,460
|
$
|
24,004
|
||
Total
long-term financial liabilities
|
$
|
14,269
|
$
|
11,693
|
$
|
12,066
|
||
Statistical operating data and
productivity measures (c)
|
||||||||
Employees
(average for
the year)
|
22,695
|
22,389
|
22,092
|
|||||
Gross
ton miles (GTM) per average number of employees (thousands)
|
14,975
|
15,539
|
15,977
|
|||||
GTMs
per U.S. gallon of fuel consumed
|
894
|
887
|
880
|
|||||
|
||||||||
(a)
|
The
2008 figures include a deferred income tax recovery of $117 million ($0.24
per basic or diluted share), of which $83 million was due to the
resolution of various income tax matters and adjustments related to tax
filings of prior years, $23 million resulted from the enactment of
corporate income tax rate changes in Canada and $11 million was due to net
capital losses arising from the reorganization of a
subsidiary.
|
|||||||
|
||||||||
(b)
|
The
2007 figures include a deferred income tax recovery of $328 million ($0.66
per basic share or $0.64 per diluted share), resulting mainly from the
enactment of corporate income tax rate changes in Canada and the gains on
sale of the Central Station Complex of $92 million, or $64 million
after-tax ($0.13 per basic or diluted share) and the Company's investment
in English Welsh and Scottish Railway of $61 million, or $41 million
after-tax ($0.08 per basic or diluted share).
|
|||||||
|
||||||||
(c)
|
Based
on estimated data available at such time and subject to change as more
complete information becomes
available.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Revenues
|
||||||
In
millions, unless otherwise indicated
|
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
||
Rail
freight revenues
|
$
|
7,641
|
$
|
7,186
|
6%
|
|
Other
revenues
|
841
|
711
|
18%
|
|||
Total
revenues
|
$
|
8,482
|
$
|
7,897
|
7%
|
|
Rail
freight revenues:
|
||||||
Petroleum
and chemicals
|
$
|
1,346
|
$
|
1,226
|
10%
|
|
Metals
and minerals
|
950
|
826
|
15%
|
|||
Forest
products
|
1,436
|
1,552
|
(7%)
|
|||
Coal
|
478
|
385
|
24%
|
|||
Grain
and fertilizers
|
1,382
|
1,311
|
5%
|
|||
Intermodal
|
1,580
|
1,382
|
14%
|
|||
Automotive
|
469
|
504
|
(7%)
|
|||
Total
rail freight revenues
|
$
|
7,641
|
$
|
7,186
|
6%
|
|
Revenue
ton miles (RTM) (millions)
|
177,951
|
184,148
|
(3%)
|
|||
Rail
freight revenue/RTM (cents)
|
4.29
|
3.90
|
10%
|
|||
Carloads
(thousands)
|
4,615
|
4,744
|
(3%)
|
|||
Rail
freight revenue/carload (dollars)
|
1,656
|
1,515
|
9%
|
Revenues
for the year ended December 31, 2008 totaled $8,482 million compared to
$7,897 million in 2007. The increase of $585 million was mainly due to
freight rate increases of approximately $780 million, of which
approximately half was related to a higher fuel surcharge resulting from
year-over-year net increases in applicable fuel prices and higher volumes
in specific commodity groups, particularly metals and minerals,
intermodal, and coal, which also reflect the negative impact of the UTU
strike on first-quarter 2007 volumes. These gains were partly
offset by lower volumes due to 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. In the first nine months of the year, the Company
experienced a $245 million negative translation impact of the stronger
Canadian dollar on U.S. dollar-denominated revenues that was almost
entirely offset in the fourth quarter as a result of the weakened Canadian
dollar. This offsetting effect was experienced in all revenue
commodity groups, although not explicitly stated in the discussions that
follow. In addition, the CTA Decision to retroactively reduce
rail revenue entitlement for grain transportation, as well as the CTA’s
determination that the Company exceeded the revenue cap for the 2007-08
crop year, reduced grain revenues by $26 million in the fourth
quarter.
In 2008, revenue ton miles
(RTM), measuring the relative weight and distance of rail freight
transported by the Company, declined 3% relative to 2007. 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 10% when compared to 2007, mainly due to freight rate
increases, including a higher fuel
surcharge.
|
Petroleum
and chemicals
|
||||||
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
|||
Revenues
(millions)
|
$
|
1,346
|
$
|
1,226
|
10%
|
|
RTMs
(millions)
|
32,346
|
32,761
|
(1%)
|
|||
Revenue/RTM
(cents)
|
4.16
|
3.74
|
11%
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Percentage
of revenues
|
|||||
Petroleum
and plastics
|
63%
|
||||
Chemicals
|
37%
|
||||
Year ended December
31,
|
2004
|
2005
|
2006
|
2007
|
2008
|
Carloads*(In
thousands)
|
596
|
594
|
590
|
599
|
547
|
*Includes
the former Great Lakes Transportation LLC’s railroads and related holdings
(GLT) from May 10, 2004 and the former BC Rail (BC Rail) from July 14,
2004.
|
Metals
and minerals
|
||||||
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
|||
Revenues
(millions)
|
$
|
950
|
$
|
826
|
15%
|
|
RTMs
(millions)
|
17,953
|
16,719
|
7%
|
|||
Revenue/RTM
(cents)
|
5.29
|
4.94
|
7%
|
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. For the year ended December 31, 2008, revenues for
this commodity group increased by $124 million, or 15%, when compared to
2007. The increase was mainly due to freight rate increases, strength in
commodities related to oil and gas development, empty movements of private
railcars, and strong demand for flat rolled products in the first nine
months of the year. Partly offsetting these gains were the impact of
fourth quarter weakness in the steel industry which reduced shipments of
iron ore, flat rolled products, and scrap iron; and reduced shipments of
non-ferrous ore. Revenue per revenue ton mile increased by 7% in 2008,
mainly due to freight rate increases that were partly offset by an
increase in the average length of
haul.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Percentage
of revenues
|
|||||
Metals
|
54%
|
||||
Minerals
|
27%
|
||||
Iron
ore
|
19%
|
||||
Year ended December
31,
|
2004
|
2005
|
2006
|
2007
|
2008
|
Carloads*(In
thousands)
|
801
|
994
|
981
|
1,010
|
1,025
|
*Includes
GLT from May 10, 2004 and BC Rail from July 14, 2004.
|
Forest
products
|
||||||
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
|||
Revenues
(millions)
|
$
|
1,436
|
$
|
1,552
|
(7%)
|
|
RTMs
(millions)
|
33,847
|
39,808
|
(15%)
|
|||
Revenue/RTM
(cents)
|
4.24
|
3.90
|
9%
|
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. For the
year ended December 31, 2008, revenues for this commodity group decreased
by $116 million, or 7%, when compared to 2007. The decrease was
mainly due to reduced lumber and panel shipments, which were affected by
the decline in U.S. housing starts that resulted in mill closures and
production curtailments, and reduced volumes of pulp and paper
products. These factors were partly offset by freight rate
increases. Revenue per revenue ton mile increased by 9% in 2008, mainly
due to freight rate increases and a positive change in traffic
mix.
|
Percentage
of revenues
|
|||||
Pulp
and paper
|
59%
|
||||
Lumber
and panels
|
41%
|
||||
Year ended December
31,
|
2004
|
2005
|
2006
|
2007
|
2008
|
Carloads*(In
thousands)
|
678
|
712
|
667
|
584
|
511
|
*Includes
GLT from May 10, 2004 and BC Rail from July 14, 2004.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Coal
|
||||||
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
|||
Revenues
(millions)
|
$
|
478
|
$
|
385
|
24%
|
|
RTMs
(millions)
|
14,886
|
13,776
|
8%
|
|||
Revenue/RTM
(cents)
|
3.21
|
2.79
|
15%
|
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. For the year ended December 31, 2008, revenues for
this commodity group increased by $93 million, or 24%, when compared to
2007. The increase was mainly due to freight rate increases,
increased shipments of U.S. coal due to the startup of a new mine
operation, strong volumes of coal received from western U.S. mines to
destinations on CN lines and increased supply of petroleum coke from
Alberta. These gains were partly offset by production issues
experienced by Canadian and U.S. mines. Revenue per revenue ton mile
increased by 15% in 2008, largely due to freight rate increases and a
positive change in traffic mix.
|
Percentage
of revenues
|
|||||
Coal
|
84%
|
||||
Petroleum
coke
|
16%
|
||||
Year
ended December 31,
|
2004
|
2005
|
2006
|
2007
|
2008
|
Carloads*(In
thousands)
|
429
|
448
|
411
|
361
|
375
|
*Includes
GLT from May 10, 2004 and BC Rail from July 14,
2004.
|
Grain
and fertilizers
|
||||||
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
|||
Revenues
(millions)
|
$
|
1,382
|
$
|
1,311
|
5%
|
|
RTMs
(millions)
|
42,507
|
45,359
|
(6%)
|
|||
Revenue/RTM
(cents)
|
3.25
|
2.89
|
12%
|
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. For the year ended
December 31, 2008, revenues for this commodity group increased by $71
million, or 5%, when compared to 2007. The increase was mainly
due to freight rate increases, higher ethanol shipments, stronger export
volumes of Canadian canola and additional shipments of soybeans via the
southern U.S. These gains were partly offset by reduced wheat
volumes as a result of depleted stockpiles and reduced corn
shipments. In addition, the negative impact of the CTA Decision
to retroactively reduce rail revenue entitlement for grain transportation,
as well as the CTA’s determination that the Company exceeded the revenue
cap for 2007-08 crop year, reduced revenues by $26 million in the fourth
quarter. Revenue per revenue ton mile increased by 12% in 2008,
largely due to freight rate increases.
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Percentage
of revenues
|
|||||
Oilseeds
|
29%
|
||||
Feed
grain
|
27%
|
||||
Food
grain
|
24%
|
||||
Fertilizers
|
20%
|
||||
Year
ended December 31,
|
2004
|
2005
|
2006
|
2007
|
2008
|
Carloads*(In
thousands)
|
577
|
566
|
594
|
601
|
579
|
*Includes
GLT from May 10, 2004 and BC Rail from July 14,
2004.
|
Intermodal
|
||||||
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
|||
Revenues
(millions)
|
$
|
1,580
|
$
|
1,382
|
14%
|
|
RTMs
(millions)
|
33,822
|
32,607
|
4%
|
|||
Revenue/RTM
(cents)
|
4.67
|
4.24
|
10%
|
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. For the year ended December 31,
2008, revenues for this commodity group increased by $198 million, or 14%,
when compared to 2007. The increase was mainly due to freight
rate increases, higher volumes through the Port of Prince Rupert, which
opened its intermodal terminal in late 2007 and higher Canadian retail and
U.S. transborder traffic due to market share gains. These gains
were partly offset by lower volumes both through the Port of Halifax as
various customers rationalized their services and consumer demand
weakened, and through the Port of Vancouver in the fourth quarter due to
weak consumer demand. Revenue per revenue ton mile increased by
10% in 2008, mainly due to freight rate increases.
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Percentage
of revenues
|
|||||
International
|
52%
|
||||
Domestic
|
48%
|
||||
Year
ended December 31,
|
2004
|
2005
|
2006
|
2007
|
2008
|
Carloads*(In
thousands)
|
1,202
|
1,248
|
1,326
|
1,324
|
1,377
|
*Includes
GLT from May 10, 2004 and BC Rail from July 14,
2004.
|
Automotive
|
||||||
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
|||
Revenues
(millions)
|
$
|
469
|
$
|
504
|
(7%)
|
|
RTMs
(millions)
|
2,590
|
3,118
|
(17%)
|
|||
Revenue/RTM
(cents)
|
18.11
|
16.16
|
12%
|
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. For the year ended
December 31, 2008, revenues for this commodity group decreased by $35
million, or 7%, when compared to 2007. The decrease was mainly
due to reduced volumes of domestic finished vehicle and parts traffic
resulting from customer production curtailments and a second-quarter
strike at a major customer’s parts supplier. These factors were
partly offset by freight rate increases. Revenue per revenue
ton mile increased by 12% in 2008, largely due to freight rate increases
that were partly offset by an increase in the average length of
haul.
|
Percentage
of revenues
|
|||||
Finished
vehicles
|
87%
|
||||
Auto
parts
|
13%
|
||||
Year
ended December 31,
|
2004
|
2005
|
2006
|
2007
|
2008
|
Carloads*
(In
thousands)
|
295
|
279
|
255
|
265
|
201
|
*Includes
GLT from May 10, 2004 and BC Rail from July 14,
2004.
|
Other
revenues
Other
revenues include revenues from non-rail transportation services,
interswitching, and maritime operations. In 2008, other
revenues increased by $130 million, or 18%, when compared to 2007, mainly
due to an increase in non-rail transportation services attributable to CN
WorldWide activities and higher optional service
revenues. These gains were partly offset by lower commuter and
interswitching revenues.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Operating
expenses
Operating
expenses amounted to $5,588 million in 2008 compared to $5,021 million in
2007. The increase of $567 million, or 11%, in 2008 was mainly
due to higher fuel costs, increases in purchased services and material and
in casualty and other expenses. These factors were partly
offset by lower labor and fringe benefits expense. In the first
nine months of the year, the Company experienced a $145 million positive
translation impact of the stronger Canadian dollar on U.S.
dollar-denominated expenses that was almost entirely offset in the fourth
quarter as a result of the weakened Canadian dollar. This
offsetting effect was experienced in all expense categories, although not
explicitly stated in the discussions that follow. The first
quarter 2007 UTU strike did not have a significant impact on total
operating expenses for the year
2007.
|
Percentage
of revenues
|
|||||||||
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
%
Change
|
2008
|
2007
|
|||
Labor
and fringe benefits
|
$
|
1,674
|
$
|
1,701
|
2%
|
19.7%
|
21.5%
|
||
Purchased
services and material
|
1,137
|
1,045
|
(9%)
|
13.4%
|
13.2%
|
||||
Fuel
|
1,403
|
1,026
|
(37%)
|
16.5%
|
13.0%
|
||||
Depreciation
and amortization
|
725
|
677
|
(7%)
|
8.6%
|
8.6%
|
||||
Equipment
rents
|
262
|
247
|
(6%)
|
3.1%
|
3.1%
|
||||
Casualty
and other
|
387
|
325
|
(19%)
|
4.6%
|
4.2%
|
||||
Total
operating expenses
|
$
|
5,588
|
$
|
5,021
|
(11%)
|
65.9%
|
63.6%
|
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 $27
million, or 2%, in 2008 as compared to 2007. The decrease was
mainly due to a reduction in net periodic benefit cost for pensions and
lower stock-based compensation expense. Partly offsetting these factors
were increases in annual wages and benefit expenses and 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 $92 million, or 9%, in 2008 as compared to 2007. The increase was
mainly due to higher costs for third-party non-rail transportation
services, higher repairs and maintenance expenses, as well as other costs
incurred as a result of the harsh weather conditions experienced in the
first quarter of 2008. Partly offsetting these factors was
income from the increased sale of scrap metal.
Fuel:
Fuel expense includes the cost of fuel consumed by locomotives, intermodal
equipment and other vehicles. These expenses increased by $377
million, or 37%, in 2008 as compared to 2007. The increase was
primarily due to an increase in the average price per U.S. gallon of fuel
when compared to 2007, which was partly offset by a decrease in freight
volumes.
Depreciation
and amortization: Depreciation and
amortization expense relates to the Company’s rail
operations. These expenses increased by $48 million, or 7%, in
2008 as compared to 2007. The increase was 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).
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Other
Interest
expense: Interest expense increased by $39 million, or 12% for the
year ended December 31, 2008 when compared to 2007, mainly due to the
impact of a higher average debt balance. The positive
translation impact of the stronger Canadian dollar experienced in the
first nine months of the year was almost entirely offset in the fourth
quarter due to the weakened Canadian
dollar.
|
Other
income: In 2008, the
Company recorded Other income of $26 million compared to $166 million in
2007. The decrease of $140 million was mainly due to gains on
the sale of the CSC and the investment in EWS recorded in 2007, and
foreign exchange losses in 2008 as compared to gains in 2007. These
factors were partly offset by interest income received on a court
settlement, lower fees related to the accounts receivable securitization
program and higher income from other business
activities.
|
Income tax
expense: The Company recorded income tax expense of $650 million
for the year ended December 31, 2008 compared to $548 million in 2007.
Included in 2008 and 2007 were deferred income tax recoveries of $117
million and $328 million, respectively. Of the 2008 amount, $42
million, recorded in the fourth quarter and $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, $284
million, recorded in the fourth quarter and $30 million, recorded in the
second quarter, were due to the enactment of corporate income tax rate
changes in Canada; and $14 million, recorded in the third quarter,
resulted from net capital losses arising from the reorganization of
certain subsidiaries. The effective tax rate for 2008 was 25.5%
compared to 20.3% in 2007. Excluding the deferred income tax
recoveries, the effective tax rates for 2008 and 2007 were 30.1% and
32.4%, respectively. The decrease was mainly due to a reduction
in corporate income tax rates.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
2007
compared to 2006
In
2007, net income increased by $71 million, or 3%, to $2,158 million, when
compared to 2006, with diluted earnings per share rising 9%, to
$4.25. Included in the 2007 figures was a deferred income tax
recovery of $328 million ($0.66 per basic share or $0.64 per diluted
share), resulting mainly from the enactment of corporate income tax rate
changes in Canada, and the gains on sale of the CSC of $64 million
after-tax ($0.13 per basic or diluted share) and the Company’s investment
in EWS of $41 million after-tax ($0.08 per basic or diluted
share). Included in the 2006 figures was a deferred income tax
recovery of $277 million ($0.53 per basic share or $0.51 per diluted
share), resulting primarily from the enactment of lower corporate income
tax rates in Canada and the resolution of matters pertaining to prior
years’ income taxes.
Revenues for the year ended
December 31, 2007 totaled $7,897 million compared to $7,929 million in
2006. The decrease of $32 million, relatively flat on a
percentage basis, was mainly due to the translation impact of the stronger
Canadian dollar on U.S. dollar-denominated revenues, weakness in specific
markets, particularly forest products, and the impact of the UTU strike
and adverse weather conditions in the first half of
2007. Partly offsetting these factors was the impact of net
freight rate increases, which includes lower fuel surcharge revenues as a
result of applicable fuel prices, and an overall improvement in traffic
mix.
Operating expenses increased by
$122 million, or 2%, to $5,021 million, mainly due to increased fuel costs
and equipment rents, which were partly offset by the translation impact of
the stronger Canadian dollar on U.S dollar-denominated expenses and
decreased labor and fringe benefits.
The operating ratio, defined as
operating expenses as a percentage of revenues, was 63.6% in 2007 compared
to 61.8% in 2006, a 1.8-point increase.
In
addition to the weather conditions and operational challenges in the first
half of 2007, the Company’s results included the impact of a first-quarter
strike by 2,800 members of the UTU in Canada for which the Company
estimated the negative impact on first-quarter operating income and net
income to be approximately $50 million and $35 million, respectively
($0.07 per basic or diluted share).
Foreign exchange fluctuations
have also had an impact on the comparability of the results of operations.
In 2007,
the strengthening of the Canadian dollar relative to the U.S. dollar,
which affected the conversion of the Company’s U.S. dollar-denominated
revenues and expenses, resulted in a reduction to net income of
approximately $35 million.
|
Revenues
|
||||||
In
millions, unless otherwise indicated
|
Year ended December
31,
|
2007
|
2006
|
%
Change
|
||
Rail
freight revenues
|
$
|
7,186
|
$
|
7,254
|
(1%)
|
|
Other
revenues
|
711
|
675
|
5%
|
|||
Total
revenues
|
$
|
7,897
|
$
|
7,929
|
-
|
|
Rail
freight revenues:
|
||||||
Petroleum
and chemicals
|
$
|
1,226
|
$
|
1,171
|
5%
|
|
Metals
and minerals
|
826
|
835
|
(1%)
|
|||
Forest
products
|
1,552
|
1,747
|
(11%)
|
|||
Coal
|
385
|
370
|
4%
|
|||
Grain
and fertilizers
|
1,311
|
1,258
|
4%
|
|||
Intermodal
|
1,382
|
1,394
|
(1%)
|
|||
Automotive
|
504
|
479
|
5%
|
|||
Total
rail freight revenues
|
$
|
7,186
|
$
|
7,254
|
(1%)
|
|
Revenue
ton miles (RTM) (millions)
|
184,148
|
185,610
|
(1%)
|
|||
Rail
freight revenue/RTM (cents)
|
3.90
|
3.91
|
-
|
|||
Carloads
(thousands)
|
4,744
|
4,824
|
(2%)
|
|||
Rail
freight revenue/carload (dollars)
|
1,515
|
1,504
|
1%
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Revenues
for the year ended December 31, 2007 totaled $7,897 million compared to
$7,929 million in 2006. The decrease of $32 million was mainly
due to the translation impact of the stronger Canadian dollar on U.S.
dollar-denominated revenues of approximately $220 million; weakness in
specific markets, particularly forest products; and the impact of the UTU
strike and adverse weather conditions in the first half of
2007. Partly offsetting these factors was the impact of net
freight rate increases of approximately $170 million, which includes lower
fuel surcharge revenues as a result of applicable fuel prices, and an
overall improvement in traffic mix.
In 2007, revenue ton miles (RTM),
declined 1% relative to 2006. Rail freight revenue per revenue
ton mile was flat compared to 2006, partly due to net freight rate
increases that were offset by the translation impact of the stronger
Canadian dollar.
|
Petroleum
and chemicals
|
||||||
Year
ended December 31,
|
2007
|
2006
|
%
Change
|
|||
Revenues
(millions)
|
$
|
1,226
|
$
|
1,171
|
5%
|
|
RTMs
(millions)
|
32,761
|
31,868
|
3%
|
|||
Revenue/RTM
(cents)
|
3.74
|
3.67
|
2%
|
For
the year ended December 31, 2007, revenues for this commodity group
increased by $55 million, or 5%, from 2006. The increase in
this commodity group was mainly due to net freight rate increases; the
continued growth of condensate movements, both from the west coast of
Canada and the U.S.; and increased volumes in petroleum products, driven
by higher shipments of diesel and heavy fuel oils in Canada and
alternative fuels in the U.S. These gains were partly offset by
the translation impact of the stronger Canadian dollar; areas of market
weakness for plastic feedstocks, driven largely by a customer plant
closure, and for PVC plastics and chemicals; and the impact of the UTU
strike and adverse weather conditions in the first half of
2007. Revenue per revenue ton mile increased by 2% in 2007,
mainly due to net freight rate increases and an improvement in traffic mix
that were partly offset by the translation impact of the stronger Canadian
dollar.
|
Metals
and minerals
|
||||||
Year ended December
31,
|
2007
|
2006
|
%
Change
|
|||
Revenues
(millions)
|
$
|
826
|
$
|
835
|
(1%)
|
|
RTMs
(millions)
|
16,719
|
17,467
|
(4%)
|
|||
Revenue/RTM
(cents)
|
4.94
|
4.78
|
3%
|
For
the year ended December 31, 2007, revenues for this commodity group
decreased by $9 million, or 1%, from 2006. The decrease in this
commodity group was mainly due to the translation impact of the stronger
Canadian dollar and softer demand for construction materials, primarily
caused by fewer shipments of cement and roofing material. Partly
offsetting these factors were net freight rate increases, strong shipments
of steel slabs and plates, and increased volumes of machinery and
dimensional loads. Revenue per revenue ton mile increased by 3%
in 2007, mainly due to net freight rate increases and a reduction in the
average length of haul, largely caused by the recovery of short-haul iron
ore volumes. Partly offsetting these factors was the
translation impact of the stronger Canadian
dollar.
|
Forest
products
|
||||||
Year ended December
31,
|
2007
|
2006
|
%
Change
|
|||
Revenues
(millions)
|
$
|
1,552
|
$
|
1,747
|
(11%)
|
|
RTMs
(millions)
|
39,808
|
42,488
|
(6%)
|
|||
Revenue/RTM
(cents)
|
3.90
|
4.11
|
(5%)
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
For
the year ended December 31, 2007, revenues for this commodity group
decreased by $195 million, or 11%, when compared to 2006. The
decrease in 2007 was mainly due to weak market conditions, the translation
impact of the stronger Canadian dollar and the impact of the UTU strike
and adverse weather conditions in the first half of
2007. Partly offsetting these factors were improvements in
traffic mix as a result of extended routings and net freight rate
increases. Revenue per revenue ton mile decreased by 5% in
2007, mainly due to an increase in the average length of haul and the
translation impact of the stronger Canadian dollar, which were partly
offset by net freight rate
increases.
|
Coal
|
||||||
Year
ended December 31,
|
2007
|
2006
|
%
Change
|
|||
Revenues
(millions)
|
$
|
385
|
$
|
370
|
4%
|
|
RTMs
(millions)
|
13,776
|
13,727
|
-
|
|||
Revenue/RTM
(cents)
|
2.79
|
2.70
|
3%
|
For
the year ended December 31, 2007, revenues for this commodity group
increased by $15 million, or 4%, from 2006. The improvement in
this commodity group was mainly due to increased shipments of
metallurgical coal in western Canada, largely driven by a new mine
start-up, positive changes in traffic mix and net freight rate
increases. Partly offsetting these gains were reduced shipments
of imported metallurgical coke to the U.S., the cessation by the Company
of certain short-haul U.S. coal shipments and the impact of the UTU strike
and adverse weather conditions in the first half of 2007. The
revenue per revenue ton mile increase of 3% in 2007 was mainly due to a
positive change in traffic mix and net freight rate increases, which were
partly offset by the translation impact of the stronger Canadian
dollar.
|
Grain
and fertilizers
|
||||||
Year
ended December 31,
|
2007
|
2006
|
%
Change
|
|||
Revenues (millions)
|
$
|
1,311
|
$
|
1,258
|
4%
|
|
RTMs
(millions)
|
45,359
|
44,096
|
3%
|
|||
Revenue/RTM
(cents)
|
2.89
|
2.85
|
1%
|
For
the year ended December 31, 2007, revenues for this commodity group
increased by $53 million, or 4%, from 2006. The improvement in
this commodity group was mainly due to net freight rate increases and
increased volumes, particularly of potash into the U.S., ethanol and
Canadian grain exports. These gains were partly offset by the
translation impact of the stronger Canadian dollar, lower U.S. corn
shipments and the impact of the UTU strike and adverse weather conditions
in the first half of 2007. Revenue per revenue ton mile
increased by 1% in 2007, largely due to net freight rate increases and a
positive change in traffic mix that were partly offset by the translation
impact of the stronger Canadian
dollar.
|
Intermodal
|
||||||
Year
ended December 31,
|
2007
|
2006
|
%
Change
|
|||
Revenues
(millions)
|
$
|
1,382
|
$
|
1,394
|
(1%)
|
|
RTMs
(millions)
|
32,607
|
32,922
|
(1%)
|
|||
Revenue/RTM
(cents)
|
4.24
|
4.23
|
-
|
For
the year ended December 31, 2007, revenues for this commodity group
decreased by $12 million, or 1%, from 2006. The decrease in
this commodity group was mainly due to the translation impact of the
stronger Canadian dollar, reduced overseas traffic due to lower volumes
through the ports of Halifax and Montreal and the impact of the UTU strike
and adverse weather conditions in the first half of
2007. Partly offsetting these factors were net freight
rate increases, an increase in volume through the Port of Vancouver and
the opening of the Port of Prince Rupert in the fourth
quarter. Revenue per revenue ton mile remained relatively flat
in 2007, mainly due to net freight rate increases that were offset by the
translation impact of the stronger Canadian
dollar.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Automotive
|
||||||
Year
ended December 31,
|
2007
|
2006
|
%
Change
|
|||
Revenues
(millions)
|
$
|
504
|
$
|
479
|
5%
|
|
RTMs
(millions)
|
3,118
|
3,042
|
2%
|
|||
Revenue/RTM
(cents)
|
16.16
|
15.75
|
3%
|
For
the year ended December 31, 2007, revenues for this commodity group
increased by $25 million, or 5%, from 2006. The improvement in
this commodity group was mainly due to increased market share of finished
vehicles coming out of the U.S. into western Canada, increases in finished
vehicles entering North America through CN-served ports, the benefit of
new facilities in Ontario and Michigan and net freight rate increases that
were partly offset by the translation impact of the stronger Canadian
dollar. Revenue per revenue ton mile increased by 3% in 2007,
largely due to net freight rate increases that were partly offset by the
translation impact of the stronger Canadian dollar.
Other
revenues
In
2007, Other revenues increased by $36 million, or 5%, when compared to
2006, mainly due to an increase in non-rail transportation services
revenues and higher optional service revenues which were partly offset by
the translation impact of the stronger Canadian dollar.
Operating
expenses
Operating
expenses amounted to $5,021 million in 2007 compared to $4,899 million in
2006. The increase of $122 million, or 2%, in 2007 was mainly
due to increased fuel costs and equipment rents, which were partly offset
by the translation impact of the stronger Canadian dollar on U.S
dollar-denominated expenses of approximately $135 million and decreased
labor and fringe benefits. The first-quarter 2007 UTU strike did not have
a significant impact on total operating expenses as lower labor and fringe
benefits expense was mostly offset by increases in purchased services and
other expenses.
|
Percentage
of revenues
|
|||||||||
In
millions
|
Year
ended December 31,
|
2007
|
2006
|
%
Change
|
2007
|
2006
|
|||
Labor
and fringe benefits
|
$
|
1,701
|
$
|
1,823
|
7%
|
21.5%
|
23.0%
|
||
Purchased
services and material
|
1,045
|
1,027
|
(2%)
|
13.2%
|
13.0%
|
||||
Fuel
|
1,026
|
892
|
(15%)
|
13.0%
|
11.2%
|
||||
Depreciation
and amortization
|
677
|
650
|
(4%)
|
8.6%
|
8.2%
|
||||
Equipment
rents
|
247
|
198
|
(25%)
|
3.1%
|
2.5%
|
||||
Casualty
and other
|
325
|
309
|
(5%)
|
4.2%
|
3.9%
|
||||
Total
operating expenses
|
$
|
5,021
|
$
|
4,899
|
(2%)
|
63.6%
|
61.8%
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Summary
of fourth quarter 2008 compared to corresponding quarter in 2007 –
unaudited
Fourth
quarter 2008 net income decreased by $260 million, or 31%, to $573
million, when compared to the same period in 2007, with diluted earnings
per share decreasing 28% to $1.21.
Revenues for the fourth quarter
of 2008 increased by $259 million, or 13%, to $2,200 million, when
compared to the same period in 2007. The increase was mainly due to the
positive translation impact of the weaker Canadian dollar on U.S.
dollar-denominated revenues of $230 million and freight rate increases,
including a higher fuel surcharge resulting from year-over-year net
increases in applicable fuel prices. These gains were partly offset by
lower volumes in almost all commodity groups due to weak market
conditions. In addition, the CTA Decision to retroactively
reduce rail revenue entitlement for grain transportation, as well as the
CTA’s determination that the Company exceeded the revenue cap for the
2007-08 crop year, reduced grain revenues by $26
million. Associated penalties of $4 million increased casualty
and other expense.
Operating expenses for the
three months ended December 31, 2008 increased by $175 million, or 15%, to
$1,380 million, due primarily to the negative translation impact of the
weaker Canadian dollar on U.S. dollar-denominated expenses of
approximately $145 million, and increased casualty and other and labor and
fringe benefit expenses. These factors were partly offset by
lower fuel costs as a result of a decrease in the average price per U.S.
gallon of fuel during the fourth quarter.
The operating ratio, defined as
operating expenses as a percentage of revenues, was 62.7% in the fourth
quarter of 2008 compared to 62.1% in the fourth quarter of 2007, a
0.6-point increase.
The
Company’s results of operations in the fourth quarter of 2008 were
affected by significant weakness in certain markets due to the current
economic environment. Included in the 2008 figures was a
deferred income tax recovery of $42 million ($0.09 per basic or diluted
share), resulting from the resolution of various income tax matters and
adjustments related to tax fillings of prior years. The Company’s results
of operations in the fourth quarter of 2007 included a deferred income tax
recovery of $284 million ($0.58 per basic share or $0.57 per diluted
share) resulting mainly from the enactment of corporate income tax rate
changes in Canada, the gains on sale of the CSC of $64 million ($0.13 per
basic or diluted share) and the Company’s investment in EWS of $41 million
($0.08 per basic or diluted share).
Foreign exchange fluctuations
have also had an impact on the comparability of the results of operations
in the fourth quarter of 2008. The fluctuation of the Canadian
dollar relative to U.S. dollar, which affects the conversion of the
Company’s U.S. dollar-denominated revenues and expenses, has resulted in
an increase of approximately $45 million ($0.10 per basic or diluted
share) to net income.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Summary
of quarterly financial data –
unaudited
|
In
millions, except per share data
|
||||||||||||||||||
2008
|
2007
|
|||||||||||||||||
Quarters
|
Quarters
|
|||||||||||||||||
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||
Revenues
|
$
|
2,200
|
$
|
2,257
|
$
|
2,098
|
$
|
1,927
|
$
|
1,941
|
$
|
2,023
|
$
|
2,027
|
$
|
1,906
|
||
Operating
income
|
$
|
820
|
$
|
844
|
$
|
707
|
$
|
523
|
$
|
736
|
$
|
768
|
$
|
811
|
$
|
561
|
||
Net
income
|
$
|
573
|
$
|
552
|
$
|
459
|
$
|
311
|
$
|
833
|
$
|
485
|
$
|
516
|
$
|
324
|
||
Basic
earnings per share
|
$
|
1.22
|
$
|
1.17
|
$
|
0.96
|
$
|
0.64
|
$
|
1.70
|
$
|
0.97
|
$
|
1.02
|
$
|
0.64
|
||
Diluted
earnings per share
|
$
|
1.21
|
$
|
1.16
|
$
|
0.95
|
$
|
0.64
|
$
|
1.68
|
$
|
0.96
|
$
|
1.01
|
$
|
0.63
|
||
Dividend
declared per share
|
$
|
0.23
|
$
|
0.23
|
$
|
0.23
|
$
|
0.23
|
$
|
0.21
|
$
|
0.21
|
$
|
0.21
|
$
|
0.21
|
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
(see the Business risks section of this MD&A). 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
include items that impacted the quarter-over-quarter comparability of the
results of operations as discussed below:
|
In
millions, except per share data
|
||||||||||||||||||||
2008
|
2007
|
|||||||||||||||||||
Quarters
|
Quarters
|
|||||||||||||||||||
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
Deferred
income tax recoveries
(a)
|
$
|
42
|
$
|
41
|
$
|
23
|
$
|
11
|
$
|
284
|
$
|
14
|
$
|
30
|
$
|
-
|
||||
Gain
on sale of CSC (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
|
$
|
42
|
$
|
41
|
$
|
23
|
$
|
11
|
$
|
389
|
$
|
14
|
$
|
30
|
$
|
(35)
|
||||
Basic
earnings per share
|
$
|
0.09
|
$
|
0.09
|
$
|
0.05
|
$
|
0.02
|
$
|
0.79
|
$
|
0.03
|
$
|
0.06
|
$
|
(0.07)
|
||||
Diluted
earnings per share
|
$
|
0.09
|
$
|
0.09
|
$
|
0.05
|
$
|
0.02
|
$
|
0.78
|
$
|
0.03
|
$
|
0.06
|
$
|
(0.07)
|
||||
(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 CSC 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.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Balance
sheet
Assets
As
at December 31, 2008 and 2007, the Company’s total assets were $26,720
million and $23,460 million, respectively, an increase of $3,260 million
when compared to 2007.
Current assets increased by $708
million when compared to 2007, of which $543 million related to accounts
receivable. The higher balance in accounts receivable was due to a
decrease of $617 million in the accounts receivable sold under the
securitization program and $102 million of foreign exchange translation
gains on U.S. dollar-denominated accounts receivable, which were offset by
$176 million related to an improved collection cycle.
In addition, Properties increased
by $2,790 million when compared to 2007. The increase was due to $1,991
million in foreign exchange translation gains on U.S. dollar-denominated
properties and $1,541 million related to property and capital lease
additions. These increases were offset by $723 million of
depreciation and other items netting to $19 million.
Intangible and other assets
decreased by $238 million compared to 2007. Of this amount, $246 million
related to a decrease in the Company’s pension asset.
Total
liabilities
As
at December 31, 2008 and 2007, the Company’s combined short-term and
long-term liabilities were $16,161 million and $13,283 million,
respectively, an increase of $2,878 million when compared to
2007.
Current liabilities increased
by $302 million when compared to 2007. Of this amount, $252 million
related to an increase in the current portion of long-term
debt.
Deferred income taxes increased
by $603 million when compared to 2007. The increase was due to $265
million of deferred income tax expense, excluding recognized tax benefits,
$620 million of foreign exchange translation losses on U.S.
dollar-denominated deferred income taxes and $21 million for other
items. These factors were offset by a deferred income tax
recovery of $303 million recorded in Other comprehensive
loss.
Total long-term debt, including
the current portion, increased by $2,294 million when compared to 2007.
The increase was due to issuances of Notes, capital leases and commercial
paper totaling $4,558 million and $1,325 million of foreign exchange
translation losses on U.S. dollar-denominated debt that were partly offset
by repayments totaling $3,589 million.
Equity
As
at December 31, 2008 and 2007, the Company’s equity was $10,559 million
and $10,177 million, respectively, an increase of $382 million. Increases
in equity included $1,895 million of net income for the current year and
$68 million in issuances of common shares upon exercise of stock
options. Decreases to equity included $1,021 million related to
shares repurchased under the share buyback programs and $436 million of
dividends paid. Accumulated other comprehensive loss also increased by
$124 million.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Liquidity
and capital resources
The
Company’s principal source of liquidity is cash generated from operations
and is supplemented by borrowings in the money market and the capital
market. To meet its short-term liquidity needs, the Company has
a commercial paper program, which is backstopped by a portion of its
U.S.$1 billion revolving credit facility, and an accounts receivable
securitization program. Beginning in the latter part of the
third quarter of 2008, unprecedented conditions in the financial markets
led to unsettled conditions in the commercial paper and short-term lending
markets. During these disruptions, the Company briefly lost
access to the commercial paper market, and used its accounts receivable
securitization program in lieu of new commercial paper borrowings to cover
its short-term liquidity needs. If the Company were to lose
access to its commercial paper program and its accounts receivable program
for an extended period, the Company intends to rely on its U.S.$1 billion
revolving credit facility for its short-term liquidity
needs. The Company’s access to long-term funds in the debt
capital markets will depend on its credit rating and market
conditions. While the global financial crisis has led to debt
capital markets that are marked by high volatility, the Company believes
that it has access to the long-term debt capital
markets. However, if the Company were unable to borrow funds at
acceptable rates in the debt capital markets, the Company could borrow
under its revolving credit facility, raise cash by disposing of surplus
properties or otherwise monetizing assets, reduce discretionary spending
or take a combination of these measures to assure that it has adequate
funding for its business.
Operating activities:
Cash provided from operating activities for the year ended December
31, 2008 was $2,031 million compared to $2,417 million in
2007. Net cash receipts from customers and other were $8,012
million for the year ended December 31, 2008, a decrease of $127 million
when compared to 2007, mainly due to a decrease in the proceeds received
under the Company's accounts receivable securitization program that was
partially offset by an increase in customer billings. Payments for
employee services, suppliers and other expenses were $4,920 million for
the year ended December 31, 2008, an increase of $597 million when
compared to 2007, principally due to higher payments for fuel and
third-party non-rail transportation services. Payments for
income taxes in 2008 were $425 million, a decrease of $442 million when
compared to 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 2008 were payments for interest, workforce
reductions and personal injury and other claims totaling $509 million,
compared to $457 million in 2007. In 2008 and 2007, pension contributions
were $127 million, of which $22 million related to the 2007 funding year;
and $75 million, respectively. In 2009, payments for pension
contributions are expected to be approximately $130 million and income tax
payments are expected to be in the same range as in 2008.
At December 31, 2008 and 2007,
the Company had working capital deficits of $234 million and $610 million,
respectively. The change in working capital is explained in the
Balance sheet section of this MD&A. A working capital
deficit is common in the rail industry because it is capital-intensive,
and does not indicate a lack of liquidity. The Company maintains adequate
resources to meet daily cash requirements, and has sufficient financial
capacity including the commercial paper program, accounts receivable
securitization program and revolving credit facility, to manage its
day-to-day cash requirements and current obligations. There are currently
no specific requirements relating to working capital other than in the
normal course of business.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
||||
Track
and roadway
|
$
|
1,131
|
$
|
1,069
|
|||
Rolling
stock
|
160
|
281
|
|||||
Buildings
|
57
|
172
|
|||||
Information
technology
|
122
|
97
|
|||||
Other
|
71
|
69
|
|||||
Gross
property additions
|
1,541
|
1,688
|
|||||
Less:
capital leases (a)
|
117
|
301
|
|||||
Property
additions
|
$
|
1,424
|
$
|
1,387
|
|||
(a)
|
During
2008, the Company recorded $117 million in assets it acquired through
equipment leases ($301 million in 2007, of which $211 million related to
assets acquired through equipment leases and $90 million to the leaseback
of CSC), for which $121 million was recorded in
debt.
|
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 2009, the
Company expects to invest approximately $1.5 billion for its capital
programs.
|
Free
cash flow
The
Company generated $794 million of free cash flow for the year ended
December 31, 2008 compared to $828 million 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:
|
In
millions
|
Year
ended December 31,
|
2008
|
2007
|
|||
Cash
provided from operating activities
|
$
|
2,031
|
$
|
2,417
|
||
Cash
used by investing activities
|
(1,400)
|
(895)
|
||||
Cash
provided before financing activities
|
631
|
1,522
|
||||
Adjustments:
|
||||||
Change
in accounts receivable securitization
|
568
|
(228)
|
||||
Dividends
paid
|
(436)
|
(418)
|
||||
Effect
of foreign exchange fluctuations on U.S.
|
||||||
dollar-denominated
cash and cash equivalents
|
31
|
(48)
|
||||
Free
cash flow
|
$
|
794
|
$
|
828
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Cash received from stock options
exercised during 2008 and 2007 was $44 million and $61 million,
respectively, and the related tax benefit realized upon exercise was $10
million and $16 million, respectively.
In 2008, the Company repurchased
19.4 million common shares for $1,021 million (weighted-average price of
$52.70 per share) under its share repurchase programs: 6.1 million common
shares for $331 million (weighted-average price of $54.42 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.
During 2008, the
Company paid quarterly dividends of $0.23 per share amounting to $436
million, compared to $418 million, at the rate of $0.21 per share, for the
same period 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
|
|||||||||
December
31,
|
2008
|
2007
|
|||||||
Debt-to-total
capitalization ratio (a)
|
42.8%
|
35.6%
|
|||||||
Add:
Present value of operating lease commitments plus securitization financing
(b)
|
2.4%
|
4.8%
|
|||||||
Adjusted
debt-to-total capitalization ratio
|
45.2%
|
40.4%
|
|||||||
Adjusted
debt-to-adjusted EBITDA
|
|||||||||
$ in millions, unless otherwise
indicated
|
Year
ended December 31,
|
2008
|
2007
|
||||||
Debt
|
$
|
7,911
|
$
|
5,617
|
|||||
Add:
Present value of operating lease commitments plus securitization financing
(b)
|
787
|
1,287
|
|||||||
Adjusted
debt
|
8,698
|
6,904
|
|||||||
Operating
income
|
2,894
|
2,876
|
|||||||
Add:
Depreciation and amortization
|
725
|
677
|
|||||||
EBITDA
|
3,619
|
3,553
|
|||||||
Add:
Deemed interest on operating leases
|
39
|
41
|
|||||||
Adjusted
EBITDA
|
$
|
3,658
|
$
|
3,594
|
|||||
Adjusted
debt-to-adjusted EBITDA
|
2.38
times
|
1.92
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.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
The
Company has access to various financing arrangements:
Revolving
credit facility
The
Company has a U.S.$1 billion revolving credit facility, expiring in
October 2011. The credit facility 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 December 31, 2008, the Company
had no outstanding borrowings under its revolving credit facility (nil as
at December 31, 2007) and had letters of credit drawn of $181 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 December 31, 2008, the Company
had total borrowings of $626 million, of which $256 million was
denominated in Canadian dollars and $370 million was denominated in U.S.
dollars (U.S.$303 million). The weighted-average interest rate
on these borrowings was 2.42%. 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
The
Company has U.S.$1.85 billion registered for offering under its currently
effective shelf prospectus and registration statement, expiring in January
2010, providing for the issuance of debt securities in one or more
offerings.
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.
|
|
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 December 31,
2008:
|
In
millions
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
& thereafter
|
||||||||
Long-term
debt obligations (a)
|
$
|
6,599
|
$
|
367
|
$
|
-
|
$
|
1,112
|
$
|
-
|
$
|
486
|
$
|
4,634
|
|
Interest
on long-term debt obligations
|
6,665
|
377
|
361
|
357
|
315
|
304
|
4,951
|
||||||||
Capital
lease obligations (b)
|
1,837
|
207
|
158
|
199
|
96
|
145
|
1,032
|
||||||||
Operating
lease obligations (c)
|
876
|
166
|
134
|
112
|
87
|
65
|
312
|
||||||||
Purchase
obligations (d)
|
1,006
|
457
|
260
|
83
|
61
|
57
|
88
|
||||||||
Other
long-term liabilities reflected on
|
|||||||||||||||
the
balance sheet (e)
|
813
|
73
|
62
|
51
|
45
|
43
|
539
|
||||||||
Total
obligations
|
$
|
17,796
|
$
|
1,647
|
$
|
975
|
$
|
1,914
|
$
|
604
|
$
|
1,100
|
$
|
11,556
|
|
(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 $1,312 million which are included in “Capital lease
obligations.”
|
||||||||||||||
(b)
|
Includes
$1,312 million of minimum lease payments and $525 million of imputed
interest at rates ranging from 2.1% to 7.9%.
|
||||||||||||||
(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.
|
For
2009 and the foreseeable future, the Company expects cash flow from
operations and from its various sources of financing to be sufficient to
meet its debt repayments and future obligations, and to fund anticipated
capital expenditures.
See the Business risks section
of this MD&A for a discussion of assumptions and risk factors
affecting such forward-looking
statement.
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Acquisitions
Acquisition
of Elgin, Joliet and Eastern Railway Company (EJ&E) – Subsequent
event
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 the
Company 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 would 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 Company has received all
necessary regulatory approvals, including the U.S. Surface Transportation
Board (STB) ruling rendered on December 24, 2008. On January
31, 2009, the Company completed its acquisition of EJ&E for a purchase
price of U.S.$300 million, paid with cash on hand.
Over the next few years, the
Company has committed to spend approximately U.S.$100 million for
infrastructure improvements and over U.S.$60 million under a series of
mitigation agreements with individual communities, as well as under a
comprehensive voluntary mitigation program that addresses municipalities’
concerns raised during the regulatory approval
process. Expenditures for additional STB-imposed mitigation are
being currently evaluated by the Company.
The Company accounted for the
acquisition using the purchase method of accounting pursuant to SFAS No.
141(R), “Business Combinations,” which became effective for acquisitions
closing on or after January 1, 2009. (See the Recent accounting
pronouncements section of this MD&A.)
|
In
2008, the Company acquired the three principal railway subsidiaries of the
Quebec Railway Corp. (QRC) and a QRC rail-freight ferry operation for a
total acquisition cost of $50 million, paid with cash on hand. The
acquisition includes:
(i) Chemin
de fer de la Matapedia et du Golfe, a 221-mile short-line
railway,
(ii) New
Brunswick East Coast Railway, a 196-mile short-line railway,
(iii) Ottawa
Central Railway, a 123-mile short-line railway, and
(iv) Compagnie
de gestion de Matane Inc., a rail ferry which provides shuttle boat-rail
freight service.
In
2007, the Company acquired the rail assets of Athabasca Northern Railway
(ANY) for $25 million, with a planned investment of $135 million in rail
line upgrades over a three-year period.
Acquisitions
in 2008 and 2007 were accounted for using the purchase method of
accounting. As such, the Company’s consolidated financial statements
include the assets, liabilities and results of operations of the acquired
entities from the dates of
acquisition.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
|
Sale
of Central Station Complex
In
November 2007, CN finalized an agreement with Homburg Invest Inc., to sell
its Central Station Complex in Montreal for proceeds of $355 million
before transaction costs. Under the agreement, the Company
entered into long-term arrangements to lease back its corporate
headquarters building and the Central Station railway passenger
facilities. The transaction resulted in a gain on disposition
of $222 million, including amounts related to the corporate headquarters
building and the Central Station railway passenger facilities, which are
being deferred and amortized over their respective lease
terms. A gain of $92 million ($64 million after-tax) was
recognized immediately in Other income.
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. The trust is a multi-seller trust and the Company is not
the primary beneficiary. The trust was established in Ontario in 1994 by a
Canadian bank to acquire receivables and interests in other financial
assets from a variety of originators. Funding for the
acquisition of these assets is customarily through the issuance of
asset-backed commercial paper notes. The notes are secured by,
and recourse is limited to, the assets purchased using the proceeds of the
notes. At December 31, 2008, the trust held interests in 16
pools of assets and had notes outstanding of $3.3 billion. Pursuant to the
agreement, the Company sells an interest in its receivables and receives
proceeds net of the required reserve as stipulated in the agreement. The
required reserve represents an amount set aside to allow for possible
credit losses and is recognized by the Company as a retained interest and
recorded in Other current assets in its Consolidated Balance Sheet. The
eligible freight receivables as defined in the agreement may not include
delinquent or defaulted receivables, or receivables that do not meet
certain obligor-specific criteria, including concentrations in excess of
prescribed limits with any one customer.
The Company has retained the
responsibility for servicing, administering and collecting the receivables
sold and receives no fee for such ongoing servicing responsibilities. The
average servicing period is approximately one month. In 2008, proceeds
from collections reinvested in the securitization program were
approximately $3.3 billion. At December 31, 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. As such, no gain or loss
was recorded.
The Company is subject to
customary requirements that include reporting requirements as well as
compliance to specified ratios, 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 its
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 terms
of the agreement, the Company may change the percentage of co-ownership
interest 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 December 31, 2008, the Company
had sold receivables that resulted in proceeds of $71 million under the
accounts receivable securitization program ($588 million at December 31,
2007), and recorded the retained interest of approximately 10% of this
amount (retained interest of approximately 10% recorded at December 31,
2007). The fair value of the retained interest approximated carrying value
as a result of the short collection cycle and negligible credit
losses.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
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 17 – Major commitments and contingencies,
to the Company’s Annual Consolidated Financial
Statements.
|
Stock
plans
The
Company has various stock-based incentive plans for eligible
employees. A description of the Company’s major plans is
provided in Note 11
– Stock plans, to the Company’s Annual Consolidated Financial
Statements. Compensation cost for awards under all stock-based
compensation plans was $27 million, $62 million and $79 million for the
years ended December 31, 2008, 2007 and 2006, respectively. The
total tax benefit recognized in income in relation to stock-based
compensation expense for the years ended December 31, 2008, 2007 and 2006
was $7 million, $23 million and $22 million,
respectively.
|
Financial
instruments
The
Company has limited involvement with derivative financial instruments in
the management of its risks and does not use them for trading
purposes. At December 31, 2008, the Company did not have
any derivative financial instruments outstanding.
Fuel
To
mitigate the effects of fuel price changes on its operating margins and
overall profitability, the Company had a hedging program which called for
entering into swap positions on crude and heating oil to cover a target
percentage of future fuel consumption up to two years in
advance. However, no additional swap positions were entered
into since September 2004. As such, the Company terminated this
program in late 2006.
Since the changes in the fair
value of the swap positions were highly correlated to changes in the price
of fuel, the fuel hedges were accounted for as cash flow hedges, whereby
the effective portion of the cumulative change in the market value of the
derivative instruments had been recorded in Accumulated other
comprehensive loss.
During 2006, the Company’s
remaining swap positions matured and were settled. As a result,
the related unrealized gains of $57 million, $39 million after-tax
previously recorded in Accumulated other comprehensive loss were
reclassified into income as realized gains. Total realized
gains from the Company’s fuel hedging activities, which were recorded as a
reduction of fuel expense, were $64 million for the year ended December
31, 2006. The Company did not recognize any material gains or
losses in 2006 due to hedge ineffectiveness as the Company’s derivative
instruments were highly effective in hedging the changes in cash flows
associated with forecasted purchases of diesel fuel.
Interest
rate
The
Company is exposed to interest rate risk related to the funded status of
its pension and postretirement plans and on a portion of its long-term
debt and does not currently hold any derivative financial instruments to
manage this risk. At December 31, 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, which are
being amortized over the term of the related debt.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Income
taxes
|
Payments
for income taxes
The
Company is required to make scheduled installment payments as prescribed
by the tax authorities. In Canada, payments in 2008 were $288
million ($724 million was paid in 2007 of which $367 million was paid in
respect to the 2006 fiscal year). In the U.S., payments in 2008 were $137
million ($143 million in 2007). For the 2009 fiscal year, the
Company’s payments are expected to be in the same range as in
2008.
See the Business risks section
of this MD&A for a discussion of assumptions and risk factors
affecting such forward-looking
statements.
|
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.
As
at December 31, 2008, under this current share repurchase program, the
Company repurchased 6.1 million common shares for $331 million, at a
weighted-average price of $54.42 per share.
In
June 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; and 17.7 million common shares were repurchased in 2007
for $897 million, at a weighted-average price of $50.70 per
share.
|
Outstanding
share data
As
at February 5, 2009, the Company had 468.3 million common shares
and 14.3 million stock options
outstanding.
|
Recent
accounting pronouncements
The
Accounting Standards Board of the Canadian Institute of Chartered
Accountants has announced its decision to require all publicly accountable
enterprises to report under International Financial Reporting Standards
(IFRS) for the years beginning on or after January 1, 2011. However,
National Instrument 52-107 currently allows foreign issuers, as defined by
the Securities and Exchange Commission (SEC), such as CN, to file with
Canadian securities regulators financial statements prepared in accordance
with U.S. GAAP. As such, the Company has decided not to report
under IFRS by 2011 and to continue reporting under U.S.
GAAP. In August 2008, the SEC issued a roadmap for the
potential convergence to IFRS for U.S. issuers and foreign
issuers. The proposal stipulates that the SEC will decide in
2011 whether to move forward with the convergence to IFRS with the
transition beginning in 2014. Should the SEC adopt such a
proposal, the Company will convert its reporting to IFRS at such
time.
In
December 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141(R), “Business
Combinations,” which requires that assets acquired and liabilities assumed
be measured at fair value as of the acquisition date, and that goodwill
acquired from a bargain purchase (previously referred to as negative
goodwill) be recognized in the Consolidated Statement of Income in the
period the acquisition occurs. The standard also prescribes
disclosure requirements to enable users of financial statements to
evaluate and understand the nature and financial effects of the business
combination. The standard is effective for business
combinations with an acquisition date on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company will apply SFAS No. 141(R) on a prospective basis, beginning with
its acquisition of EJ&E in 2009. As at December 31, 2008, the Company
had approximately $40 million of transaction costs recorded in Other
current assets related to the acquisition of EJ&E. Pursuant to the
requirements of this standard, such costs will be expensed at the time of
acquisition.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
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 following information should be read in
conjunction with the Company’s Annual Consolidated Financial Statements
and Notes thereto.
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.
|
Personal
injury and other claims
The
Company becomes involved, from time to time, in various legal actions
seeking compensatory, and occasionally punitive damages, including actions
brought on behalf of various purported classes of claimants and claims
relating to personal injuries, occupational disease, and property damage,
arising out of harm to individuals or property allegedly caused by
derailments or other accidents.
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.
At December 31, 2008, 2007 and
2006, the Company’s provision for personal injury and other claims in
Canada was as follows:
|
In
millions
|
2008
|
2007
|
2006
|
||||
Balance
January 1
|
$
|
196
|
$
|
195
|
$
|
205
|
|
Accrual
and other
|
42
|
41
|
60
|
||||
Payments
|
(49)
|
(40)
|
(70)
|
||||
Balance
December 31
|
$
|
189
|
$
|
196
|
$
|
195
|
Assumptions used in estimating
the ultimate costs for Canadian employee injury claims consider, among
others, the discount rate, the rate of inflation, wage increases and
health care costs. The Company periodically reviews its
assumptions to reflect currently available information. Over
the past three years, the Company has not significantly changed any of
these assumptions.
For all other legal claims in
Canada, estimates are based on the specifics of the case, trends and
judgment.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
In
millions
|
2008
|
2007
|
2006
|
||||
Balance
January 1
|
$
|
250
|
$
|
407
|
$
|
452
|
|
Accrual
and other
|
57
|
(111)
|
(8)
|
||||
Payments
|
(42)
|
(46)
|
(37)
|
||||
Balance
December 31
|
$
|
265
|
$
|
250
|
$
|
407
|
For the U.S. personal injury and
other claims liability, historical claim data is used to formulate
assumptions relating to the expected number of claims and average cost per
claim (severity) for each year. Changes in any one of these
assumptions could affect the personal injury and other claims liability
and the casualty and other expense as reported in the Company’s results of
operations. For example, a 5% change in the asbestos average
claim values or a 0.5% change in the inflation trend rate would result in
an approximate $5 million increase or decrease in the liability recorded
for unasserted asbestos claims. Additional disclosures are
provided in Note 17 – Major commitments and contingencies, to the
Company’s Annual Consolidated Financial
Statements.
|
Environmental
claims
Known
existing environmental concerns
The
Company has identified approximately 345 sites at which it is or may be
liable for remediation costs, in some cases along with other potentially
responsible parties, including those imposed by the United States Federal
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA), also known as the Superfund law. CERCLA and
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, as well as to those whose waste is disposed of at the site,
without regard to fault or the legality of the original
conduct. The Company has been notified that it is a potentially
responsible party for study and clean-up costs at approximately 10 sites
governed by the Superfund law for which investigation and remediation
payments are or will be made or are yet to be determined and, in many
instances, is one of several potentially responsible parties.
The ultimate cost of addressing
these known contaminated sites cannot be definitely established given that
the environmental liability for any given site may vary depending on the
nature and extent of the contamination, the available clean-up techniques,
the Company’s share of the costs and evolving regulatory standards
governing environmental liability. As a result, liabilities are
recorded based on the results of a four-phase assessment conducted on a
site-by-site basis. Cost scenarios established by external
consultants based on the extent of contamination and expected costs for
remedial efforts are used by the Company to estimate the costs related to
a particular site. Provisions related to specific environmental
sites are recorded when environmental assessments occur and/or remedial
efforts are probable, and when costs, based on a specific plan of action
in terms of the technology to be used and the extent of the corrective
action required, can be reasonably estimated. As a result, it
is not practical to quantitatively describe the effects of changes to
these many assumptions and judgments. However, the Company
consistently applies its methodology of estimating its environmental
liabilities and records adjustments to initial estimates as additional
information becomes available.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
In
millions
|
2008
|
2007
|
2006
|
||||
Balance
January 1
|
$
|
111
|
$
|
131
|
$
|
124
|
|
Accruals
and other
|
29
|
(1)
|
17
|
||||
Payments
|
(15)
|
(19)
|
(10)
|
||||
Balance
December 31
|
$
|
125
|
$
|
111
|
$
|
131
|
The
Company anticipates that the majority of the liability at December 31,
2008 will be paid out over the next five years; however, some costs may be
paid out over a longer period. No individual site is deemed to
be material. Based on the information currently available, the
Company considers its provisions to be adequate.
At December 31, 2008, most of the
Company’s properties not acquired through recent acquisitions have reached
the final assessment stage and therefore costs related to such sites have
been anticipated. The final assessment stage can span multiple
years. For properties acquired through recent acquisitions, the
Company obtains assessments from both external and internal consultants
and a liability has been or will be accrued based on such
assessments.
Unknown
existing environmental concerns
While
the Company believes that it has identified the costs likely to be
incurred for environmental matters in the next several years, based on
known information, newly discovered facts, changes in law, the possibility
of spills and releases of hazardous materials into the environment and the
Company’s ongoing efforts to identify potential environmental liabilities
that may be associated with its properties may result in the
identification of additional environmental liabilities and related
costs. The magnitude of such additional liabilities and the
costs of complying with future environmental laws and containing or
remediating contamination cannot be reasonably estimated due to many
factors including:
(i) the
lack of specific technical information available with respect to many
sites;
(ii) the
absence of any government authority, third-party orders, or claims with
respect to particular sites;
(iii)
the potential for new or changed laws and regulations and for development
of new remediation technologies and
uncertainty regarding the timing of the work with respect to particular
sites;
(iv)
the ability to recover costs from any third parties with respect to
particular sites;
and
therefore, the likelihood of any such costs being incurred or whether such
costs would be material to the Company cannot be determined at this time.
There can thus be no assurance that liabilities or costs related to
environmental matters will not be incurred in the future, or will not have
a material adverse effect on the Company’s financial position or results
of operations in a particular quarter or fiscal year, or that the
Company’s liquidity will not be adversely impacted by such liabilities or
costs, although management believes, based on current information, that
the costs to address environmental matters will not have a material
adverse effect on the Company’s financial condition or liquidity. Costs
related to any unknown existing or future contamination will be accrued in
the period in which they become probable and reasonably
estimable.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Depreciation
Railroad
properties are carried at cost less accumulated depreciation including
asset impairment write-downs. The Company follows the group
method of depreciation for railroad properties and, as such, depreciates
the cost of railroad properties, less net salvage value, on a
straight-line basis over their estimated useful lives. In
addition, under the group method of depreciation, the cost of railroad
properties, less net salvage value, retired or disposed of in the normal
course of business, is charged to accumulated depreciation.
Assessing the reasonableness of
the estimated useful lives of properties requires judgment and is based on
currently available information, including periodic depreciation studies
conducted by the Company. The Company’s U.S. properties are subject to
comprehensive depreciation studies as required by the Surface
Transportation Board (STB). Depreciation studies for Canadian
properties are not required by regulation and are therefore conducted
internally. Studies are performed on specific asset groups on a periodic
basis.
The studies consider, among
others, the analysis of historical retirement data using recognized life
analysis techniques, and the forecasting of asset life
characteristics. Changes in circumstances, such as
technological advances, changes to the Company’s business strategy,
changes in the Company’s capital strategy or changes in regulations can
result in the actual useful lives differing from the Company’s
estimates.
A change in the remaining useful
life of a group of assets, or their estimated net salvage value, will
affect the depreciation rate used to amortize the group of assets and thus
affect depreciation expense as reported in the Company’s results of
operations. A change of one year in the composite useful life
of the Company’s fixed asset base would impact annual depreciation expense
by approximately $16 million.
Depreciation studies are a means
of ensuring that the assumptions used to estimate the useful lives of
particular asset groups are still valid and where they are not, they serve
as the basis to establish the new depreciation rates to be used on a
prospective basis. In 2008, the Company completed a
depreciation study of its Canadian properties, plant and equipment,
resulting in an increase in depreciation expense of $20 million for the
year ended December 31, 2008 compared to the same period in
2007. In 2007, the Company completed a depreciation study for
all of its U.S. assets, for which there was no significant impact on
depreciation expense.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Pensions
and other postretirement benefits
In 2008, the Company’s plans have
a measurement date of December 31. The Company’s pension asset,
pension liability and accrual for postretirement benefits liability at
December 31, 2008, were $1,522 million, $237 million and $260 million,
respectively ($1,768 million, $187 million and $266 million at December
31, 2007, respectively). The descriptions in the following paragraphs
pertaining to pensions relate generally to the Company’s main pension
plan, the CN Pension Plan (the Plan), unless otherwise
specified.
Calculation
of net periodic benefit cost
The
Company accounts for net periodic benefit cost for pensions and other
postretirement benefits as required by SFAS No. 87, "Employers' Accounting
for Pensions,” and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions,” respectively. Under these
standards, assumptions are made regarding the valuation of benefit
obligations and performance of plan assets. In the calculation of net
periodic benefit cost, these standards allow for a gradual recognition of
changes in benefit obligations and fund performance over the expected
average remaining service life of the employee group covered by the
plans.
In
accounting for pensions and other postretirement benefits, assumptions are
required for, among others, the discount rate, the expected long-term rate
of return on plan assets, the rate of compensation increase, health care
cost trend rates, mortality rates, employee early retirements,
terminations and disability. Changes in these assumptions result in
actuarial gains or losses, which pursuant to SFAS No. 158, will be
recognized in Other comprehensive income (loss). In accordance
with SFAS No. 87 and SFAS No. 106, the Company has elected to amortize
these gains or losses into net periodic benefit cost over the expected
average remaining service life of the employee group covered by the plans
only to the extent that the unrecognized net actuarial gains and losses
are in excess of the corridor threshold, which is calculated as 10% of the
greater of the beginning-of-year balances of the projected benefit
obligation or market-related value of plan assets. The Company’s net
periodic benefit cost for future periods is dependent on demographic
experience, economic conditions and investment performance. Recent
demographic experience has revealed no material net gains or losses on
termination, retirement, disability and mortality. Experience
with respect to economic conditions and investment performance is further
discussed herein.
The
Company recorded consolidated net periodic benefit cost (income) for
pensions of $(48) million, $29 million and $66 million in 2008, 2007, and
2006, respectively. Consolidated net periodic benefit cost for
other postretirement benefits was $12 million, $14 million and $17 million
in 2008, 2007, and 2006, respectively.
At December 31, 2008, and 2007,
the pension benefit obligation, accumulated postretirement benefit
obligation (APBO), and other postretirement benefits liability were as
follows:
|
In
millions
|
December
31,
|
2008
|
2007
|
|||
Pension
benefit obligation
|
$
|
12,326
|
$
|
14,419
|
||
Accumulated
postretirement benefit obligation
|
$
|
260
|
$
|
266
|
||
Other
postretirement benefits liability
|
$
|
260
|
$
|
266
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Discount
rate assumption
The
Company’s discount rate assumption, which is set annually at the end of
each year, is used to determine the projected benefit obligation at the
end of the year and the net periodic benefit cost for the following year.
The discount rate is used to measure the single amount that, if invested
at the measurement date in a portfolio of high-quality debt instruments
with a rating of AA or better, would provide the necessary cash flows to
pay for pension benefits as they become due. The discount rate
is determined by management with the aid of third-party actuaries. The
Company’s methodology for determining the discount rate is based on a
zero-coupon bond yield curve, which is derived from a semi-annual bond
yield curve provided by a third party. The portfolio of
hypothetical zero-coupon bonds is expected to generate cash flows that
match the estimated future benefit payments of the plans as the bond rate
for each maturity year is applied to the plans’ corresponding expected
benefit payments of that year. A discount rate of 7.42%, based
on bond yields prevailing at December 31, 2008, (5.53% at December 31,
2007,) was considered appropriate by the Company to match the
approximately 10-year average duration of estimated future benefit
payments. The current estimate for the expected average remaining service
life of the employee group covered by the plans is approximately nine
years.
For the year ended December 31,
2008, a one-percentage-point decrease in the 5.53% discount rate used to
determine net periodic benefit cost at January 1, 2008, would have
resulted in an increase of approximately $110 million in net periodic
benefit cost, whereas a one-percentage-point increase would have resulted
in a decrease of approximately $5 million, given that the Company
amortizes net actuarial gains and losses over the expected average
remaining service life of the employee group covered by the plans, only to
the extent they are in excess of the corridor threshold.
Expected
long-term rate of return assumption
To
develop its expected long-term rate of return assumption used in the
calculation of net periodic benefit cost applicable to the market-related
value of assets, the Company considers both its past experience and future
estimates of long-term investment returns, the expected composition of the
plans’ assets as well as the expected long-term market returns in the
future. For 2008, the Company used a long-term rate of return
assumption of 8.00% on the market-related value of plan assets to compute
net periodic benefit cost. However, given the recent performance of its
plan assets and the equity markets in North America, the Company will,
effective for 2009, reduce the expected long-term rate of return on plan
assets from 8.00% to 7.75% to reflect management’s current view of
long-term investment returns. The Company has elected to use a
market-related value of assets, whereby realized and unrealized
gains/losses and appreciation/depreciation in the value of the investments
are recognized over a period of five years, while investment income is
recognized immediately. If the Company had elected to use the
market value of assets, which at December 31, 2008, is below the
market-related value of Plan assets by $650 million, net periodic benefit
cost would increase by approximately $49 million for 2008, assuming all
other assumptions remained constant. The Company follows a
disciplined investment strategy, which limits concentration of investments
by asset class, foreign currency, sector or company. The
Investment Committee of the Board of Directors has approved an investment
policy that establishes long-term asset mix targets based on a review of
historical returns achieved by worldwide investment markets. Investment
managers may deviate from these targets but their performance is evaluated
in relation to the market performance of the target mix. The Company does
not anticipate the long-term return on plan assets to fluctuate materially
from related capital market indices. The Investment Committee
reviews investments regularly with specific approval required for major
investments in illiquid securities. The policy also permits the
use of derivative financial instruments to implement asset mix decisions
or to hedge existing or anticipated exposures. The Plan does
not invest in the securities of the Company or its
subsidiaries. During the last 10 years ended December 31, 2008,
the Plan earned an annual average rate of return of 7.07%.
|
Rates
of return
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
Actual
|
(11.0%)
|
8.0%
|
10.7%
|
20.5%
|
11.7%
|
|
Market-related
value
|
7.8%
|
12.7%
|
11.4%
|
8.6%
|
6.3%
|
|
Expected
|
8.0%
|
8.0%
|
8.0%
|
8.0%
|
8.0%
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
The
Company’s expected long-term rate of return on plan assets reflects
management’s view of long-term investment returns and the effect of a 1%
variation in such rate of return would result in a change to the net
periodic benefit cost of approximately $70
million. Management’s assumption of the expected long-term rate
of return is subject to risks and uncertainties that could cause the
actual rate of return to differ materially from management’s
assumption. There can thus be no assurance that the plan assets
will be able to earn the expected long-term rate of return on plan
assets.
Net
periodic benefit cost (income) for pensions for 2009
In
2009, the Company expects its net periodic benefit income to decrease by
approximately $20 million. This additional expense is mainly due to an
increase in the discount rate used, from 5.53% to 7.42%, and a decrease in
the expected long-term rate of return assumption, from 8.00% to 7.75%,
which are partially offset by the impact of a year-over-year increase in
the market-related value of plan assets and the benefit resulting from the
end of the amortization period for prior service
costs.
Plan
asset allocation
Based
on the fair value of the assets held as at December 31, 2008, the Plan
assets are comprised of 41% in Canadian and foreign equities, 39% in debt
securities, 2% in real estate assets and 18% in other assets. The
long-term asset allocation percentages are not expected to differ
materially from the current composition.
A
significant portion of the plan assets is invested in publicly traded
equity securities whose return is primarily driven by stock market
performance. Debt securities also account for a significant
portion of the plan investments and provide a partial offset to the
variation in the pension benefit obligation that is driven by
changes in the discount rate. The funded status of the plan
fluctuates with market conditions and impacts funding
requirements. The Company will continue to make contributions
to the pension plans that as a minimum meet pension legislative
requirements.
Rate
of compensation increase and health care cost trend rate
The
rate of compensation increase is determined by the Company based on its
long-term plans for such increases. For 2008, a rate of compensation
increase of 3.5% was used to determine the benefit obligation and the net
periodic benefit cost.
For postretirement benefits other
than pensions, the Company reviews external data and its own historical
trends for health care costs to determine the health care cost trend
rates. For measurement purposes, the projected health care cost trend rate
for prescription drugs was assumed to be 12% in 2008, and it is assumed
that the rate will decrease gradually to 4.5% in 2028 and remain at that
level thereafter. For the year ended December 31, 2008, a
one-percentage-point change in either the rate of compensation increase or
the health care cost trend rate would not cause a material change to the
Company’s net periodic benefit cost for both pensions and other
postretirement benefits.
Funding
of pension plans
For
pension funding purposes, an actuarial valuation is required at least on a
triennial basis. The latest actuarial valuation of the CN Pension Plan was
conducted as at December 31, 2007, and indicated a funding excess. Total
contributions for all of the Company’s pension plans are expected to be
approximately $130 million in 2009 and 2010 based on the plans’ current
position. Adverse changes to the assumptions discussed herein,
particularly the discount rate and the expected long-term rate of return
on plan assets, could affect the funded status of the Company’s pension
plans and, as such, could have a significant impact on the cash funding
requirements of the pension plans.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
CN
|
BC
Rail Ltd
|
U.S.
and
|
||||||||
In
millions
|
December 31,
2008
|
Pension
Plan
|
Pension
Plan
|
other
plans
|
Total
|
|||||
Plan
assets by category
|
||||||||||
Equity
securities
|
$
|
5,311
|
$
|
189
|
$
|
78
|
$
|
5,578
|
||
Debt
securities
|
5,051
|
218
|
77
|
5,346
|
||||||
Real
estate
|
264
|
10
|
1
|
275
|
||||||
Other
|
2,314
|
84
|
14
|
2,412
|
||||||
Total
|
$
|
12,940
|
$
|
501
|
$
|
170
|
$
|
13,611
|
||
Benefit
obligation at end of year
|
$
|
11,515
|
$
|
425
|
$
|
386
|
$
|
12,326
|
||
Company
contributions in 2008
|
$
|
112
|
$
|
-
|
$
|
15
|
$
|
127
|
||
Employee
contributions in 2008
|
$
|
52
|
$
|
-
|
$
|
-
|
$
|
52
|
Additional
disclosures are provided in Note 12 – Pensions and other postretirement
benefits, to the Company’s Annual Consolidated Financial
Statements.
Income
taxes
The
Company follows the asset and liability method of accounting for income
taxes. Under the asset and liability method, the change in the net
deferred income tax asset or liability is included in the computation of
net income. Deferred income tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years
in which temporary differences are expected to be recovered or
settled. As a result, a projection of taxable income is
required for those years, as well as an assumption of the ultimate
recovery/settlement period for temporary differences. The
projection of future taxable income is based on management’s best estimate
and may vary from actual taxable income. On an annual basis,
the Company assesses its need to establish a valuation allowance for its
deferred income tax assets, and if it is deemed more likely than not that
its deferred income tax assets will not be realized based on its taxable
income projections, a valuation allowance is recorded. As at December 31,
2008, the Company expects that the large majority of its deferred income
tax assets will be recovered from
future taxable income. In addition, Canadian and U.S. tax rules
and regulations are subject to interpretation and require judgment by the
Company that may be challenged by the taxation authorities upon audit of
the filed income tax returns. In Canada, the federal income tax
returns filed for the years 2004 to 2007 and the provincial income tax
returns filed for the years 2003 to 2007 remain subject to examination by
the taxation authorities. In the U.S., the income tax returns
filed for the years 2004 to 2007 remain subject to examination by the
taxation authorities. The Company believes that its provisions
for income taxes at December 31, 2008 are adequate pertaining to any
future assessments from the taxation authorities. The Company’s
deferred income tax assets are mainly composed of temporary differences
related to accruals for workforce reductions, personal injury and other
reserves, environmental and other postretirement benefits, and losses and
tax credit carryforwards. The majority of these accruals will
be paid out over the next five years. The Company’s deferred
income tax liabilities are mainly composed of temporary differences
related to properties and the net pension asset. The reversal
of temporary differences is expected at future-enacted income tax rates
which could change due to fiscal budget changes and/or changes in income
tax laws. As a result, a change in the timing and/or the income
tax rate at which the components will reverse, could materially affect
deferred income tax expense as recorded in the Company’s results of
operations. A one-percentage-point change in the Company’s
reported effective income tax rate would have the effect of changing the
income tax expense by $25 million in
2008.
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Forward-Looking
Statements
Certain
information included in this MD&A 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, is the Company’s assumption that such
growth opportunities are less affected by the current situation in the
North American and global economies. The assumptions used by
the Company to prepare its forward looking statements, 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. Moreover, the current situation in financial
markets is adding a substantial amount of risk to the North American
economy, which is already in a recession, and to the global economy, which
is significantly slowing down.
|
Business
risks
In
the normal course of business, the Company is exposed to various business
risks and uncertainties that can have an effect on the Company’s results
of operations, financial position, or liquidity. While some exposures may
be reduced by the Company’s risk mitigation strategies, many risks are
driven by external factors beyond the Company’s control or are of a nature
which cannot be eliminated. The following is a discussion of key areas of
business risks and uncertainties.
|
Competition
The
Company faces significant competition from rail carriers and other modes
of transportation, and is also affected by its customers’ flexibility to
select among various origins and destinations, including ports, in getting
their products to market. Specifically, the Company faces
competition from Canadian Pacific Railway Company (CP), which operates the
other major rail system in Canada and services most of the same industrial
areas, commodity resources and population centers as the Company; major
U.S. railroads and other Canadian and U.S. railroads; long-distance
trucking companies, and transportation via the St. Lawrence-Great Lakes
Seaway and the Mississippi River. Competition is generally based on the
quality and the reliability of the service provided, access to markets, as
well as price. Factors affecting the competitive position of
customers, including exchange rates and energy cost, 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. Factors affecting the general
market conditions for our customers, including a prolonged downturn in the
North American and global economies, could result in an over-supply of
transportation capacity relative to demand. An extended period
of supply/demand imbalance could negatively impact market rate levels for
all transportation services, and more specifically the Company’s ability
to increase rates. This, in turn, could materially and
adversely affect the Company’s business, results of operations or
financial position.
|
|
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 above-ground 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 compliance and capital costs likely to be incurred
in the next several years, newly discovered facts, changes in law, the
possibility of future spills and releases of hazardous materials into the
environment and the Company’s ongoing efforts to identify potential
environmental liabilities that may be associated with its properties, may
result in additional environmental liabilities and related
costs.
In railroad and related
transportation operations, it is possible that derailments or other
accidents, including spills and releases of hazardous materials, 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, compliance with laws or other risks, including
costs relating to the performance of clean-ups, payment of environmental
penalties and remediation obligations, and damages relating to harm to
individuals or property.
The
environmental liability for any given contaminated site varies 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. As such, the ultimate cost of addressing known contaminated
sites cannot be definitively established. Also, additional contaminated
sites yet unknown may be discovered or future operations may result in
accidental releases.
While some exposures may be
reduced by the Company’s risk mitigation strategies (including periodic
audits, employee training programs and emergency plans and procedures),
many environmental risks are driven by external factors beyond the
Company’s control or are of a nature which cannot be completely
eliminated. Therefore, there can be no assurance, notwithstanding the
Company’s mitigation strategies, that liabilities or costs related to
environmental matters will not be incurred in the future or that
environmental matters will not have a material adverse effect on the
Company’s results of operations, financial position or liquidity, in a
particular quarter or fiscal year.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Personal
injury and other claims
The
Company becomes involved, from time to time, in various legal actions
seeking compensatory, and occasionally punitive damages, including actions
brought on behalf of various purported classes of claimants and claims
relating to personal injuries, occupational disease, and property damage,
arising out of harm to individuals or property allegedly caused by
derailments or other accidents. 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 December 31, 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 results of operations, financial position or liquidity, in a
particular quarter or fiscal year.
|
Labor
negotiations
Canadian
workforce
As
at December 31, 2008, CN employed a total of 15,667 employees in Canada,
of which 12,058 were unionized employees.
The collective agreements
for CN's Northern Quebec Territory short line, which cover
approximately 200 employees, expired on December 15, 2007. Negotiations
are ongoing to renew these collective agreements, and neither party has
requested conciliation assistance. The agreement remains in effect until
the bargaining process has been exhausted. The Teamsters Canada Rail
Conference (TCRC) was recently successful with an application to replace
the United Transportation Union (UTU) as the certified bargaining agent
for the conductors working on the Northern Quebec Territory short
line.
The collective agreement
covering approximately 100 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-Engineers, TCRC-CTY,
the Canadian Auto Workers and the TCRC-Maintenance of Way Division.
Negotiations, which commenced in June 2008, are ongoing and neither party
has requested conciliation assistance. The agreement remains in effect
until the bargaining process has been exhausted.
On November 14, 2008, the TCRC
gave the Company notice that it was reopening collective agreements
imposed by virtue of federal back-to-work legislation to resolve the
dispute between the UTU and CN in 2007. The Company's view is
that these agreements were made binding on the UTU and any other trade
union certified by the Canada Industrial Relations Board (CIRB) to
represent the employees, including the TCRC, until they expire on July 22,
2010. In January 2009, the TCRC filed a complaint with the CIRB
challenging the Company's position. The collective agreements between CN
and the TCRC, which represent approximately 1,500 locomotive engineers in
one bargaining unit, and approximately 200 rail traffic controllers (also
known as train dispatchers) in a separate bargaining unit, expired on
December 31, 2008. In January 2009, the TCRC advised the Company that it
would request a consolidation of the bargaining units for which they hold
a certificate (conductors, locomotive engineers and train dispatchers) and
that pending determination by the CIRB; were seeking to put negotiations
in abeyance. Neither party has requested conciliation assistance. Until
the parties exhaust the conciliation timelines specified in the Canada
Labour Code, no legal strike or lock out can occur.
Four collective agreements
covering approximately 75 employees represented by the TCRC and the
TCRC-Maintenance of Way Division at the recently acquired Chemin de fer de
Matapédia et Gaspé (CFMG), Ottawa Central Railway (OCR) and New Brunswick
and East Coast Railway (NBEC) are currently expired. Negotiations are
ongoing to renew these collective agreements and are at various stages.
The collective agreements remain in effect until the bargaining process
has been exhausted.
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 results of operations or
financial position.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
U.S.
workforce
As
at December 31, 2008, CN employed a total of 6,560 employees in the United
States, of which 5,527 were unionized employees.
As of February 2009, 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 results of operations or financial
position.
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Economic
regulation – U.S.
Various
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. The
STB has completed the following recent proceedings:
(i)
A review of 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,
whereby the STB directed carriers to adjust their fuel surcharge programs
on a basis more closely related to the amount of fuel consumed on
individual movements. The Company implemented a mileage-based fuel
surcharge, effective April 26, 2007, to conform to the STB’s
decision.
(ii)
A review of rate dispute resolution procedures, whereby the STB modified
its rate guidelines for handling medium-sized and smaller rate
disputes.
(iii)
A review 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.
During
2008, legislation was introduced in the U.S. House of Representatives
regarding the STB’s authority to review the environmental impacts of
“minor” rail mergers that would have applied retroactively to any
transaction that had not been approved by the STB by August 1, 2008,
including the Company’s then proposed acquisition of the
EJ&E. This legislation was considered by the full House of
Representatives but was not enacted into law.
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).
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.
No assurance can be given that
these or any future regulatory initiatives by the U.S. federal government
will not materially adversely affect the Company’s results of operations,
or its competitive and financial position.
Safety
regulation in Canada
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. The following
action has been taken by the federal government:
A
full review of the Railway Safety Act was conducted by the Railway Safety
Act Review Panel and the Panel’s report has been tabled 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.
Safety
Regulation in the United States
Rail
safety regulation in the U.S. is the responsibility of the FRA, which
administers the Federal Railroad Safety Act, as well as the rail portions
of other safety statutes. In 2008, the U.S. federal government enacted
legislation reauthorizing the Federal Railroad Safety Act. This
legislation covers a broad range of safety issues, including fatigue
management, positive train control (PTC), grade crossings, bridge safety,
and other matters. 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 Company is currently analyzing
the impact of this requirement on its network and taking steps to ensure
implementation in accordance with the new law. The legislation
also would cap the number of on-duty and limbo time hours for certain rail
employees on a monthly basis. The Company is assessing the impact of this
requirement on the Company’s hourly wage agreements in the U.S. and will
take appropriate steps to ensure that its operations conform to the new
requirements. 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. The Company is
currently evaluating the financial and operational implications of this
legislation.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
Other
risks
Economic
conditions
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,
negative changes in North American and global economic conditions,
resulting in a prolonged recession or more severe economic or industrial
restructuring that affect the producers and consumers of the commodities
carried by the Company, may have a material adverse effect on the volume
of rail shipments carried by the Company, and thus negatively affect its
results of operations, financial position, or liquidity.
Trade
restrictions
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.
Terrorism
and international conflicts
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.
Customer
credit risk
In
the normal course of business, the Company monitors the financial
condition and credit limits of its customers and reviews the credit
history of each new customer. Although the Company believes
there are no significant concentrations of credit risk, the current
economic conditions have affected the Company’s customers and have thus
resulted in an increase to the Company’s credit risk and exposure to
business failures of its customers. To manage its credit risk,
the Company’s focus is on keeping the average daily sales outstanding
within an acceptable range, and working with customers to ensure timely
payments, and in certain cases, requiring financial security through
letters of credit. A widespread deterioration of customer
credit and business failures of customers could have a material adverse
affect on the Company's results of operations or financial
position.
Pension
funding
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 calculated under guidance issued by the Canadian
Institute of Actuaries (CIA). Adverse changes with respect to
pension plan returns and the level of interest rates from the date of the
last actuarial valuation may have a material adverse effect on the
Company’s results of operations and financial position by significantly
increasing future pension contributions. The Company’s funding
requirements, as well as the impact on the results of operations, are
determined upon completion of actuarial valuations, which are generally
required by the Office of the Superintendent of Financial Institutions
(OSFI) on a triennial basis or when deemed appropriate. Based
on the last actuarial valuation of the CN Pension Plan filed by the
Company as at December 31, 2007, the Company expects to make contributions
of approximately $130 million in 2009. The OSFI may require the
Company to file an actuarial valuation as at December 31, 2008, earlier
than planned. If prepared, the actuarial valuation would
indicate a funding deficit under a solvency or wind-up scenario as
calculated under the guidance issued by the CIA. As a result,
the Company’s contributions would significantly increase. The
CIA allows for any funding deficit to be paid over a number of years and
resets the funding requirements at each valuation date. Should
the Company be required by OSFI to prepare an actuarial valuation as at
December 31, 2008, the Company expects cash from operations and its other
sources of financing to be sufficient to meet its funding
obligation.
|
|
Management's
Discussion
and Analysis U.S.
GAAP
|
|
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 December 31, 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 fourth quarter ending December 31, 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.
|
As of December 31, 2008,
management has assessed the effectiveness of the Company's internal
control over financial reporting using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control - Integrated Framework. Based on this
assessment, management has determined that the Company's internal control
over financial reporting was effective as of December 31, 2008, and issued
Management’s Report on Internal Control over Financial Reporting dated
February 5, 2009 to that effect.
|
Additional
information, including the Company’s 2008 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
February
5, 2009
|
(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(s) 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(s) 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(s) 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(s) 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: February
5, 2009
|
By:
|
/s/
Cristina Circelli
|
|||
Name:
|
Cristina
Circelli
|
||||
Title:
|
Deputy
Corporate Secretary and
General Counsel
|