Excluding gain on sale of rail line segment, adjusted Q1-2013
net income was C$519 million, or
C$1.22 per diluted share
(1)
MONTREAL,
April 22, 2013 /CNW Telbec/ - CN
(TSX: CNR) (NYSE: CNI) today reported its financial and operating
results for the first quarter ended March
31, 2013.
First-quarter 2013 highlights
- First-quarter 2013 net income was C$555
million, or C$1.30 per diluted
share, compared with net income of C$775
million, or C$1.75 per diluted
share, for first-quarter 2012. The first-quarter 2013 results
included an after-tax gain of C$36
million, or C$0.08 per diluted
share, and the first quarter of 2012 included an after-tax gain of
C$252 million, or C$0.57 per diluted share, from the sale of rail
line segments in the Toronto area
to a public transit agency.
- Q1-2013 adjusted diluted earnings per share (EPS) were
C$1.22, an increase of three per cent
over adjusted diluted EPS of C$1.18
for the same period of 2012 (excluding gains on rail line sales in
both years). (1)
- Revenues for the latest quarter increased five per cent to
C$2,466 million, while revenue
ton-miles rose three per cent and carloadings increased two per
cent.
- Operating income declined two per cent to C$780 million.
- The operating ratio was 68.4 per cent, a deterioration of 2.2
points from the year-earlier performance of 66.2 per cent.
- The Company utilized C$20 million
of free cash flow in first-quarter 2013, while it generated
C$48 million of free cash flow in the
comparable period of 2012. (1)
Claude Mongeau, president and
chief executive officer, said: "CN faced a number of operational
challenges in the first quarter, including extreme cold and heavy
snow in Western Canada, which
hampered operations, congested the network and constrained volume
growth. We've turned the corner since then, improving train
velocity and reducing freight car dwell times in yards across the
network to restore the service level expected by our customers.
"CN will emerge stronger from this first-quarter experience. To
improve network resilience, particularly given our expectation of
continued strong volume growth, CN is undertaking several capacity
enhancement projects in its Edmonton-Winnipeg corridor. These and other
productivity initiatives will increase CN's planned 2013 capital
spending to C$2 billion, an increase
of C$100 million over our original
2013 plan."
2013 financial outlook (2)
CN is maintaining the 2013 financial outlook it issued on
Jan. 22, 2013, except for its revised
plan to invest approximately C$2
billion in capital programs in 2013, compared with the
previous plan to invest C$1.9
billion. Approximately C$1.1
billion of the total expenditure will be targeted on track
infrastructure to maintain a safe and fluid railway network. In
addition, the Company will invest in projects to support a number
of productivity and growth initiatives.
Foreign currency impact on results
Although CN reports its earnings in Canadian dollars, a large
portion of its revenues and expenses is denominated in U.S.
dollars. As such, the Company's results are affected by
exchange-rate fluctuations. There was minimal impact on CN's
first-quarter 2013 net income on a constant currency basis.
(1)
First-quarter 2013 revenues, traffic volumes and
expenses
The five per cent rise in first-quarter revenues was mainly
attributable to freight rate increases and higher freight volumes,
due in part to growth in the North American and Asian economies,
partly offset by operational challenges that constrained
volumes.
Revenues increased for petroleum and chemicals (17 per cent),
intermodal (seven per cent), metals and minerals (three per cent),
forest products (two per cent), automotive (two per cent), and
grain and fertilizers (one per cent). Coal revenues declined one
per cent.
Carloads increased by two per cent while revenue ton-miles,
measuring the relative weight and distance of rail freight
transported by CN, increased three per cent over the same quarter
in 2012.
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 two per cent over the first quarter of
2012, driven by freight rate increases, partly offset by an
increase in the average length of haul.
Operating expenses increased nine per cent in the first quarter
of 2013, mainly due to higher labor and fringe benefits expense,
increased purchased services and material expense, increased fuel
costs, as well as operational challenges including harsher winter
conditions in Western Canada.
(1) |
See discussion and reconciliation of non-GAAP adjusted
performance measures in the attached supplementary schedule,
Non-GAAP Measures. |
|
(2) |
See Forward-Looking Statements for a summary of the key
assumptions and risks regarding CN's 2013 outlook. |
Forward-Looking Statements
Certain information included in this news release constitutes
"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, these forward-looking statements
involve risks, uncertainties and assumptions. The Company cautions
that its assumptions may not materialize and that current economic
conditions render such assumptions, although reasonable at the time
they were made, subject to greater uncertainty. 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. To the extent that CN has provided guidance that are
non-GAAP financial measures, the Company may not be able to provide
a reconciliation to the GAAP measures, due to unknown variables and
uncertainty related to future results. Key assumptions used in
determining forward-looking information are set forth below.
Current assumptions
CN is maintaining the 2013 financial outlook it issued on
Jan. 22, 2013, except for its revised
plan to invest approximately C$2
billion in capital programs in 2013, compared with the
previous plan to invest C$1.9
billion. Approximately C$1.1
billion of the total expenditure will be targeted on track
infrastructure to maintain a safe and fluid railway network. In
addition, the Company will invest in projects to support a number
of productivity and growth initiatives.
CN has made a number of economic and market assumptions in
preparing its 2013 outlook. The Company is forecasting that North
American industrial production for the year will increase by about
two per cent. CN also expects U.S. housing starts to be in the
range of 950,000 units and U.S. motor vehicles sales to be
approximately 15 million units. In addition, CN is assuming that
2013/2014 grain crop production in both Canada and the U.S. will be in-line with their
respective five-year averages. With respect to the 2012/2013 crop,
production in Canada was slightly
above the five-year average while production in the U.S. was below
the five-year average. With these assumptions, CN assumes carload
growth of three to four per cent, along with continued pricing
improvement above inflation. CN also assumes the Canadian-U.S.
exchange rate to be around parity for 2013 and that the price of
crude oil (West Texas Intermediate) for the year to be in the range
of US$90-$100 per barrel.
Important risk factors that could affect the
forward-looking statements include, but are not limited to, the
effects of general economic and business conditions, industry
competition, inflation, currency and interest rate fluctuations,
changes in fuel prices, legislative and/or regulatory developments,
compliance with environmental laws and regulations, actions by
regulators, various events which could disrupt operations,
including natural events such as severe weather, droughts, floods
and earthquakes, labor negotiations and disruptions, environmental
claims, uncertainties of investigations, proceedings or other types
of claims and litigation, risks and liabilities arising from
derailments, and other risks detailed from time to time in reports
filed by CN with securities regulators in Canada and the
United States. Reference should be made to "Management's
Discussion and Analysis" in CN's annual and interim reports, Annual
Information Form and Form 40-F filed with Canadian and U.S.
securities regulators, available on CN's website, for a summary of
major risk factors.
CN assumes no obligation to update or revise
forward-looking statements to reflect future events, changes in
circumstances, or changes in beliefs, unless required by applicable
Canadian securities laws. In the event CN does update any
forward-looking statement, no inference should be made that CN will
make additional updates with respect to that statement, related
matters, or any other forward-looking statement.
CN - Canadian National Railway Company and its operating railway
subsidiaries - spans 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, Ala.,
and the key metropolitan areas of Toronto, Buffalo, Chicago, Detroit, Duluth,
Minn./Superior, Wis.,
Green Bay, Wis., Minneapolis/St. Paul, Memphis, and Jackson, Miss., with connections to all points
in North America. For more
information on CN, visit the Company's website at www.cn.ca.
CANADIAN NATIONAL RAILWAY
COMPANY |
CONSOLIDATED STATEMENT OF INCOME
(U.S. GAAP) - unaudited |
(In millions, except per share
data) |
|
|
|
|
|
|
|
|
|
Three months
ended |
|
|
March 31 |
|
|
|
2013 |
|
|
2012 |
|
|
|
Revenues |
$ |
2,466 |
|
$ |
2,346 |
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
Labor and fringe benefits |
|
569 |
|
|
509 |
|
Purchased services and material |
|
328 |
|
|
299 |
|
Fuel |
|
405 |
|
|
376 |
|
Depreciation and amortization |
|
235 |
|
|
230 |
|
Equipment rents |
|
68 |
|
|
62 |
|
Casualty and other |
|
81 |
|
|
77 |
Total operating
expenses |
|
1,686 |
|
|
1,553 |
|
|
|
|
|
|
|
Operating income |
|
780 |
|
|
793 |
|
|
|
|
|
|
|
Interest expense |
|
(89) |
|
|
(86) |
|
|
|
|
|
|
|
Other income (Note
3) |
|
42 |
|
|
293 |
|
|
|
|
|
|
|
Income before income
taxes |
|
733 |
|
|
1,000 |
|
|
|
|
|
|
|
Income tax expense
(Note 7) |
|
(178) |
|
|
(225) |
Net income |
$ |
555 |
|
$ |
775 |
|
|
|
|
|
|
|
Earnings per share
(Note 10) |
|
|
|
|
|
|
Basic |
$ |
1.30 |
|
$ |
1.76 |
|
Diluted |
$ |
1.30 |
|
$ |
1.75 |
|
|
|
|
|
|
|
Weighted-average
number of shares |
|
|
|
|
|
|
Basic |
|
426.7 |
|
|
441.0 |
|
Diluted |
|
428.3 |
|
|
443.5 |
See accompanying notes to
unaudited consolidated financial statements. |
CANADIAN NATIONAL RAILWAY
COMPANY |
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME (U.S. GAAP) - unaudited |
(In millions) |
|
Three months ended
March 31 |
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
555 |
$ |
775 |
|
|
|
|
|
Other comprehensive
income |
|
|
|
|
|
Foreign exchange gain
(loss) on: |
|
|
|
|
|
|
Translation of the net investment in
foreign operations |
|
130 |
|
(117) |
|
|
Translation of US dollar-denominated
long-term debt designated as a hedge of the net investment in U.S.
subsidiaries |
|
(118) |
|
112 |
|
|
|
|
|
|
Pension and other
postretirement benefit plans (Note 6): |
|
|
|
|
|
|
Amortization of net actuarial loss
included in net periodic benefit cost (income) |
|
59 |
|
31 |
|
|
Amortization of prior service cost
included in net periodic benefit cost (income) |
|
1 |
|
2 |
Other comprehensive
income before income taxes |
|
72 |
|
28 |
Income tax expense |
|
(2) |
|
(23) |
Other comprehensive
income (Note 11) |
|
70 |
|
5 |
Comprehensive
income |
$ |
625 |
$ |
780 |
See accompanying notes to
unaudited consolidated financial statements. |
|
|
|
|
CANADIAN NATIONAL RAILWAY
COMPANY |
CONSOLIDATED BALANCE SHEET
(U.S. GAAP) - unaudited |
(In millions) |
|
|
|
|
|
|
|
|
|
|
March 31 |
|
December 31 |
|
March 31 |
|
|
2013 |
|
|
2012 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
128 |
|
$ |
155 |
|
$ |
182 |
|
Restricted cash and cash equivalents
(Note 4) |
|
512 |
|
|
521 |
|
|
499 |
|
Accounts receivable (Note
4) |
|
900 |
|
|
831 |
|
|
769 |
|
Material and supplies |
|
289 |
|
|
230 |
|
|
261 |
|
Deferred and receivable income
taxes |
|
75 |
|
|
43 |
|
|
80 |
|
Other |
|
95 |
|
|
89 |
|
|
102 |
Total current assets |
|
1,999 |
|
|
1,869 |
|
|
1,893 |
|
|
|
|
|
|
|
|
|
Properties |
|
24,733 |
|
|
24,541 |
|
|
23,681 |
Intangible and other
assets |
|
260 |
|
|
249 |
|
|
299 |
|
|
|
|
|
|
|
|
|
Total assets |
$ |
26,992 |
|
$ |
26,659 |
|
$ |
25,873 |
|
|
|
|
|
|
|
|
|
Liabilities and
shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable and other |
$ |
1,332 |
|
$ |
1,626 |
|
$ |
1,342 |
|
Current portion of long-term debt
(Note 4) |
|
1,466 |
|
|
577 |
|
|
895 |
Total current
liabilities |
|
2,798 |
|
|
2,203 |
|
|
2,237 |
|
|
|
|
|
|
|
|
|
Deferred income
taxes |
|
5,700 |
|
|
5,555 |
|
|
5,494 |
Pension and other
postretirement benefits, net of current portion |
|
659 |
|
|
784 |
|
|
569 |
Other liabilities and
deferred credits |
|
778 |
|
|
776 |
|
|
683 |
Long-term debt |
|
5,945 |
|
|
6,323 |
|
|
5,892 |
|
|
|
|
|
|
|
|
|
Shareholders'
equity: |
|
|
|
|
|
|
|
|
|
Common shares |
|
4,088 |
|
|
4,108 |
|
|
4,153 |
|
Accumulated other comprehensive loss
(Note 11) |
|
(3,187) |
|
|
(3,257) |
|
|
(2,834) |
|
Retained earnings |
|
10,211 |
|
|
10,167 |
|
|
9,679 |
|
|
|
|
|
|
|
|
|
Total shareholders'
equity |
|
11,112 |
|
|
11,018 |
|
|
10,998 |
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders' equity |
$ |
26,992 |
|
$ |
26,659 |
|
$ |
25,873 |
See accompanying notes to
unaudited consolidated financial statements. |
|
|
|
CANADIAN NATIONAL RAILWAY
COMPANY |
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (U.S. GAAP) -
unaudited |
(In millions) |
|
|
|
|
|
|
|
Three months
ended |
|
March 31 |
|
|
2013 |
|
|
2012 |
|
|
|
Common shares
(1) |
|
|
|
|
|
Balance, beginning of period |
$ |
4,108 |
|
$ |
4,141 |
|
Stock options exercised and other |
|
17 |
|
|
56 |
|
Share repurchase programs (Note 4) |
|
(37) |
|
|
(44) |
Balance, end of period |
$ |
4,088 |
|
$ |
4,153 |
|
|
|
|
|
|
Accumulated other comprehensive
loss |
|
|
|
|
|
Balance, beginning of period |
$ |
(3,257) |
|
$ |
(2,839) |
|
Other comprehensive income |
|
70 |
|
|
5 |
Balance, end of period |
$ |
(3,187) |
|
$ |
(2,834) |
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
Balance, beginning of period |
$ |
10,167 |
|
$ |
9,378 |
|
Net income |
|
555 |
|
|
775 |
|
Share repurchase programs (Note 4) |
|
(328) |
|
|
(309) |
|
Dividends |
|
(183) |
|
|
(165) |
Balance, end of period |
$ |
10,211 |
|
$ |
9,679 |
See accompanying notes
to unaudited consolidated financial statements.
|
(1) |
During the three months ended
March 31, 2013, the Company issued 0.4 million common shares as a
result of stock options exercised and repurchased 3.9 million
common shares under its current share repurchase program. At March
31, 2013, the Company had 424.9 million common shares
outstanding. |
CANADIAN NATIONAL
RAILWAY COMPANY |
CONSOLIDATED STATEMENT
OF CASH FLOWS (U.S. GAAP) - unaudited |
(In millions) |
|
Three months
ended |
|
March 31 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
Operating
activities |
|
|
|
|
|
Net income |
$ |
555 |
|
$ |
775 |
Adjustments to reconcile
net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
235 |
|
|
230 |
|
Deferred income taxes |
|
83 |
|
|
194 |
|
Gain on disposal of property (Note
3) |
|
(40) |
|
|
(281) |
Changes in operating
assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
(59) |
|
|
44 |
|
Material and supplies |
|
(57) |
|
|
(61) |
|
Accounts payable and other |
|
(321) |
|
|
(200) |
|
Other current assets |
|
(3) |
|
|
(30) |
Pensions and other,
net |
|
(72) |
|
|
(546) |
Net cash provided by
operating activities |
|
321 |
|
|
125 |
|
|
|
|
|
|
Investing
activities |
|
|
|
|
|
Property additions |
|
(228) |
|
|
(224) |
Disposal of property
(Note 3) |
|
52 |
|
|
311 |
Change in restricted cash
and cash equivalents |
|
9 |
|
|
- |
Other, net |
|
6 |
|
|
2 |
Net cash provided by
(used in) investing activities |
|
(161) |
|
|
89 |
|
|
|
|
|
|
Financing
activities |
|
|
|
|
|
Issuance of debt (Note
4) |
|
1,260 |
|
|
1,077 |
Repayment of debt |
|
(929) |
|
|
(745) |
Issuance of common shares
due to exercise of stock options and related excess tax benefits
realized |
|
14 |
|
|
54 |
Repurchase of common
shares (Note 4) |
|
(361) |
|
|
(353) |
Dividends paid |
|
(183) |
|
|
(165) |
Net cash used in
financing activities |
|
(199) |
|
|
(132) |
Effect of foreign
exchange fluctuations on US dollar-denominated cash and cash
equivalents |
|
12 |
|
|
(1) |
Net increase
(decrease) in cash and cash equivalents |
|
(27) |
|
|
81 |
Cash and cash
equivalents, beginning of period |
|
155 |
|
|
101 |
Cash and cash
equivalents, end of period |
$ |
128 |
|
$ |
182 |
|
|
|
|
|
|
Supplemental cash flow
information |
|
|
|
|
|
Net cash receipts from
customers and other |
$ |
2,509 |
|
$ |
2,379 |
Net cash payments
for: |
|
|
|
|
|
|
Employee services, suppliers and
other expenses |
|
(1,672) |
|
|
(1,534) |
|
Interest |
|
(90) |
|
|
(110) |
|
Personal injury and other claims |
|
(14) |
|
|
(30) |
|
Pensions (Note 6) |
|
(101) |
|
|
(553) |
|
Income taxes |
|
(311) |
|
|
(27) |
Net cash provided by
operating activities |
$ |
321 |
|
$ |
125 |
See accompanying notes to
unaudited consolidated financial statements. |
CANADIAN NATIONAL RAILWAY
COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. GAAP)
|
Note 1 - Basis of presentation
In management's opinion, the accompanying
unaudited Interim Consolidated Financial Statements and Notes
thereto, expressed in Canadian dollars, and prepared in accordance
with U.S. generally accepted accounting principles (U.S. GAAP) for
interim financial statements, contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly Canadian
National Railway Company's (the Company) financial position as at
March 31, 2013, December 31, 2012 and March 31, 2012, and its results of operations,
changes in shareholders' equity and cash flows for the three months
ended March 31, 2013 and 2012.
These unaudited Interim Consolidated Financial
Statements and Notes thereto have been prepared using accounting
policies consistent with those used in preparing the Company's 2012
Annual Consolidated Financial Statements. While management believes
that the disclosures presented are adequate to make the information
not misleading, these unaudited Interim Consolidated Financial
Statements and Notes thereto should be read in conjunction with the
Company's Interim Management's Discussion and Analysis (MD&A)
and the 2012 Annual Consolidated Financial Statements and Notes
thereto.
Note 2 - Accounting change
In February 2013,
the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income. ASU
2013-02 added new disclosure requirements to Accounting Standards
Codification (ASC) 220, Comprehensive Income, for items
reclassified out of accumulated other comprehensive income (AOCI)
effective for reporting periods beginning after December 15, 2012. It requires entities to
disclose additional information about amounts reclassified out of
AOCI by component including changes in AOCI balances and
significant items reclassified out of AOCI by the respective line
items of net income. The Company has adopted ASU 2013-02 for the
reporting period beginning January 1,
2013 and the prescribed disclosures are presented in Note 11
- Accumulated other comprehensive income (loss).
Note 3 - Disposal of property
2013 - Disposal of Lakeshore West
On March 19, 2013, the Company
entered into an agreement with Metrolinx to sell a segment of the
Oakville subdivision in
Oakville and Burlington, Ontario, together with the rail
fixtures and certain passenger agreements (collectively the
"Lakeshore West"), for cash proceeds of $52
million before transaction costs. Under the agreement, the
Company obtained the perpetual right to operate freight trains over
the Lakeshore West at its then current level of operating activity,
with the possibility of increasing its operating activity for
additional consideration. The transaction resulted in a gain on
disposal of $40 million ($36 million after-tax) that was recorded in Other
income under the full accrual method of accounting for real estate
transactions.
2012 - Disposal of Bala-Oakville
On March 23, 2012, the Company
entered into an agreement with Metrolinx to sell a segment of the
Bala and a segment of the
Oakville subdivisions in
Toronto, Ontario, together with
the rail fixtures and certain passenger agreements (collectively
the "Bala-Oakville"), for cash proceeds of $311 million before transaction costs. Under the
agreement, the Company obtained the perpetual right to operate
freight trains over the Bala-Oakville
at its then current level of operating activity, with the
possibility of increasing its operating activity for additional
consideration. The transaction resulted in a gain on disposal of
$281 million ($252 million after-tax) that was recorded in
Other income under the full accrual method of accounting for real
estate transactions.
Note 4 - Financing activities
Revolving credit facility
The Company has an $800 million
revolving credit facility agreement with a consortium of lenders.
The agreement, which contains customary terms and conditions,
allows for an increase in the facility amount, up to a maximum of
$1,300 million, as well as the option
to extend the term by an additional year at each anniversary date,
subject to the consent of individual lenders. The Company exercised
such option and on March 22, 2013,
the expiry date of the agreement was extended by one year to
May 5, 2018. The Company plans to use
the credit facility for working capital and general corporate
purposes, including backstopping its commercial paper program. As
at March 31, 2013, the Company had no
outstanding borrowings under its revolving credit facility (nil as
at December 31, 2012).
Commercial paper
The Company has a commercial paper program, which is backed by its
revolving credit facility, enabling it to issue commercial paper up
to a maximum aggregate principal amount of $800 million, or the US dollar equivalent. As at
March 31, 2013, the Company had total
borrowings of $567 million, of which
$486 million was denominated in
Canadian dollars and $81 million was
denominated in US dollars (US$80
million) presented in Current portion of long-term debt on
the Consolidated Balance Sheet (nil as at December 31, 2012). The weighted-average interest
rate on these borrowings was 1.01%.
Accounts receivable securitization
program
On December 20, 2012, the Company
entered into a three-year agreement, commencing on February 1, 2013, to sell an undivided
co-ownership interest in a revolving pool of accounts receivables
to unrelated trusts for maximum cash proceeds of $450 million. The trusts are multi-seller trusts
and the Company is not the primary beneficiary. Funding for the
acquisition of these assets is customarily through the issuance of
asset-backed commercial paper notes by the unrelated trusts.
The Company has retained the responsibility for
servicing, administering and collecting the receivables sold. The
average servicing period is approximately one month. Subject to
customary indemnifications, each trust's recourse is limited to the
accounts receivables transferred.
The Company is subject to customary reporting
requirements for which failure to perform could result in
termination of the program. In addition, the program is subject to
customary credit rating requirements, which if not met, could also
result in termination of the program. The Company monitors the
reporting requirements and is currently not aware of any trends,
events or conditions that could cause such termination.
The accounts receivable securitization program
provides the Company with readily available short-term financing
for general corporate use. 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.
The Company accounts for its accounts receivable
securitization program under ASC 860, Transfers and
Servicing. Based on the structure of the program, the Company
accounts for the proceeds from the program as a secured borrowing.
As such, as at March 31, 2013, the
Company recorded $420 million of
proceeds received under the accounts receivable securitization
program in the Current portion of long-term debt on the
Consolidated Balance Sheet at a weighted-average interest rate of
1.16% which is secured by and limited to $488 million of accounts receivable.
Bilateral letter of credit facilities and
Restricted cash and cash equivalents
The Company has a series of bilateral letter of credit facility
agreements with various banks to support its requirements to post
letters of credit in the ordinary course of business. On
March 22, 2013, the expiry date of
these agreements was extended by one year to April 28, 2016. Under these agreements, the
Company has the option from time to time to pledge collateral in
the form of cash or cash equivalents, for a minimum term of one
month, equal to at least the face value of the letters of credit
issued. As at March 31, 2013, the
Company had letters of credit drawn of $542
million ($551 million as at
December 31, 2012) from a total
committed amount of $559 million
($562 million as at December 31, 2012) by the various banks. As at
March 31, 2013, cash and cash
equivalents of $512 million
($521 million as at December 31, 2012) were pledged as collateral and
recorded as Restricted cash and cash equivalents on the
Consolidated Balance Sheet.
Share repurchase programs
On October 22, 2012, the Board of
Directors of the Company approved a share repurchase program which
allows for the repurchase of up to $1.4
billion in common shares, not to exceed 18.0 million common
shares, between October 29, 2012 and
October 28, 2013 pursuant to a normal
course issuer bid at prevailing market prices plus brokerage fees,
or such other prices as may be permitted by the Toronto Stock
Exchange.
The following table provides the activity under such share
repurchase program as well as the share repurchase programs of the
prior year:
|
|
|
|
|
|
|
Three months ended March 31 |
In millions, except
per share data |
2013 |
|
2012 |
Number of
common shares repurchased (1) |
|
3.9 |
|
|
4.7 |
Weighted-average price per share (2) |
$ |
94.06 |
|
$ |
75.09 |
Amount of repurchase |
$ |
365 |
|
$ |
353 |
(1) |
Includes common shares
purchased in the first quarters of 2013 and 2012 pursuant to
private agreements between the Company and arm's length third-party
sellers. |
(2) |
Includes brokerage
fees. |
Note 5 - 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 10 - Stock plans to the Company's 2012
Annual Consolidated Financial Statements. The following table
provides total stock-based compensation expense for awards under
all plans, as well as the related tax benefit recognized in income,
for the three months ended March 31,
2013 and 2012.
|
|
|
Three months ended March 31 |
In millions |
|
2013 |
|
2012 |
|
|
|
|
|
Cash settled
awards |
|
|
|
|
Restricted share unit
plan (1) |
$ |
10 |
$ |
9 |
Voluntary Incentive
Deferral Plan (VIDP) |
|
14 |
|
1 |
|
|
24 |
|
10 |
Stock option
awards |
|
2 |
|
2 |
|
|
|
|
|
Total stock-based
compensation expense |
$ |
26 |
$ |
12 |
|
|
|
|
|
Tax benefit recognized
in income |
$ |
6 |
$ |
1 |
(1) |
2013 includes the
reversal of approximately $20 million of stock-based compensation
expense related to the forfeiture of restricted share units by
former executives. |
Cash settled awards
Following approval by the Board of Directors in January 2013, the Company granted 0.4 million
restricted share units (RSUs) to designated management employees
entitling them to receive payout in cash based on the Company's
share price. The RSUs granted are generally scheduled for payout
after three years ("plan period") and vest conditionally upon the
attainment of a target relating to return on invested capital over
the plan period.
Payout is conditional upon the attainment of a
minimum share price calculated using the average of the last three
months of the plan period. In addition, commencing at various
dates, for senior and executive management employees ("executive
employees"), payout is conditional on compliance with the
conditions of their benefit plans, award or employment agreements,
including but not limited to non-compete, non-solicitation, and
non-disclosure of confidential information conditions. Current or
former executive employees who breach such conditions of their
benefit plans, award or employment agreements will forfeit the RSU
payout. Should the Company reasonably determine that a current or
former executive employee may have violated the conditions of their
benefit plans, award or employment agreement, the Company may at
its discretion change the manner of vesting of the RSUs to suspend
payout on any RSUs pending resolution of such matter.
As at March 31,
2013, 0.1 million RSUs remained authorized for future
issuance under this plan.
In February 2012,
the Company's Board of Directors unanimously voted to forfeit and
cancel the RSU payout of approximately $18
million otherwise due in February
2012 to its former Chief Executive Officer (CEO) after
determining that the former CEO was likely in breach of his
non-compete and non-disclosure of confidential information
conditions contained in the former CEO's employment agreement. On
February 4, 2013, the Company's
Executive Vice-President and Chief Operating Officer (COO) resigned
to join the Company's major competitor in Canada. As a result of the COO's resignation,
compensation amounts subject to non-compete, non-solicitation and
other applicable terms of his long-term incentive award agreements
and related plans, and certain amounts accumulated under
non-registered pension plans and arrangements were forfeited. In
February 2013, the Company entered
into confidential agreements to settle these matters. As a result,
in the quarter ended March 31, 2013,
the stock-based compensation liability was reduced by approximately
$20 million.
The following table provides the 2013 activity
for all cash settled awards:
|
|
RSUs |
|
VIDP |
In millions |
Nonvested |
Vested |
|
Nonvested |
Vested |
Outstanding at December
31, 2012 |
0.9 |
0.7 |
(1) |
- |
1.4 |
Granted (Payout) |
0.4 |
(0.5) |
|
- |
(0.2) |
Forfeited/Settled |
(0.1) |
(0.2) |
(1) |
- |
- |
Outstanding at March
31, 2013 |
1.2 |
- |
|
- |
1.2 |
(1) |
The balance
outstanding at December 31, 2012 included the units of the RSU
payout that were in dispute that were settled in the first quarter
of 2013.
|
The following table provides valuation and expense information
for all cash settled awards:
In millions, unless otherwise
indicated |
RSUs
(1) |
|
VIDP
(2) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of
grant |
2013 |
2012 |
2011 |
2010 |
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
recognized over requisite service period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2013
(3) |
$ |
4 |
$ |
11 |
$ |
8 |
$ |
(4) |
$ |
(9) |
|
$ |
14 |
|
|
$ |
24 |
Three months ended March 31,
2012 |
|
N/A |
$ |
2 |
$ |
3 |
$ |
4 |
$ |
- |
|
$ |
1 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013 |
$ |
4 |
$ |
35 |
$ |
53 |
$ |
- |
$ |
- |
|
$ |
143 |
|
|
$ |
235 |
December 31, 2012 |
|
N/A |
$ |
24 |
$ |
45 |
$ |
70 |
$ |
18 |
|
$ |
134 |
|
|
$ |
291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013 ($) |
$ |
67.85 |
$ |
90.81 |
$ |
100.80 |
|
N/A |
|
N/A |
|
$ |
102.10 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of awards vested during
the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
2013 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
|
N/A |
|
$ |
1 |
|
|
$ |
1 |
Three months ended March 31,
2012 |
|
N/A |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
|
$ |
1 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at March 31,
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation cost |
$ |
21 |
$ |
23 |
$ |
11 |
$ |
- |
|
N/A |
|
$ |
2 |
|
|
$ |
57 |
Remaining recognition period
(years) |
|
2.8 |
|
1.8 |
|
0.8 |
|
N/A |
|
N/A |
|
|
N/A |
(4) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price ($) |
$ |
102.10 |
$ |
102.10 |
$ |
102.10 |
|
N/A |
|
N/A |
|
$ |
102.10 |
|
|
|
N/A |
Expected stock price volatility
(6) |
|
16% |
|
16% |
|
14% |
|
N/A |
|
N/A |
|
|
N/A |
|
|
|
N/A |
Expected term (years)
(7) |
|
2.8 |
|
1.8 |
|
0.8 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
|
N/A |
Risk-free interest rate
(8) |
|
1.08% |
|
1.01% |
|
1.02% |
|
N/A |
|
N/A |
|
|
N/A |
|
|
|
N/A |
Dividend rate ($)
(9) |
$ |
1.72 |
$ |
1.72 |
$ |
1.72 |
|
N/A |
|
N/A |
|
|
N/A |
|
|
|
N/A |
(1) |
Compensation cost is based on the
fair value of the awards at period-end using the lattice-based
valuation model that uses the assumptions as presented
herein. |
(2) |
Compensation cost is based on
intrinsic value. |
(3) |
Includes the reversal of
stock-based compensation expense related to the forfeiture of
restricted share units by former executives. |
(4) |
The remaining recognition period
has not been quantified as it relates solely to the 25% Company
grant and the dividends earned thereon, representing a minimal
number of units. |
(5) |
Assumptions used to determine fair
value are at March 31, 2013. |
(6) |
Based on the historical volatility
of the Company's stock over a period commensurate with the expected
term of the award. |
(7) |
Represents the remaining period of
time that awards are expected to be outstanding. |
(8) |
Based on the implied yield
available on zero-coupon government issues with an equivalent term
commensurate with the expected term of the awards. |
(9) |
Based on the annualized dividend
rate. |
Stock option awards
Following approval by the Board of Directors in January 2013, the Company granted 0.5 million
conventional stock options to designated senior management
employees. The stock option plan allows eligible employees to
acquire common shares of the Company upon vesting at a price equal
to the market value of the common shares at the date of grant. The
options are exercisable during a period not exceeding 10 years. The
right to exercise options generally accrues over a period of four
years of continuous employment. Options are not generally
exercisable during the first 12 months after the date of grant. At
March 31, 2013, 10.1 million common
shares remained authorized for future issuances under this plan.
The total number of options outstanding at March 31, 2013 was 4.2 million.
The following table provides the activity of
stock option awards during 2013, and for options outstanding and
exercisable at March 31, 2013, the
weighted-average exercise price and the weighted-average years to
expiration. The table also provides the aggregate intrinsic value
for in-the-money stock options, which represents the value that
would have been received by option holders had they exercised their
options on March 31, 2013 at the
Company's closing stock price of $102.10.
|
|
|
Options
outstanding |
|
Number
of options |
Weighted-average
exercise price |
|
Weighted-average
years to expiration |
Aggregate
intrinsic value |
|
In millions |
|
|
|
|
|
In millions |
Outstanding at December
31, 2012 (1) |
4.3 |
$ |
52.09 |
|
|
|
|
Granted |
0.5 |
$ |
94.91 |
|
|
|
|
Forfeited/Cancelled |
(0.2) |
$ |
68.41 |
|
|
|
|
Exercised |
(0.4) |
$ |
33.39 |
|
|
|
|
Outstanding at March
31, 2013 (1) |
4.2 |
$ |
59.13 |
|
6.3 |
$ |
180 |
Exercisable at March
31, 2013 (1) |
2.8 |
$ |
49.32 |
|
5.1 |
$ |
148 |
(1) |
Stock options with a
US dollar exercise price have been translated to Canadian dollars
using the foreign exchange rate in effect at the balance sheet
date.
|
The following table provides valuation and expense information
for all stock option awards:
In millions, unless otherwise
indicated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of grant |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense recognized over
requisite service period (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
2013 |
|
$ |
1 |
|
$ |
1 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
2 |
Three months ended March 31,
2012 |
|
|
N/A |
|
$ |
1 |
|
$ |
1 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At grant date ($) |
|
$ |
17.03 |
|
$ |
15.49 |
|
$ |
15.66 |
|
$ |
13.09 |
|
$ |
12.60 |
|
$ |
12.44 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of awards vested during
the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
2013 |
|
$ |
- |
|
$ |
2 |
|
$ |
3 |
|
$ |
2 |
|
$ |
3 |
|
$ |
- |
|
$ |
10 |
Three months ended March 31,
2012 |
|
|
N/A |
|
$ |
- |
|
$ |
2 |
|
$ |
2 |
|
$ |
4 |
|
$ |
3 |
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at March 31,
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation cost |
|
$ |
7 |
|
$ |
3 |
|
$ |
2 |
|
$ |
1 |
|
$ |
- |
|
$ |
- |
|
$ |
13 |
Remaining recognition period
(years) |
|
|
3.8 |
|
|
2.8 |
|
|
1.8 |
|
|
0.8 |
|
|
- |
|
|
- |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant price ($) |
|
$ |
94.91 |
|
$ |
76.70 |
|
$ |
68.94 |
|
$ |
54.76 |
|
$ |
42.14 |
|
$ |
48.51 |
|
|
N/A |
Expected stock price volatility
(2) |
|
|
23% |
|
|
26% |
|
|
26% |
|
|
28% |
|
|
39% |
|
|
27% |
|
|
N/A |
Expected term (years)
(3) |
|
|
5.4 |
|
|
5.4 |
|
|
5.3 |
|
|
5.4 |
|
|
5.3 |
|
|
5.3 |
|
|
N/A |
Risk-free interest rate
(4) |
|
|
1.41% |
|
|
1.33% |
|
|
2.53% |
|
|
2.45% |
|
|
1.97% |
|
|
3.58% |
|
|
N/A |
Dividend rate ($)
(5) |
|
$ |
1.72 |
|
$ |
1.50 |
|
$ |
1.30 |
|
$ |
1.08 |
|
$ |
1.01 |
|
$ |
0.92 |
|
|
N/A |
(1) |
Compensation cost is based on the
grant date fair value using the Black-Scholes option-pricing model
that uses the assumptions at the grant date. |
(2) |
Based on the average of the
historical volatility of the Company's stock over a period
commensurate with the expected term of the award and the implied
volatility from traded options on the Company's stock. |
(3) |
Represents the period of time that
awards are expected to be outstanding. The Company uses historical
data to estimate option exercise and employee termination, and
groups of employees that have similar historical exercise behavior
are considered separately. |
(4) |
Based on the implied yield
available on zero-coupon government issues with an equivalent term
commensurate with the expected term of the awards. |
(5) |
Based on the annualized dividend
rate. |
Note 6 - Pensions and other postretirement
benefits
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. Senior and executive
management ("executive employees") subject to certain minimum
service and age requirements, are also eligible for an additional
retirement benefit under their Special Retirement Stipend
Agreements (SRS), the Supplemental Executive Retirement Plan (SERP)
or the Defined Contribution Supplemental Executive Retirement Plan
(DC SERP). Executive employees who breach the non-compete,
non-solicitation and non-disclosure of confidential information
conditions of the SRS, SERP or DC SERP plans or other employment
agreement will forfeit the retirement benefit under these plans.
Should the Company reasonably determine that a current or former
executive employee may have violated the conditions of their SRS,
SERP, or DC SERP plan or other employment agreement, the Company
may at its discretion withhold or suspend payout of the retirement
benefit pending resolution of such matter.
On February 4,
2013, the Company's COO resigned to join the Company's major
competitor in Canada. As a result,
compensation amounts accumulated under non-registered pension plans
subject to non-compete and non-solicitation agreements were
forfeited. The Company will record an actuarial gain related to the
amounts forfeited upon the completion of its next actuarial
valuation for accounting purposes, as at December 31, 2013.
For the three months ended March 31,
2013 and 2012, the components of net periodic benefit cost
(income) for pensions and other postretirement benefits were as
follows:
(a) Components of
net periodic benefit cost (income) for pensions |
|
|
|
|
|
|
Three months ended March 31 |
In millions |
|
2013 |
|
2012 |
Service cost |
$ |
41 |
$ |
36 |
Interest cost |
|
164 |
|
184 |
Settlement gain |
|
(1) |
|
- |
Expected return on plan assets |
|
(239) |
|
(248) |
Amortization of prior service
cost |
|
1 |
|
1 |
Amortization of net actuarial
loss |
|
59 |
|
31 |
Net periodic benefit cost |
$ |
25 |
$ |
4 |
|
|
|
|
|
(b) Components of
net periodic benefit cost for other postretirement
benefits |
|
|
|
|
|
|
Three months ended March 31 |
In millions |
|
2013 |
|
2012 |
Service cost |
$ |
1 |
$ |
1 |
Interest cost |
|
2 |
|
3 |
Amortization of prior service
cost |
|
- |
|
1 |
Net periodic benefit cost |
$ |
3 |
$ |
5 |
Company contributions to its various pension
plans are made in accordance with the applicable legislation in
Canada and the United States (U.S.) and are determined by
actuarial valuations. Actuarial valuations are required on an
annual basis both in Canada and
the U.S. The next actuarial valuation for funding purposes for the
Company's Canadian pension plans, based on a valuation date of
December 31, 2012, will be performed
and filed by June 2013 and is
expected to identify a going-concern surplus of approximately
$1.4 billion and a solvency deficit
of approximately $2.0 billion
calculated using the three-year average of the Company's
hypothetical windup ratio in accordance with the Pension Benefit
Standards Regulations, 1985. Under Canadian legislation, the
solvency deficit is required to be funded through special solvency
payments, for which each annual amount is equal to one fifth of the
solvency deficit, and is re-established at each valuation date.
Pension contributions made in the first three
months of 2013 and 2012 of $101
million and $553 million,
respectively, mainly represent contributions to the Company's main
pension plan, the CN Pension Plan. These contributions are for the
current service cost as determined under the Company's current
actuarial valuations. During the first three months of 2012, the
Company made voluntary contributions of $450
million. Voluntary contributions can be treated as a
prepayment against the Company's required special solvency payments
and as at March 31, 2013, the Company
had approximately $680 million of
accumulated prepayments which remain available to offset future
required solvency deficit payments. In April
2013, the Company made a voluntary contribution of
$100 million to the CN Pension Plan,
increasing the year-to-date pension contributions to $201 million and its accumulated prepayments to
approximately $780 million. The
Company expects to make total contributions in 2013 of
approximately $235 million for all
the Company's pension plans and to apply approximately $310 million from its accumulated prepayments to
satisfy the remainder of its estimated 2013 required solvency
deficit payment.
Additional information relating to the pension
plans is provided in Note 11 - Pensions and other postretirement
benefits to the Company's 2012 Annual Consolidated Financial
Statements.
Note 7 - Income taxes
The Company recorded income tax expense of
$178 million for the three months
ended March 31, 2013, compared to
$225 million for the same period in
2012. Included in the 2013 figures was an income tax recovery of
$16 million resulting from a revision
of the apportionment of U.S. state taxes.
Note 8 - Major commitments and
contingencies
A. Commitments
As at March 31, 2013, 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 $648 million
($735 million as at December 31, 2012). The Company also has
remaining estimated commitments in relation to the acquisition of
the principal lines of the former Elgin, Joliet
and Eastern Railway Company of approximately $100 million (US$100
million) to be spent over the next few years for railroad
infrastructure improvements, grade separation projects, as well as
commitments under a series of agreements with individual
communities and a comprehensive voluntary mitigation program
established to address surrounding municipalities' concerns. The
commitment for the grade separation projects is based on estimated
costs provided by the Surface Transportation Board (STB) at the
time of acquisition and could be subject to adjustment. In
addition, remaining implementation costs associated with the U.S.
federal government legislative requirement to implement positive
train control (PTC) by 2015 are estimated to be approximately
$180 million (US$180 million). The Company also has agreements
with fuel suppliers to purchase approximately 95% of its estimated
2013 volume, 77% of its anticipated 2014 volume, 60% of its
anticipated 2015 volume, 60% of its anticipated 2016 volume and 24%
of its anticipated 2017 volume at market prices prevailing on the
date of the purchase.
B. Contingencies
In the normal course of business, the Company becomes involved 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 employee and
third-party personal injuries, occupational disease and property
damage, arising out of harm to individuals or property allegedly
caused by, but not limited to, derailments or other accidents.
Canada
Employee injuries are governed by the workers' compensation
legislation in each province whereby employees may be awarded
either a lump sum or a future stream of payments depending on the
nature and severity of the injury. As such, the provision for
employee injury claims is discounted. In the provinces where the
Company is self-insured, costs related to employee work-related
injuries are accounted for based on actuarially developed estimates
of the ultimate cost associated with such injuries, including
compensation, health care and third-party administration costs. A
comprehensive actuarial study is generally performed at least on a
triennial basis. For all other legal actions, the Company
maintains, and regularly updates on a case-by-case basis,
provisions for such items when the expected loss is both probable
and can be reasonably estimated based on currently available
information.
United
States
Personal injury claims by the Company's employees, including claims
alleging occupational disease and work-related injuries, are
subject to the provisions of the Federal Employers' Liability Act
(FELA). Employees are compensated under FELA for damages assessed
based on a finding of fault through the U.S. jury system or through
individual settlements. As such, the provision is undiscounted.
With limited exceptions where claims are evaluated on a
case-by-case basis, the Company follows an actuarial-based approach
and accrues the expected cost for personal injury, including
asserted and unasserted occupational disease claims, and property
damage claims, based on actuarial estimates of their ultimate cost.
A comprehensive actuarial study is performed annually.
For employee work-related injuries, including
asserted occupational disease claims, and third-party claims,
including grade crossing, trespasser and property damage claims,
the actuarial valuation considers, among other factors, the
Company's historical patterns of claims filings and payments. For
unasserted occupational disease claims, the actuarial study
includes the projection of the Company's experience into the future
considering the potentially exposed population. The Company adjusts
its liability based upon management's assessment and the results of
the study. On an ongoing basis, management reviews and compares the
assumptions inherent in the latest actuarial study with the current
claim experience and, if required, adjustments to the liability are
recorded.
As at March 31,
2013, the Company had aggregate reserves for personal injury
and other claims of $317 million, of
which $46 million was recorded as a
current liability ($314 million as at
December 31, 2012, of which
$82 million was recorded as a current
liability).
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
March 31, 2013, or with respect to
future claims, cannot be reasonably determined. When establishing
provisions for contingent liabilities the Company considers, where
a probable loss estimate cannot be made with reasonable certainty,
a range of potential probable losses for each such matter, and
records the amount it considers the most reasonable estimate within
the range. However, when no amount within the range is a better
estimate than any other amount, the minimum amount in the range is
accrued. For matters where a loss is reasonably possible but not
probable, a range of potential losses cannot be estimated due to
various factors which may include the limited availability of
facts, the lack of demand for specific damages and the fact that
proceedings were at an early stage. Based on information currently
available, the Company believes that the eventual outcome of the
actions against the Company will not, individually or in the
aggregate, have a material adverse effect on the Company's
consolidated financial position. However, due to the inherent
inability to predict with certainty unforeseeable future
developments, there can be no assurance that the ultimate
resolution of these actions 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.
C. Environmental matters
The Company's operations are subject to numerous federal,
provincial, state, municipal and local environmental laws and
regulations in Canada and the U.S.
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 300 sites at which it is
or may be liable for remediation costs, in some cases along with
other potentially responsible parties, associated with alleged
contamination and is subject to environmental clean-up and
enforcement actions, including those imposed by the United States
Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), also known as the Superfund law, or
analogous state laws. CERCLA and similar state laws, in addition to
other similar Canadian and U.S. laws, generally impose joint and
several liability for clean-up and enforcement costs on current and
former owners and operators of a site, as well as those whose waste
is disposed of at the site, without regard to fault or the legality
of the original conduct. The Company has been notified that it is a
potentially responsible party for study and clean-up costs at
approximately 10 sites governed by the Superfund law (and analogous
state laws) for which investigation and remediation payments are or
will be made or are yet to be determined and, in many instances, is
one of several potentially responsible parties.
The ultimate cost of addressing these known
contaminated sites cannot be definitely established given that the
estimated environmental liability for any given site may vary
depending on the nature and extent of the contamination; the nature
of anticipated response actions, taking into account the available
clean-up techniques; evolving regulatory standards governing
environmental liability; and the number of potentially responsible
parties and their financial viability. As a result, liabilities are
recorded based on the results of a four-phase assessment conducted
on a site-by-site basis. A liability is initially recorded when
environmental assessments occur, 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. The Company estimates the
costs related to a particular site using cost scenarios established
by external consultants based on the extent of contamination and
expected costs for remedial efforts. In the case of multiple
parties, the Company accrues its allocable share of liability
taking into account the Company's alleged responsibility, the
number of potentially responsible parties and their ability to pay
their respective share of the liability. Adjustments to initial
estimates are recorded as additional information becomes
available.
The Company's provision for specific
environmental sites is undiscounted and includes costs for
remediation and restoration of sites, as well as 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. Recoveries of environmental remediation costs from other
parties are recorded as assets when their receipt is deemed
probable.
As at March 31,
2013, the Company had aggregate accruals for environmental
costs of $118 million, of which
$32 million was recorded as a current
liability ($123 million as at
December 31, 2012, of which
$31 million was recorded as a current
liability). The Company anticipates that the majority of the
liability at March 31, 2013 will be
paid out over the next five years. However, some costs may be paid
out over a longer period. The Company expects to partly recover
certain accrued remediation costs associated with alleged
contamination and has recorded a receivable in Intangible and other
assets for such recoverable amounts. 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, the discovery of new facts, future
changes in laws, the possibility of 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; and |
(iv) |
the determination of the Company's
liability in proportion to other potentially responsible parties
and the ability to recover costs from any third parties with
respect to particular sites. |
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 position or liquidity. Costs related to any unknown
existing or future contamination will be accrued in the period in
which they become probable and reasonably estimable.
D. Guarantees and
indemnifications
In the normal course of business, the Company, including certain of
its subsidiaries, enters into agreements that may involve providing
guarantees or indemnifications to third parties and others, which
may extend beyond the term of the agreements. These include, but
are not limited to, residual value guarantees on operating leases,
standby letters of credit, 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 2013 and 2021, 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. As at March
31, 2013, 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
As at March 31, 2013, the Company,
including certain of its subsidiaries, had granted $542 million of irrevocable standby letters of
credit and $12 million of 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 March 31, 2013, the maximum potential liability
under these guarantee instruments was $554
million, of which $489 million
related to workers' compensation and other employee benefit
liabilities and $65 million related
to equipment under leases and other liabilities. The letters of
credit were drawn on the Company's bilateral letter of credit
facilities. The Company had not recorded a liability as at
March 31, 2013 with respect to these
guarantee instruments as they related to the Company's future
performance and the Company did not expect to make any payments
under these guarantee instruments. The majority of the guarantee
instruments mature at various dates between 2013 and 2015.
(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; |
(d) |
contracts for the acquisition of services; |
(e) |
financing agreements; |
(f) |
trust indentures, fiscal agency agreements, underwriting
agreements or similar agreements relating to debt or equity
securities of the Company and engagement agreements with financial
advisors; |
(g) |
transfer agent and registrar agreements in respect of the
Company's securities; |
(h) |
trust and other agreements relating to pension plans and other
plans, including those establishing trust funds to secure payment
to certain officers and senior employees of special retirement
compensation arrangements; |
(i) |
pension transfer agreements; |
(j) |
master agreements with financial institutions governing
derivative transactions; |
(k) |
settlement agreements with insurance companies or other third
parties whereby such insurer or third-party has been indemnified
for any present or future claims relating to insurance policies,
incidents or events covered by the settlement agreements; and |
(l) |
acquisition agreements. |
To the extent of any actual claims under these agreements, the
Company maintains provisions for such items, which it considers to
be adequate. Due to the nature of the indemnification clauses, the
maximum exposure for future payments may be material. However, such
exposure cannot be reasonably determined.
During the period, the Company entered into
various indemnification contracts with third parties for which the
maximum exposure for future payments cannot be reasonably
determined. As a result, the Company was unable to determine the
fair value of these guarantees and accordingly, no liability was
recorded. There are no recourse provisions to recover any amounts
from third parties.
Note 9 - Financial instruments
For financial assets and liabilities measured at
fair value on a recurring basis, fair value is the price the
Company would receive to sell an asset or pay to transfer a
liability in an orderly transaction with a market participant at
the measurement date. In the absence of active markets for
identical assets or liabilities, such measurements involve
developing assumptions based on market observable data and, in the
absence of such data, internal information that is believed to be
consistent with what market participants would use in a
hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company's market
assumptions. Preference is given to observable inputs. These two
types of inputs create the following fair value hierarchy:
Level 1: |
Quoted prices for identical instruments in active markets. |
Level 2: |
Quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not
active; and model-derived valuations whose inputs are observable or
whose significant value drivers are observable. |
Level 3: |
Significant inputs to the valuation model are
unobservable. |
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, Restricted
cash and cash equivalents, Accounts receivable, Other current
assets, Accounts payable and other:
The carrying amounts approximate fair value because of the short
maturity of these instruments. Cash and cash equivalents and
Restricted cash and cash equivalents include highly liquid
investments purchased three months or less from maturity and are
classified as Level 1. Accounts receivable, Other current assets,
and Accounts payable and other are classified as Level 2 as they
may not be priced using quoted prices, but rather determined from
market observable information.
(ii) Intangible and other assets:
Included in Intangible and other assets are equity investments for
which the carrying value approximates the fair value, with the
exception of certain cost investments for which the fair value is
estimated based on the Company's proportionate share of the
underlying net assets. Intangible and other assets are classified
as Level 3 as their fair value is based on significant unobservable
inputs.
(iii) Debt:
The fair value of the Company's 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
Company's debt is classified as Level 2.
The following table presents the carrying
amounts and estimated fair values of the Company's financial
instruments as at March 31, 2013 and
December 31, 2012 for which the
carrying values on the Consolidated Balance Sheet are different
from their fair values:
In millions |
|
March 31, 2013 |
|
|
December 31,
2012 |
|
|
|
Carrying
amount |
|
Fair
value |
|
|
Carrying
amount |
|
Fair
value |
Financial assets |
|
|
|
|
|
|
|
|
|
|
Investments |
$ |
32 |
$ |
131 |
|
$ |
30 |
$ |
125 |
Financial
liabilities |
|
|
|
|
|
|
|
|
|
|
Total debt |
$ |
7,411 |
$ |
8,771 |
|
$ |
6,900 |
$ |
8,379 |
Note 10 - Earnings per share
The following table provides a reconciliation between basic and
diluted earnings per share:
|
|
|
Three
months ended March 31 |
In millions, except per share data |
|
2013 |
|
|
2012 |
|
|
|
|
|
|
Net income |
$ |
555 |
|
$ |
775 |
|
|
|
|
|
|
Weighted-average shares outstanding |
|
426.7 |
|
|
441.0 |
Effect of stock options |
|
1.6 |
|
|
2.5 |
Weighted-average diluted shares outstanding |
|
428.3 |
|
|
443.5 |
|
|
|
|
|
|
Basic earnings per share |
$ |
1.30 |
|
$ |
1.76 |
Diluted earnings per share |
$ |
1.30 |
|
$ |
1.75 |
Basic earnings per share are calculated based on
the weighted-average number of common shares outstanding over each
period. Diluted earnings per share are calculated based on the
weighted-average diluted shares outstanding using the treasury
stock method, which assumes that any proceeds received from the
exercise of in-the-money stock options would be used to purchase
common shares at the average market price for the period. The
weighted-average number of stock options that were not included in
the calculation of diluted earnings per share, as their inclusion
would have had an anti-dilutive impact, was 0.1 million for both
the three months ended March 31, 2013
and the corresponding period in 2012.
Note 11 - Accumulated other comprehensive income
(loss)
The following tables provide the components, the
change and the reclassifications out of Accumulated other
comprehensive income (loss) for the three-month periods ending
March 31, 2013 and 2012:
In
millions |
|
Derivative
instruments |
|
Pension
and other
postretirement
benefit plans |
|
Foreign
currency
items |
|
Total
before
tax |
|
Tax
recovery
(expense) |
|
Total net
of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1,
2013 |
$ |
8 |
$ |
(3,290) |
$ |
(579) |
$ |
(3,861) |
$ |
604 |
$ |
(3,257) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss) before reclassifications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
- |
|
- |
|
12 |
|
12 |
|
14 |
|
26 |
Amounts reclassified from
accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
|
- |
|
59 |
|
- |
|
59 |
(1) |
(16) |
(2) |
43 |
|
Amortization of prior service cost |
|
- |
|
1 |
|
- |
|
1 |
(1) |
- |
(2) |
1 |
Other comprehensive income (loss) |
|
- |
|
60 |
|
12 |
|
72 |
|
(2) |
|
70 |
Ending balance
at March 31, 2013 |
$ |
8 |
$ |
(3,230) |
$ |
(567) |
$ |
(3,789) |
$ |
602 |
$ |
(3,187) |
|
|
|
|
|
|
|
|
|
|
|
|
In
millions |
|
Derivative
instruments |
|
Pension and
other
postretirement
benefit plans |
|
Foreign
currency
items |
|
Total
before
tax |
|
Tax
recovery
(expense) |
|
Total
net
of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at January 1,
2012 |
$ |
8 |
$ |
(2,750) |
$ |
(574) |
$ |
(3,316) |
$ |
477 |
$ |
(2,839) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss) before reclassifications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
- |
|
- |
|
(5) |
|
(5) |
|
(17) |
|
(22) |
Amounts reclassified from accumulated
other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
|
- |
|
31 |
|
- |
|
31 |
(1) |
(5) |
(2) |
26 |
|
Amortization of prior service cost |
|
- |
|
2 |
|
- |
|
2 |
(1) |
(1) |
(2) |
1 |
Other comprehensive income (loss) |
|
- |
|
33 |
|
(5) |
|
28 |
|
(23) |
|
5 |
Ending balance at March 31,
2012 |
$ |
8 |
$ |
(2,717) |
$ |
(579) |
$ |
(3,288) |
$ |
454 |
$ |
(2,834) |
(1) |
Reclassified to Labor and fringe benefits on the Consolidated
Statement of Income and included in components of net periodic
benefit cost (income). See Note 6 - Pensions and other
postretirement benefits to the Company's unaudited Interim
Consolidated Financial Statements. |
(2) |
Included in Income tax expense on the Consolidated Statement
of Income.
|
CANADIAN NATIONAL RAILWAY COMPANY |
SELECTED RAILROAD STATISTICS (U.S. GAAP)
- unaudited |
|
|
|
|
Three months
ended |
|
March 31 |
|
2013 |
2012 |
|
|
Statistical operating data |
|
|
|
|
|
Rail freight revenues ($ millions) |
2,265 |
2,147 |
Gross ton miles (GTM) (millions) |
96,301 |
92,593 |
Revenue ton miles (RTM) (millions) |
50,576 |
49,049 |
Carloads (thousands) |
1,231 |
1,205 |
Route miles (includes Canada and the U.S.)
(1) |
20,100 |
20,000 |
Employees (end of period) |
23,624 |
23,303 |
Employees (average for the period) |
23,435 |
23,156 |
|
|
|
Productivity |
|
|
|
|
|
Operating ratio (%) |
68.4 |
66.2 |
Rail freight revenue per RTM (cents) |
4.48 |
4.38 |
Rail freight revenue per carload ($) |
1,840 |
1,782 |
Operating expenses per GTM (cents) |
1.75 |
1.68 |
Labor and fringe benefits expense per GTM
(cents) |
0.59 |
0.55 |
GTMs per average number of employees
(thousands) |
4,109 |
3,999 |
Diesel fuel consumed (US gallons in millions) |
101.7 |
96.9 |
Average fuel price ($/US gallon) |
3.61 |
3.54 |
GTMs per US gallon of fuel consumed |
947 |
956 |
|
|
|
Safety indicators |
|
|
|
|
|
Injury frequency rate per 200,000 person hours
(2) |
1.37 |
1.23 |
Accident rate per million train miles
(2) |
2.12 |
2.17 |
|
|
|
Financial ratio |
|
|
|
|
|
Debt-to-total capitalization ratio (% at end of
period) (3) |
40.0 |
38.2 |
(1) |
Rounded to the nearest hundred miles. |
(2) |
Based on Federal Railroad Administration (FRA) reporting
criteria. |
(3) |
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.
|
Statistical data and related productivity measures are based on
estimated data available at such time and are subject to change as
more complete information becomes available, as such certain of the
2012 comparative data and related productivity measures have been
restated.
CANADIAN NATIONAL RAILWAY COMPANY |
SUPPLEMENTARY INFORMATION (U.S. GAAP) -
unaudited |
|
|
|
|
|
|
Three
months ended March 31 |
|
2013 |
2012 |
% Change
Fav (Unfav) |
% Change at
constant
currency
Fav (Unfav) (1) |
|
|
Revenues (millions of dollars) |
|
|
|
|
Petroleum and chemicals |
457 |
392 |
17% |
16% |
Metals and minerals |
282 |
273 |
3% |
3% |
Forest products |
336 |
328 |
2% |
2% |
Coal |
165 |
167 |
(1%) |
(1%) |
Grain and fertilizers |
401 |
397 |
1% |
1% |
Intermodal |
492 |
460 |
7% |
7% |
Automotive |
132 |
130 |
2% |
1% |
Total rail freight revenues |
2,265 |
2,147 |
5% |
5% |
Other revenues |
201 |
199 |
1% |
1% |
Total revenues |
2,466 |
2,346 |
5% |
5% |
|
|
|
|
|
Revenue ton miles (millions) |
|
|
|
|
Petroleum and chemicals |
10,554 |
8,867 |
19% |
19% |
Metals and minerals |
4,990 |
4,938 |
1% |
1% |
Forest products |
7,266 |
7,466 |
(3%) |
(3%) |
Coal |
5,340 |
5,509 |
(3%) |
(3%) |
Grain and fertilizers |
11,009 |
11,581 |
(5%) |
(5%) |
Intermodal |
10,747 |
10,018 |
7% |
7% |
Automotive |
670 |
670 |
- |
- |
|
50,576 |
49,049 |
3% |
3% |
Rail freight revenue / RTM
(cents) |
|
|
|
|
Total rail freight revenue per RTM |
4.48 |
4.38 |
2% |
2% |
Commodity groups: |
|
|
|
|
Petroleum and chemicals |
4.33 |
4.42 |
(2%) |
(2%) |
Metals and minerals |
5.65 |
5.53 |
2% |
2% |
Forest products |
4.62 |
4.39 |
5% |
5% |
Coal |
3.09 |
3.03 |
2% |
2% |
Grain and fertilizers |
3.64 |
3.43 |
6% |
6% |
Intermodal |
4.58 |
4.59 |
- |
- |
Automotive |
19.70 |
19.40 |
2% |
1% |
|
|
|
|
|
Carloads (thousands) |
|
|
|
|
Petroleum and chemicals |
151 |
146 |
3% |
3% |
Metals and minerals |
244 |
245 |
- |
- |
Forest products |
111 |
112 |
(1%) |
(1%) |
Coal |
97 |
106 |
(8%) |
(8%) |
Grain and fertilizers |
142 |
143 |
(1%) |
(1%) |
Intermodal |
432 |
399 |
8% |
8% |
Automotive |
54 |
54 |
- |
- |
|
1,231 |
1,205 |
2% |
2% |
Rail freight revenue / carload
(dollars) |
|
|
|
|
Total rail freight revenue per carload |
1,840 |
1,782 |
3% |
3% |
Commodity groups: |
|
|
|
|
Petroleum and chemicals |
3,026 |
2,685 |
13% |
12% |
Metals and minerals |
1,156 |
1,114 |
4% |
3% |
Forest products |
3,027 |
2,929 |
3% |
3% |
Coal |
1,701 |
1,575 |
8% |
8% |
Grain and fertilizers |
2,824 |
2,776 |
2% |
1% |
Intermodal |
1,139 |
1,153 |
(1%) |
(1%) |
Automotive |
2,444 |
2,407 |
2% |
1% |
(1) See supplementary schedule entitled Non-GAAP Measures
for an explanation of this Non-GAAP measure.
|
Statistical data and related productivity
measures are based on estimated data available at such time and are
subject to change as more complete information becomes
available.
CANADIAN NATIONAL RAILWAY COMPANY |
NON-GAAP MEASURES - unaudited
|
Adjusted performance measures
For the three months ended March 31, 2013, the Company reported adjusted net
income of $519 million, or
$1.22 per diluted share. The adjusted
figures exclude the gain on disposal of a segment of the
Oakville subdivision, together
with the rail fixtures and certain passenger agreements
(collectively the "Lakeshore West"), of $40
million, or $36 million
after-tax ($0.08 per diluted share).
For the three months ended March 31,
2012, the Company reported adjusted net income of
$523 million, or $1.18 per diluted share. The adjusted figures
exclude the gain on disposal of a segment of the Bala and a segment of the Oakville subdivisions, together with the rail
fixtures and certain passenger agreements (collectively the
"Bala-Oakville"), of $281
million, or $252 million
after-tax ($0.57 per diluted
share).
Management believes that adjusted net income and
adjusted earnings per share are useful measures of performance that
can facilitate period-to-period comparisons, as they exclude items
that do not necessarily arise as part of the normal day-to-day
operations of the Company and could distort the analysis of trends
in business performance. The exclusion of such items in adjusted
net income and adjusted earnings per share does not, however, imply
that such items are necessarily non-recurring. These adjusted
measures do not have any standardized meaning prescribed by GAAP
and may, therefore, not be comparable to similar measures presented
by other companies. The reader is advised to read all information
provided in the Company's 2013 unaudited Interim Consolidated
Financial Statements and Notes thereto. The following table
provides a reconciliation of net income and earnings per share, as
reported for the three months ended March
31, 2013 and 2012, to the adjusted performance measures
presented herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended |
|
Three months
ended |
|
March 31, 2013 |
|
March 31, 2012 |
In millions, except per share
data |
|
Reported |
|
Adjustments |
|
Adjusted |
|
|
Reported |
|
Adjustments |
|
Adjusted |
Revenues |
$ |
2,466 |
$ |
- |
$ |
2,466 |
|
$ |
2,346 |
$ |
- |
$ |
2,346 |
Operating expenses |
|
1,686 |
|
- |
|
1,686 |
|
|
1,553 |
|
- |
|
1,553 |
Operating income |
|
780 |
|
- |
|
780 |
|
|
793 |
|
- |
|
793 |
Interest expense |
|
(89) |
|
- |
|
(89) |
|
|
(86) |
|
- |
|
(86) |
Other income |
|
42 |
|
(40) |
|
2 |
|
|
293 |
|
(281) |
|
12 |
Income before income taxes |
|
733 |
|
(40) |
|
693 |
|
|
1,000 |
|
(281) |
|
719 |
Income tax expense |
|
(178) |
|
4 |
|
(174) |
|
|
(225) |
|
29 |
|
(196) |
Net income |
$ |
555 |
$ |
(36) |
$ |
519 |
|
$ |
775 |
$ |
(252) |
$ |
523 |
Operating ratio |
|
68.4% |
|
|
|
68.4% |
|
|
66.2% |
|
|
|
66.2% |
Effective tax rate |
|
24.3% |
|
|
|
25.1% |
|
|
22.5% |
|
|
|
27.3% |
Basic earnings per share |
$ |
1.30 |
$ |
(0.08) |
$ |
1.22 |
|
$ |
1.76 |
$ |
(0.57) |
$ |
1.19 |
Diluted earnings per
share |
$ |
1.30 |
$ |
(0.08) |
$ |
1.22 |
|
$ |
1.75 |
$ |
(0.57) |
$ |
1.18 |
Constant currency
Although CN conducts its business and reports
its earnings in Canadian dollars, a large portion of revenues and
expenses is denominated in US dollars. As such, the Company's
results are affected by exchange-rate fluctuations.
Financial results at "constant currency" allow
results to be viewed without the impact of fluctuations in foreign
currency exchange rates, thereby facilitating period-to-period
comparisons in the analysis of trends in business performance.
Measures at constant currency are considered non-GAAP measures and
do not have any standardized meaning prescribed by GAAP and may,
therefore, not be comparable to similar measures presented by other
companies. Financial results at constant currency are obtained by
translating the current period results denominated in US dollars at
the foreign exchange rates of the comparable period of the prior
year. The average foreign exchange rates were $1.01 and $1.00 per
US$1.00, respectively, for the three
months ended March 31, 2013 and 2012.
There was minimal impact on the Company's 2013 first quarter net
income on a constant currency basis.
Free cash flow
The Company utilized $20
million of free cash flow for the three months ended
March 31, 2013 compared to generated
$48 million for the same period in
2012. 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 the sum of net cash provided by operating
activities, adjusted for changes in cash and cash equivalents
resulting from foreign exchange fluctuations; and net cash provided
by (used in) investing activities, adjusted for changes in
restricted cash and cash equivalents, if any, the impact of major
acquisitions, if any; and the payment of dividends, calculated as
follows:
|
|
|
Three
months ended March 31 |
In millions |
|
2013 |
|
|
2012 |
|
|
|
|
|
|
Net cash provided by operating
activities |
$ |
321 |
|
$ |
125 |
Net cash provided by (used in)
investing activities |
|
(161) |
|
|
89 |
Net cash provided before financing
activities |
|
160 |
|
|
214 |
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
Dividends paid |
|
(183) |
|
|
(165) |
|
Change in restricted cash and cash
equivalents |
|
(9) |
|
|
- |
|
Effect of foreign exchange fluctuations on US
dollar-denominated cash and cash equivalents |
|
12 |
|
|
(1) |
Free cash flow |
$ |
(20) |
|
$ |
48 |
SOURCE CN