Q2-2014 diluted earnings per share (EPS) of C$1.03 increased 24 per cent over adjusted
diluted Q2-2013 EPS of C$0.83
(1)
MONTREAL,
July 21, 2014 /CNW Telbec/ - CN (TSX:
CNR) (NYSE: CNI) today reported its financial and operating results
for the second quarter and six-month period ended June 30, 2014.
Second-quarter 2014 financial highlights
- Net income was C$847 million, or
C$1.03 per diluted share, compared
with net income of C$717 million, or
C$0.84 per diluted share, for the
year-earlier quarter. The Q2-2013 results included a net gain of
C$13 million (C$0.01 per diluted share) resulting from a gain
on a non-monetary transaction with another railway that was partly
offset by the effect of the enactment of higher provincial
corporate income tax rates.
- Excluding the Q2-2013 net gain, Q2-2014 diluted EPS of
C$1.03 increased 24 per cent over
last year's adjusted diluted EPS of C$0.83. (1)
- Operating income for the second-quarter of 2014 increased 21
per cent to C$1,258 million.
- Second-quarter 2014 revenues increased 17 per cent to
C$3,116 million, revenue ton-miles
grew by 14 per cent, and carloadings increased 11 per cent.
- CN's operating ratio for Q2-2014 improved by 1.3 points to 59.6
per cent from 60.9 per cent for the year-earlier quarter.
- Free cash flow for the first half of 2014 was C$1,270 million, compared with C$788 million for the year-earlier first half.
(1)
Claude Mongeau,
president and chief executive officer, said: "CN recovered swiftly
from the first-quarter winter weather challenges - just as our
customers would expect us to do - thanks to solid execution by our
dedicated team of railroaders. CN delivered record volumes in the
quarter by bringing its key supply chains back into sync and taking
advantage of continued strength in several of our core markets.
This solid operational recovery underscores our ability to
accommodate growth at low incremental cost and to drive very strong
financial results."
CN's Western
Canada grain hopper car movements were particularly strong
during the second quarter, up nearly 70 per cent from the
year-earlier period. The Company expects such hopper car movements
for the crop-year ending July 31,
2014, to be a new record and close to 25 per cent higher
than average crop-year movements.
Mongeau said: "We are pleased that the Canadian
grain supply chain CN serves is now back in sync. Our wait-list of
customer grain car orders represents only about one week of
shipments from the Prairies, and grain vessel line-ups at all ports
are back to normal."
Revised 2014 financial outlook (1)
(2)
CN's strong second-quarter results and continued growth
opportunities in intermodal, bulk and merchandise markets have
prompted a positive revision to the Company's 2014 financial
outlook. Under its revised 2014 outlook, CN now expects to:
- Deliver solid double-digit EPS growth in 2014 over adjusted
diluted 2013 EPS of C$3.06, compared
with its earlier forecast of aiming for double-digit 2014 EPS
growth, and
- Generate free cash flow in the range of C$1.8 billion to C$2 billion, compared with the
earlier free cash flow projection of C$1.6
billion to C$1.7 billion for 2014. (1)
Mongeau said: "The continuing success of our
agenda of Operational and Service Excellence positions CN well to
achieve this improved financial outlook for the year."
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. On a constant currency basis that
excludes the impact of fluctuations in foreign currency exchange
rates, CN's second-quarter 2014 net income would have been lower by
C$28 million, or C$0.03 per diluted share. (1)
Second-quarter 2014 revenues, traffic volumes
and expenses
Revenues for the second quarter of 2014 increased by 17 per cent to
C$3,116 million. Revenues increased
for grain and fertilizers (35 per cent), metals and minerals (20
per cent), intermodal (17 per cent), petroleum and chemicals (17
per cent) automotive (15 per cent), forest products (nine per
cent), and coal (five per cent).
The increase in revenues was mainly attributable
to higher freight volumes due to a record Canadian grain crop,
strong energy markets and market share gains, particularly in
intermodal; the positive translation impact of the weaker Canadian
dollar on U.S.-dollar-denominated revenues; and freight rate
increases.
Revenues in the second quarter of 2014 also
benefited from increased volumes as the Company recovered from
winter weather-related challenges that delayed shipments in the
first quarter of 2014.
Carloadings for the second quarter rose 11 per
cent to 1,463 thousand.
Revenue ton-miles, measuring the relative weight
and distance of rail freight transported by CN, increased by 14 per
cent over the year-earlier quarter. 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
four per cent over the year-earlier period, driven by the positive
translation impact of the weaker Canadian dollar and freight rate
increases, partly offset by an increase in the average length of
haul.
Operating expenses for the quarter increased by
14 per cent to C$1,858 million. That
was mainly attributable to the negative translation impact of a
weaker Canadian dollar on U.S.-dollar-denominated expenses, higher
fuel costs, increased labor and fringe benefits expense and
increased purchased services and material expense.
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 2014 key assumptions
CN has made a number of economic and market assumptions in
preparing its 2014 outlook. The Company is forecasting that North
American industrial production for the year will increase by about
three to four percent, compared with three per cent growth as
stated in its first-quarter 2014 financial results news release
issued on April 22, 2014. CN also
expects U.S. housing starts to be in the range of one million
units, down slightly from its April 22,
2014, forecast of 1.1 million units. CN is also assuming
U.S. motor vehicles sales will be approximately 16 million units.
In addition, CN is assuming 2014/2015 grain crops in Canada and the
United States will be in-line with their respective
five-year averages. With these assumptions, CN now assumes mid to
high single-digit carload growth, compared with mid-single digit
carload growth stated on April 22,
2014, along with continued pricing improvement above
inflation. CN also assumes that the value of the Canadian dollar in
U.S. currency will be in the range of $0.90
to $0.95 and the price of crude oil (West Texas
Intermediate) to be in the range of US$95-$105 per barrel. In 2014, CN plans to
invest approximately C$2.25 billion
in capital program, of which approximately C$1.2 billion is targeted toward maintaining the
safety and integrity of the network, particularly track
infrastructure. The capital program also includes funds for
projects supporting growth and productivity.
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.
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 2014 outlook. |
CN is a true backbone of the economy,
transporting approximately C$250
billion worth of goods annually for a wide range of business
sectors, ranging from resource products to manufactured products to
consumer goods, across a rail network spanning Canada and mid-America. CN - Canadian National
Railway Company, along with its operating railway subsidiaries --
serves the cities and ports of Vancouver, Prince
Rupert, B.C., Montreal,
Halifax, New Orleans, and Mobile, Ala., and the metropolitan areas of
Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth,
Minn./Superior, Wis., 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.
Consolidated Statement of Income -
unaudited
|
Three months
ended |
|
Six months
ended |
|
June 30 |
|
June 30 |
In millions, except per share data |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
Revenues
|
$ |
3,116 |
|
$ |
2,666 |
|
$ |
5,809 |
|
$ |
5,132 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Labor and fringe benefits |
|
560 |
|
|
498 |
|
|
1,147 |
|
|
1,067 |
Purchased services and material |
|
390 |
|
|
341 |
|
|
778 |
|
|
669 |
Fuel |
|
484 |
|
|
402 |
|
|
952 |
|
|
807 |
Depreciation and amortization |
|
257 |
|
|
250 |
|
|
513 |
|
|
485 |
Equipment rents |
|
84 |
|
|
68 |
|
|
161 |
|
|
136 |
Casualty and other |
|
83 |
|
|
65 |
|
|
180 |
|
|
146 |
Total operating expenses |
|
1,858 |
|
|
1,624 |
|
|
3,731 |
|
|
3,310 |
Operating income |
|
1,258 |
|
|
1,042 |
|
|
2,078 |
|
|
1,822 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
(91) |
|
|
(88) |
|
|
(183) |
|
|
(177) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (Note 3) |
|
2 |
|
|
28 |
|
|
96 |
|
|
70 |
Income before income taxes |
|
1,169 |
|
|
982 |
|
|
1,991 |
|
|
1,715 |
Income tax expense (Note 7) |
|
(322) |
|
|
(265) |
|
|
(521) |
|
|
(443) |
Net income |
$ |
847 |
|
$ |
717 |
|
$ |
1,470 |
|
$ |
1,272 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
1.03 |
|
$ |
0.85 |
|
$ |
1.78 |
|
$ |
1.50 |
Diluted |
$ |
1.03 |
|
$ |
0.84 |
|
$ |
1.77 |
|
$ |
1.49 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares (Note
10) |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
821.8 |
|
|
846.1 |
|
|
824.9 |
|
|
849.8 |
Diluted |
|
825.3 |
|
|
849.1 |
|
|
828.3 |
|
|
852.8 |
See accompanying notes to
unaudited consolidated financial statements. |
Consolidated Statement of Comprehensive Income -
unaudited
|
Three months
ended |
|
Six months
ended |
|
June 30 |
|
June 30 |
In millions |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
847 |
|
$ |
717 |
|
$ |
1,470 |
|
$ |
1,272 |
Other comprehensive income (loss) (Note
11) |
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on foreign currency
translation |
|
(30) |
|
|
23 |
|
|
(5) |
|
|
35 |
Net change in pension and other postretirement
benefit plans |
|
30 |
|
|
56 |
|
|
63 |
|
|
116 |
Other comprehensive income before income
taxes |
|
- |
|
|
79 |
|
|
58 |
|
|
151 |
Income tax recovery (expense) |
|
(38) |
|
|
14 |
|
|
(14) |
|
|
12 |
Other comprehensive income (loss) |
|
(38) |
|
|
93 |
|
|
44 |
|
|
163 |
Comprehensive income |
$ |
809 |
|
$ |
810 |
|
$ |
1,514 |
|
$ |
1,435 |
See accompanying notes to
unaudited consolidated financial statements. |
Consolidated Balance Sheet - unaudited
|
June 30 |
|
December 31 |
|
June 30 |
In millions |
|
2014 |
|
|
2013 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
127 |
|
$ |
214 |
|
$ |
87 |
|
Restricted cash and cash equivalents (Note
4) |
|
468 |
|
|
448 |
|
|
497 |
|
Accounts receivable (Note 4) |
|
925 |
|
|
815 |
|
|
876 |
|
Material and supplies |
|
355 |
|
|
274 |
|
|
330 |
|
Deferred and receivable income taxes |
|
74 |
|
|
137 |
|
|
34 |
|
Other |
|
93 |
|
|
89 |
|
|
81 |
Total current assets |
|
2,042 |
|
|
1,977 |
|
|
1,905 |
Properties |
|
26,478 |
|
|
26,227 |
|
|
25,305 |
Intangible and other assets |
|
2,114 |
|
|
1,959 |
|
|
335 |
Total assets |
$ |
30,634 |
|
$ |
30,163 |
|
$ |
27,545 |
|
|
|
|
|
|
|
|
|
Liabilities and shareholders'
equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
Accounts payable and other |
$ |
1,601 |
|
$ |
1,477 |
|
$ |
1,469 |
|
Current portion of long-term debt (Note
4) |
|
621 |
|
|
1,021 |
|
|
1,322 |
Total current liabilities |
|
2,222 |
|
|
2,498 |
|
|
2,791 |
Deferred income taxes |
|
6,709 |
|
|
6,537 |
|
|
5,867 |
Pension and other postretirement
benefits, net of current portion |
|
544 |
|
|
541 |
|
|
594 |
Other liabilities and deferred
credits |
|
776 |
|
|
815 |
|
|
767 |
Long-term debt |
|
7,040 |
|
|
6,819 |
|
|
6,141 |
Shareholders'
equity |
|
|
|
|
|
|
|
|
|
Common shares |
|
3,975 |
|
|
4,015 |
|
|
4,063 |
|
Accumulated other comprehensive loss (Note
11) |
|
(1,806) |
|
|
(1,850) |
|
|
(3,094) |
|
Retained earnings |
|
11,174 |
|
|
10,788 |
|
|
10,416 |
Total shareholders' equity |
|
13,343 |
|
|
12,953 |
|
|
11,385 |
Total liabilities and
shareholders' equity |
$ |
30,634 |
|
$ |
30,163 |
|
$ |
27,545 |
See accompanying notes to
unaudited consolidated financial statements. |
Consolidated Statement of Changes in Shareholders' Equity -
unaudited
|
Three months
ended |
|
Six months
ended |
|
June 30 |
|
June 30 |
In millions |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
Common shares
(1) |
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
$ |
3,994 |
|
$ |
4,088 |
|
$ |
4,015 |
|
$ |
4,108 |
|
Stock options exercised and other |
|
9 |
|
|
10 |
|
|
18 |
|
|
27 |
|
Share repurchase programs (Note 4) |
|
(28) |
|
|
(35) |
|
|
(58) |
|
|
(72) |
Balance, end of period |
$ |
3,975 |
|
$ |
4,063 |
|
$ |
3,975 |
|
$ |
4,063 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
loss (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
$ |
(1,768) |
|
$ |
(3,187) |
|
$ |
(1,850) |
|
$ |
(3,257) |
|
Other comprehensive income (loss) |
|
(38) |
|
|
93 |
|
|
44 |
|
|
163 |
Balance, end of period |
$ |
(1,806) |
|
$ |
(3,094) |
|
$ |
(1,806) |
|
$ |
(3,094) |
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
$ |
10,870 |
|
$ |
10,211 |
|
$ |
10,788 |
|
$ |
10,167 |
|
Net income |
|
847 |
|
|
717 |
|
|
1,470 |
|
|
1,272 |
|
Share repurchase programs (Note 4) |
|
(337) |
|
|
(330) |
|
|
(672) |
|
|
(658) |
|
Dividends |
|
(206) |
|
|
(182) |
|
|
(412) |
|
|
(365) |
Balance, end of period |
$ |
11,174 |
|
$ |
10,416 |
|
$ |
11,174 |
|
$ |
10,416 |
See accompanying
notes to unaudited consolidated financial statements. |
(1) |
During the three and six months ended June 30,
2014, the Company issued 0.2 million and 0.5 million common shares,
respectively, as a result of stock options exercised and
repurchased 5.6 million and 11.9 million common shares,
respectively, under its current share repurchase program. At June
30, 2014, the Company had 819.2 million common shares
outstanding.
During the three and six months ended June 30, 2013, the Company
issued 0.3 million and 1.1 million common shares, respectively, as
a result of stock options exercised and repurchased 7.2 million and
15.0 million common shares, respectively, under its previous share
repurchase program. At June 30, 2013, the Company had 842.9 million
common shares outstanding. |
Consolidated Statement of Cash Flows - unaudited
|
Three months
ended |
|
Six months
ended |
|
June 30 |
|
June 30 |
In millions |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
|
Operating activities |
|
|
Net income |
$ |
847 |
|
$ |
717 |
|
$ |
1,470 |
|
$ |
1,272 |
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
257 |
|
|
250 |
|
|
513 |
|
|
485 |
|
Deferred income taxes |
|
53 |
|
|
73 |
|
|
148 |
|
|
156 |
|
Gain on disposal of property (Note
3) |
|
- |
|
|
(29) |
|
|
(80) |
|
|
(69) |
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
(47) |
|
|
39 |
|
|
(99) |
|
|
(20) |
|
|
Material and supplies |
|
(27) |
|
|
(38) |
|
|
(81) |
|
|
(95) |
|
|
Accounts payable and other |
|
143 |
|
|
118 |
|
|
96 |
|
|
(203) |
|
|
Other current assets |
|
24 |
|
|
14 |
|
|
11 |
|
|
11 |
|
Pensions and other, net |
|
23 |
|
|
(81) |
|
|
(60) |
|
|
(153) |
Net cash provided by operating
activities |
|
1,273 |
|
|
1,063 |
|
|
1,918 |
|
|
1,384 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
Property additions |
|
(482) |
|
|
(418) |
|
|
(730) |
|
|
(646) |
Disposal of property (Note
3) |
|
- |
|
|
- |
|
|
97 |
|
|
52 |
Change in restricted cash and cash
equivalents |
|
3 |
|
|
15 |
|
|
(20) |
|
|
24 |
Other, net |
|
(15) |
|
|
(8) |
|
|
(15) |
|
|
(2) |
Net cash used in investing
activities |
|
(494) |
|
|
(411) |
|
|
(668) |
|
|
(572) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
Issuance of debt, excluding commercial
paper (Note 4) |
|
- |
|
|
- |
|
|
347 |
|
|
505 |
Repayment of debt, excluding
commercial paper |
|
(117) |
|
|
(156) |
|
|
(573) |
|
|
(896) |
Net issuance (repayment) of commercial
paper |
|
(180) |
|
|
(15) |
|
|
9 |
|
|
551 |
Issuance of common shares due to
exercise of stock options and related excess tax benefits
realized |
|
6 |
|
|
9 |
|
|
13 |
|
|
23 |
Repurchase of common shares (Note
4) |
|
(347) |
|
|
(351) |
|
|
(712) |
|
|
(712) |
Dividends paid |
|
(206) |
|
|
(182) |
|
|
(412) |
|
|
(365) |
Net cash used in financing
activities |
|
(844) |
|
|
(695) |
|
|
(1,328) |
|
|
(894) |
Effect of foreign exchange
fluctuations on US dollar-denominated cash and cash
equivalents |
|
(6) |
|
|
2 |
|
|
(9) |
|
|
14 |
Net decrease in cash and cash
equivalents |
|
(71) |
|
|
(41) |
|
|
(87) |
|
|
(68) |
Cash and cash equivalents, beginning
of period |
|
198 |
|
|
128 |
|
|
214 |
|
|
155 |
Cash and cash equivalents, end
of period |
$ |
127 |
|
$ |
87 |
|
$ |
127 |
|
$ |
87 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information |
|
|
|
|
|
|
|
|
|
|
|
Net cash receipts from customers and
other |
$ |
3,060 |
|
$ |
2,656 |
|
$ |
5,732 |
|
$ |
5,165 |
Net cash payments for: |
|
|
|
|
|
|
|
|
|
|
|
|
Employee services, suppliers and other
expenses |
|
(1,512) |
|
|
(1,241) |
|
|
(3,196) |
|
|
(2,913) |
|
Interest |
|
(105) |
|
|
(84) |
|
|
(210) |
|
|
(174) |
|
Personal injury and other claims |
|
(11) |
|
|
(14) |
|
|
(24) |
|
|
(28) |
|
Pensions (Note 6) |
|
(7) |
|
|
(109) |
|
|
(100) |
|
|
(210) |
|
Income taxes |
|
(152) |
|
|
(145) |
|
|
(284) |
|
|
(456) |
Net cash provided by operating
activities |
$ |
1,273 |
|
$ |
1,063 |
|
$ |
1,918 |
|
$ |
1,384 |
See accompanying
notes to unaudited consolidated financial statements. |
Notes to Unaudited Consolidated Financial Statements
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 June 30, 2014, December
31, 2013 and June 30, 2013,
and its results of operations, changes in shareholders' equity and
cash flows for the three and six months ended June 30, 2014 and 2013.
To be consistent with the basis of presentation
used in preparing the Company's 2013 Annual Consolidated Financial
Statements, these unaudited Interim Consolidated Financial
Statements and Notes thereto reflect the fourth quarter 2013 common
stock split and net basis disclosure of commercial paper as
described below.
On October 22,
2013, the Board of Directors of the Company approved a
two-for-one common stock split in the form of a stock dividend of
one additional common share of CN for each share outstanding, paid
on November 29, 2013 to shareholders
of record on November 15, 2013. At
the effective date of the stock split, all equity-based benefit
plans and share repurchase programs were adjusted to reflect the
issuance of such additional shares. All share and per share data
presented herein reflect the impact of the stock split.
Beginning with the fourth quarter of 2013, the
Company revised the Consolidated Statement of Cash Flows to present
on a net basis the issuances and repayments of commercial paper,
all of which have a maturity of less than 90 days and which were
previously reported on a gross basis.
These unaudited Interim Consolidated Financial
Statements and Notes thereto have been prepared using accounting
policies consistent with those used in preparing the Company's 2013
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 2013 Annual Consolidated Financial Statements and Notes
thereto.
2 - Accounting change
On May 28, 2014, the Financial
Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2014-09, Revenue from Contracts with Customers,
which establishes principles for reporting the nature, amount,
timing and uncertainty of revenues and cash flows arising from an
entity's contracts with customers. The core principle of the new
standard is that an entity recognizes revenue to represent the
transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. This standard is
effective for annual and interim reporting periods beginning after
December 15, 2016 and will replace
most existing revenue recognition guidance within U.S. GAAP. Early
adoption is not permitted. The standard permits the use of either
the retrospective or cumulative effect transition method. The
Company is evaluating the effect that ASU 2014-09 will have on its
Consolidated Financial Statements, related disclosures, as well as
the transition method to apply the new standard.
3 - Disposal of property
2014
Deux-Montagnes
On February 28, 2014, the Company
closed a transaction with Agence Métropolitaine de Transport to
sell the Deux-Montagnes
subdivision between Saint-Eustache
and Montreal, Quebec, including
the Mont-Royal tunnel, together
with the rail fixtures (collectively the "Deux-Montagnes"), for
cash proceeds of $97 million before
transaction costs. Under the agreement, the Company obtained the
perpetual right to operate freight trains over the Deux-Montagnes 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 $80
million ($72 million
after-tax) that was recorded in Other income under the full accrual
method of accounting for real estate transactions.
2013
Exchange of easements
On June 8, 2013, the Company entered
into an agreement with another Class I railroad to exchange
perpetual railroad operating easements including the track and
roadway assets on specific rail lines (collectively the "exchange
of easements") without monetary consideration. The Company has
accounted for the exchange of easements at fair value pursuant to
FASB Accounting Standards Codification (ASC) 845, Nonmonetary
Transactions. The transaction resulted in a gain on exchange of
easements of $29 million
($18 million after-tax) that was
recorded in Other income.
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.
4 - Financing activities
Shelf prospectus and registration statement
On February 11, 2014, under its
current shelf prospectus and registration statement which expires
January 2016, the Company issued
$250 million 2.75% Notes due 2021 in
the Canadian capital markets, which resulted in net proceeds of
$247 million, intended for general
corporate purposes, including the redemption and refinancing of
outstanding indebtedness and share repurchases.
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
$1.3 billion, 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 14, 2014,
the expiry date of the agreement was extended by one year to
May 5, 2019. The Company plans to use
the credit facility for working capital and general corporate
purposes, including backstopping its commercial paper program. As
at June 30, 2014 and December 31, 2013, the Company had no outstanding
borrowings under its revolving credit facility and there were no
draws during the six months ended June 30,
2014.
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
June 30, 2014, the Company had total
borrowings of $285 million
($273 million as at December 31, 2013) presented in Current portion
of long-term debt on the Consolidated Balance Sheet at a
weighted-average interest rate of 1.14% (1.14% as at December 31, 2013).
Accounts receivable securitization
program
The Company has a three-year agreement that expires on February 1, 2016 to sell an undivided
co-ownership interest in a revolving pool of accounts receivable to
unrelated trusts for maximum cash proceeds of $450 million.
The Company accounts for the proceeds of its
accounts receivable securitization program as a secured borrowing
under ASC 860, Transfers and Servicing. As such, as at
June 30, 2014, the Company recorded
$250 million ($250 million as at December 31, 2013) 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 1.21% (1.18% as at December 31, 2013) which is secured by and
limited to $279 million ($281 million as at December 31, 2013) 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 14, 2014, the expiry date of
these agreements was extended by one year to April 28, 2017. 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 June 30, 2014, the
Company had letters of credit drawn of $491
million ($481 million as at
December 31, 2013) from a total
committed amount of $510 million
($503 million as at December 31, 2013) by the various banks. As at
June 30, 2014, cash and cash
equivalents of $468 million
($448 million as at December 31, 2013) were pledged as collateral and
recorded as Restricted cash and cash equivalents on the
Consolidated Balance Sheet.
Share repurchase programs
On October 22, 2013, the Board of
Directors of the Company approved a share repurchase program which
allows for the repurchase of up to 30.0 million common shares,
between October 29, 2013 and
October 23, 2014, 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 information
related to the share repurchase programs for the three and six
months ended June 30, 2014 and
2013:
|
Three months ended June 30 |
|
Six months ended June 30 |
In millions, except per share data |
2014 |
2013 |
|
2014 |
2013 |
Number of common shares repurchased
(1) |
|
5.6 |
|
7.2 |
|
|
11.9 |
|
15.0 |
Weighted-average price per share
(2) |
$ |
64.70 |
$ |
50.52 |
|
$ |
61.29 |
$ |
48.71 |
Amount of repurchase |
$ |
365 |
$ |
365 |
|
$ |
730 |
$ |
730 |
(1) |
Includes common shares purchased in the first
quarters of 2014 and 2013 pursuant to private agreements between
the Company and arm's length third-party sellers. |
(2) |
Includes brokerage fees. |
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 2013 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
and six months ended June 30, 2014
and 2013:
|
Three months ended June 30 |
|
Six months ended June 30 |
In millions |
|
2014 |
|
2013 |
|
|
2014 |
|
2013 |
Cash settled awards |
|
|
|
|
|
|
|
|
|
Share Unit Plan (1) |
$ |
31 |
$ |
11 |
|
$ |
45 |
$ |
21 |
Voluntary Incentive
Deferral Plan (VIDP) |
|
20 |
|
(1) |
|
|
21 |
|
13 |
Total cash settled awards |
|
51 |
|
10 |
|
|
66 |
|
34 |
Stock option awards |
|
3 |
|
2 |
|
|
5 |
|
4 |
Total stock-based compensation expense |
$ |
54 |
$ |
12 |
|
$ |
71 |
$ |
38 |
Tax benefit recognized in income |
$ |
15 |
$ |
2 |
|
$ |
19 |
$ |
8 |
(1) |
The six months ended June 30, 2013
includes the reversal of approximately $20 million of stock-based
compensation expense related to the forfeiture of performance share
units by former executives. |
Cash settled awards
Share Unit Plan
Following approval by the Board of Directors in January 2014, the Company granted 0.8 million
performance share units (PSUs), previously known as restricted
share units to designated management employees entitling them to
receive payout in cash based on the Company's share price. The PSUs
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 on PSUs is also 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 PSU 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 PSUs to suspend payout on any PSUs pending
resolution of such matter.
The following table provides the 2014 activity
for all cash settled awards:
|
|
PSUs |
|
VIDP |
In millions |
|
Nonvested |
Vested |
|
Nonvested |
Vested |
Outstanding at December 31, 2013 |
|
1.7 |
0.9 |
|
- |
2.3 |
|
Granted (Payout) |
|
0.8 |
(0.9) |
|
- |
(0.1) |
Outstanding at June 30,
2014 |
|
2.5 |
- |
|
- |
2.2 |
The following table provides valuation and expense information
for all cash settled awards:
In millions, unless otherwise
indicated |
|
|
PSUs (1) |
VIDP (2) |
|
Total |
Year
of grant |
2014 |
2013 |
2012 |
2011 |
2010 |
2009 |
|
|
|
|
Stock-based compensation
expense (recovery) recognized over requisite service
period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
2014 |
$ |
11 |
$ |
18 |
$ |
18 |
$ |
(2) |
$ |
- |
$ |
- |
|
$ |
21 |
$ |
66 |
Six months ended June 30, 2013
(3) |
|
N/A |
$ |
7 |
$ |
15 |
$ |
12 |
$ |
(4) |
$ |
(9) |
|
$ |
13 |
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
$ |
11 |
$ |
52 |
$ |
79 |
$ |
- |
$ |
- |
$ |
- |
|
$ |
160 |
$ |
302 |
December 31, 2013 |
|
N/A |
$ |
34 |
$ |
61 |
$ |
80 |
$ |
- |
$ |
- |
|
$ |
145 |
$ |
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 ($) |
$ |
52.43 |
$ |
67.73 |
$ |
68.90 |
|
N/A |
|
N/A |
|
N/A |
|
$ |
69.40 |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of awards vested
during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
2014 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
|
N/A |
|
N/A |
|
$ |
1 |
$ |
1 |
Six months ended June 30,
2013 |
|
N/A |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
|
N/A |
|
$ |
1 |
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at June 30,
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation
cost |
$ |
27 |
$ |
24 |
$ |
9 |
$ |
- |
|
N/A |
|
N/A |
|
$ |
2 |
$ |
62 |
Remaining recognition period
(years) |
|
2.5 |
|
1.5 |
|
0.5 |
|
N/A |
|
N/A |
|
N/A |
|
|
N/A (4) |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price ($) |
$ |
69.40 |
$ |
69.40 |
$ |
69.40 |
|
N/A |
|
N/A |
|
N/A |
|
$ |
69.40 |
|
N/A |
Expected stock price volatility
(6) |
|
15% |
|
13% |
|
13% |
|
N/A |
|
N/A |
|
N/A |
|
|
N/A |
|
N/A |
Expected term (years)
(7) |
|
2.5 |
|
1.5 |
|
0.5 |
|
N/A |
|
N/A |
|
N/A |
|
|
N/A |
|
N/A |
Risk-free interest rate
(8) |
|
1.14% |
|
1.06% |
|
0.97% |
|
N/A |
|
N/A |
|
N/A |
|
|
N/A |
|
N/A |
Dividend rate ($)
(9) |
$ |
1.00 |
$ |
1.00 |
$ |
1.00 |
|
N/A |
|
N/A |
|
N/A |
|
|
N/A |
|
N/A |
(1) |
Compensation cost is based on the
fair value of the awards at period-end using the lattice-based
valuation model that uses the assumptions as presented
herein. |
(2) |
Compensation cost is based on
intrinsic value. |
(3) |
Includes the reversal of
approximately $20 million of stock-based compensation expense
related to the forfeiture of PSUs 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 June 30, 2014. |
(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 2014, the Company granted 1.0 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 issued by the Company are conventional options that vest
over a period of time. 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 and expire after 10 years. At June 30, 2014, 19.2 million common shares
remained authorized for future issuances under this plan. The total
number of options outstanding at June 30,
2014 was 8.2 million.
The following table provides the activity of
stock option awards during 2014, and for options outstanding and
exercisable at June 30, 2014, 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 June 30, 2014 at the
Company's closing stock price of $69.40 on the Toronto Stock Exchange.
|
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, 2013
(1) |
7.7 |
$ |
30.97 |
|
|
|
|
|
|
Granted |
1.0 |
$ |
58.72 |
|
|
|
|
|
|
Exercised |
(0.5) |
$ |
24.53 |
|
|
|
|
|
Outstanding at June 30, 2014
(1) |
8.2 |
$ |
34.46 |
|
5.8 |
|
$ |
285 |
Exercisable at June 30, 2014
(1) |
5.6 |
$ |
28.06 |
|
4.6 |
|
$ |
233 |
(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 |
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
Total |
Stock-based compensation
expense recognized over requisite service period
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
2014 |
$ |
3 |
|
$ |
1 |
|
$ |
- |
|
$ |
1 |
|
$ |
- |
|
$ |
- |
|
$ |
5 |
Six months ended June 30,
2013 |
|
N/A |
|
$ |
2 |
|
$ |
1 |
|
$ |
1 |
|
$ |
- |
|
$ |
- |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At grant date ($) |
$ |
11.08 |
|
$ |
8.52 |
|
$ |
7.74 |
|
$ |
7.83 |
|
$ |
6.55 |
|
$ |
6.30 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of awards vested
during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
2014 |
$ |
- |
|
$ |
2 |
|
$ |
2 |
|
$ |
3 |
|
$ |
2 |
|
$ |
- |
|
$ |
9 |
Six months ended June 30,
2013 |
|
N/A |
|
$ |
- |
|
$ |
2 |
|
$ |
3 |
|
$ |
2 |
|
$ |
4 |
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards at June 30,
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized compensation
cost |
$ |
7 |
|
$ |
2 |
|
$ |
1 |
|
$ |
1 |
|
$ |
- |
|
$ |
- |
|
$ |
11 |
Remaining recognition period
(years) |
|
3.5 |
|
|
2.5 |
|
|
1.5 |
|
|
0.5 |
|
|
- |
|
|
- |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant price ($) |
$ |
58.72 |
|
$ |
47.47 |
|
$ |
38.35 |
|
$ |
34.47 |
|
$ |
27.38 |
|
$ |
21.07 |
|
|
N/A |
Expected stock price volatility
(2) |
|
23% |
|
|
23% |
|
|
26% |
|
|
26% |
|
|
28% |
|
|
39% |
|
|
N/A |
Expected term (years)
(3) |
|
5.4 |
|
|
5.4 |
|
|
5.4 |
|
|
5.3 |
|
|
5.4 |
|
|
5.3 |
|
|
N/A |
Risk-free interest rate
(4) |
|
1.51% |
|
|
1.41% |
|
|
1.33% |
|
|
2.53% |
|
|
2.44% |
|
|
1.97% |
|
|
N/A |
Dividend rate ($)
(5) |
$ |
1.00 |
|
$ |
0.86 |
|
$ |
0.75 |
|
$ |
0.65 |
|
$ |
0.54 |
|
$ |
0.51 |
|
|
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. |
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
employees ("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.
For the three and six months ended June 30, 2014 and 2013, the components of net
periodic benefit cost (income) for pensions and other
postretirement benefits were as follows:
Components of
net periodic benefit cost (income) for pensions |
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June 30 |
In millions |
|
2014 |
|
2013 |
|
|
2014 |
|
2013 |
Service cost |
$ |
31 |
$ |
37 |
|
$ |
66 |
$ |
78 |
Interest cost |
|
177 |
|
165 |
|
|
355 |
|
329 |
Settlement gain |
|
- |
|
- |
|
|
- |
|
(1) |
Expected return on plan
assets |
|
(244) |
|
(240) |
|
|
(489) |
|
(479) |
Amortization of prior service
cost |
|
1 |
|
1 |
|
|
2 |
|
2 |
Amortization of net actuarial
loss |
|
30 |
|
54 |
|
|
62 |
|
113 |
Net periodic benefit cost
(income) |
$ |
(5) |
$ |
17 |
|
$ |
(4) |
$ |
42 |
|
|
|
|
|
|
|
|
|
|
Components of
net periodic benefit cost for other postretirement
benefits |
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
Six months ended June 30 |
In millions |
|
2014 |
|
2013 |
|
|
2014 |
|
2013 |
Service cost |
$ |
- |
$ |
- |
|
$ |
1 |
$ |
1 |
Interest cost |
|
4 |
|
3 |
|
|
6 |
|
5 |
Amortization of prior service
cost |
|
- |
|
1 |
|
|
1 |
|
1 |
Amortization of net actuarial
gain |
|
(1) |
|
- |
|
|
(2) |
|
- |
Net periodic benefit
cost |
$ |
3 |
$ |
4 |
|
$ |
6 |
$ |
7 |
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 generally required
on an annual basis both in Canada
and the U.S. The latest actuarial valuations for funding purposes
for the Company's Canadian pension plans, based on a valuation date
of December 31, 2013, were filed in
June 2014 and identified a
going-concern surplus of approximately $1.6
billion and a solvency deficit of approximately $1.7 billion calculated using the three-year
average of the Company's hypothetical wind-up 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 six
months of 2014 and 2013 of $100
million and $210 million,
respectively, mainly represent contributions to the Company's main
pension plan, the CN Pension Plan. These pension contributions are
for the current service cost as determined under the Company's
current actuarial valuations for funding purposes. The Company
expects to make total cash contributions in 2014 of approximately
$130 million for all of the Company's
pension plans. Voluntary contributions can be treated as a
prepayment against the Company's required special solvency deficit
payments. As at December 31, 2013,
the Company had approximately $470
million of accumulated prepayments available to offset
future required solvency deficit payments. The Company applied
approximately $170 million of such
prepayments during the first six months of 2014 and will apply
approximately $165 million for the
remainder of the year.
Additional information relating to the pension
plans is provided in Note 11 - Pensions and other postretirement
benefits to the Company's 2013 Annual Consolidated Financial
Statements.
7 - Income taxes
The Company recorded income tax expense of $322 million and $521
million for the three and six months ended June 30, 2014, compared to $265 million and $443
million, respectively, for the same periods in 2013.
Included in the 2014 figure was an income tax
recovery of $18 million resulting
from a change in estimate of the deferred income tax liability
related to properties, which was recorded in the first quarter.
Included in the 2013 figures was a net income
tax recovery of $26 million;
consisting of a $5 million income tax
expense resulting from the enactment of higher provincial corporate
income tax rates and a $15 million
income tax recovery resulting from the recognition of U.S. state
income tax losses, which were both recorded in the second quarter;
and a $16 million income tax recovery
resulting from a revision of the apportionment of U.S. state income
taxes, which was recorded in the first quarter.
8 - Major commitments and
contingencies
Commitments
As at June 30, 2014, 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 $763 million
($482 million as at December 31, 2013). The Company also has
estimated remaining commitments of approximately $278 million (US$260
million), in relation to the U.S. federal government
legislative requirement to implement Positive Train Control (PTC)
by December 31, 2015.
In addition, the Company has estimated remaining
commitments, through to December 31,
2016, of approximately $69
million (US$65 million), in
relation to the acquisition of the principal lines of the former
Elgin, Joliet and Eastern Railway Company. These
commitments are 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 Company also has agreements with fuel
suppliers which allow but do not require the Company to purchase
approximately 80% of its estimated remaining 2014 volume, 60% of
its anticipated 2015 volume, 55% of its anticipated 2016 volume and
20% of its anticipated 2017 volume at market prices prevailing on
the date of the purchase.
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 June 30,
2014, the Company had aggregate reserves for personal injury
and other claims of $314 million, of
which $49 million was recorded as a
current liability ($316 million as at
December 31, 2013, of which
$45 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
June 30, 2014, 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.
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 270 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 expenses, 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 June 30,
2014, the Company had aggregate accruals for environmental
costs of $119 million, of which
$48 million was recorded as a current
liability ($119 million as at
December 31, 2013, of which
$41 million was recorded as a current
liability). The Company anticipates that the majority of the
liability at June 30, 2014 will be
paid out over the next five years. However, some costs may be paid
out over a longer period. 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:
(a) |
the lack of specific technical information available with
respect to many sites; |
(b) |
the absence of any government authority, third-party orders, or
claims with respect to particular sites; |
(c) |
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 |
(d) |
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.
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.
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 2014 and 2022, 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 June 30,
2014, the maximum exposure in respect of these guarantees
was $189 million. There are no
recourse provisions to recover any amounts from third parties.
Other guarantees
As at June 30, 2014, the Company,
including certain of its subsidiaries, had granted $491 million of irrevocable standby letters of
credit and $92 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 June 30, 2014, the maximum potential liability
under these guarantee instruments was $583
million, of which $523 million
related to workers' compensation and other employee benefit
liabilities and $60 million related
to 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 June 30,
2014 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 2014 and 2016.
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, no liability was recorded. There are no
recourse provisions to recover any amounts from third parties.
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:
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.
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. Investments are classified as Level 3 as
their fair value is based on significant unobservable inputs.
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 provides the carrying
amounts and estimated fair values of the Company's financial
instruments as at June 30, 2014 and
December 31, 2013 for which the
carrying values on the Consolidated Balance Sheet are different
from their fair values:
In millions |
|
June 30, 2014 |
|
|
December 31, 2013 |
|
|
Carrying
amount |
|
Fair
value |
|
|
Carrying
amount |
|
Fair
value |
Financial assets |
|
|
|
|
|
|
|
|
|
Investments |
$ |
57 |
$ |
168 |
|
$ |
57 |
$ |
164 |
Financial liabilities |
|
|
|
|
|
|
|
|
|
Total debt |
$ |
7,661 |
$ |
8,799 |
|
$ |
7,840 |
$ |
8,683 |
10 - Earnings per share
The following table provides a reconciliation between basic and
diluted earnings per share:
|
Three months ended June 30 |
|
Six months ended June 30 |
In millions, except per share
data |
|
2014 |
|
2013 |
|
|
2014 |
|
2013 |
Net income |
$ |
847 |
$ |
717 |
|
$ |
1,470 |
$ |
1,272 |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding |
|
821.8 |
|
846.1 |
|
|
824.9 |
|
849.8 |
Effect of stock options |
|
3.5 |
|
3.0 |
|
|
3.4 |
|
3.0 |
Weighted-average diluted shares
outstanding |
|
825.3 |
|
849.1 |
|
|
828.3 |
|
852.8 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
$ |
1.03 |
$ |
0.85 |
|
$ |
1.78 |
$ |
1.50 |
Diluted earnings per share |
$ |
1.03 |
$ |
0.84 |
|
$ |
1.77 |
$ |
1.49
|
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.
11 - Accumulated other comprehensive
loss
The components of Accumulated other comprehensive loss are as
follows:
In
millions |
|
Foreign
currency
translation
adjustments |
|
Pension
and other
postretirement
benefit plans |
|
Derivative
instruments |
|
Total
before tax |
|
Income
tax
recovery
(expense) |
|
Total
net of tax |
Balance at March 31,
2014 |
$ |
(508) |
$ |
(1,482) |
$ |
8 |
$ |
(1,982) |
$ |
214 |
$ |
(1,768) |
Other comprehensive
income (loss) before reclassifications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange loss
on translation of net investment in foreign operations |
|
(257) |
|
|
|
|
|
(257) |
|
- |
|
(257) |
|
Unrealized foreign exchange gain
on translation of US dollar-denominated long-term
debt designated as a hedge of the net investment in U.S.
subsidiaries |
|
227 |
|
|
|
|
|
227 |
|
(31) |
|
196 |
Amounts reclassified
from Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial
loss |
|
|
|
29 |
|
|
|
29 |
(1) |
(7) |
(2) |
22 |
|
Amortization of prior service
cost |
|
|
|
1 |
|
|
|
1 |
(1) |
- |
(2) |
1 |
Other comprehensive
income (loss) |
|
(30) |
|
30 |
|
- |
|
- |
|
(38) |
|
(38) |
Balance at June 30,
2014 |
$ |
(538) |
$ |
(1,452) |
$ |
8 |
$ |
(1,982) |
$ |
176 |
$ |
(1,806) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In
millions |
|
Foreign
currency
translation
adjustments |
|
Pension
and other
postretirement
benefit plans |
|
Derivative
instruments |
|
Total
before tax |
|
Income
tax
recovery
(expense) |
|
Total
net of tax |
Balance at December
31, 2013 |
$ |
(533) |
$ |
(1,515) |
$ |
8 |
$ |
(2,040) |
$ |
190 |
$ |
(1,850) |
Other comprehensive
income (loss) before reclassifications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange gain
on translation of net investment in foreign operations |
|
19 |
|
|
|
|
|
19 |
|
- |
|
19 |
|
Unrealized foreign exchange loss
on translation of US dollar-denominated long-term debt
designated as a hedge of the net investment in U.S.
subsidiaries |
|
(24) |
|
|
|
|
|
(24) |
|
1 |
|
(23) |
Amounts reclassified
from Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial
loss |
|
|
|
60 |
|
|
|
60 |
(1) |
(15) |
(2) |
45 |
|
Amortization of prior service
cost |
|
|
|
3 |
|
|
|
3 |
(1) |
- |
(2) |
3 |
Other comprehensive
income (loss) |
|
(5) |
|
63 |
|
- |
|
58 |
|
(14) |
|
44 |
Balance at June 30,
2014 |
$ |
(538) |
$ |
(1,452) |
$ |
8 |
$ |
(1,982) |
$ |
176 |
$ |
(1,806) |
(1) |
Reclassified to Labor and fringe
benefits on the Consolidated Statement of Income and included in
components of net periodic benefit cost. See Note 6 - Pensions and
other postretirement benefits. |
(2) |
Included in Income tax expense on
the Consolidated Statement of Income. |
In
millions |
|
Foreign
currency
translation
adjustments |
|
Pension
and other
postretirement
benefit plans |
|
Derivative
instruments |
|
Total
before tax |
|
Income
tax
recovery
(expense) |
|
Total
net of tax |
Balance at March 31,
2013 |
$ |
(567) |
$ |
(3,230) |
$ |
8 |
$ |
(3,789) |
$ |
602 |
$ |
(3,187) |
Other comprehensive
income (loss) before reclassifications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange gain
on translation of net investment in foreign operations |
|
225 |
|
|
|
|
|
225 |
|
- |
|
225 |
|
Unrealized foreign exchange loss
on translation of US dollar-denominated long-term debt
designated as a hedge of the net investment in U.S.
subsidiaries |
|
(202) |
|
|
|
|
|
(202) |
|
28 |
|
(174) |
Amounts reclassified
from Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial
loss |
|
|
|
54 |
|
|
|
54 |
(1) |
(13) |
(2) |
41 |
|
Amortization of prior service
cost |
|
|
|
2 |
|
|
|
2 |
(1) |
(1) |
(2) |
1 |
Other comprehensive
income |
|
23 |
|
56 |
|
- |
|
79 |
|
14 |
|
93 |
Balance at June 30,
2013 |
$ |
(544) |
$ |
(3,174) |
$ |
8 |
$ |
(3,710) |
$ |
616 |
$ |
(3,094) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In
millions |
|
Foreign
currency
translation
adjustments |
|
Pension
and other
postretirement
benefit plans |
|
Derivative
instruments |
|
Total
before tax |
|
Income
tax
recovery
(expense) |
|
Total
net of tax |
Balance at December
31, 2012 |
$ |
(579) |
$ |
(3,290) |
$ |
8 |
$ |
(3,861) |
$ |
604 |
$ |
(3,257) |
Other comprehensive
income (loss) before reclassifications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange gain
on translation of net investment in foreign operations |
|
355 |
|
|
|
|
|
355 |
|
- |
|
355 |
|
Unrealized foreign exchange loss
on translation of US dollar-denominated long-term debt
designated as a hedge of the net investment in U.S.
subsidiaries |
|
(320) |
|
|
|
|
|
(320) |
|
42 |
|
(278) |
Amounts reclassified
from Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial
loss |
|
|
|
113 |
|
|
|
113 |
(1) |
(29) |
(2) |
84 |
|
Amortization of prior service
cost |
|
|
|
3 |
|
|
|
3 |
(1) |
(1) |
(2) |
2 |
Other comprehensive
income |
|
35 |
|
116 |
|
- |
|
151 |
|
12 |
|
163 |
Balance at June 30,
2013 |
$ |
(544) |
$ |
(3,174) |
$ |
8 |
$ |
(3,710) |
$ |
616 |
$ |
(3,094) |
(1) |
Reclassified to Labor and fringe
benefits on the Consolidated Statement of Income and included in
components of net periodic benefit cost. See Note 6 - Pensions and
other postretirement benefits. |
(2) |
Included in Income tax expense on
the Consolidated Statement of Income. |
Selected Railroad Statistics - unaudited
|
Three months ended June 30 |
|
Six months ended June 30 |
|
2014 |
2013 |
|
2014 |
2013 |
|
|
|
|
|
|
Statistical operating
data |
|
|
|
|
|
Rail freight revenues ($
millions) (1) |
2,942 |
2,493 |
|
5,520 |
4,848 |
Gross ton miles (GTM)
(millions) |
116,243 |
101,547 |
|
217,719 |
197,848 |
Revenue ton miles (RTM)
(millions) |
60,081 |
52,702 |
|
113,415 |
103,278 |
Carloads (thousands) |
1,463 |
1,316 |
|
2,702 |
2,547 |
Route miles (includes Canada
and the U.S.) |
20,000 |
20,000 |
|
20,000 |
20,000 |
Employees (end of
period) |
24,875 |
23,925 |
|
24,875 |
23,925 |
Employees (average for the
period) |
24,565 |
23,926 |
|
24,161 |
23,681 |
|
|
|
|
|
|
Productivity |
|
|
|
|
|
Operating ratio (%) |
59.6 |
60.9 |
|
64.2 |
64.5 |
Rail freight revenue per RTM
(cents) (1) |
4.90 |
4.73 |
|
4.87 |
4.69 |
Rail freight revenue per carload
($) (1) |
2,011 |
1,894 |
|
2,043 |
1,903 |
Operating expenses per GTM
(cents) |
1.60 |
1.60 |
|
1.71 |
1.67 |
Labor and fringe benefits expense
per GTM (cents) |
0.48 |
0.49 |
|
0.53 |
0.54 |
GTMs per average number of
employees (thousands) |
4,732 |
4,244 |
|
9,011 |
8,355 |
Diesel fuel consumed (US
gallons in millions) |
112.3 |
103.5 |
|
219.2 |
205.2 |
Average fuel price ($/US
gallon) |
3.84 |
3.43 |
|
3.90 |
3.52 |
GTMs per US gallon of fuel
consumed |
1,035 |
981 |
|
993 |
964 |
|
|
|
|
|
|
Safety indicators |
|
|
|
|
|
Injury frequency rate (per
200,000 person hours) (2) |
1.49 |
1.43 |
|
1.78 |
1.42 |
Accident rate (per million
train miles) (2) |
2.43 |
2.10 |
|
2.40 |
2.11 |
|
|
|
|
|
|
Financial ratio |
|
|
|
|
|
Debt-to-total capitalization ratio
(% at end of period) (3) |
36.5 |
39.6 |
|
36.5 |
39.6 |
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 2013 comparative statistical data and related productivity
measures have been restated. |
(1) |
In 2014, certain Other revenues
were reclassified to the commodity groups within rail freight
revenues. This change has no impact on the Company's previously
reported results of operations as Total revenues remains unchanged.
The 2013 comparative figures have been reclassified in order to be
consistent with the 2014 presentation. |
(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. |
Supplementary Information - unaudited
|
Three months ended June 30 |
|
Six months ended June 30 |
|
2014 |
2013 |
% Change
Fav
(Unfav) |
|
% Change at
constant
currency
Fav (Unfav)
(2) |
|
2014 |
2013 |
% Change
Fav
(Unfav) |
|
% Change at
constant
currency
Fav (Unfav)
(2) |
Revenues (millions of dollars)
(1) |
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
564 |
481 |
17% |
|
12% |
|
1,132 |
942 |
20% |
|
14% |
Metals and minerals |
370 |
309 |
20% |
|
14% |
|
678 |
597 |
14% |
|
7% |
Forest products |
393 |
361 |
9% |
|
4% |
|
732 |
699 |
5% |
|
(1%) |
Coal |
201 |
192 |
5% |
|
2% |
|
383 |
362 |
6% |
|
2% |
Grain and fertilizers |
526 |
391 |
35% |
|
31% |
|
957 |
799 |
20% |
|
15% |
Intermodal |
716 |
610 |
17% |
|
15% |
|
1,337 |
1,166 |
15% |
|
12% |
Automotive |
172 |
149 |
15% |
|
10% |
|
301 |
283 |
6% |
|
- |
Total rail freight revenues |
2,942 |
2,493 |
18% |
|
14% |
|
5,520 |
4,848 |
14% |
|
9% |
Other revenues |
174 |
173 |
1% |
|
(4%) |
|
289 |
284 |
2% |
|
(3%) |
Total revenues |
3,116 |
2,666 |
17% |
|
13% |
|
5,809 |
5,132 |
13% |
|
8% |
Revenue ton miles (millions) |
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
12,779 |
10,841 |
18% |
|
18% |
|
25,658 |
21,395 |
20% |
|
20% |
Metals and minerals |
6,018 |
5,207 |
16% |
|
16% |
|
11,027 |
10,197 |
8% |
|
8% |
Forest products |
7,582 |
7,543 |
1% |
|
1% |
|
14,137 |
14,809 |
(5%) |
|
(5%) |
Coal |
5,733 |
5,945 |
(4%) |
|
(4%) |
|
11,027 |
11,285 |
(2%) |
|
(2%) |
Grain and fertilizers |
14,073 |
10,442 |
35% |
|
35% |
|
25,386 |
21,451 |
18% |
|
18% |
Intermodal |
13,048 |
11,989 |
9% |
|
9% |
|
24,709 |
22,736 |
9% |
|
9% |
Automotive |
848 |
735 |
15% |
|
15% |
|
1,471 |
1,405 |
5% |
|
5% |
Total revenue ton miles |
60,081 |
52,702 |
14% |
|
14% |
|
113,415 |
103,278 |
10% |
|
10% |
Rail freight revenue / RTM (cents)
(1) |
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
4.41 |
4.44 |
(1%) |
|
(5%) |
|
4.41 |
4.40 |
- |
|
(5%) |
Metals and minerals |
6.15 |
5.93 |
4% |
|
(1%) |
|
6.15 |
5.85 |
5% |
|
(1%) |
Forest products |
5.18 |
4.79 |
8% |
|
3% |
|
5.18 |
4.72 |
10% |
|
4% |
Coal |
3.51 |
3.23 |
9% |
|
5% |
|
3.47 |
3.21 |
8% |
|
4% |
Grain and fertilizers |
3.74 |
3.74 |
- |
|
(3%) |
|
3.77 |
3.72 |
1% |
|
(2%) |
Intermodal |
5.49 |
5.09 |
8% |
|
6% |
|
5.41 |
5.13 |
5% |
|
3% |
Automotive |
20.28 |
20.27 |
- |
|
(5%) |
|
20.46 |
20.14 |
2% |
|
(4%) |
Total rail freight revenue per RTM |
4.90 |
4.73 |
4% |
|
- |
|
4.87 |
4.69 |
4% |
|
- |
Carloads (thousands) |
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
160 |
149 |
7% |
|
7% |
|
321 |
300 |
7% |
|
7% |
Metals and minerals |
267 |
274 |
(3%) |
|
(3%) |
|
474 |
518 |
(8%) |
|
(8%) |
Forest products |
113 |
113 |
- |
|
- |
|
213 |
224 |
(5%) |
|
(5%) |
Coal |
141 |
110 |
28% |
|
28% |
|
266 |
207 |
29% |
|
29% |
Grain and fertilizers |
172 |
133 |
29% |
|
29% |
|
312 |
275 |
13% |
|
13% |
Intermodal |
547 |
477 |
15% |
|
15% |
|
1,004 |
909 |
10% |
|
10% |
Automotive |
63 |
60 |
5% |
|
5% |
|
112 |
114 |
(2%) |
|
(2%) |
Total carloads |
1,463 |
1,316 |
11% |
|
11% |
|
2,702 |
2,547 |
6% |
|
6% |
Rail freight revenue / carload
(dollars) (1) |
|
|
|
|
|
|
|
|
|
|
|
Petroleum and chemicals |
3,525 |
3,228 |
9% |
|
5% |
|
3,526 |
3,140 |
12% |
|
7% |
Metals and minerals |
1,386 |
1,128 |
23% |
|
17% |
|
1,430 |
1,153 |
24% |
|
17% |
Forest products |
3,478 |
3,195 |
9% |
|
4% |
|
3,437 |
3,121 |
10% |
|
4% |
Coal |
1,426 |
1,745 |
(18%) |
|
(21%) |
|
1,440 |
1,749 |
(18%) |
|
(21%) |
Grain and fertilizers |
3,058 |
2,940 |
4% |
|
1% |
|
3,067 |
2,905 |
6% |
|
2% |
Intermodal |
1,309 |
1,279 |
2% |
|
- |
|
1,332 |
1,283 |
4% |
|
2% |
Automotive |
2,730 |
2,483 |
10% |
|
5% |
|
2,688 |
2,482 |
8% |
|
2% |
Total rail freight revenue per carload |
2,011 |
1,894 |
6% |
|
3% |
|
2,043 |
1,903 |
7% |
|
3% |
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. |
(1) |
In 2014, certain Other revenues
were reclassified to the commodity groups within rail freight
revenues. This change has no impact on the Company's previously
reported results of operations as Total revenues remains unchanged.
The 2013 comparative figures have been reclassified in order to be
consistent with the 2014 presentation.
|
(2) |
See supplementary schedule
entitled Non-GAAP Measures for an explanation of this non-GAAP
measure. |
Non-GAAP Measures
Adjusted performance measures
For the three and six months ended June 30,
2014, the Company reported adjusted net income of
$847 million, or $1.03 per diluted share and $1,398 million, or $1.68 per diluted share, respectively. The
adjusted figures for the six months ended June 30, 2014 exclude a gain on disposal of the
Deux-Montagnes subdivision,
including the Mont-Royal tunnel,
together with the rail fixtures, of $80
million, or $72 million
after-tax ($0.09 per diluted
share).
For the three and six months ended June 30, 2013, the Company reported adjusted net
income of $704 million, or
$0.83 per diluted share and
$1,223 million, or $1.44 per diluted share, respectively. The
adjusted figures for the three and six months ended June 30, 2013 exclude a gain on exchange of
perpetual railroad operating easements including the track and
roadway assets on specific rail lines of $29
million, or $18 million
after-tax ($0.02 per diluted share)
and an income tax expense of $5
million ($0.01 per diluted
share) resulting from the enactment of higher provincial corporate
income tax rates. The adjusted figures for the six months ended
June 30, 2013 also exclude a gain on
disposal of a segment of the Oakville subdivision, together with the rail
fixtures and certain passenger agreements, of $40 million, or $36
million after-tax ($0.04 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 therefore, may not be comparable to similar measures presented
by other companies. The reader is advised to read all information
provided in the Company's 2014 unaudited Interim Consolidated
Financial Statements and Notes thereto. The following tables
provide a reconciliation of net income and earnings per share, as
reported for the three and six months ended June 30, 2014 and 2013, to the adjusted
performance measures presented herein.
|
Three months ended June 30,
2014 |
|
|
Six months ended June 30, 2014 |
In millions, except per share data |
|
Reported |
|
Adjustments |
|
Adjusted |
|
|
Reported |
|
Adjustments |
|
Adjusted |
Revenues |
$ |
3,116 |
$ |
- |
$ |
3,116 |
|
$ |
5,809 |
$ |
- |
$ |
5,809 |
Operating expenses |
|
1,858 |
|
- |
|
1,858 |
|
|
3,731 |
|
- |
|
3,731 |
Operating income |
|
1,258 |
|
- |
|
1,258 |
|
|
2,078 |
|
- |
|
2,078 |
Interest expense |
|
(91) |
|
- |
|
(91) |
|
|
(183) |
|
- |
|
(183) |
Other income |
|
2 |
|
- |
|
2 |
|
|
96 |
|
(80) |
|
16 |
Income before income taxes |
|
1,169 |
|
- |
|
1,169 |
|
|
1,991 |
|
(80) |
|
1,911 |
Income tax expense |
|
(322) |
|
- |
|
(322) |
|
|
(521) |
|
8 |
|
(513) |
Net income |
$ |
847 |
$ |
- |
$ |
847 |
|
$ |
1,470 |
$ |
(72) |
$ |
1,398 |
Operating ratio |
|
59.6% |
|
|
|
59.6% |
|
|
64.2% |
|
|
|
64.2% |
Effective tax rate |
|
27.5% |
|
|
|
27.5% |
|
|
26.2% |
|
|
|
26.8% |
Basic earnings per share |
$ |
1.03 |
$ |
- |
$ |
1.03 |
|
$ |
1.78 |
$ |
(0.09) |
$ |
1.69 |
Diluted earnings per share |
$ |
1.03 |
$ |
- |
$ |
1.03 |
|
$ |
1.77 |
$ |
(0.09) |
$ |
1.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
2013 |
|
|
Six months ended June 30, 2013 |
In millions, except per share data |
|
Reported |
|
Adjustments |
|
Adjusted |
|
|
Reported |
|
Adjustments |
|
Adjusted |
Revenues |
$ |
2,666 |
$ |
- |
$ |
2,666 |
|
$ |
5,132 |
$ |
- |
$ |
5,132 |
Operating expenses |
|
1,624 |
|
- |
|
1,624 |
|
|
3,310 |
|
- |
|
3,310 |
Operating income |
|
1,042 |
|
- |
|
1,042 |
|
|
1,822 |
|
- |
|
1,822 |
Interest expense |
|
(88) |
|
- |
|
(88) |
|
|
(177) |
|
- |
|
(177) |
Other income (loss) |
|
28 |
|
(29) |
|
(1) |
|
|
70 |
|
(69) |
|
1 |
Income before income taxes |
|
982 |
|
(29) |
|
953 |
|
|
1,715 |
|
(69) |
|
1,646 |
Income tax expense |
|
(265) |
|
16 |
|
(249) |
|
|
(443) |
|
20 |
|
(423) |
Net income |
$ |
717 |
$ |
(13) |
$ |
704 |
|
$ |
1,272 |
$ |
(49) |
$ |
1,223 |
Operating ratio |
|
60.9% |
|
|
|
60.9% |
|
|
64.5% |
|
|
|
64.5% |
Effective tax rate |
|
27.0% |
|
|
|
26.1% |
|
|
25.8% |
|
|
|
25.7% |
Basic earnings per share |
$ |
0.85 |
$ |
(0.01) |
$ |
0.84 |
|
$ |
1.50 |
$ |
(0.05) |
$ |
1.45 |
Diluted earnings per share |
$ |
0.84 |
$ |
(0.01) |
$ |
0.83 |
|
$ |
1.49 |
$ |
(0.05) |
$ |
1.44 |
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
therefore, may 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
$1.09 and $1.10 per US$1.00,
respectively, for the three and six months ended June 30, 2014 and $1.02 per US$1.00
for both the three and six months ended June
30, 2013.
On a constant currency basis, the Company's net
income for the three and six months ended June 30, 2014 would have been lower by
$28 million, or $0.03 per diluted share and $54 million, or $0.07 per diluted share, respectively. The
following table presents a reconciliation of 2014 net income as
reported to net income on a constant currency basis:
|
Three months ended |
|
Six months ended |
In millions |
June 30, 2014 |
|
June 30, 2014 |
Net income, as reported |
$ |
847 |
|
$ |
1,470 |
Impact due to the weakening
Canadian dollar included in net income |
|
(26) |
|
|
(52) |
Decrease due to the weakening
Canadian dollar on additional year-over-year US$ net income |
|
(2) |
|
|
(2) |
Impact of foreign exchange
using constant currency rates |
|
(28) |
|
|
(54) |
Net income, on a constant
currency basis |
$ |
819 |
|
$ |
1,416 |
Free cash flow
Free cash flow does not have any standardized meaning prescribed by
GAAP and therefore, may 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 for debt obligations and for
discretionary uses such as payment of dividends and strategic
opportunities.
The Company defines its free cash flow measure
as the difference between net cash provided by operating activities
and net cash used in investing activities; adjusted for changes in
restricted cash and cash equivalents and the impact of major
acquisitions, if any.
|
Three months ended June 30 |
|
Six months ended June 30 |
In millions |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
Net cash provided by operating
activities |
$ |
1,273 |
|
$ |
1,063 |
|
$ |
1,918 |
$ |
|
1,384 |
Net cash used in investing
activities |
|
(494) |
|
|
(411) |
|
|
(668) |
|
|
(572) |
Net cash provided before financing
activities |
|
779 |
|
|
652 |
|
|
1,250 |
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in restricted cash and cash
equivalents |
|
(3) |
|
|
(15) |
|
|
20 |
|
|
(24) |
Free cash flow |
$ |
776 |
|
$ |
637 |
|
$ |
1,270 |
$ |
|
788 |
SOURCE CN