CNR Canadian National Railway Company

Full-year 2014 adjusted diluted EPS rose 23% to C$3.76 ⁽¹⁾

2014 freight volumes were a CN record

MONTREAL, Jan. 27, 2015 /PRNewswire/ - CN (TSX: CNR) (NYSE: CNI) today reported its financial and operating results for the fourth quarter and year ended Dec. 31, 2014.

Fourth-quarter and full-year 2014 financial highlights

• Fourth-quarter 2014 net income was C$844 million versus net income of C$635 million for the same period of 2013.
• Q4-2014 diluted earnings per share (EPS) increased 36 per cent to C$1.03 from diluted EPS of C$0.76 for the final quarter of 2013.
• Full-year 2014 net income was C$3,167 million, or C$3.85 per diluted share, compared with net income of C$2,612 million, or C$3.09 per diluted share, for 2013.
• Full-year 2014 adjusted diluted EPS increased 23 per cent to C$3.76, with adjusted 2014 net income of C$3,095 million versus adjusted net income of C$2,582 million in 2013. ⁽¹⁾
• Full-year 2014 volumes reached record levels, with carloadings up eight per cent and revenue ton-miles up 10 per cent.
• Q4-2014 operating income increased 30 per cent to C$1,260 million, and full-year 2014 operating income rose 19 per cent to C$4,624 million.
• The fourth-quarter 2014 operating ratio improved by 4.1 points to 60.7 per cent; the full-year 2014 operating ratio improved by 1.5 points to 61.9 per cent.
• 2014 free cash flow totalled C$2,220 million, compared with free cash flow of C$1,623 million for 2013. ⁽¹⁾

Claude Mongeau, president and chief executive officer, said: "CN delivered a strong fourth-quarter 2014 performance, concluding a remarkable year characterized by brutal first-quarter winter weather, followed by a strong rebound starting in March, and capped by record full-year freight volumes. We're particularly proud of our solid operating performance that allowed us to move record volumes of Western Canadian grain and equally strong U.S. grain shipments.

"Our agenda of Operational and Service Excellence is clearly working. This momentum is helping us to grow CN's business faster than the overall economy and to do so at low incremental cost. This will provide us with a strong foundation for 2015, a year in which we see continued opportunities for growth in energy-related commodities, intermodal traffic, and commodities tied to U.S. housing construction, automotive sales and other consumer spending."

Positive 2015 outlook, increased dividend ⁽²⁾
Mongeau said: "CN is optimistic about its future prospects. The Company is aiming to deliver double-digit EPS growth in 2015 over adjusted diluted 2014 EPS of C$3.76. In addition, CN plans to increase its capital spending by roughly C$300 million for a total 2015 investment of approximately C$2.6 billion.

"Given CN's strong balance sheet and its solid outlook for earnings and free cash flow generation, I am pleased to announce that the Company's Board of Directors has approved a 25 per cent increase in CN's 2015 quarterly common-share dividend. CN has increased its dividend per share by 17 per cent per year on average since its privatization in 1995."

Full-year 2014 revenues, traffic volumes and expenses
2014 revenues increased 15 per cent to C$12,134 million. Revenues increased for petroleum and chemicals (21 per cent), grain and fertilizers (21 per cent), metals and minerals (20 per cent), intermodal (13 per cent), automotive (12 per cent), forest products (seven per cent), and coal (four per cent).

The rise in total revenues was mainly attributable to higher freight volumes due to a record 2013/2014 Canadian grain crop, strong energy markets, particularly crude oil and frac sand, new intermodal and automotive business; the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues; and freight rate increases.

Carloadings for 2014 increased eight per cent over 2013 to 5,625 thousand.

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased by 10 per cent in 2014 over 2013. 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 in 2014 over the previous year.

Operating expenses for 2014 increased by 12 per cent to C$7,510 million, mainly due to the negative translation impact of a weaker Canadian dollar on U.S.-dollar-denominated expenses, increased purchased services and material expense, higher fuel costs, as well as increased labor and fringe benefits expense.

The operating ratio was 61.9 per cent in 2014, an improvement of 1.5 points over the 2013 operating ratio of 63.4 per cent.

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 net income for the fourth quarter and year ended Dec. 31, 2014, would have been lower by C$45 million, or C$0.06 per diluted share and C$121 million, or C$0.15 per diluted share, respectively. ⁽¹⁾

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 non-GAAP financial measures in its outlook, 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.

2015 key assumptions
CN has made a number of economic and market assumptions in preparing its 2015 outlook. The Company is forecasting that North American industrial production for the year will increase in the range of three to four per cent, that U.S. housing starts will be in the range of 1.2 million units, and that U.S. motor vehicles sales will be approximately 16.7 million units. The 2014/2015 Canadian grain crop represented a significant reduction toward the historical trend line while the U.S. grain crop was above trend. CN assumes that  the 2015/2016 grain crops in both Canada and the United States will be in line with trend yields. CN also assumes its 2015 customer shipments of energy-related commodities, namely crude oil and frac sand, will grow by approximately 75,000 carloads versus 2014. With these assumptions, CN assumes total carload growth for all freight categories will be in the three to four per cent range, along with continued pricing improvement above inflation. CN also assumes that in 2015 the value of the Canadian dollar in U.S. currency will be in the range of $0.80 to $0.85, and that the average price of crude oil (West Texas Intermediate) will fluctuate around US$50 per barrel. In 2015, CN plans to invest approximately C$2.6 billion in its capital programs, of which approximately C$1.3 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 2015 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.

These unaudited interim consolidated financial statements, expressed in Canadian dollars, and prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP), contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Canadian National Railway Company's (the Company) financial position as at December 31, 2014 and December 31, 2013, and its results of operations, comprehensive income, changes in shareholders' equity and cash flows for the three months and years ended December 31, 2014 and 2013. These consolidated financial statements have been prepared using accounting policies consistent with those used in preparing the Company's 2014 Annual Consolidated Financial Statements and should be read in conjunction with such statements, Notes thereto and Management's Discussion and Analysis (MD&A).

These unaudited interim consolidated financial statements, expressed in Canadian dollars, and prepared in accordance with U.S. GAAP, contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as at December 31, 2014 and December 31, 2013, and its results of operations, comprehensive income, changes in shareholders' equity and cash flows for the three months and years ended December 31, 2014 and 2013. These consolidated financial statements have been prepared using accounting policies consistent with those used in preparing the Company's 2014 Annual Consolidated Financial Statements and should be read in conjunction with such statements, Notes thereto and MD&A.

Non-GAAP Measures

Adjusted performance measures
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 Annual Consolidated Financial Statements, Notes thereto and Management's Discussion and Analysis (MD&A).

For the three months and year ended December 31, 2014, the Company reported adjusted net income of $844 million, or $1.03 per diluted share and $3,095 million, or $3.76 per diluted share, respectively. The adjusted figures for the year ended December 31, 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 months and year ended December 31, 2013, the Company reported adjusted net income of $635 million, or $0.76 per diluted share and $2,582 million, or $3.06 per diluted share, respectively. The adjusted figures for the year ended December 31, 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 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). The adjusted figures also exclude a $24 million ($0.03 per diluted share) income tax expense resulting from the enactment of higher provincial corporate income tax rates.

The following table provides a reconciliation of net income and earnings per share, as reported for the three months and years ended December 31, 2014 and 2013, to the adjusted performance measures presented herein.

Constant currency
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 $1.14 and $1.10 per US$1.00, respectively, for the three months and year ended December 31, 2014, and $1.05 and $1.03 per US$1.00, respectively, for the corresponding periods in 2013.

On a constant currency basis, the Company's net income for the three months and year ended December 31, 2014 would have been lower by $45 million, or $0.06 per diluted share and $121 million, or $0.15 per diluted share, respectively.

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.

SOURCE CN