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 /PRNewswire/ - 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
potentiallyresponsible 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