form6-k.htm
 

FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Report of Foreign Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For the month of February, 2009
 
Commission File Number: 001-02413
 
Canadian National Railway Company
(Translation of registrant’s name into English)
 
935 de la Gauchetiere Street West
Montreal, Quebec
Canada H3B 2M9
(Address of principal executive offices)



Indicate by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F:
 
Form 20-F        
 
 
Form 40-F    X  
 

 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
 
Yes        
 
 
No    X  
 

 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
 
Yes        
 
 
No    X  
 

 
Indicate by check mark whether by furnishing the information contained in this
Form, the Registrant is also thereby furnishing  the information to the Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
 
Yes        
 
 
No    X  
 

 
If “Yes” is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): N/A
 
 

 
 
 

 

 
 

CN logo
 
Canadian National Railway Company

Table of Contents
 
Item
 
   
   
   
   
   

 


 
 

 
Management’s Report on Internal Control over Financial Reporting


Management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2008 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of December 31, 2008.
KPMG LLP, an independent registered public accounting firm, has issued an unqualified audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 and has also expressed an unqualified opinion on the Company's 2008 consolidated financial statements as stated in their Reports of Independent Registered Public Accounting Firm dated February 5, 2009.
 
 
 
 
 
(s) E. Hunter Harrison
President and Chief Executive Officer
 
February 5, 2009
 
 
 
 
 
(s) Claude Mongeau
Executive Vice-President and Chief Financial Officer
 
February 5, 2009
 

 
1

 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of the Canadian National Railway Company:
 
We have audited the accompanying consolidated balance sheets of the Canadian National Railway Company (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with generally accepted accounting principles in the United States.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 5, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
 
 
(s) KPMG LLP*
Chartered Accountants
 
Montreal, Canada
February 5, 2009

* CA Auditor permit no. 23443
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
KPMG Canada provides services to KPMG LLP.

 
2

 

Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of the Canadian National Railway Company:
 
We have audited the Canadian National Railway Company’s (the “Company”) internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control -Integrated Framework issued by the COSO.
 
We also have audited, in accordance with Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2008 and 2007, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2008, and our report dated February 5, 2009 expressed an unqualified opinion on those consolidated financial statements.
 
(s) KPMG LLP*
Chartered Accountants
 
Montreal, Canada
February 5, 2009
 
*CA Auditor permit no. 23443
 
 
 
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
KPMG Canada provides services to KPMG LLP.

 
3

 
Consolidated Statement of Income                                                                                                      U.S. GAAP

In millions, except per share data
Year ended December 31,
   
2008 
   
2007 
   
2006 
                       
Revenues
   
$
8,482 
 
$
7,897 
 
$
7,929 
                       
Operating expenses
                   
 
Labor and fringe benefits
     
1,674 
   
1,701 
   
1,823 
 
Purchased services and material
     
1,137 
   
1,045 
   
1,027 
 
Fuel
     
1,403 
   
1,026 
   
892 
 
Depreciation and amortization
     
725 
   
677 
   
650 
 
Equipment rents
     
262 
   
247 
   
198 
 
Casualty and other
     
387 
   
325 
   
309 
Total operating expenses
     
5,588 
   
5,021 
   
4,899 
                       
Operating income
     
2,894 
   
2,876 
   
3,030 
                       
Interest expense
     
(375)
   
(336)
   
(312)
Other income (Note 13)
     
26 
   
166 
   
11 
Income before income taxes
     
2,545 
   
2,706 
   
2,729 
                       
Income tax expense (Note 14)
     
(650)
   
(548)
   
(642)
Net income
   
$
1,895 
 
$
2,158 
 
$
2,087 
                       
Earnings per share (Note 16)
                   
 
Basic
   
$
3.99 
 
$
4.31 
 
$
3.97 
 
Diluted
   
$
3.95 
 
$
4.25 
 
$
3.91 
                       
Weighted-average number of shares
                   
 
Basic
     
474.7 
   
501.2 
   
525.9 
 
Diluted
     
480.0 
   
508.0 
   
534.3 
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
                       
See accompanying notes to consolidated financial statements.
             

 
4

 

Consolidated Statement of Comprehensive Income                                                    U.S. GAAP

In millions
Year ended December 31,
 
2008 
 
2007 
 
2006 
                   
Net income
$
1,895 
$
2,158 
$
2,087 
                   
Other comprehensive income (loss) (Note 19):
           
 
Unrealized foreign exchange gain (loss) on:
           
   
Translation of the net investment in foreign operations
 
1,259 
 
(1,004)
 
32 
   
Translation of U.S. dollar-denominated long-term debt designated as
           
     
a hedge of the net investment in U.S. subsidiaries
 
(1,266)
 
788 
 
(33)
                   
 
Pension and other postretirement benefit plans (Note 12):
           
   
Net actuarial gain (loss) arising during the period
 
(452)
 
391 
 
 -
   
Prior service cost arising during the period
 
(3)
 
(12)
 
 -
   
Amortization of net actuarial loss (gain) included in net periodic benefit cost
(2)
 
49 
 
 -
   
Amortization of prior service cost included in net periodic benefit cost
 
21 
 
21 
 
 -
   
Minimum pension liability adjustment
 
 
 
                   
 
Derivative instruments (Note 18):
 
 
(1)
 
(57)
                   
Other comprehensive income (loss) before income taxes
 
(443)
 
232 
 
(57)
                   
Income tax recovery (expense) on Other comprehensive income (loss)
 
319 
 
(219)
 
(179)
                   
Other comprehensive income (loss)
 
(124)
 
13 
 
(236)
                   
Comprehensive income
$
1,771 
$
2,171 
$
1,851 
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
                   
See accompanying notes to consolidated financial statements.
           

 
5

 

Consolidated Balance Sheet                                                                                                                             U.S. GAAP

In millions
December 31,
 
2008 
   
2007 
             
Assets
           
             
Current assets
           
     Cash and cash equivalents
 
$
413 
 
$
310 
     Accounts receivable (Note 4)
   
913 
   
370 
     Material and supplies
   
200 
   
162 
     Deferred income taxes (Note 14)
   
98 
   
68 
     Other
   
132 
   
138 
     
1,756 
   
1,048 
             
Properties (Note 5)
   
23,203 
   
20,413 
Intangible and other assets (Note 6)
   
1,761 
   
1,999 
             
Total assets
 
$
26,720 
 
$
23,460 
             
Liabilities and shareholders’ equity
           
             
Current liabilities
           
     Accounts payable and other (Note 7)
 
$
1,386 
 
$
1,336 
     Current portion of long-term debt (Note 9)
   
506 
   
254 
             
     
1,892 
   
1,590 
             
Deferred income taxes (Note 14)
   
5,511 
   
4,908 
Other liabilities and deferred credits (Note 8)
   
1,353 
   
1,422 
Long-term debt (Note 9)
   
7,405 
   
5,363 
             
Shareholders’ equity
           
     Common shares (Note 10)
   
4,179 
   
4,283 
     Accumulated other comprehensive loss (Note 19)
   
(155)
   
(31)
     Retained earnings
   
6,535 
   
5,925 
             
     
10,559 
   
10,177 
             
Total liabilities and shareholders’ equity
 
$
26,720 
 
$
23,460 
             
             
             
             
On Behalf of the Board:
           
             
             
             
David G. McLean
E. Hunter Harrison
         
Director
Director
         
             
             
             
See accompanying notes to consolidated financial statements.
           

 
6

 

Consolidated Statement of Changes in Shareholders’ Equity                                                                          U.S. GAAP

 
Issued and
     
Accumulated
           
 
outstanding
     
other
       
Total
 
common
 
Common
comprehensive
 
Retained
 
shareholders’
In millions
shares
 
shares
loss
 
earnings
 
equity
                           
Balances at December 31, 2005
536.8 
 
$
4,580 
 
$
(222)
 
$
4,891 
 
$
9,249 
Net income
   
   
   
2,087 
   
2,087 
Stock options exercised and other (Notes 10, 11)
5.1 
   
133 
   
   
   
133 
Share repurchase programs (Note 10)
(29.5)
   
(254)
   
   
(1,229)
   
(1,483)
Other comprehensive loss (Note 19)
   
   
(236)
   
   
(236)
Adjustment to Accumulated other comprehensive
                         
     loss (Note 2)
   
   
414 
   
   
414 
Dividends ($0.65 per share)
   
   
   
(340)
   
(340)
Balances at December 31, 2006
512.4 
   
4,459 
   
(44)
   
5,409 
   
9,824 
                           
     Adoption of accounting pronouncements (Note 2)
   
   
   
95 
   
95 
Restated balance, beginning of year
512.4 
   
4,459 
   
(44)
   
5,504 
   
9,919 
                           
Net income
   
   
   
2,158 
   
2,158 
Stock options exercised and other (Notes 10, 11)
3.0 
   
89 
   
   
   
89 
Share repurchase programs (Note 10)
(30.2)
   
(265)
   
   
(1,319)
   
(1,584)
Other comprehensive income (Note 19)
   
   
13 
   
   
13 
Dividends ($0.84 per share)
   
   
   
(418)
   
(418)
Balances at December 31, 2007
485.2 
   
4,283 
   
(31)
   
5,925 
   
10,177 
                           
Net income
   
   
   
1,895 
   
1,895 
Stock options exercised and other (Notes 10, 11)
2.4 
   
68 
   
   
   
68 
Share repurchase programs (Note 10)
(19.4)
   
(172)
   
   
(849)
   
(1,021)
Other comprehensive loss (Note 19)
   
   
(124)
   
   
(124)
Dividends ($0.92 per share)
   
   
   
(436)
   
(436)
Balances at December 31, 2008
468.2 
 
$
4,179 
 
$
(155)
 
$
6,535 
 
$
10,559 
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
See accompanying notes to consolidated financial statements.
                         

 
7

 

Consolidated Statement of Cash Flows                                                                                                                U.S. GAAP

In millions
Year ended December 31,
 
2008 
   
2007 
   
2006 
                   
Operating activities
                 
Net income
 
$
1,895 
 
$
2,158 
 
$
2,087 
Adjustments to reconcile net income to net cash
               
   provided from operating activities:
                 
     Depreciation and amortization
   
725 
   
678 
   
653 
     Deferred income taxes (Note 14)
   
230 
   
(82)
   
     Gain on sale of Central Station Complex (Note 5)
 
   
(92)
   
     Gain on sale of investment in English Welsh and Scottish Railway (Note 6)
 
   
(61)
   
     Other changes in:
                 
        Accounts receivable (Note 4)
   
(432)
   
229 
   
(17)
        Material and supplies
   
(23)
   
18 
   
(36)
        Accounts payable and other
   
(127)
   
(396)
   
194 
        Other current assets
   
37 
   
84 
   
61 
     Other
   
(274)
   
(119)
   
Cash provided from operating activities
   
2,031 
   
2,417 
   
2,951 
                   
Investing activities
                 
Property additions
   
(1,424)
   
(1,387)
   
(1,298)
Acquisitions, net of cash acquired (Note 3)
   
(50)
   
(25)
   
(84)
Sale of Central Station Complex (Note 5)
   
   
351 
   
Sale of investment in English Welsh and Scottish Railway (Note 6)
 
   
114 
   
Other, net
   
74 
   
52 
   
33 
Cash used by investing activities
   
(1,400)
   
(895)
   
(1,349)
                   
Financing activities
                 
Issuance of long-term debt
   
4,433 
   
4,171 
   
3,308 
Reduction of long-term debt
   
(3,589)
   
(3,589)
   
(3,089)
Issuance of common shares due to exercise of stock options and
               
   related excess tax benefits realized (Note 11)
   
54 
   
77 
   
120 
Repurchase of common shares (Note 10)
   
(1,021)
   
(1,584)
   
(1,483)
Dividends paid
   
(436)
   
(418)
   
(340)
Cash used by financing activities
   
(559)
   
(1,343)
   
(1,484)
                   
Effect of foreign exchange fluctuations on U.S. dollar-
               
   denominated cash and cash equivalents
   
31 
   
(48)
   
(1)
                   
Net increase in cash and cash equivalents
 
103 
   
131 
   
117 
                   
Cash and cash equivalents, beginning of year
   
310 
   
179 
   
62 
                   
Cash and cash equivalents, end of year
 
$
413 
 
$
310 
 
$
179 
                   
Supplemental cash flow information
                 
   Net cash receipts from customers and other
 
$
8,012 
 
$
8,139 
 
$
7,946 
   Net cash payments for:
                 
        Employee services, suppliers and other expenses
 
(4,920)
   
(4,323)
   
(4,130)
        Interest
   
(396)
   
(340)
   
(294)
        Workforce reductions (Note 8)
   
(22)
   
(31)
   
(45)
        Personal injury and other claims (Note 17)
   
(91)
   
(86)
   
(107)
        Pensions (Note 12)
   
(127)
   
(75)
   
(112)
        Income taxes (Note 14)
   
(425)
   
(867)
   
(307)
Cash provided from operating activities
 
$
2,031 
 
$
2,417 
 
$
2,951 
See accompanying notes to consolidated financial statements.
           

 
8

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP

Canadian National Railway Company, together with its wholly owned subsidiaries, collectively “CN” or “the Company,” is engaged in the rail and related transportation business. CN spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans and Mobile, Alabama, and the key cities of Toronto, Buffalo, Chicago, Detroit, Duluth, Minnesota/Superior, Wisconsin, Green Bay, Wisconsin, Minneapolis/St. Paul, Memphis, St. Louis, and Jackson, Mississippi, with connections to all points in North America. CN’s freight revenues are derived from the movement of a diversified and balanced portfolio of goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive.


1 – Summary of significant accounting policies
 
These consolidated financial statements are expressed in Canadian dollars, except where otherwise indicated, and have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management reviews its estimates, including those related to personal injury and other claims, environmental claims, depreciation, pensions and other postretirement benefits, and income taxes, based upon currently available information.  Actual results could differ from these estimates.
 
A. Principles of consolidation
These consolidated financial statements include the accounts of all subsidiaries. The Company’s investments in which it has significant influence are accounted for using the equity method and all other investments are accounted for using the cost method.
 
B. Revenues
Freight revenues are recognized using the percentage of completed service method based on the transit time of freight as it moves from origin to destination. Costs associated with movements are recognized as the service is performed. Revenues are presented net of taxes collected from customers and remitted to governmental authorities.
 
C. Foreign exchange
All of the Company’s United States (U.S.) operations are self-contained foreign entities with the U.S. dollar as their functional currency. Accordingly, the U.S. operations’ assets and liabilities are translated into Canadian dollars at the rate in effect at the balance sheet date and the revenues and expenses are translated at average exchange rates during the year. All adjustments resulting from the translation of the foreign operations are recorded in Other comprehensive income (loss) (see Note 19).
The Company designates the U.S. dollar-denominated long-term debt of the parent company as a foreign exchange hedge of its net investment in U.S. subsidiaries. Accordingly, unrealized foreign exchange gains and losses, from the dates of designation, on the translation of the U.S. dollar-denominated long-term debt are also included in Other comprehensive income (loss).
 
D. Cash and cash equivalents
Cash and cash equivalents include highly liquid investments purchased three months or less from maturity and are stated at cost, which approximates market value.
 
E. Accounts receivable
Accounts receivable are recorded at cost net of billing adjustments and an allowance for doubtful accounts. The allowance for doubtful accounts is based on expected collectability and considers historical experience as well as known trends or uncertainties related to account collectability.  Any gains or losses on the sale of accounts receivable are calculated by comparing the carrying amount of the accounts receivable sold to the total of the cash proceeds on sale and the fair value of the retained interest in such receivables on the date of transfer. Costs related to the sale of accounts receivable are recognized in earnings in the period incurred.
 
 

 
9

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP
 
 
F. Material and supplies
Material and supplies, which consist mainly of rail, ties, and other items for construction and maintenance of property and equipment, as well as diesel fuel, are valued at weighted-average cost.
 
G. Properties
Railroad properties are carried at cost less accumulated depreciation including asset impairment write-downs. Labor, materials and other costs associated with the installation of rail, ties, ballast and other track improvements are capitalized to the extent they meet the Company’s minimum threshold for capitalization. Major overhauls and large refurbishments are also capitalized when they result in an extension to the useful life or increase the functionality of the asset.  Included in property additions are the costs of developing computer software for internal use.  Maintenance costs are expensed as incurred.
The cost of railroad properties, less net salvage value, retired or disposed of in the normal course of business is charged to accumulated depreciation, in accordance with the group method of depreciation. The Company reviews the carrying amounts of properties held and used whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable based on future undiscounted cash flows.  Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value.
Assets held for sale are measured at the lower of their carrying amount or fair value, less cost to sell. Losses resulting from significant line sales are recognized in income when the asset meets the criteria for classification as held for sale, whereas losses resulting from significant line abandonments are recognized in the statement of income when the asset ceases to be used. Gains are recognized in income when they are realized.
 
H. Depreciation
The cost of properties, including those under capital leases, net of asset impairment write-downs, is depreciated on a straight-line basis over their estimated useful lives as follows:
 
Asset class
Annual rate
Track and roadway
2%
Rolling stock
3%
Buildings
2%
Information technology
15%
Other
7%

The Company follows the group method of depreciation for railroad properties and, as such, conducts comprehensive depreciation studies on a periodic basis to assess the reasonableness of the lives of properties based upon current information and historical activities. Changes in estimated useful lives are accounted for prospectively.  In 2008, the Company completed a depreciation study of its Canadian properties, plant and equipment, resulting in an increase in depreciation expense of $20 million for the year ended December 31, 2008 compared to the same period in 2007.  In 2007, the Company completed a depreciation study for all of its U.S. assets, for which there was no significant impact on depreciation expense.
 
I. Intangible assets
Intangible assets relate to customer contracts and relationships assumed through past acquisitions and are being amortized on a straight-line basis over 40 to 50 years.
 
J. Pensions
Pension costs are determined using actuarial methods.  Net periodic benefit cost is charged to income and includes:
(i)    the cost of pension benefits provided in exchange for employees’ services rendered during the year,
(ii)  the interest cost of pension obligations,
(iii) the expected long-term return on pension fund assets,
(iv)  the amortization of prior service costs and amendments over the expected average remaining service life of the employee
        group covered by the plans, and
 

 
10

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP
 
 
(v)   the amortization of cumulative net actuarial gains and losses in excess of 10% of, the greater of the beginning of year balances
        of the projected benefit obligation or market-related value of plan assets, over the expected average remaining service life of the
        employee group covered by the plans.
 
The pension plans are funded through contributions determined in accordance with the projected unit credit actuarial cost method.
 
K. Postretirement benefits other than pensions
The Company accrues the cost of postretirement benefits other than pensions using actuarial methods. These benefits, which are funded by the Company as they become due, include life insurance programs, medical benefits and free rail travel benefits.
The Company amortizes the cumulative net actuarial gains and losses in excess of 10% of the projected benefit obligation at the beginning of the year, over the expected average remaining service life of the employee group covered by the plans.
 
L. Personal injury and other claims
In Canada, the Company accounts for costs related to employee work-related injuries based on actuarially developed estimates of the ultimate cost associated with such injuries, including compensation, health care and third-party administration costs.
In the U.S., the Company accrues the expected cost for personal injury, property damage and occupational disease claims, based on actuarial estimates of their ultimate cost.
 
For all other legal actions in Canada and the U.S., 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.
 
M. Environmental expenditures
Environmental expenditures that relate to current operations are expensed unless they relate to an improvement to the property. Expenditures that relate to an existing condition caused by past operations and which are not expected to contribute to current or future operations are expensed. Environmental liabilities are recorded when environmental assessments occur and/or remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used and the extent of the corrective action required, can be reasonably estimated.
 
N. Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method, the change in the net deferred tax asset or liability is included in the computation of net income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled.
 
O. Derivative financial instruments
The Company uses derivative financial instruments from time to time in the management of its interest rate and foreign currency exposures. Derivative instruments are recorded on the balance sheet at fair value and the changes in fair value are recorded in earnings or Other comprehensive income (loss) depending on the nature and effectiveness of the hedge transaction. Income and expense related to hedged derivative financial instruments are recorded in the same category as that generated by the underlying asset or liability.
 

 
11

 

Notes to Consolidated Financial Statements                                                                                                     U.S. GAAP
 
 
 
P. Stock-based compensation
The Company follows the fair value based approach for stock option awards based on the grant-date fair value using the Black-Scholes option-pricing model. The Company expenses the fair value of its stock option awards on a straight-line basis, over the period during which an employee is required to provide service (requisite service period) or until retirement eligibility is attained, whichever is shorter. The Company also follows the fair value based approach for cash settled awards. Compensation cost for cash settled awards is based on the fair value of the awards at period-end and is recognized over the period during which an employee is required to provide service (requisite service period) or until retirement eligibility is attained, whichever is shorter. See Note 11 – Stock plans, for the assumptions used to determine fair value and for other required disclosures.
 
Q. Recent accounting pronouncements
The Accounting Standards Board of the Canadian Institute of Chartered Accountants has announced its decision to require all publicly accountable enterprises to report under International Financial Reporting Standards (IFRS) for the years beginning on or after January 1, 2011. However, National Instrument 52-107 allows foreign issuers, as defined by the Securities and Exchange Commission (SEC), such as CN, to file with Canadian securities regulators financial statements that are prepared in accordance with U.S. GAAP.  As such, the Company has decided not to report under IFRS by 2011 and to continue reporting under U.S. GAAP.  In August 2008, the SEC issued a roadmap for the potential convergence to IFRS for U.S. issuers and foreign issuers.  The proposal stipulates that the SEC will decide in 2011 whether to move forward with the convergence to IFRS with the transition beginning in 2014.  Should the SEC adopt such a proposal, the Company will convert its reporting to IFRS at such time.
 
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R), “Business Combinations,” which requires that assets acquired and liabilities assumed be measured at fair value as of the acquisition date, and that goodwill acquired from a bargain purchase (previously referred to as negative goodwill) be recognized in the Consolidated Statement of Income in the period the acquisition occurs.  The standard also prescribes disclosure requirements to enable users of financial statements to evaluate and understand the nature and financial effects of the business combination.  The standard is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company will apply SFAS No. 141(R) on a prospective basis, beginning with its acquisition of Elgin, Joliet and Eastern Railway Company (EJ&E) in 2009 (see Note 3). As at December 31, 2008, the Company had approximately $40 million of transaction costs recorded in Other current assets related to the acquisition of EJ&E. Pursuant to the requirements of this standard, such costs will be expensed at the time of acquisition.
 
 
2 – Accounting changes
 
2007
Income taxes
On January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes,” which prescribes the criteria for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This Interpretation also provides guidance on derecognition, classification, interest and penalties, disclosure, and transition.  The application of FIN No. 48 on January 1, 2007 had the effect of decreasing the net deferred income tax liability and increasing Retained earnings by $98 million.  Disclosures prescribed by FIN No. 48 are presented in Note 14 – Income taxes.
 
Pensions and other postretirement benefits
On January 1, 2007, pursuant to SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R),” the Company early adopted the requirement to measure the defined benefit plan assets and the projected benefit obligation as of the date of the fiscal year-end statement of financial position for its U.S. plans.  The Company elected to use the 15-month transition method, which allowed for the extrapolation of net periodic benefit cost based on the September 30, 2006 measurement date to the fiscal year-end date of December 31, 2007.  As a result, the Company recorded a reduction of $3 million to Retained earnings at January 1, 2007, which represented the net periodic benefit cost pursuant to the actuarial valuation attributable to the period between the early measurement date of September 30, 2006 and January 1, 2007 (the date of adoption).
 
 
 
12

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP
 
 
2006
Stock-based compensation
On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which required the expensing of all options issued, modified or settled based on the grant date fair value over the period during which an employee is required to provide service (requisite service period) or until retirement eligibility is attained, whichever is shorter. Compensation cost for cash settled awards is based on the fair value of the awards at period-end and is recognized over the period during which an employee is required to provide service (requisite service period) or until retirement eligibility is attained, whichever is shorter.
The Company adopted SFAS No. 123(R) using the modified prospective approach, which required application of the standard to all awards granted, modified, repurchased or cancelled on or after January 1, 2006, and to all awards for which the requisite service had not been rendered as at such date. Since January 1, 2003, the Company had been following the fair value based approach prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” for stock option awards granted, modified or settled on or after such date, while cash settled awards were measured at their intrinsic value at each reporting period until December 31, 2005. As such, the application of SFAS No. 123(R) on January 1, 2006 to all awards granted prior to its adoption did not have a significant impact on the financial statements. In accordance with the modified prospective approach, prior period financial statements were not restated to reflect the impact of SFAS No. 123(R).
For the year ended December 31, 2006, the application of SFAS No. 123(R) had the effect of increasing stock-based compensation expense and decreasing net income by $16 million and $12 million, respectively, or $0.02 per basic and diluted earnings per share. Disclosures prescribed by SFAS No. 123(R) for the Company’s various stock-based compensation plans are presented in Note 11 – Stock plans.
 
Pension and other postretirement plans
On December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R),” which required the Company to recognize the funded status of its various benefit plans in its Consolidated Balance Sheet. Pursuant to SFAS No. 158, the Company recognizes changes in the funded status in the year in which the changes occur, through Other comprehensive income (loss).  The actuarial gains/losses and prior service costs/credits that arise during the period will be recognized as a component of Other comprehensive income (loss).  These amounts recognized in Accumulated other comprehensive loss will be adjusted as they are subsequently recognized as components of net periodic benefit cost.  Prior to December 31, 2006, actuarial gains/losses and prior service costs/credits were deferred in their recognition, and amortized into net periodic benefit cost over the expected average remaining service life of the employee group covered by the plans.  The adoption of SFAS No. 158 had no impact on years prior to 2006 as retrospective application was not allowed. This Standard has no effect on the computation of net periodic benefit cost for pensions and other postretirement benefits. See Note 12 – Pensions and other postretirement benefits for the prospective application of SFAS No. 158 to the Company’s benefit plans.
 
 
 
13

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP
 

 
3 – Acquisitions

Acquisition of Elgin, Joliet and Eastern Railway Company (EJ&E) – Subsequent event
In September 2007, the Company and U.S. Steel Corporation (U.S. Steel), the indirect owner of the EJ&E, announced an agreement under which the Company would acquire the principal lines of the EJ&E for a purchase price of approximately U.S.$300 million.  Under the terms of the agreement, the Company would acquire substantially all of the railroad assets and equipment of EJ&E, except those that support the Gary Works site in northwest Indiana and the steelmaking operations of U.S. Steel.
The Company has received all necessary regulatory approvals, including the U.S. Surface Transportation Board (STB) ruling rendered on December 24, 2008.  On January 31, 2009, the Company completed its acquisition of the EJ&E for a purchase price of U.S.$300 million, paid with cash on hand.
Over the next few years, the Company has committed to spend approximately U.S.$100 million for infrastructure improvements and over U.S.$60 million under a series of mitigation agreements with individual communities, as well as under a comprehensive voluntary mitigation program that addresses municipalities’ concerns raised during the regulatory approval process.  Expenditures for additional STB-imposed mitigation are being currently evaluated by the Company.
The Company accounted for the acquisition using the purchase method of accounting pursuant to SFAS No. 141(R), “Business Combinations,” which became effective for acquisitions closing on or after January 1, 2009 (see Note 1 (Q) Recent accounting pronouncements).

2008
The Company acquired the three principal railway subsidiaries of the Quebec Railway Corp. (QRC) and a QRC rail-freight ferry operation for a total acquisition cost of $50 million, paid with cash on hand. The acquisition includes:
 (i)   Chemin de fer de la Matapedia et du Golfe, a 221-mile short-line railway,
(ii)   New Brunswick East Coast Railway, a 196-mile short-line railway,
(iii)  Ottawa Central Railway, a 123-mile short-line railway, and
(iv)  Compagnie de gestion de Matane Inc., a rail ferry which provides shuttle boat-rail freight service.
 
2007
The Company acquired the rail assets of Athabasca Northern Railway (ANY) for $25 million, with a planned investment of $135 million in rail line upgrades over a three-year period.
 
2006
The Company acquired the following three entities for a total acquisition cost of $84 million, paid with cash on hand:
(i)   Alberta short-line railways, composed of the 600-mile Mackenzie Northern Railway, the 118-mile Lakeland &
 Waterways Railway and the 21-mile Central Western Railway,
(ii)  Savage Alberta Railway, Inc., a 345-mile short-line railway, and
(iii) the remaining 51% of SLX Canada Inc., a company engaged in equipment leasing in which the Company
 previously had a 49% interest that had been consolidated.
 
All acquisitions were accounted for using the purchase method of accounting. As such, the Company’s consolidated financial statements include the assets, liabilities and results of operations of the acquired entities from the dates of acquisition.


 
14

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP
 

 
4 – Accounts receivable

In millions
December 31,
 
2008 
 
2007 
Freight
   
$
673 
 
$
146 
Non-freight
     
266 
   
251 
       
939 
   
397 
Allowance for doubtful accounts
     
(26)
   
(27)
               
     
$
913 
 
$
370 

The Company has a five-year agreement, expiring in May 2011, to sell an undivided co-ownership interest for maximum cash proceeds of $600 million in a revolving pool of freight receivables to an unrelated trust.  The trust is a multi-seller trust and the Company is not the primary beneficiary. The trust was established in Ontario in 1994 by a Canadian bank to acquire receivables and interests in other financial assets from a variety of originators.  Funding for the acquisition of these assets is customarily through the issuance of asset-backed commercial paper notes.  The notes are secured by, and recourse is limited to, the assets purchased using the proceeds of the notes.  At December 31, 2008, the trust held interests in 16 pools of assets and had notes outstanding of $3.3 billion. Pursuant to the agreement, the Company sells an interest in its receivables and receives proceeds net of the required reserve as stipulated in the agreement. The required reserve represents an amount set aside to allow for possible credit losses and is recognized by the Company as a retained interest and recorded in Other current assets in its Consolidated Balance Sheet. The eligible freight receivables as defined in the agreement may not include delinquent or defaulted receivables, or receivables that do not meet certain obligor-specific criteria, including concentrations in excess of prescribed limits with any one customer.
The Company has retained the responsibility for servicing, administering and collecting the receivables sold and receives no fee for such ongoing servicing responsibilities. The average servicing period is approximately one month.  In 2008, proceeds from collections reinvested in the securitization program were approximately $3.3 billion.  At December 31, 2008, the servicing asset and liability were not significant.  Subject to customary indemnifications, the trust’s recourse is generally limited to the receivables.
The Company accounted for the accounts receivable securitization program as a sale, because control over the transferred accounts receivable was relinquished. Due to the relatively short collection period and the high quality of the receivables sold, the fair value of the undivided interest transferred to the trust approximated the book value thereof.  As such, no gain or loss was recorded.
The Company is subject to customary requirements that include reporting requirements as well as compliance to specified ratios, for which failure to perform could result in termination of the program.  In addition, the trust is subject to customary credit rating requirements, which if not met, could also result in termination of the program. The Company monitors its requirements and is currently not aware of any trends, events or conditions that could cause such termination.
At December 31, 2008, the Company had sold receivables that resulted in proceeds of $71 million under this program ($588 million at December 31, 2007), and recorded retained interest of approximately 10% of this amount in Other current assets (retained interest of approximately 10% recorded as at December 31, 2007).  The fair value of the retained interest approximated carrying value as a result of the short collection cycle and negligible credit losses.
Other income included $10 million in 2008, $24 million in 2007 and $12 million in 2006, for costs related to the agreement, which fluctuate with changes in prevailing interest rates (see Note 13).  These costs include interest, program fees and fees for unused committed availability.


 
15

 

Notes to Consolidated Financial Statements                                                                                                     U.S. GAAP
 

5 – Properties

In millions
 
December 31, 2008
   
December 31, 2007
         
Accumulated
             
Accumulated
     
     
Cost
 
depreciation
   
Net
   
Cost
 
depreciation
   
Net
Track and roadway (1)
$
24,724 
 
$
6,643 
 
$
18,081 
 
$
22,020 
 
$
6,433 
 
$
15,587 
Rolling stock
 
4,833 
   
1,585 
   
3,248 
   
4,702 
   
1,606 
   
3,096 
Buildings
 
1,253 
   
541 
   
712 
   
1,105 
   
498 
   
607 
Information technology
 
739 
   
187 
   
552 
   
667 
   
131 
   
536 
Other
 
957 
   
347 
   
610 
   
829 
   
242 
   
587 
   
$
32,506 
 
$
9,303 
 
$
23,203 
 
$
29,323 
 
$
8,910 
 
$
20,413 
                                     
Capital leases included in properties
                             
Track and roadway (1)
$
418 
 
$
 
$
416 
 
$
418 
 
$
 
$
416 
Rolling stock
 
1,335 
   
287 
   
1,048 
   
1,287 
   
245 
   
1,042 
Buildings
 
109 
   
   
102 
   
109 
   
   
105 
Information technology
 
   
                - 
   
   
   
                - 
   
Other
 
122 
   
30 
   
92 
   
121 
   
27 
   
94 
   
$
1,987 
 
$
326 
 
$
1,661 
 
$
1,936 
 
$
278 
 
$
1,658 
                                     
(1)
Includes the cost of land of $1,827 million and $1,530 million as at December 31, 2008 and 2007, respectively, of which $108 million was for right-of-way access and was recorded as a capital lease in both years.  Following a review in 2008 of its asset classifications, the Company decreased the amounts of capital leases included in properties and has presented them as owned.
 
 
Sale of Central Station Complex
In November 2007, the Company finalized an agreement with Homburg Invest Inc., to sell its Central Station Complex in Montreal for proceeds of $355 million before transaction costs.  Under the agreement, the Company entered into long-term arrangements to lease back its corporate headquarters building and the Central Station railway passenger facilities.  The transaction resulted in a gain on disposition of $222 million, including amounts related to the corporate headquarters building and the Central Station railway passenger facilities, which are being deferred and amortized over their respective lease terms.  A gain of $92 million ($64 million after-tax) was recognized immediately in Other income (see Note 13).


6 – Intangible and other assets

In millions
December 31,
 
2008 
   
2007 
Pension asset (Note 12)
 
$
1,522 
 
$
1,768 
Investments (A)
   
24 
   
24 
Other receivables
   
83 
   
106 
Intangible assets (B)
   
65 
   
54 
Other
   
67 
   
47 
   
$
1,761 
 
$
1,999 

A. Investments
As at December 31, 2008, the Company had $20 million ($17 million at December 31, 2007) of investments accounted for under the equity method and $4 million ($7 million at December 31, 2007) of investments accounted for under the cost method.

 
16

 

Notes to Consolidated Financial Statements                                                                                                     U.S. GAAP
 
 
In November 2007, Germany's state-owned railway, Deutsche Bahn AG, acquired all of the shares of English Welsh and Scottish Railway (EWS), a company that provides most of the rail freight services in Great Britain and operates freight trains through the English Channel Tunnel, and in which the Company had a 32% ownership interest.  The Company accounted for its investment in EWS using the equity method.  The Company's share of the cash proceeds was $114 million, resulting in a gain on disposition of the investment of $61 million ($41 million after-tax) which was recorded in Other income (see Note 13).  An additional £18 million (Cdn$36 million) was placed in escrow at the time of sale, and will be recognized when defined contingencies are resolved.  At December 31, 2008, £12 million (Cdn$22 million) remained in escrow.
 
B. Intangible assets
Intangible assets relate to customer contracts and relationships assumed through past acquisitions.
 
 
7 – Accounts payable and other


In millions
December 31,
 
2008
   
2007 
             
Trade payables
 
$
413
 
$
457
Payroll-related accruals
   
237
   
234
Accrued charges
   
232
   
146
Accrued interest
   
123
   
118
Personal injury and other claims provision
   
118
   
102
Income and other taxes
   
75
   
123
Environmental provisions
   
30
   
28
Other postretirement benefits liability
   
19
   
18
Workforce reduction provisions
   
17
   
19
Other
   
122
   
91
             
   
$
1,386
 
$
1,336


8 – Other liabilities and deferred credits


In millions
December 31,
 
 2008 
   
 2007 
Personal injury and other claims provisions, net of current portion
 
$
336 
 
$
344 
Other postretirement benefits liability, net of current portion (Note 12)
   
241 
   
248 
Pension liability (Note 12)
   
237 
   
187 
Environmental provisions, net of current portion
   
95 
   
83 
Workforce reduction provisions, net of current portion (A)
   
39 
   
53 
Deferred credits and other
   
405 
   
507 
   
$
1,353 
 
$
 1,422 

A. Workforce reduction provisions
The workforce reduction provisions, which relate to job reductions of prior years, including job reductions from the integration of acquired companies, are mainly comprised of payments related to severance, early retirement incentives and bridging to early retirement, the majority of which will be disbursed within the next four years. In 2008, net charges and adjustments increased the provisions by $6 million ($6 million for the year ended December 31, 2007).  Payments have reduced the provisions by $22 million for the year ended December 31, 2008 ($31 million for the year ended December 31, 2007).  As at December 31, 2008, the aggregate provisions, including the current portion, amounted to $56 million ($72 million as at December 31, 2007).

 
17

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP

9 – Long-term debt
 
   
  
   
U.S. dollar-denominated amount
           
   
  
       
December 31,
In millions 
Maturity
     
2008 
   
2007 
Debentures and notes:  (A)
                   
   
  
                   
Canadian National series: 
                   
 
4.25%
5-year notes  (B)
Aug. 1, 2009
 
$
300 
 
$
365 
 
$
297 
 
6.38%
10-year notes  (B)
Oct. 15, 2011
   
400 
   
487 
   
397 
 
4.40%
10-year notes  (B)
Mar. 15, 2013
   
400 
   
487 
   
397 
 
4.95%
6-year notes  (B)
Jan. 15, 2014
   
325 
   
396 
   
 
5.80%
10-year notes  (B)
June 1, 2016
   
250 
   
305 
   
248 
 
5.85%
10-year notes  (B)
Nov. 15, 2017
   
250 
   
305 
   
248 
 
5.55%
10-year notes  (B)
May 15, 2018
   
325 
   
396 
   
 
6.80%
20-year notes  (B)
July 15, 2018
   
200 
   
244 
   
198 
 
7.63%
30-year debentures 
May 15, 2023
   
150 
   
183 
   
149 
 
6.90%
30-year notes  (B)
July 15, 2028
   
475 
   
578 
   
471 
 
7.38%
30-year debentures  (B)
Oct. 15, 2031
   
200 
   
244 
   
198 
 
6.25%
30-year notes  (B)
Aug. 1, 2034
   
500 
   
609 
   
496 
 
6.20%
30-year notes  (B)
June 1, 2036
   
450 
   
548 
   
446 
 
6.71%
Puttable Reset Securities PURSSM (B)
July 15, 2036
   
250 
   
305 
   
248 
 
6.38%
30-year debentures  (B)
Nov. 15, 2037
   
300 
   
365 
   
297 
   
  
                   
Illinois Central series: 
                   
 
6.63%
10-year notes 
June 9, 2008
   
20 
   
   
20 
 
5.00%
99-year income debentures 
Dec. 1, 2056
   
   
   
 
7.70%
100-year debentures 
Sept. 15, 2096
   
125 
   
152 
   
124 
   
  
                   
Wisconsin Central series: 
                   
 
6.63%
10-year notes 
April 15, 2008
   
150 
   
   
149 
   
  
           
5,978 
   
4,390 
BC Rail series: 
                   
 
Non-interest bearing 90-year subordinated notes (C)
July 14, 2094
   
-
   
842 
   
842 
Total debentures and notes  
           
6,820 
   
5,232 
Other:
  
                   
 
Commercial paper  (D) (E)
           
626 
   
122 
 
Capital lease obligations and other  (F)
           
1,320 
   
1,114 
Total other  
           
1,946 
   
1,236 
   
  
           
8,766 
   
6,468 
Less:
  
                   
 
Net unamortized discount  
           
855 
   
851 
Total debt 
           
7,911 
   
5,617 
   
  
                   
Less:
  
                   
 
Current portion of long-term debt  
           
506 
   
254 
   
  
         
$
7,405 
 
$
5,363 


 
18

 

Notes to Consolidated Financial Statements                                                                                                    U.S. GAAP


A. The Company’s debentures, notes and revolving credit facility are unsecured.
 
B. These debt securities are redeemable, in whole or in part, at the option of the Company, at any time, at the greater of par and a formula price based on interest rates prevailing at the time of redemption.
 
C. The Company records these notes as a discounted debt of $7 million, using an imputed interest rate of 5.75%.  The discount of $835 million is included in the net unamortized discount.
 
D. The Company has a U.S.$1 billion revolving credit facility expiring in October 2011. The credit facility is available for general corporate purposes, including back-stopping the Company’s commercial paper program, and provides for borrowings at various interest rates, including the Canadian prime rate, bankers’ acceptance rates, the U.S. federal funds effective rate and the London Interbank Offer Rate, plus applicable margins. The credit facility agreement has one financial covenant, which limits debt as a percentage of total capitalization, and with which the Company is in compliance.  As at December 31, 2008, the Company had no outstanding borrowings under its revolving credit facility (nil as at December 31, 2007) and had letters of credit drawn of $181 million ($57 million as at December 31, 2007).
 
E. The Company has a commercial paper program, which is backed by a portion of its revolving credit facility, enabling it to issue commercial paper up to a maximum aggregate principal amount of $800 million, or the U.S. dollar equivalent.  Commercial paper debt is due within one year but is classified as long-term debt, reflecting the Company’s intent and contractual ability to refinance the short-term borrowings through subsequent issuances of commercial paper or drawing down on the long-term revolving credit facility.  As at December 31, 2008, the Company had total borrowings of $626 million, of which $256 million was denominated in Canadian dollars and $370 million was denominated in U.S. dollars (U.S.$303 million).  The weighted-average interest rate on these borrowings was 2.42%.  As at December 31, 2007, the Company had total borrowings of $122 million, of which $114 million was denominated in Canadian dollars and $8 million was denominated in U.S. dollars (U.S.$8 million).  The weighted-average interest rate on these borrowings was 5.01%.
 
F. During 2008, the Company recorded $117 million in assets acquired through equipment leases ($301 million in 2007, of which $211 million related to assets acquired through equipment leases and $90 million to a leaseback of the Central Station Complex as described in Note 5), for which $121 million was recorded in debt.
Interest rates for capital lease obligations range from approximately 2.1% to 7.9% with maturity dates in the years 2009 through 2037. The imputed interest on these leases amounted to $525 million as at December 31, 2008 and $515 million as at December 31, 2007.
The capital lease obligations are secured by properties with a net carrying amount of $1,245 million as at December 31, 2008 and $1,241 million as at December 31, 2007.
 
G. Long-term debt maturities, including repurchase arrangements and capital lease repayments on debt outstanding as at December 31, 2008, for the next five years and thereafter, are as follows:

In millions
     
         
2009 (1)
 
$
506 
2010 
   
95 
2011 
   
1,248 
2012 
   
39 
2013 
   
581 
2014 and thereafter
   
5,442 
(1)
Includes $139 million of capital lease obligations.

H. The aggregate amount of debt payable in U.S. currency as at December 31, 2008 was U.S.$6,069 million (Cdn$7,392 million) and U.S.$5,280 million (Cdn$5,234 million) as at December 31, 2007.


 
19

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP
 
 
I. The Company has U.S.$1.85 billion available under its currently effective shelf prospectus and registration statement, expiring in January 2010, providing for the issuance of debt securities in one or more offerings.
 

 
10 – Capital stock
 
A. Authorized capital stock
The authorized capital stock of the Company is as follows:
· Unlimited number of Common Shares, without par value
· Unlimited number of Class A Preferred Shares, without par value, issuable in series
· Unlimited number of Class B Preferred Shares, without par value, issuable in series
 
B. Issued and outstanding common shares
During 2008, the Company issued 2.4 million shares (3.0 million shares in 2007 and 5.1 million shares in 2006) related to stock options exercised.  The total number of common shares issued and outstanding was 468.2 million as at December 31, 2008.
 
C. Share repurchase programs
On July 21, 2008, the Board of Directors of the Company approved a new share repurchase program which allows for the repurchase of up to 25.0 million common shares between July 28, 2008 and July 20, 2009 pursuant to a normal course issuer bid, at prevailing market prices or such other prices as may be permitted by the Toronto Stock Exchange.
As at December 31, 2008, under this current share repurchase program, the Company repurchased 6.1 million common shares for $331 million, at a weighted-average price of $54.42 per share.
 
In June 2008, the Company ended its 33.0 million share repurchase program, which began on July 26, 2007, repurchasing a total of 31.0 million common shares for $1,588 million, at a weighted-average price of $51.22 per share.  Of this amount,  13.3 million common shares were repurchased in 2008 for $690 million, at a weighted-average price of $51.91 per share and 17.7 million common shares were repurchased in 2007 for $897 million, at a weighted-average price of $50.70 per share.


11 – Stock plans

The Company has various stock-based incentive plans for eligible employees.  A description of the Company’s major plans is provided below:
 
A.       Employee Share Investment Plan
The Company has an Employee Share Investment Plan (ESIP) giving eligible employees the opportunity to subscribe for up to 10% of their gross salaries to purchase shares of the Company’s common stock on the open market and to have the Company invest, on the employees’ behalf, a further 35% of the amount invested by the employees, up to 6% of their gross salaries.
The number of participants holding shares at December 31, 2008 was 14,114 (13,385 at December 31, 2007 and 12,590 at December 31, 2006). The total number of ESIP shares purchased on behalf of employees, including the Company’s contributions, was 1.5 million in 2008 and 1.3 million in each of 2007 and 2006, resulting in a pre-tax charge to income of $18 million, $16 million and $15 million for the years ended December 31, 2008, 2007 and 2006, respectively.
 
B.     Stock-based compensation plans
Compensation cost for awards under all stock-based compensation plans was $27 million, $62 million and $79 million for the years ended December 31, 2008, 2007 and 2006, respectively.  The total tax benefit recognized in income in relation to stock-based compensation expense for the years ended December 31, 2008, 2007 and 2006 was $7 million, $23 million and $22 million, respectively.
 

 
20

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP
 
 
(i)     Cash settled awards
Restricted share units
The Company has granted restricted share units (RSUs), 0.7 million in 2008, 0.7 million in 2007, and 0.8 million in 2006, to designated management employees entitling them to receive payout in cash based on the Company’s share price.  The RSUs granted are generally scheduled for payout after three years (“plan period”) and vest conditionally upon the attainment of a target relating to return on invested capital (ROIC) 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.  For the 2006 grant, the target related to ROIC was exceeded. The Human Resources and Compensation Committee approved payout as permitted under the terms of the plan agreement, after considering that the ROIC target was exceeded and that the minimum share price condition was not met by a marginal amount.  As such, the RSUs vested on December 31, 2008, resulting in a payout in February 2009 of $51 million, calculated using the Company’s average share price during the 20-day period ending on January 31, 2009.
 
Vision 2008 Share Unit Plan (Vision)
In the first quarter of 2005, the Board of Directors of the Company approved a special share unit plan with a four-year term to December 31, 2008, granting 0.9 million units to designated senior management employees to receive cash payout in January 2009.  Based on the award agreement, the share units would vest conditionally upon the attainment of a target relating to the Company’s share price during the six-month period ending December 31, 2008. Payout would be conditional upon the attainment of targets relating to both the Company’s return on invested capital over the four-year period and to the average share price during the 20-day period ending on December 31, 2008.  At December 31, 2008, the units partially vested, however, the payout condition related to the Company’s share price was not met. As such, no payout occurred and the units were subsequently cancelled.
 
Voluntary Incentive Deferral Plan
The Company has a Voluntary Incentive Deferral Plan (VIDP), providing eligible senior management employees the opportunity to elect to receive their annual incentive bonus payment and other eligible incentive payments in deferred share units (DSUs). A DSU is equivalent to a common share of the Company and also earns dividends when normal cash dividends are paid on common shares. The number of DSUs received by each participant is established using the average closing price for the 20 trading days prior to and including the date of the incentive payment.  For each participant, the Company will grant a further 25% of the amount elected in DSUs, which will vest over a period of four years.  The election to receive eligible incentive payments in DSUs is no longer available to a participant when the value of the participant's vested DSUs is sufficient to meet the Company's stock ownership guidelines. The value of each participant’s DSUs is payable in cash at the time of cessation of employment. The Company’s liability for DSUs is marked-to-market at each period-end based on the Company’s closing stock price.
 

The following table provides the 2008 activity for all cash settled awards:
                 
 
RSUs
 
Vision
 
VIDP
In millions
Nonvested
Vested
 
Nonvested
Vested
 
Nonvested
Vested
Outstanding at December 31, 2007
1.6 
0.9
 (1)
0.8 
 
0.2 
1.9 
Granted
0.7 
 
 
Forfeited
(0.1)
 
 
Vested during period
(0.9)
0.9 
 
 
(0.1)
0.1 
Payout
(0.9)
 
 
(0.2)
Cancelled
 
(0.8)
 
Outstanding at December 31, 2008
1.3 
0.9
  (1)
 
0.1 
1.8 
(1) Includes 0.1 million of 2004 time-vested RSUs.
               

 
21

 

Notes to Consolidated Financial Statements                                                                                                       U.S. GAAP


The following table provides valuation and expense information for all cash settled awards:
 
  
                                             
In millions, unless otherwise indicated
RSUs (1)
 
Vision (1)
 
VIDP (2)
   
Total
 
  
                                   
2003 
     
Year of grant
2008 
 
2007 
 
2006 
 
2005 
 
2004 
 
2005 
 
onwards
     
 
  
                                             
Stock-based compensation expense (recovery)
                                         
 
recognized over requisite service period
                                         
Year ended December 31, 2008
$
 
$
(2)
 
$
24 
   
N/A
 
$
 
$
(10)
 
$
(10)
 
$
13 
Year ended December 31, 2007
 
N/A
 
$
 11 
 
$
 8 
 
$
 14