Form
20-F
|
Form
40-F X
|
Yes
|
No X
|
Yes
|
No X
|
Yes
|
No X
|
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
|
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.
|
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.
|
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.
|
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
|
-
|
-
|
1
|
||||||
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.
|
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.
|
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.
|
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)
|
3
|
||||||
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)
|
6
|
||||||
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.
|
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.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
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
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
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).
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
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.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
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.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
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
|
$
|
2
|
$
|
416
|
$
|
418
|
$
|
2
|
$
|
416
|
||||||
Rolling
stock
|
1,335
|
287
|
1,048
|
1,287
|
245
|
1,042
|
||||||||||||
Buildings
|
109
|
7
|
102
|
109
|
4
|
105
|
||||||||||||
Information
technology
|
3
|
-
|
3
|
1
|
-
|
1
|
||||||||||||
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).
|
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.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
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
|
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).
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
|
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
|
9
|
7
|
|||||||
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
|
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.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
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.
|
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.
|
Notes to Consolidated Financial
Statements
U.S. GAAP
|
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.
|
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
|
$
|
8
|
$
|
(2)
|
$
|
24
|
N/A
|
$
|
3
|
$
|
(10)
|
$
|
(10)
|
$
|
13
|
|||||||||
Year
ended December 31, 2007
|
N/A
|
$
|
11
|
$
|
8
|
$
|
14
|