form6k.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 April 2015

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


 
 
 

 

 
Canadian National Railway Company

Table of Contents
 
 
 
 
 
 
 


 
 

 
 

Item 1
 
CN Logo
North America’s Railroad
 


NEWS RELEASE
 
CN reports Q1-2015 net income of C$704 million,
or C$0.86 per diluted share
 
Adjusted diluted earnings per share increased by 30 per cent (1)

MEMPHIS, Tenn., April 20, 2015 CN (TSX: CNR) (NYSE: CNI) today reported its financial and operating results for the first quarter ended March 31, 2015.

First-quarter 2015 financial highlights
·  
Net income was C$704 million, or C$0.86 per diluted share, compared with net income of C$623 million, or C$0.75 per diluted share, for first-quarter 2014.
·  
First-quarter 2015 diluted earnings per share (EPS) increased 30 per cent to C$0.86 from adjusted diluted EPS of C$0.66 in Q1-2014, which excluded a gain on a rail line sale. (1)
·  
Q1-2015 net income of C$704 million increased 28 per cent over adjusted net income of C$551 million for the first quarter of 2014. (1)
·  
Q1-2015 operating income increased 30 per cent to C$1,063 million.
·  
First-quarter 2015 revenues increased 15 per cent to C$3,098 million, revenue ton-miles grew by seven per cent, and carloadings increased nine per cent.
·  
CN’s operating ratio for Q1-2015 improved by 3.9 points to 65.7 per cent from 69.6 per cent the year before.
·  
Free cash flow for first-quarter 2015 was C$521 million, up from C$494 million for the year-earlier quarter. (1)

Claude Mongeau, president and chief executive officer, said: “CN turned in a solid first-quarter performance thanks to strong freight demand and continued productivity improvements, helped in part by easier winter conditions compared with last year’s polar vortex.

“CN is pleased to affirm its outlook for double-digit EPS growth in 2015 versus last year’s adjusted diluted EPS of C$3.76, despite weaker than expected energy markets and a mixed economy. (1)

“As always we remain committed to growing our business faster than the overall economy and doing so at low incremental cost. We are equally committed to running a safe railway and are increasing our 2015 capital envelope by C$100 million to C$2.7 billion to sustain additional rail infrastructure safety investments.” (2)

Foreign currency impact on results
Although CN reports its earnings in Canadian dollars, a large portion of its revenues and expenses is denominated in U.S. dollars. The fluctuation of the Canadian dollar relative to the U.S. dollar affects the conversion of the Company’s U.S.-dollar-denominated revenues and expenses. On a constant currency basis, CN’s net income for the first quarter of 2015 would have been lower by C$56 million, or C$0.07 per diluted share. (1)
 
 
 
 
 
 
 
 
 
 
 
1

 
 
 
First-quarter 2015 revenues, traffic volumes and expenses
Revenues for the first quarter of 2015 increased by 15 per cent to C$3,098 million. Revenues increased for grain and fertilizers (24 per cent), forest products (23 per cent), automotive (23 per cent), metals and minerals (22 per cent), petroleum and chemicals (13 per cent), and intermodal (11 per cent). Coal revenues declined by 13 per cent.

The increase in revenues was mainly attributable to the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues; higher volumes of Canadian grain and potash; strong overseas intermodal demand; higher shipments of lumber and panels to U.S. markets; higher volumes of frac sand; and freight rate increases. These factors were partly offset by decreased shipments of coal due to weaker global demand. Overall, revenues were favorably affected by improved operating conditions due to a more normal winter when compared with the same period of 2014, which enhanced the Company’s ability to serve its customers.

Carloadings for the quarter rose by nine per cent to 1,353 thousand.

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased by seven per cent over the year-earlier quarter. Rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, increased by eight per cent over the year-earlier period, driven by the positive translation impact of the weaker Canadian dollar and freight rate increases, partly offset by a lower applicable fuel surcharge rate.

Operating expenses for the quarter increased by nine per cent to C$2,035 million, mainly as a result of the negative translation impact of a weaker Canadian dollar on U.S.-dollar-denominated expenses, increased casualty and other expense, higher labor and fringe benefits expense, as well as increased purchased services and material expense, partly offset by lower fuel costs. Overall, expenses were favorably affected by improved operating conditions due to a more normal winter when compared with the same period of 2014.

Forward-Looking Statements
Certain information included in this news release constitutes “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and under Canadian securities laws. CN cautions that, by their nature, these forward-looking statements involve risks, uncertainties and assumptions. The Company cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company or the rail industry to be materially different from the outlook or any future results or performance implied by such statements. To the extent that CN has provided guidance that are non-GAAP financial measures, the Company may not be able to provide a reconciliation to the GAAP measures, due to unknown variables and uncertainty related to future results. Key assumptions used in determining forward-looking information are set forth below.
 
 
2015 key assumptions
CN has made a number of economic and market assumptions in preparing its 2015 outlook. The Company is now assuming that North American industrial production for the year will increase by approximately three per cent, compared with its Jan. 27, 2015, assumption of three to four per cent, that U.S. housing starts will be in the range of 1.2 million units, and that U.S. motor vehicles sales will be approximately 16.7 million units. The 2014/2015 Canadian grain crop represented a significant reduction toward the historical trend line while the U.S. grain crop was above trend. CN assumes that the 2015/2016 grain crops in both Canada and the United States will be in line with trend yields. CN also assumes its 2015 customer shipments of energy-related commodities, namely crude oil and frac sand, will grow by approximately 40,000 carloads versus 2014, compared with its previous assumption announced on Jan. 27, 2015, of 75,000-carload growth for the two commodities in 2015 versus 2014. With these assumptions, CN assumes total carload growth for all freight categories in 2015 will be approximately three per cent, compared with its Jan. 27, 2015, forecast of three to four per cent growth, along with continued pricing improvement above inflation. CN also now assumes that in 2015 the value of the Canadian dollar in U.S. currency will be approximately $0.80, compared with the Jan. 27, 2015, assumption of $0.80 to $0.85, and that the average price of crude oil (West Texas Intermediate) will fluctuate around US$50 per barrel. In 2015,
 
 
 
 
 
 
 
 
 
 
 
 
 
2

 
 

CN plans to invest approximately C$2.7 billion in its capital program, of which approximately C$1.4 billion is targeted toward maintaining the safety and integrity of the network, particularly track infrastructure. The 2015 capital program, which CN previously set at C$2.6 billion, with C$1.3 billion earmarked for network safety and integrity, also includes funds for projects supporting growth and productivity.

Important risk factors that could affect the forward-looking statements include, but are not limited to, the effects of general economic and business conditions, industry competition, inflation, currency and interest rate fluctuations, changes in fuel prices, legislative and/or regulatory developments, compliance with environmental laws and regulations, actions by regulators, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, labor negotiations and disruptions, environmental claims, uncertainties of investigations, proceedings or other types of claims and litigation, risks and liabilities arising from derailments, and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to “Management’s Discussion and Analysis” in CN’s annual and interim reports, Annual Information Form and Form 40-F filed with Canadian and U.S. securities regulators, available on CN’s website, for a summary of major risk factors.
 
CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable Canadian securities laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement.

1)  
See discussion and reconciliation of non-GAAP adjusted performance measures in the attached supplementary schedule, Non-GAAP Measures.

2)  
See Forward-Looking statements for a summary of the key assumptions and risks regarding CN’s 2015 outlook.

CN is a true backbone of the economy, transporting more than C$250 billion worth of goods annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods, across a rail network spanning Canada and mid-America. CN – Canadian National Railway Company, along with its operating railway subsidiaries -- serves the cities and ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth, Minn./Superior, Wis., and Jackson, Miss., with connections to all points in North America. For more information on CN, visit the company’s website at www.cn.ca.





- 30 -





Contacts:
Media
Investment Community
Mark Hallman
Janet Drysdale
Director
Communications and Public Affairs
Vice-President
Investor Relations
(905) 669-3384
(514) 399-0052

 
 
 
 
 
 
 
 
 
 

 
3

 
Consolidated Statement of Income - unaudited
Item 2
           
 
Three months ended
 
March 31
In millions, except per share data
 
2015 
   
2014 
Revenues
$
 3,098 
 
$
 2,693 
Operating expenses
         
Labor and fringe benefits
 
 668 
   
 587 
Purchased services and material
 
 457 
   
 388 
Fuel
 
 361 
   
 468 
Depreciation and amortization
 
 296 
   
 256 
Equipment rents
 
 94 
   
 77 
Casualty and other
 
 159 
   
 97 
Total operating expenses
 
 2,035 
   
 1,873 
Operating income
 
 1,063 
   
 820 
Interest expense
 
 (104)
   
 (92)
Other income (Note 3)
 
 4 
   
 94 
Income before income taxes
 
 963 
   
 822 
Income tax expense (Note 4)
 
 (259)
   
 (199)
Net income
$
 704 
 
$
 623 
           
Earnings per share (Note 5)
         
Basic
$
 0.87 
 
$
 0.75 
Diluted
$
 0.86 
 
$
 0.75 
           
Weighted-average number of shares (Note 5)
         
Basic
 
809.4 
   
828.0 
Diluted
 
814.3 
   
831.3 
           
See accompanying notes to unaudited consolidated financial statements.
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
4

 
Consolidated Statement of Comprehensive Income - unaudited

         
Three months ended
         
March 31
In millions
 
2015 
   
2014 
                 
Net income
$
 704 
 
$
623 
           
Other comprehensive income (Note 9)
         
Net gain on foreign currency translation
 
 96 
   
 25 
Net change in pension and other postretirement benefit plans
 
 61 
   
33 
Other comprehensive income before income taxes
 
157 
   
58 
Income tax recovery
 
 69 
   
 24 
Other comprehensive income
 
226 
   
82 
Comprehensive income
$
930 
 
$
705 
                 
See accompanying notes to unaudited consolidated financial statements.
         

 
 
 
 
 
 
 
 
 
 
 
 

Canadian National Railway Company

 
5

 
Consolidated Balance Sheet - unaudited

 
March 31 
 
December 31 
 
March 31 
In millions
 
2015 
   
2014 
   
2014 
                 
Assets
               
                 
Current assets
               
Cash and cash equivalents
$
178 
 
$
52 
 
$
198 
Restricted cash and cash equivalents (Note 6)
 
473 
   
463 
   
471 
Accounts receivable
 
924 
   
928 
   
899 
Material and supplies
 
429 
   
335 
   
331 
Deferred and receivable income taxes
 
108 
   
163 
   
162 
Other
 
180 
   
125 
   
117 
Total current assets
 
2,292 
   
2,066 
   
2,178 
                 
Properties
 
29,857 
   
28,514 
   
26,643 
Pension asset
 
1,010 
   
882 
   
1,784 
Intangible and other assets
 
337 
   
330 
   
288 
Total assets
$
33,496 
 
$
31,792 
 
$
30,893 
                 
Liabilities and shareholders’ equity
               
                 
Current liabilities
               
Accounts payable and other
$
1,738 
 
$
1,657 
 
$
1,547 
Current portion of long-term debt
 
1,083 
   
544 
   
912 
Total current liabilities
 
2,821 
   
2,201 
   
2,459 
                 
Deferred income taxes
 
7,267 
   
6,902 
   
6,748 
Other liabilities and deferred credits
 
678 
   
704 
   
757 
Pension and other postretirement benefits
 
666 
   
650 
   
546 
Long-term debt
 
8,320 
   
7,865 
   
7,287 
                 
Shareholders’ equity
               
Common shares (1)
 
3,706 
   
3,718 
   
3,773 
Additional paid-in capital (1)
 
452 
   
439 
   
221 
Accumulated other comprehensive loss (Note 9)
 
(2,201)
   
(2,427)
   
(1,768)
Retained earnings
 
11,787 
   
11,740 
   
10,870 
Total shareholders’ equity
 
13,744 
   
13,470 
   
13,096 
Total liabilities and shareholders’ equity
$
33,496 
 
$
31,792 
 
$
30,893 
                 
See accompanying notes to unaudited consolidated financial statements.
               
 
(1)  The Company reclassified certain 2014 balances from Common shares to Additional paid-in capital to conform with the 2015 presentation.
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
6

 
Consolidated Statement of Changes in Shareholders’ Equity - unaudited


   
Issued and
         
Accumulated
       
   
outstanding
       
Additional
other
   
Total
   
common
 
Common
 
paid-in
comprehensive
Retained
shareholders’
In millions
shares
 
shares
 
capital
loss (Note 9)
earnings
equity
                             
Balance at December 31, 2014
809.4 
 
$
3,718 
$
439 
 
$
(2,427)
$
11,740 
$
13,470 
                             
Net income
                   
704
 
704
Stock-based compensation
0.3 
   
13 
 
13 
       
(1)
 
25 
Share repurchase program (Note 6)
(5.4)
   
(25)
           
(404)
 
(429)
Other comprehensive income
               
226 
     
226 
Dividends
                   
(252)
 
(252)
Balance at March 31, 2015
804.3 
 
$
3,706 
$
452 
 
$
(2,201)
$
11,787 
$
13,744 
                             
   
Issued and
         
Accumulated
       
   
outstanding
       
Additional
other
   
Total
   
common
 
Common
 
paid-in
comprehensive
Retained
shareholders’
In millions
shares
 
shares
 
capital
loss (Note 9)
earnings
equity
                             
Balance at December 31, 2013
830.6 
 
$
3,795 
$
220 
 
$
(1,850)
$
10,788 
$
12,953 
                             
Net income
                   
623 
 
623 
Stock-based compensation
0.3 
   
 
           
Share repurchase program (Note 6)
(6.3)
   
(30)
           
(335)
 
(365)
Other comprehensive income
               
82 
     
82 
Dividends
         
  
       
(206)
 
(206)
Balance at March 31, 2014
824.6 
 
$
3,773 
$
221 
 
$
(1,768)
$
10,870 
$
13,096 
                             
See accompanying notes to unaudited consolidated financial statements.
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
7

 
Consolidated Statement of Cash Flows - unaudited

 
Three months ended
 
March 31
In millions
 
2015 
   
2014 
Operating activities
         
Net income
$
 704 
 
$
 623 
Adjustments to reconcile net income to net cash provided by operating activities:
         
     Depreciation and amortization
 
 296 
   
 256 
     Deferred income taxes
 
70 
   
 95 
     Gain on disposal of property (Note 3)
 
 - 
   
 (80)
Changes in operating assets and liabilities:
         
     Accounts receivable
 
71 
   
 (52)
     Material and supplies
 
(84)
   
 (54)
     Accounts payable and other
 
21 
   
 (47)
     Other current assets
 
(17)
   
 (13)
Pensions and other, net
 
(69)
   
(83)
Net cash provided by operating activities
 
992 
   
645 
Investing activities
         
Property additions
 
 (468)
   
(248)
Disposal of property (Note 3)
 
 - 
   
97 
Change in restricted cash and cash equivalents
 
 (10)
   
(23)
Other, net
 
 (3)
   
 - 
Net cash used in investing activities
 
 (481)
   
(174)
Financing activities
         
Issuance of debt
 
 - 
   
 347 
Repayment of debt
 
(47)
   
(456)
Net issuance of commercial paper (Note 6)
 
310 
   
189 
Common shares issued for stock options exercised,
         
   equity award settlements, and excess tax benefits
 
 10 
   
 7 
Repurchase of common shares (Note 6)
 
(410)
   
(365)
Dividends paid
 
(252)
   
(206)
Net cash used in financing activities
 
(389)
   
(484)
Effect of foreign exchange fluctuations on US
         
   dollar-denominated cash and cash equivalents
 
   
(3)
Net increase (decrease) in cash and cash equivalents
 
126 
   
(16)
Cash and cash equivalents, beginning of period
 
 52 
   
 214 
Cash and cash equivalents, end of period
$
178 
 
$
 198 
Supplemental cash flow information
         
Net cash receipts from customers and other
$
 3,212 
 
$
 2,672 
Net cash payments for:
         
    Employee services, suppliers and other expenses
 
(1,800)
   
(1,684)
    Interest
 
(91)
   
(105)
    Personal injury and other claims
 
(15)
   
(13)
    Pensions (Note 7)
 
(86)
   
(93)
    Income taxes
 
(228)
   
(132)
Net cash provided by operating activities
$
992 
 
$
 645 
           
See accompanying notes to unaudited consolidated financial statements.
         
 
 
 
 
 
 
 
 

 

 
Canadian National Railway Company

 
8

 
Notes to Unaudited Consolidated Financial Statements

1 - Basis of presentation
In management’s opinion, the accompanying unaudited Interim Consolidated Financial Statements and Notes thereto, expressed in Canadian dollars, and prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial statements, contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Canadian National Railway Company’s (“CN” or the “Company”) financial position as at March 31, 2015, December 31, 2014 and March 31, 2014, and its results of operations, changes in shareholders’ equity and cash flows for the three months ended March 31, 2015 and 2014.

These unaudited Interim Consolidated Financial Statements and Notes thereto have been prepared using accounting policies consistent with those used in preparing the Company’s 2014 Annual Consolidated Financial Statements and Notes thereto. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited Interim Consolidated Financial Statements and Notes thereto should be read in conjunction with the Company’s 2014 Annual Consolidated Financial Statements and Notes thereto.


2 - Recent accounting pronouncement
On April 7, 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2015-03, Interest – Imputation of Interest. This ASU simplifies the presentation of debt issuance costs by requiring that such costs be presented in the balance sheet as a deduction from the carrying amount of debt. This standard is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted and the new guidance should be applied on a retrospective basis. There will be no significant impact to the Company’s Consolidated Financial Statements from the adoption of this standard.


3 - Other income
Recorded in Other income are gains and losses on the disposal of land and property, including the disposal of property described below.  In addition, for the three months ended March 31, 2015 and 2014, Other income included foreign exchange gains of $36 million and $10 million, respectively, related to foreign exchange forward contracts (see Note 11 – Financial instruments) and foreign exchange losses of $35 million and $10 million, respectively, related to the re-measurement of foreign currency denominated monetary assets and liabilities, including US dollar-denominated debt of the parent company not designated as a hedge of its net investment in U.S. subsidiaries.
 
Disposal of property
2014
Deux-Montagnes
On February 28, 2014, the Company closed a transaction with Agence Métropolitaine de Transport to sell the Deux-Montagnes subdivision between Saint-Eustache and Montreal, Quebec, including the Mont-Royal tunnel, together with the rail fixtures (collectively the “Deux-Montagnes”), for cash proceeds of $97 million before transaction costs. Under the agreement, the Company obtained the perpetual right to operate freight trains over the Deux-Montagnes at its then current level of operating activity, with the possibility of increasing its operating activity for additional consideration. The transaction resulted in a gain on disposal of $80 million ($72 million after-tax) that was recorded in Other income under the full accrual method of accounting for real estate transactions.


4 - Income taxes
The Company recorded income tax expense of $259 million for the three months ended March 31, 2015 compared to $199 million for the same period in 2014. Included in the 2014 figure was an income tax recovery of $18 million resulting from a change in estimate of the deferred income tax liability related to properties.

 
 
 
 
 
 
 
 
 
 
 
 

Canadian National Railway Company

 
9

 
Notes to Unaudited Consolidated Financial Statements

5 - Earnings per share

 
Three months ended March 31
In millions, except per share data
 
2015 
 
2014 
Net income
$
 704 
$
 623 
         
Weighted-average basic shares outstanding
 
809.4 
 
828.0 
Effect of stock-based compensation
 
4.9 
 
3.3 
Weighted-average diluted shares outstanding
 
814.3 
 
831.3 
         
Basic earnings per share
$
 0.87 
$
 0.75 
Diluted earnings per share
$
 0.86 
$
 0.75 


6 - Financing activities
Revolving credit facility
The Company has an $800 million revolving credit facility agreement with a consortium of lenders. The agreement, which contains customary terms and conditions, allows for an increase in the facility amount, up to a maximum of $1.3 billion, as well as the option to extend the term by an additional year at each anniversary date, subject to the consent of individual lenders. On March 12, 2015, the Company exercised such option and extended the term of its agreement by one year to May 5, 2020. 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 Offered Rate (LIBOR), 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 March 31, 2015 and December 31, 2014, the Company had no outstanding borrowings under its revolving credit facility and there were no draws during the three months ended March 31, 2015.

Commercial paper
The Company has a commercial paper program, which is back-stopped by its revolving credit facility, enabling it to issue commercial paper up to a maximum aggregate principal amount of $800 million, or the US dollar equivalent. As at March 31, 2015, the Company had total commercial paper borrowings of $310 million (nil as at December 31, 2014) at a weighted-average interest rate of 0.89% presented in Current portion of long-term debt on the Consolidated Balance Sheet.

Accounts receivable securitization program
The Company has an agreement, expiring on February 1, 2017, to sell an undivided co-ownership interest in a revolving pool of accounts receivable to unrelated trusts for maximum cash proceeds of $450 million.
As at March 31, 2015, the Company recorded $50 million ($50 million as at December 31, 2014) of proceeds received under the accounts receivable securitization program in Current portion of long-term debt on the Consolidated Balance Sheet at a weighted-average interest rate of 1.04% (1.24% as at December 31, 2014) which is secured by, and limited to, $56 million ($56 million as at December 31, 2014) of accounts receivable.

Bilateral letter of credit facilities and Restricted cash and cash equivalents
The Company has a series of bilateral letter of credit facility agreements with various banks to support its requirements to post letters of credit in the ordinary course of business. On March 12, 2015, the Company extended the expiry date of its agreements by one year to April 28, 2018. Under these agreements, the Company has the option from time to time to pledge collateral in the form of cash or cash equivalents, for a minimum term of one month, equal to at least the face value of the letters of credit issued. As at March 31, 2015, the Company had letters of credit drawn of $497 million ($487 million as at December 31, 2014) from a total committed amount of $517 million ($511 million as at December 31, 2014) by the various banks. As at March 31, 2015, cash and cash equivalents of $473 million ($463 million as at December 31, 2014) were pledged as collateral and recorded as Restricted cash and cash equivalents on the Consolidated Balance Sheet.

 
 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
10

 
Notes to Unaudited Consolidated Financial Statements

Share repurchase programs
The Company may repurchase shares pursuant to a normal course issuer bid (NCIB) at prevailing market prices plus brokerage fees, or such other prices as may be permitted by the Toronto Stock Exchange. Under its current NCIB, the Company may repurchase up to 28.0 million common shares between October 24, 2014 and October 23, 2015. As at March 31, 2015, the Company had repurchased 11.0 million common shares for $839 million under its current program.
The following table provides the information related to the share repurchase programs for the three months ended March 31, 2015 and 2014:

     
Three months ended March 31
 In millions, except per share data
 
2015 
2014 
Number of common shares repurchased (1)
   
5.4 
 
6.3 
Weighted-average price per share (2)
 
$
79.17 
$
58.22 
Amount of repurchase
 
$
 429 
$
 365 
             
(1)
 Includes common shares purchased in the first quarter of 2015 and 2014 pursuant to private agreements between the Company and arm's length third-party sellers.
(2)
 Includes brokerage fees.
       


7 - Pensions and other postretirement benefits
The Company has various retirement benefit plans under which substantially all of its employees are entitled to benefits at retirement age, generally based on compensation and length of service and/or contributions. Additional information relating to the pension plans is provided in Note 12 - Pensions and other postretirement benefits to the Company’s 2014 Annual Consolidated Financial Statements.

Components of net periodic benefit cost for pensions
     
   
Three months ended March 31
In millions
   
 2015 
 
 2014 
Current service cost
 
$
43 
$
35 
Interest cost
   
163 
 
178 
Expected return on plan assets
   
(251)
 
(245)
Amortization of prior service cost
   
 
Amortization of net actuarial loss
   
61 
 
32 
Net periodic benefit cost
 
$
17 
$
           
Components of net periodic benefit cost for other postretirement benefits
     
   
Three months ended March 31
In millions
   
 2015 
 
 2014 
Current service cost
 
$
$
Interest cost
   
 
Amortization of prior service cost
   
 
Amortization of net actuarial gain
   
(1)
 
(1)
Net periodic benefit cost
 
$
$

Pension contributions made in the first three months of 2015 and 2014 of $86 million and $93 million, respectively, primarily represent contributions to the Company’s main pension plan, the CN Pension Plan. These pension contributions are for the current service cost as determined under the Company’s current actuarial valuations for funding purposes. The Company expects to make total cash contributions in 2015 of approximately $125 million for all of the Company’s pension plans.
 
 
 
 
 
 
 
 

 



Canadian National Railway Company

 
11

 
Notes to Unaudited Consolidated Financial Statements

8 – Stock-based compensation
The Company has various stock-based compensation plans for eligible employees. A description of the Company’s major plans is provided in Note 14 – Stock plans to the Company’s 2014 Annual Consolidated Financial Statements.

   
Three months ended March 31
In millions
 
2015 
 
2014 
Equity settled awards
       
Share Units Plan (1)
$
 8 
$
 - 
Stock option awards
 
 3 
 
 2 
Stock-based compensation expense - Equity settled awards
$
 11 
$
 2 
Cash settled awards
       
Share Units Plan (1)
$
 9 
$
 14 
Voluntary Incentive Deferral Plan (2)
 
 1 
 
 1 
Stock-based compensation expense – Cash settled awards
$
 10 
$
15 
Total stock-based compensation expense
$
 21 
$
 17 
Tax benefit recognized in income
$
 5 
$
 4 
                           
(1)
Performance share unit (PSU) awards are granted under the Share Units Plan.
 
(2)
Deferred share unit (DSU) awards are granted under the Voluntary Incentive Deferral Plan.
 

 
Equity settled awards
Share Units Plan
Under the Share Units Plan, the Company grants performance share unit (PSU) awards.
PSU-ROIC awards vest from 0% to 200%, subject to the attainment of a return on invested capital (ROIC) performance condition (previously from 0% to 150% for PSUs-ROIC outstanding as at December 31, 2014) over the plan period. Payout of PSU-ROIC awards is conditional upon the attainment of a minimum share price.
PSU-TSR awards, introduced in 2015, vest from 0% to 200%, subject to the attainment of a total shareholder return (TSR) market condition over the plan period of three years based on the Company’s TSR relative to a Class I Railways peer group and components of the S&P/TSX 60 Index.
In the first quarter of 2015, the Company granted 0.4 million PSU-ROIC awards and 0.1 million PSU-TSR awards.
Equity settled PSUs will be settled in common shares of the Company, subject to the attainment of their respective vesting conditions, by way of disbursement from the Employee Benefit Plan Trusts. The number of shares remitted to the participant upon settlement is equal to the number of PSUs awarded multiplied by their respective vesting factor less amounts withheld to satisfy the participant’s minimum statutory withholding tax requirement.
The settlement of PSUs, for senior and executive management employees, is conditional on compliance with the conditions of their benefit plans, award or employment agreements, including but not limited to non-compete, non-solicitation and non-disclosure of confidential information.
 
 
 
 
 
 
 
 
 
 
 

 


 Canadian National Railway Company

 
12

 
Notes to Unaudited Consolidated Financial Statements

Equity settled awards (excluding stock option awards)

   
PSUs-ROIC (1)
 
PSUs-TSR (2)
DSUs (3)
 
Units
 
Weighted-
average
 grant date
fair value
 
Units
 
Weighted-
average
grant date
fair value
 
Units
 
Weighted-
average
grant date
fair value
   
In millions
     
In millions
     
In millions
   
Outstanding at December 31, 2014
0.9 
$
 71.05 
 
 
N/A 
 
1.7 
$
76.29 
   Granted
0.4 
$
 50.87 
 
0.1 
$
 114.86 
 
$
81.18 
Outstanding at March 31, 2015
1.3 
$
 64.35 
 
0.1 
$
 114.86 
 
1.7 
$
 76.45 
                         
(1)
The grant date fair value of PSUs-ROIC granted in 2015 of $21 million is calculated using a lattice-based valuation model. As at March 31, 2015, total unrecognized compensation cost related to non-vested PSUs-ROIC outstanding was $36 million and is expected to be recognized over a weighted-average period of 2.1 years.
(2)
The grant date fair value of PSUs-TSR granted in 2015 of $16 million is calculated using a Monte Carlo simulation model. As at March 31, 2015, the total unrecognized compensation cost related to non-vested PSUs-TSR outstanding was $13 million and is expected to be recognized over a weighted-average period of 2.8 years.
(3)
The grant date fair value of DSUs granted in 2015 of $2 million is calculated using an intrinsic value model and represents deferrals of annual incentive bonus payment and other eligible incentive payments. As at March 31, 2015, the total unrecognized compensation cost related to non-vested DSUs outstanding was $1 million. The remaining recognition period has not been quantified as it relates solely to the 25% Company grant, representing a minimal number of units. As at March 31, 2015, the aggregate intrinsic value of DSUs outstanding amounted to $149 million.

Stock option awards
   
Options outstanding
 
   
Number
Weighted-
average
 
   
of options
exercise price
 
   
In millions
     
Outstanding at December 31, 2014 (1)
7.5 
$
37.37 
 
   Granted (2)
0.8 
$
84.55 
 
   Exercised
(0.3)
$
27.24 
 
Outstanding at March 31, 2015 (1) (3) (4)
8.0 
$
44.69 
 
Exercisable at March 31, 2015 (1) (4)
5.7 
$
35.51 
 
     
(1)
Stock options with a US dollar exercise price have been translated into Canadian dollars using the foreign exchange rate in effect at the balance sheet date.
(2)
The grant date fair value of options awarded in 2015 of $11 million ($13.22 per unit) is calculated using the Black-Scholes option-pricing model.
(3)
As at March 31, 2015, total unrecognized compensation cost related to non-vested options outstanding was $15 million and is expected to be recognized over a weighted-average period of 3.2 years.
(4)
As at March 31, 2015, substantially all stock options were in-the-money. The weighted-average years to expiration of outstanding options was 6.0 years and the weighted-average years to expiration of exercisable stock options was 4.8 years. As at March 31, 2015, the aggregate intrinsic value of in-the-money stock options outstanding amounted to $322 million and aggregate intrinsic value of stock options exercisable amounted to $281 million.

Cash settled awards

Number of units- In millions
 
PSUs-ROIC (1)
 
DSUs (2)
Outstanding at December 31, 2014
 
1.6 
 
0.5 
   Settled
 
(0.9)
 
Outstanding at March 31, 2015
 
0.7 
 
0.5 
           
(1)
As at March 31, 2015, total unrecognized compensation cost related to non-vested PSUs-ROIC outstanding was $24 million and is expected to be recognized over a weighted-average period of 1.4 years. As at March 31, 2015, the PSU liability was $60 million ($157 million as at December 31, 2014).
(2)
As at March 31, 2015, total unrecognized compensation cost related to non-vested DSUs outstanding was minimal. The remaining recognition period has not been quantified as it relates solely to the 25% Company grant and the dividends earned thereon, representing a minimal number of units. As at March 31, 2015, the DSU liability was $43 million ($40 million as at December 31, 2014).
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
13

 
Notes to Unaudited Consolidated Financial Statements

9 - Accumulated other comprehensive loss

In millions
 
Foreign
currency
 translation
adjustments
 
       Pension
and other
postretirement
 benefit plans
 
Derivative
 instruments
 
Total 
before tax
   
Income tax
recovery
(expense)
   
Total 
net of tax
Balance at December 31, 2014
$
(458)
$
(2,510)
$
$
(2,961)
 
$
534 
 
$
(2,427)
Other comprehensive income (loss)
                         
 
before reclassifications:
                         
 
Foreign exchange gain on
                         
   
translation of net investment in
                         
   
foreign operations
742 
         
742 
   
   
742 
 
Foreign exchange loss on
                         
   
translation of US dollar-
                         
   
denominated debt designated
                         
   
as a hedge of the net investment
                         
   
in U.S. subsidiaries (1)
(646)
         
(646)
   
85 
   
(561)
Amounts reclassified from Accumulated
                         
 
other comprehensive loss:
                         
 
Amortization of net actuarial loss
     
60 
     
60 
 (2)
(16)
 (3)
44 
 
Amortization of prior service cost
     
     
 (2)
 
Other comprehensive income
 
96 
 
61 
 
 
157 
   
69 
   
226 
Balance at March 31, 2015
$
(362)
$
(2,449)
$
$
(2,804)
 
$
603 
 
$
(2,201)
                                   
In millions
 
Foreign
currency
translation
adjustments
 
       Pension
and other
postretirement
benefit plans
 
Derivative
 instruments
 
Total
   before tax
   
Income tax
 recovery
 (expense)
   
Total
        net of tax
Balance at December 31, 2013
$
(533)
$
(1,515)
$
$
(2,040)
 
$
190 
 
$
(1,850)
Other comprehensive income (loss)
                         
 
before reclassifications:
                         
 
Foreign exchange gain on
                         
   
translation of net investment in
                         
   
foreign operations
276 
         
276 
   
   
276 
 
Foreign exchange loss on
                         
   
translation of US dollar-
                         
   
denominated debt designated
                         
   
as a hedge of the net investment
                         
   
in U.S. subsidiaries (1)
(251)
         
(251)
   
32 
   
(219)
Amounts reclassified from Accumulated
                         
 
other comprehensive loss:
                         
 
Amortization of net actuarial loss
   
31 
     
31 
 (2)
(8)
 (3)
23 
 
Amortization of prior service cost
     
     
 (2)
 
Other comprehensive income
 
25 
 
33 
 
 
58 
   
24 
   
82 
Balance at March 31, 2014
$
(508)
$
(1,482)
$
$
(1,982)
 
$
214 
 
$
(1,768)
                                   
(1)
The Company designates US dollar-denominated debt of the parent company as a foreign currency hedge of its net investment in U.S. subsidiaries. As a result, from the dates of designation, foreign exchange gains and losses on translation of the Company’s US dollar-denominated debt are recorded in Accumulated other comprehensive loss, which minimizes volatility of earnings resulting from the conversion of US dollar-denominated debt into Canadian dollars.
(2)
Reclassified to Labor and fringe benefits on the Consolidated Statement of Income and included in components of net periodic benefit cost. See Note 7 - Pensions and other postretirement benefits.
(3)
Included in Income tax expense on the Consolidated Statement of Income.
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
14

 
Notes to Unaudited Consolidated Financial Statements

10 - Major commitments and contingencies
Commitments
As at March 31, 2015, the Company had commitments to acquire railroad ties, rail, freight cars, locomotives, and other equipment and services, as well as outstanding information technology service contracts and licenses, at an aggregate cost of $1,569 million ($1,054 million as at December 31, 2014). The Company also has estimated remaining commitments of approximately $556 million (US$438 million), in relation to the U.S. federal government legislative requirement to implement Positive Train Control (PTC).
In addition, the Company has estimated remaining commitments, through to December 31, 2016, of approximately $62 million (US$49 million), in relation to the acquisition of the principal lines of the former Elgin, Joliet and Eastern Railway Company. These commitments are for railroad infrastructure improvements, grade separation projects as well as commitments under a series of agreements with individual communities and a comprehensive voluntary mitigation program established to address surrounding municipalities’ concerns.

Contingencies
In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party personal injuries, occupational disease and property damage, arising out of harm to individuals or property allegedly caused by, but not limited to, derailments or other accidents.
As at March 31, 2015, the Company had aggregate reserves for personal injury and other claims of $306 million, of which $50 million was recorded as a current liability ($298 million as at December 31, 2014, of which $48 million was recorded as a current liability).
Although the Company considers such provisions to be adequate for all its outstanding and pending claims, the final outcome with respect to actions outstanding or pending at March 31, 2015, or with respect to future claims, cannot be reasonably determined. When establishing provisions for contingent liabilities the Company considers, where a probable loss estimate cannot be made with reasonable certainty, a range of potential probable losses for each such matter, and records the amount it considers the most reasonable estimate within the range. However, when no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. For matters where a loss is reasonably possible but not probable, a range of potential losses cannot be estimated due to various factors which may include the limited availability of facts, the lack of demand for specific damages and the fact that proceedings were at an early stage. Based on information currently available, the Company believes that the eventual outcome of the actions against the Company will not, individually or in the aggregate, have a material adverse effect on the Company’s financial position. However, due to the inherent inability to predict with certainty unforeseeable future developments, there can be no assurance that the ultimate resolution of these actions will not have a material adverse effect on the Company’s results of operations, financial position or liquidity in a particular quarter or fiscal year.

Environmental matters
The Company’s operations are subject to numerous federal, provincial, state, municipal and local environmental laws and regulations in Canada and the U.S. concerning, among other things, emissions into the air; discharges into waters; the generation, handling, storage, transportation, treatment and disposal of waste, hazardous substances, and other materials; decommissioning of underground and aboveground storage tanks; and soil and groundwater contamination. A risk of environmental liability is inherent in railroad and related transportation operations; real estate ownership, operation or control; and other commercial activities of the Company with respect to both current and past operations.
The Company has identified approximately 250 sites at which it is or may be liable for remediation costs, in some cases along with other potentially responsible parties, associated with alleged contamination and is subject to environmental clean-up and enforcement actions, including those imposed by the United States Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also known as the Superfund law, or analogous state laws. CERCLA and similar state laws, in addition to other similar Canadian and U.S. laws, generally impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site, as well as those whose waste is disposed of at the site, without regard to fault or the legality of the original conduct. The Company has been notified that it is a potentially responsible party for study and clean-up costs at approximately 10 sites governed by the Superfund law (and analogous state laws) for which investigation and remediation payments are or will be made or are yet to be determined and, in many instances, is one of several potentially responsible parties.
 
 
 
 
 
 
 
 
 
 
 
 


Canadian National Railway Company

 
15

 
Notes to Unaudited Consolidated Financial Statements

The ultimate cost of addressing these known contaminated sites cannot be definitively established given that the estimated environmental liability for any given site may vary depending on the nature and extent of the contamination; the nature of anticipated response actions, taking into account the available clean-up techniques; evolving regulatory standards governing environmental liability; and the number of potentially responsible parties and their financial viability. As a result, liabilities are recorded based on the results of a four-phase assessment conducted on a site-by-site basis. A liability is initially recorded when environmental assessments occur, remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used and the extent of the corrective action required, can be reasonably estimated. The Company estimates the costs related to a particular site using cost scenarios established by external consultants based on the extent of contamination and expected costs for remedial efforts. In the case of multiple parties, the Company accrues its allocable share of liability taking into account the Company’s alleged responsibility, the number of potentially responsible parties and their ability to pay their respective share of the liability. Adjustments to initial estimates are recorded as additional information becomes available.
The Company’s provision for specific environmental sites is undiscounted and includes costs for remediation and restoration of sites, as well as monitoring costs. Costs related to any unknown existing or future contamination will be accrued in the period in which they become probable and reasonably estimable.
As at March 31, 2015, the Company had aggregate accruals for environmental costs of $150 million, of which $82 million was recorded as a current liability ($114 million as at December 31, 2014, of which $45 million was recorded as a current liability). For the three months ended March 31, 2015, the Company recorded environmental accruals of approximately $35 million related to first quarter derailments. The Company anticipates that the majority of the liability at March 31, 2015 will be paid out over the next five years. However, some costs may be paid out over a longer period. Based on the information currently available, the Company considers its accruals to be adequate.

Guarantees and indemnifications
A list of indemnifications found in various types of contracts with third parties is provided in Note 16 – Major commitments and contingencies to the Company’s 2014 Annual Consolidated Financial Statements.

Guarantees
(a)  
Guarantee of residual values of operating leases
The Company has guaranteed a portion of the residual values of certain of its assets under operating leases with expiry dates between 2015 and 2022, for the benefit of the lessor. If the fair value of the assets at the end of their respective lease term is less than the fair value, as estimated at the inception of the lease, then the Company must, under certain conditions, compensate the lessor for the shortfall. As at March 31, 2015, the maximum exposure in respect of these guarantees was $201 million ($194 million as at December 31, 2014). There are no recourse provisions to recover any amounts from third parties.

(b)  
Other guarantees
As at March 31, 2015, the Company, including certain of its subsidiaries, had granted $497 million ($487 million as at December 31, 2014) of irrevocable standby letters of credit and $112 million ($106 million as at December 31, 2014) of surety and other bonds, issued by highly rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at March 31, 2015, the maximum potential liability under these guarantee instruments was $609 million ($593 million as at December 31, 2014), of which $535 million ($525 million as at December 31, 2014) related to workers’ compensation and other employee benefit liabilities and $74 million ($68 million as at December 31, 2014) related to other liabilities. The letters of credit were drawn on the Company’s bilateral letter of credit facilities. The guarantee instruments expire at various dates between 2015 and 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
16

 
Notes to Unaudited Consolidated Financial Statements

11 - Financial instruments
Derivative financial instruments
The Company uses derivative financial instruments from time to time in the management of its foreign currency and interest rate exposures. The Company has limited involvement with derivative financial instruments in the management of its risks and does not hold or issue them for trading or speculative purposes. As at March 31, 2015, the Company had outstanding foreign exchange forward contracts with a notional value of US$350 million (US$350 million as at December 31, 2014). Changes in the fair value of forward contracts, resulting from changes in foreign exchange rates, are recognized in Other income in the Consolidated Statement of Income as they occur. For the three months ended March 31, 2015 and 2014, the Company recorded a pre-tax gain of $36 million and $10 million, respectively, related to foreign exchange forward contracts. As at March 31, 2015, the Company recorded an unrealized gain of $45 million ($9 million as at December 31, 2014) related to foreign exchange forward contracts in Other current assets in the Consolidated Balance Sheet.

Fair value of financial instruments
The carrying amounts of Cash and cash equivalents, Restricted cash and cash equivalents, Accounts receivable, Other current assets, and Accounts payable and other, approximate fair value because of the short maturity of these instruments. Cash and cash equivalents and Restricted cash and cash equivalents include highly liquid investments purchased three months or less from maturity and are classified as Level 1. Accounts receivable, Other current assets, and Accounts payable and other, are classified as Level 2 as they may not be priced using quoted prices, but rather determined from market observable information.
Included in Intangible and other assets are equity investments for which the carrying amount approximates the fair value, with the exception of certain cost investments for which the fair value is estimated based on the Company’s proportionate share of the underlying net assets. Investments are classified as Level 3 as their fair value is based on significant unobservable inputs. As at March 31, 2015, the Company’s investments had a carrying amount of $60 million ($58 million as at December 31, 2014) and a fair value of $194 million ($183 million as at December 31, 2014).
The fair value of the Company’s debt is estimated based on the quoted market prices for the same or similar debt instruments, as well as discounted cash flows using current interest rates for debt with similar terms, company rating, and remaining maturity. The Company’s debt is classified as Level 2. As at March 31, 2015, the Company’s debt had a carrying amount of $9,403 million ($8,409 million as at December 31, 2014) and a fair value of $11,022 million ($9,767 million as at December 31, 2014).
Additional information related to the fair value of financial instruments, including a description of the fair value hierarchy which defines the criteria used to classify financial instruments as Level 1, Level 2 or Level 3 is provided in Note 17 – Financial instruments to the Company’s 2014 Annual Consolidated Financial Statements.


 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
17

 
Selected Railroad Statistics - unaudited

   
Three months ended March 31
 
2015 
2014 
     
Financial measures
   
     
Key financial performance indicators
   
Total revenues ($ millions)
 3,098 
 2,693 
Rail freight revenues ($ millions)
 2,980 
 2,578 
Operating income ($ millions)
 1,063 
 820 
Adjusted diluted earnings per share ($) (1)
 0.86 
 0.66 
Free cash flow ($ millions) (1)
 521 
 494 
Property additions ($ millions)
 468 
 248 
Share repurchases ($ millions)
 429 
 365 
Dividends per share ($)
 0.3125 
 0.2500 
     
Financial position
   
Total assets ($ millions)
33,496 
 30,893 
Total liabilities ($ millions)
19,752 
 17,797 
Shareholders' equity ($ millions)
 13,744 
 13,096 
     
Financial ratio
   
Operating ratio (%)
 65.7 
 69.6 
     
Operational measures (2)
   
     
Statistical operating data
   
Gross ton miles (GTM) (millions)
 111,390 
 101,476 
Revenue ton miles (RTM) (millions)
 57,129 
 53,334 
Carloads (thousands)
 1,353 
 1,239 
Route miles (includes Canada and the U.S.)
 19,600 
 19,800 
Employees (end of period)
 25,486 
 23,992 
Employees (average for the period)
 25,235 
 23,756 
     
Key operating measures
   
Rail freight revenue per RTM (cents)
 5.22 
 4.83 
Rail freight revenue per carload ($)
 2,203 
 2,081 
GTMs per average number of employees (thousands)
 4,414 
 4,272 
Operating expenses per GTM (cents)
 1.83 
 1.85 
Labor and fringe benefits expense per GTM (cents)
 0.60 
 0.58 
Diesel fuel consumed (US gallons in millions)
 114.3 
 106.9 
Average fuel price ($ per US gallon)
 2.84 
 3.95 
GTMs per US gallon of fuel consumed
 975 
 949 
Terminal dwell (hours)
 16.9 
 19.8 
Train velocity (miles per hour)
 24.9 
 24.0 
     
Safety indicators (3)
   
Injury frequency rate (per 200,000 person hours)
 1.64 
 2.09 
Accident rate (per million train miles)
 2.47 
 2.39 
       
(1)
See supplementary schedule entitled Non-GAAP Measures for an explanation of this non-GAAP measure.
(2)
Statistical operating data, key operating measures and safety indicators are based on estimated data available at such time and are subject to change as more complete information becomes available, as such, certain of the comparative data have been restated. Definitions of these indicators are provided on our website, www.cn.ca/glossary.
(3)
Based on Federal Railroad Administration (FRA) reporting criteria.
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Canadian National Railway Company

 
18

 
Supplementary Information - unaudited

   
Three months ended March 31
             
   
2015 
2014 
% Change Fav (Unfav)
 
% Change at constant currency
Fav (Unfav) (1)
Revenues (millions of dollars)
           
Petroleum and chemicals
 
 643 
 568 
13%
 
5%
Metals and minerals
 
 377 
 308 
22%
 
11%
Forest products
 
 418 
 339 
23%
 
13%
Coal
 
 159 
 182 
(13%)
 
(19%)
Grain and fertilizers
 
 535 
 431 
24%
 
17%
Intermodal
 
 689 
 621 
11%
 
7%
Automotive
 
 159 
 129 
23%
 
12%
Total rail freight revenues
 
 2,980 
 2,578 
16%
 
8%
Other revenues
 
 118 
 115 
3%
 
(4%)
Total revenues
 
 3,098 
 2,693 
15%
 
7%
Revenue ton miles (millions)
           
Petroleum and chemicals
 
 13,617 
 12,879 
6%
 
6%
Metals and minerals
 
 5,711 
 5,009 
14%
 
14%
Forest products
 
 7,242 
 6,555 
10%
 
10%
Coal
 
 4,210 
 5,294 
(20%)
 
(20%)
Grain and fertilizers
 
 12,944 
 11,313 
14%
 
14%
Intermodal
 
 12,593 
 11,661 
8%
 
8%
Automotive
 
 812 
 623 
30%
 
30%
Total revenue ton miles
 
 57,129 
 53,334 
7%
 
7%
Rail freight revenue / RTM (cents)
           
Petroleum and chemicals
 
 4.72 
 4.41 
7%
 
(1%)
Metals and minerals
 
 6.60 
 6.15 
7%
 
(2%)
Forest products
 
 5.77 
 5.17 
12%
 
3%
Coal
 
 3.78 
 3.44 
10%
 
2%
Grain and fertilizers
 
 4.13 
 3.81 
8%
 
3%
Intermodal
 
 5.47 
 5.33 
3%
 
(1%)
Automotive
 
 19.58 
 20.71 
(5%)
 
(14%)
Total rail freight revenue per RTM
 
 5.22 
 4.83 
8%
 
1%
Carloads (thousands)
           
Petroleum and chemicals
 
 164 
 161 
2%
 
2%
Metals and minerals
 
 237 
 207 
14%
 
14%
Forest products
 
 109 
 100 
9%
 
9%
Coal
 
 115 
 125 
(8%)
 
(8%)
Grain and fertilizers
 
 154 
 140 
10%
 
10%
Intermodal
 
 522 
 457 
14%
 
14%
Automotive
 
 52 
 49 
6%
 
6%
Total carloads
 
 1,353 
 1,239 
9%
 
9%
Rail freight revenue / carload (dollars)
           
Petroleum and chemicals
 
 3,921 
 3,528 
11%
 
3%
Metals and minerals
 
 1,591 
 1,488 
7%
 
(3%)
Forest products
 
 3,835 
 3,390 
13%
 
4%
Coal
 
 1,383 
 1,456 
(5%)
 
(12%)
Grain and fertilizers
 
 3,474 
 3,079 
13%
 
7%
Intermodal
 
 1,320 
 1,359 
(3%)
 
(7%)
Automotive
 
 3,058 
 2,633 
16%
 
6%
Total rail freight revenue per carload
 
 2,203 
 2,081 
6%
 
(1%)
             
Statistical operating data and related key operating measures are based on estimated data available at such time and are subject to change as more complete information becomes available.
 
(1) See supplementary schedule entitled Non-GAAP Measures for an explanation of this non-GAAP measure.
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

 
19

 
Non-GAAP Measures - unaudited

Adjusted performance measures
Management believes that adjusted net income and adjusted earnings per share are useful measures of performance that can facilitate period-to-period comparisons, as they exclude items that do not necessarily arise as part of the normal day-to-day operations of the Company and could distort the analysis of trends in business performance. The exclusion of such items in adjusted net income and adjusted earnings per share does not, however, imply that such items are necessarily non-recurring. These adjusted measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies. The reader is advised to read all information provided in the Company’s 2015 unaudited Interim Consolidated Financial Statements, and Notes thereto.
For the three months ended March 31, 2015, the Company reported adjusted net income of $704 million, or $0.86 per diluted share.
For the three months ended March 31, 2014, the Company reported adjusted net income of $551 million, or $0.66 per diluted share. The adjusted figures for the three months ended March 31, 2014 exclude a gain on disposal of the Deux-Montagnes subdivision, including the Mont-Royal tunnel, together with the rail fixtures (collectively the “Deux-Montagnes”), of $80 million, or $72 million after-tax ($0.09 per diluted share).
The following table provides a reconciliation of net income and earnings per share, as reported for the three months ended March 31, 2015 and 2014, to the adjusted performance measures presented herein.

       
Three months ended March 31
In millions, except per share data
           
2015 
 
2014 
Net income as reported
         
$
 704 
$
 623 
Adjustments:
                 
 
Other income
           
 - 
 
 (80)
 
Income tax expense
           
 - 
 
 8 
Adjusted net income
         
$
 704 
$
 551 
Basic earnings per share as reported
         
$
 0.87 
$
 0.75 
Impact of adjustments, per share
           
 - 
 
 (0.09)
Adjusted basic earnings per share
         
$
 0.87 
$
 0.66 
Diluted earnings per share as reported
         
$
 0.86 
$
 0.75 
Impact of adjustments, per share
           
 - 
 
 (0.09)
Adjusted diluted earnings per share
         
$
 0.86 
$
 0.66 


Constant currency
Financial results at constant currency allow results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons in the analysis of trends in business performance. Measures at constant currency are considered non-GAAP measures and do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US dollars at the foreign exchange rates of the comparable period of the prior year. The average foreign exchange rates were $1.24 and $1.10 per US$1.00, respectively, for the three months ended March 31, 2015 and 2014.
On a constant currency basis, the Company’s net income for the three months ended March 31, 2015 would have been lower by $56 million, or $0.07 per diluted share.
 
 
 
 
 
 
 
 
 
 




Canadian National Railway Company

 
20

 
Non-GAAP Measures - unaudited

Free cash flow
Free cash flow does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies. The Company believes that free cash flow is a useful measure of performance as it demonstrates the Company’s ability to generate cash for debt obligations and for discretionary uses such as payment of dividends and strategic opportunities.
The Company defines its free cash flow measure as the difference between net cash provided by operating activities and net cash used in investing activities; adjusted for changes in restricted cash and cash equivalents and the impact of major acquisitions, if any.

   
Three months ended March 31
In millions
   
2015 
 
2014 
Net cash provided by operating activities
 
$
992 
$
645 
Net cash used in investing activities
   
 (481)
 
 (174)
Net cash provided before financing activities
   
 511 
 
 471 
           
Adjustment: Change in restricted cash and cash equivalents
   
 10 
 
 23 
Free cash flow
 
$
521 
$
494 

Credit measures
Management believes that the adjusted debt-to-total capitalization ratio is a useful credit measure that aims to show the true leverage of the Company. Similarly, the adjusted debt-to-adjusted earnings before interest, income taxes, depreciation and amortization (EBITDA) multiple is another useful credit measure because it reflects the Company’s ability to service its debt. The Company excludes Other income in the calculation of EBITDA. However, since these measures do not have any standardized meaning prescribed by GAAP, they may not be comparable to similar measures presented by other companies and, as such, should not be considered in isolation.

Adjusted debt-to-total capitalization ratio
           
     
March 31,
 
2015 
 
2014 
Debt-to-total capitalization ratio (1)
     
40.6%
 
38.5%
Add: Impact of present value of operating lease commitments (2)
   
1.6%
 
1.6%
Adjusted debt-to-total capitalization ratio
     
42.2%
 
40.1%
               
Adjusted debt-to-adjusted EBITDA
           
               
In millions, unless otherwise indicated
 
Twelve months ended March 31,
 
 2015 
 
 2014 
Debt
   
$
9,403 
$
8,199 
Add: Present value of operating lease commitments (2)
     
644 
 
575 
Adjusted debt
     
10,047 
 
8,774 
               
Operating income
     
 4,867 
 
 3,913 
Add: Depreciation and amortization
     
 1,090 
 
 1,001 
EBITDA (excluding Other income)
     
 5,957 
 
 4,914 
Add: Deemed interest on operating leases
     
30 
 
28 
Adjusted EBITDA
   
$
5,987 
$
4,942 
Adjusted debt-to-adjusted EBITDA
   
1.68 times
 
1.78 times
               
(1)
Debt-to-total capitalization is calculated as total Long-term debt plus Current portion of long-term debt, divided by the sum of total debt plus Total shareholders’ equity.
(2)
The operating lease commitments have been discounted using the Company’s implicit interest rate for each of the periods presented.

The increase in the Company’s adjusted debt-to-total capitalization ratio at March 31, 2015, as compared to the same period in 2014, was mainly due to an increased debt level caused by a weaker Canadian-to-US dollar foreign exchange rate in effect at the balance sheet date. The Company’s higher operating income earned for the twelve months ended March 31, 2015, was partly offset by the impact of an increased debt level as at March 31, 2015, which resulted in a decrease in the Company’s adjusted debt-to-adjusted EBITDA multiple, as compared to the same period in 2014.
 
 
 
 
 
 
 
 
 
 
 




Canadian National Railway Company

 
21

 
Management’s Discussion and Analysis
 
Item 3
 
Management’s discussion and analysis (MD&A) relates to the financial position and results of operations of Canadian National Railway Company, together with its wholly-owned subsidiaries, collectively “CN” or “the Company.” Canadian National Railway Company’s common shares are listed on the Toronto and New York stock exchanges. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars and determined on the basis of United States generally accepted accounting principles (U.S. GAAP). The Company’s objective is to provide meaningful and relevant information reflecting the Company’s financial position and results of operations. In certain instances, the Company may make reference to certain non-GAAP measures that, from management’s perspective, are useful measures of performance. The reader is advised to read all information provided in the MD&A in conjunction with the Company’s 2015 unaudited Interim Consolidated Financial Statements and Notes thereto as well as the 2014 Annual Consolidated Financial Statements, Notes thereto and the 2014 Annual MD&A.


Business profile
CN is engaged in the rail and related transportation business. CN’s network of approximately 20,000 route miles of track spans Canada and mid-America, uniquely connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico. CN’s extensive network and efficient connections to all Class I railroads provide CN customers access to all three North American Free Trade Agreement (NAFTA) nations. A true backbone of the economy, CN handles over $250 billion worth of goods annually and carries more than 300 million tons of cargo, serving exporters, importers, retailers, farmers and manufacturers.
CN’s freight revenues are derived from seven commodity groups representing a diversified and balanced portfolio of goods transported between a wide range of origins and destinations. This product and geographic diversity better positions the Company to face economic fluctuations and enhances its potential for growth opportunities. For the three months ended March 31, 2015, no individual commodity group accounted for more than 22% of total revenues. From a geographic standpoint, 17% of revenues relate to United States (U.S.) domestic traffic, 34% transborder traffic, 18% Canadian domestic traffic and 31% overseas traffic. The Company is the originating carrier for approximately 85% of traffic moving along its network, which allows it both to capitalize on service advantages and build on opportunities to efficiently use assets.


Strategy overview
A description of the Company’s Strategy is provided in the section entitled Strategy overview of the Company’s 2014 Annual MD&A.

2015 first quarter highlights
·  
The Company attained record first quarter levels of rail freight revenues, operating income, gross ton miles, revenue ton miles, and carloads.
·  
The Company achieved its lowest first quarter operating ratio of 65.7%.
·  
Operations across the network were favorably impacted by more normal winter conditions, when compared to the same period in 2014.
·  
The Company paid quarterly dividends of $0.3125 per share, representing an increase of 25% when compared to 2014, amounting to $252 million.
·  
The Company repurchased 5.4 million shares, returning over $429 million to its shareholders, under its current share repurchase program, which allows for the repurchase of up to 28.0 million common shares between October 24, 2014 and October 23, 2015.
·  
The Company increased its capital program by $100 million to $2.7 billion to sustain additional rail infrastructure safety investments. 
·  
On March 17, 2015, CN announced a plan to build a $250 million intermodal and logistics hub adjacent to its main line in the town of Milton, Ontario, which will help the Company efficiently handle growing intermodal traffic and generate new supply chain efficiencies.
·  
On April 16, 2015, CN announced a multi-year capital program to invest approximately $500 million in infrastructure improvements to its Western Canada feeder rail lines in Alberta, Manitoba, and Saskatchewan that are handling rising freight volumes of industrial products, natural resources, and energy-related commodities. In 2015, the Company will allocate approximately $100 million of its capital budget for work on this program.

Growth opportunities and assumptions
The Company sees opportunities for growth in intermodal traffic; commodities tied to U.S. housing construction; energy-related commodities, particularly crude oil and frac sand; as well as automotive sales. The Company expects North American industrial production to increase by approximately three percent as well as continued improvements in U.S. housing starts and U.S. automotive sales. The 2014/2015 Canadian grain crop represented a significant reduction toward the historical trend line while the U.S. grain crop was above trend. The Company assumes that the 2015/2016 grain crops in both Canada and the U.S. will be in line with trend yields.

 
 
 
 
 
 
 
 
 
 
 
 
 

Canadian National Railway Company

 
22

 
Management’s Discussion and Analysis

The forward-looking statements discussed in this MD&A are subject to risks and uncertainties that could cause actual results or performance to differ materially from those expressed or implied in such statements and are based on certain factors and assumptions which the Company considers reasonable, about events, developments, prospects and opportunities that may not materialize or that may be offset entirely or partially by other events and developments. For assumptions and risk factors, see the sections of this MD&A entitled Forward-looking statements and Strategy overview - Growth opportunities and assumptions.


Forward-looking statements
Certain information included in this MD&A are “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and under Canadian securities laws. CN cautions that, by their nature, forward-looking statements involve risks, uncertainties and assumptions. The Company cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. These forward-looking statements include, but are not limited to, statements with respect to growth opportunities; statements that the Company will benefit from growth in North American and global economies; the anticipation that cash flow from operations and from various sources of financing will be sufficient to meet debt repayments and future obligations in the foreseeable future; statements regarding future payments, including income taxes and pension contributions; as well as the projected capital spending program. Forward-looking statements could further be identified by the use of terminology such as the Company “believes,” “expects,” “anticipates,” “assumes” or other similar words.
Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company or the rail industry to be materially different from the outlook or any future results or performance implied by such statements. Key assumptions used in determining forward-looking information are set forth below. See also the section of this MD&A entitled Strategy overview - Growth opportunities and assumptions.

Forward-looking statements
 Key assumptions or expectations
Statements relating to general economic and business
 ∙ North American and global economic growth
conditions, including those referring to revenue
 ∙ Long-term growth opportunities being less affected by current economic
growth opportunities
   conditions
 
 ∙ Year-over-year carload growth
   
Statements relating to the Company’s ability to meet debt
 ∙ North American and global economic growth
repayments and future obligations in the foreseeable future,
 ∙ Adequate credit ratios
including income tax payments, and capital spending
 ∙ Investment grade credit rating
 
 ∙ Access to capital markets
 
 ∙ Adequate cash generated from operations and other sources of financing
   
Statements relating to pension contributions
 ∙ Adequate cash generated from operations and other sources of financing
 
 ∙ Adequate long-term return on investment on pension plan assets
 
 ∙ Level of funding as determined by actuarial valuations, particularly
 
   influenced by discount rates for funding purposes
   

Important risk factors that could affect the forward-looking statements include, but are not limited to, the effects of general economic and business conditions; industry competition; inflation, currency and interest rate fluctuations; changes in fuel prices; legislative and/or regulatory developments; compliance with environmental laws and regulations; actions by regulators; various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes; labor negotiations and disruptions; environmental claims; uncertainties of investigations, proceedings or other types of claims and litigation; risks and liabilities arising from derailments; and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the U.S. See the section entitled Business risks of this MD&A and the Company’s 2014 Annual MD&A for detailed information on major risk factors.
CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable Canadian securities laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

23

 
Management’s Discussion and Analysis

Financial highlights

     
Three months ended March 31
In millions, except percentage and  per share data
   
 2015 
 
 2014 
       
Revenues
 
$
 3,098 
$
 2,693 
Operating income
 
$
 1,063 
$
 820 
Net income
 
$
 704 
$
 623 
Adjusted net income (1)
 
$
 704 
$
 551 
             
Basic earnings per share
 
$
 0.87 
$
 0.75 
Adjusted basic earnings per share (1)
 
$
 0.87 
$
 0.66 
             
Diluted earnings per share
 
$
 0.86 
$
 0.75 
Adjusted diluted earnings per share (1)
 
$
 0.86 
$
 0.66 
             
Dividends declared per share
 
$
 0.3125 
$
 0.2500 
             
Total assets
 
$
 33,496 
$
 30,893 
Total long-term liabilities
 
$
 16,931 
$
 15,338 
             
Operating ratio
   
65.7%
 
69.6%
           
Free cash flow (2)
 
$
 521 
$
 494 
   
(1)
See the section of this MD&A entitled Adjusted performance measures for an explanation of this non-GAAP measure.
(2)
See the section of this MD&A entitled Liquidity - Free cash flow for an explanation of this non-GAAP measure.

First quarter of 2015 compared to corresponding period in 2014
Net income for the first quarter of 2015 was $704 million, an increase of $81 million, or 13%, when compared to the same period in 2014, with diluted earnings per share rising 15% to $0.86. The $81 million increase was mainly due to a higher Operating income net of the related income taxes, partly offset by a decrease in Other income.
Operating income for the quarter ended March 31, 2015, increased by $243 million, or 30%, to $1,063 million. The operating ratio, defined as operating expenses as a percentage of revenues, was 65.7% in the first quarter of 2015, compared to 69.6% in the first quarter of 2014, a 3.9-point improvement. Operations across the network were favorably impacted by more normal winter conditions, when compared to the same period in 2014.

Revenues for the three months ended March 31, 2015, increased by $405 million or 15%, to $3,098 million, mainly attributable to:
·  
the positive translation impact of the weaker Canadian dollar on US dollar-denominated revenues;
·  
higher volumes of Canadian grain and potash; strong overseas intermodal demand; higher shipments of lumber and panels to U.S. markets; continued ramp-up of frac sand; and
·  
freight rate increases.
These factors were partly offset by lower shipments of coal due to weaker global demand and lower fuel surcharge revenues.

Operating expenses for the three months ended March 31, 2015, increased by $162 million, or 9%, to $2,035 million, mainly due to:
·  
the negative translation impact of a weaker Canadian dollar on US dollar-denominated expenses;
·  
increased casualty and other expense;
·  
higher labor and fringe benefits expense; and
·  
increased purchased services and material expense.
These factors were partly offset by lower fuel costs.
 
 
 
 
 
 
 
 
 
 
 

 
 

Canadian National Railway Company

 
24

 
Management’s Discussion and Analysis

Adjusted performance measures
Management believes that adjusted net income and adjusted earnings per share are useful measures of performance that can facilitate period-to-period comparisons, as they exclude items that do not necessarily arise as part of the normal day-to-day operations of the Company and could distort the analysis of trends in business performance. The exclusion of such items in adjusted net income and adjusted earnings per share does not, however, imply that such items are necessarily non-recurring. These adjusted measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies. The reader is advised to read all information provided in the Company’s 2015 unaudited Interim Consolidated Financial Statements and Notes thereto.
For the three months ended March 31, 2015, the Company reported adjusted net income of $704 million, or $0.86 per diluted share.
For the three months ended March 31, 2014, the Company reported adjusted net income of $551 million, or $0.66 per diluted share. The adjusted figures for the three months ended March 31, 2014 exclude a gain on disposal of the Deux-Montagnes subdivision, including the Mont-Royal tunnel, together with the rail fixtures (collectively the “Deux-Montagnes”), of $80 million, or $72 million after-tax ($0.09 per diluted share).
The following table provides a reconciliation of net income and earnings per share, as reported for the three months ended March 31, 2015 and 2014, to the adjusted performance measures presented herein.

             
Three months ended March 31
In millions, except per share data
   
2015 
 
2014 
Net income as reported
   
$
 704 
$
 623 
Adjustments:
       
 
Other income
     
 - 
 
 (80)
 
Income tax expense
     
 - 
 
 8 
Adjusted net income
   
$
 704 
$
 551 
Basic earnings per share as reported
   
$
 0.87 
$
 0.75 
Impact of adjustments, per share
 
 - 
 
 (0.09)
Adjusted basic earnings per share
   
$
 0.87 
$
 0.66 
Diluted earnings per share as reported
   
$
 0.86 
$
 0.75 
Impact of adjustments, per share
 
 - 
 
 (0.09)
Adjusted diluted earnings per share
   
$
 0.86 
$
 0.66 

Constant currency
Financial results at constant currency allow results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons in the analysis of trends in business performance. Measures at constant currency are considered non-GAAP measures and do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US dollars at the foreign exchange rates of the comparable period of the prior year. The average foreign exchange rates were $1.24 and $1.10 per US$1.00, for the three months ended March 31, 2015 and 2014, respectively.
On a constant currency basis, the Company’s net income for the three months ended March 31, 2015 would have been lower by $56 million, or $0.07 per diluted share.
 
 
 
 
 
 
 
 
 
 
 
 
 

  

Canadian National Railway Company

25

 
Management’s Discussion and Analysis

Revenues
   
Three months ended March 31
In millions, unless otherwise indicated
2015 
 
2014 
% Change
% Change 
at constant
currency
Rail freight revenues
 
$
2,980 
$
2,578 
16%
8%
Other revenues
   
118 
 
115 
3%
(4%)
Total revenues
 
$
3,098 
$
2,693 
15%
7%
Rail freight revenues
             
Petroleum and chemicals
 
$
643 
$
568 
13%
5%
Metals and minerals
   
377 
 
308 
22%
11%
Forest products
   
418 
 
339 
23%
13%
Coal
   
159 
 
182 
(13%)
(19%)
Grain and fertilizers
   
535 
 
431 
24%
17%
Intermodal
   
689 
 
621 
11%
7%
Automotive
   
159 
 
129 
23%
12%
Total rail freight revenues
 
$
2,980 
$
2,578 
16%
8%
Revenue ton miles (RTM) (millions)
   
 57,129 
 
 53,334 
7%
7%
Rail freight revenue/RTM (cents)
   
5.22 
 
4.83 
8%
1%

Revenues for the quarter ended March 31, 2015, totaled $3,098 million compared to $2,693 million in the same period in 2014. The increase of $405 million, or 15%, was mainly attributable to the positive translation impact of the weaker Canadian dollar on US dollar-denominated revenues; higher volumes of Canadian grain and potash; strong overseas intermodal demand; higher shipments of lumber and panels to U.S. markets; higher volumes of frac sand; and freight rate increases. These factors were partly offset by decreased shipments of coal due to weaker global demand. Overall, revenues were favorably impacted by improved operating conditions due to a more normal winter, when compared to the same period in 2014, which enhanced the Company’s ability to serve its customers. Fuel surcharge revenues decreased by $59 million, mainly due to lower applicable fuel surcharge rates partly offset by higher freight volumes and the positive translation impact of the weaker Canadian dollar.
Revenue ton miles (RTM), measuring the relative weight and distance of rail freight transported by the Company, increased by 7% in the first quarter of 2015, relative to the same period in 2014.
Rail freight revenue per revenue ton mile, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, increased by 8% when compared to the same period in 2014, driven by the positive translation impact of the weaker Canadian dollar and freight rate increases, partly offset by a lower applicable fuel surcharge rate.

Petroleum and chemicals
       
   
Three months ended March 31
     
 2015 
 
 2014 
% Change
% Change
 at constant
currency
Revenues (millions)
 
$
 643 
$
 568 
13%
5%
RTMs (millions)
   
 13,617 
 
 12,879 
6%
6%
Revenue/RTM (cents)
   
 4.72 
 
 4.41 
7%
(1%)

For the quarter ended March 31, 2015, revenues for this commodity group increased by $75 million, or 13%, when compared to the same period in 2014. The increase was mainly due to the positive translation impact of a weaker Canadian dollar, freight rate increases, and higher shipments of propane, as well as increased crude oil and sulphur shipments. These factors were partly offset by a lower applicable fuel surcharge rate and decreased chlorine shipments.
Revenue per revenue ton mile increased by 7% in the first quarter of 2015 when compared to the same period in 2014, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases, partly offset by a lower applicable fuel surcharge rate and a significant increase in the average length of haul.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  

Canadian National Railway Company

26

 
Management’s Discussion and Analysis

 
Metals and minerals
       
   
Three months ended March 31
     
 2015 
 
 2014 
% Change
% Change
at constant
currency
Revenues (millions)
 
$
 377 
$
 308 
22%
11%
RTMs (millions)
   
 5,711 
 
 5,009 
14%
14%
Revenue/RTM (cents)
   
 6.60 
 
 6.15 
7%
(2%)

For the quarter ended March 31, 2015, revenues for this commodity group increased by $69 million, or 22%, when compared to the same period in 2014. The increase was mainly due to the positive translation impact of a weaker Canadian dollar, higher shipments of frac sand due to the continued growth from new facilities in Wisconsin, increased short-haul iron ore shipments due to milder winter conditions, and freight rate increases. These factors were partly offset by a lower applicable fuel surcharge rate and decreased shipments of drilling pipe due to a reduction in oil and gas exploration.
Revenue per revenue ton mile increased by 7% in the first quarter of 2015 when compared to the same period in 2014, mainly due to the positive translation impact of a weaker Canadian dollar, freight rate increases, and a decrease in the average length of haul, partly offset by a lower applicable fuel surcharge rate.

Forest products
       
   
Three months ended March 31
     
 2015 
 
 2014 
% Change
% Change
at constant
 currency
Revenues (millions)
 
$
 418 
$
 339 
23%
13%
RTMs (millions)
   
 7,242 
 
 6,555 
10%
10%
Revenue/RTM (cents)
   
 5.77 
 
 5.17 
12%
3%

For the quarter ended March 31, 2015, revenues for this commodity group increased by $79 million, or 23%, when compared to the same period in 2014. The increase was mainly due to the positive translation impact of a weaker Canadian dollar; higher shipments of lumber and panels to U.S. markets and increased offshore export shipments of lumber and wood pulp, in part due to milder winter conditions; as well as freight rate increases. These factors were partly offset by a lower applicable fuel surcharge rate.
Revenue per revenue ton mile increased by 12% in the first quarter of 2015 when compared to the same period in 2014, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases, partly offset by a lower applicable fuel surcharge rate and an increase in the average length of haul.

Coal
       
   
Three months ended March 31
     
 2015 
 
 2014 
% Change
% Change
at constant
currency
Revenues (millions)
 
$
 159 
$
 182 
(13%)
(19%)
RTMs (millions)
   
 4,210 
 
 5,294 
(20%)
(20%)
Revenue/RTM (cents)
   
 3.78 
 
 3.44 
10%
2%

For the quarter ended March 31, 2015, revenues for this commodity group decreased by $23 million, or 13%, when compared to the same period in 2014. The decrease was mainly due to lower shipments of metallurgical and thermal coal through west coast ports and a lower applicable fuel surcharge rate. These factors were partly offset by the positive translation impact of a weaker Canadian dollar, freight rate increases, and increased export shipments of U.S. thermal coal through the Gulf.
Revenue per revenue ton mile increased by 10% in the first quarter of 2015 when compared to the same period in 2014, mainly due to the positive translation impact of a weaker Canadian dollar, freight rate increases, and a significant decrease in the average length of haul; partly offset by lower applicable fuel surcharge rate.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  

Canadian National Railway Company

27

 
Management’s Discussion and Analysis
 
Grain and fertilizers
       
   
Three months ended March 31
     
 2015 
 
 2014 
% Change
% Change
 at constant
currency
Revenues (millions)
 
$
 535 
$
 431 
24%
17%
RTMs (millions)
   
 12,944 
 
 11,313 
14%
14%
Revenue/RTM (cents)
   
 4.13 
 
 3.81 
8%
3%

For the quarter ended March 31, 2015, revenues for this commodity group increased by $104 million, or 24%, when compared to the same period in 2014. The increase was mainly due to higher volumes of Canadian grain exports including wheat, canola, peas and lentils; higher domestic shipments of wheat, increased shipments of oats to the U.S.; as well as increased potash shipments to offshore and North American markets; the positive translation impact of a weaker Canadian dollar and freight rate increases. Revenues for this commodity group were positively impacted by milder winter conditions. These factors were partly offset by a lower applicable fuel surcharge rate and reduced export shipments of soybeans and corn through the Gulf.
Revenue per revenue ton mile increased by 8% in the first quarter of 2015 when compared to the same period in 2014, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases, partly offset by a lower applicable fuel surcharge rate and an increase in the average length of haul.

Intermodal
       
   
Three months ended March 31
     
 2015 
 
 2014 
% Change
% Change
at constant
currency
Revenues (millions)
 
$
 689 
$
 621 
11%
7%
RTMs (millions)
   
 12,593 
 
 11,661 
8%
8%
Revenue/RTM (cents)
   
 5.47 
 
 5.33 
3%
(1%)

For the quarter ended March 31, 2015, revenues for this commodity group increased by $68 million, or 11%, when compared to the same period in 2014. The increase was mainly due to higher shipments through the Port of Prince Rupert in part due to temporary diversions from U.S. west coast ports as well as increased shipments through the ports of Vancouver and Montreal; the positive translation impact of a weaker Canadian dollar; and freight rate increases. These factors were partly offset by a lower applicable fuel surcharge rate.
Revenue per revenue ton mile increased by 3% in the first quarter of 2015 when compared to the same period in 2014, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases, partly offset by a lower applicable fuel surcharge rate and an increase in the average length of haul.

Automotive
       
   
Three months ended March 31
     
 2015 
 
 2014 
% Change
% Change
at constant
currency
Revenues (millions)
 
$
 159 
$
 129 
23%
12%
RTMs (millions)
   
 812 
 
 623 
30%
30%
Revenue/RTM (cents)
   
 19.58 
 
 20.71 
(5%)
(14%)

For the quarter ended March 31, 2015, revenues for this commodity group increased by $30 million, or 23%, when compared to the same period in 2014. The increase was mainly due to higher shipments of domestic finished vehicle traffic as a result of new business and the positive translation impact of a weaker Canadian dollar.
Revenue per revenue ton mile decreased by 5% in the first quarter of 2015 when compared to the same period in 2014, mainly due to a lower applicable fuel surcharge rate and a significant increase in the average length of haul, partly offset by the positive translation impact of a weaker Canadian dollar.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  

Canadian National Railway Company

28

 
Management’s Discussion and Analysis
 
Other revenues
       
   
Three months ended March 31
     
 2015 
 
 2014 
% Change
% Change
at constant
currency
Revenues (millions)
 
$
 118 
$
 115 
3%
(4%)

Other revenues are largely derived from non-rail services that support CN’s rail business including vessels and docks, warehousing and distribution, automotive logistic services, freight forwarding and transportation management; as well as other revenues including commuter train revenues.
For the quarter ended March 31, 2015, Other revenues increased by $3 million, or 3%, when compared to the same period in 2014, mainly due to the positive translation impact of a weaker Canadian dollar as well as higher revenues from vessels and docks, partly offset by lower revenues from warehousing and distribution.


Operating expenses
Operating expenses for the first quarter of 2015 amounted to $2,035 million compared to $1,873 million in the same quarter of 2014. The increase of $162 million, or 9%, in the first quarter of 2015 was mainly due to the negative translation impact of a weaker Canadian dollar on US dollar-denominated expenses, increased casualty and other expense, higher labor and fringe benefits expense, as well as increased purchased services and material expense, partly offset by lower fuel costs. Overall, expenses were favorably impacted by improved operating conditions due to a more normal winter when compared to the same period in 2014.

 
Three months ended March 31
         
% Change
% Change at
constant
 currency
Percentage of revenues
In millions
 
2015 
 
2014 
2015 
2014 
Labor and fringe benefits
$
668 
$
587 
(14%)
(9%)
21.6%
21.8%
Purchased services and material
 
457 
 
388 
(18%)
(12%)
14.7%
14.4%
Fuel
 
361 
 
468 
23%
31%
11.7%
17.4%
Depreciation and amortization
 
296 
 
256 
(16%)
(11%)
9.6%
9.5%
Equipment rents
 
94 
 
77 
(22%)
(12%)
3.0%
2.9%
Casualty and other
 
159 
 
97 
(64%)
(56%)
5.1%
3.6%
Total operating expenses
$
2,035 
$
1,873 
(9%)
(2%)
65.7%
69.6%

Labor and fringe benefits
Labor and fringe benefits expense increased by $81 million, or 14%, in the first quarter of 2015 when compared to the same quarter of 2014. The increase was primarily a result of higher headcount to accommodate volume growth, general wage increases, the negative translation impact of the weaker Canadian dollar, as well as increased pension expense, partly offset by a larger proportion of labor workforce working on capital projects and increased labor productivity.

Purchased services and material
Purchased services and material expense increased by $69 million, or 18%, in the first quarter of 2015 when compared to the same quarter of 2014. The increase was mainly due to higher volumes resulting in increased costs for materials as well as repairs and maintenance; and the negative translation impact of the weaker Canadian dollar.

Fuel
Fuel expense decreased by $107 million, or 23%, in the first quarter of 2015 when compared to the same quarter of 2014. The decrease was primarily due to lower fuel prices, partly offset by higher freight volumes and the negative translation impact of the weaker Canadian dollar.

Depreciation and amortization
Depreciation and amortization expense increased by $40 million, or 16%, in the first quarter of 2015 when compared to the same quarter of 2014. The increase was mainly due to net capital additions and the negative translation impact of the weaker Canadian dollar.

 
 
 
 
 
 
 
 
 
 
 


  

Canadian National Railway Company

29

 
Management’s Discussion and Analysis

Equipment rents
Equipment rents expense increased by $17 million, or 22%, in the first quarter of 2015 when compared to the same quarter of 2014. The increase was primarily due to the negative translation impact of the weaker Canadian dollar and increased car hire expense due to higher car volumes, partly offset by improved car velocity and increased car hire income.

Casualty and other
Casualty and other expense increased by $62 million, or 64%, in the first quarter of 2015 when compared to the same quarter of 2014. The increase was mainly due to higher accident-related costs, higher workers’ compensation expenses and the negative impact of the weaker Canadian dollar.


Other income and expenses
Interest expense
Interest expense was $104 million for the quarter ended March 31, 2015, compared to $92 million in the same period in 2014. The increase was mainly due to the negative translation impact of the weaker Canadian dollar on US dollar-denominated interest expense.

Other income
In the first quarter of 2015, the Company recorded other income of $4 million compared to $94 million in the same period in 2014. Included in Other income for 2014 was a gain on disposal of the Deux-Montagnes of $80 million.

Income tax expense
The Company recorded income tax expense of $259 million for the three months ended March 31, 2015, compared to $199 million for the same period in 2014. Included in the 2014 figure was an income tax recovery of $18 million resulting from a change in estimate of the deferred income tax liability related to properties.
The effective tax rate for the three months ended March 31, 2015 was 26.9% compared to 24.2% for the same period in 2014. Excluding the net income tax recovery of $18 million, the effective tax rate for the first quarter of 2014 was 26.4%.
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

30

 
Management’s Discussion and Analysis

Summary of quarterly financial data

 
2015
Quarter
 
2014
 Quarters
 
2013
 Quarters
In millions, except per share data
 
First
   
Fourth
 
Third
 
Second
 
First
   
Fourth
 
Third
 
Second
Revenues
$
3,098 
 
$
3,207 
$
3,118 
$
3,116 
$
2,693 
 
$
2,745 
$
2,698 
$
2,666 
Operating income
$
1,063 
 
$
1,260 
$
1,286 
$
1,258 
$
820 
 
$
967 
$
1,084 
$
1,042 
Net income
$
704 
 
$
844 
$
853 
$
847 
$
623 
 
$
635 
$
705 
$
717 
                                     
Basic earnings per share
$
0.87 
 
$
1.04 
$
1.04 
$
1.03 
$
0.75 
 
$
0.76 
$
0.84 
$
0.85 
Diluted earnings per share
$
0.86 
 
$
1.03 
$
1.04 
$
1.03 
$
0.75 
 
$
0.76 
$
0.84 
$
0.84 
                                     
Dividends declared per share
$
0.3125 
 
$
0.2500 
$
0.2500 
$
0.2500 
$
0.2500 
 
$
0.2150 
$
0.2150 
$
0.2150 

Revenues generated by the Company during the year are influenced by seasonal weather conditions, general economic conditions, cyclical demand for rail transportation, and competitive forces in the transportation marketplace (see the section entitled Business risks of the Company’s 2014 Annual MD&A). Operating expenses reflect the impact of freight volumes, seasonal weather conditions, labor costs, fuel prices, and the Company’s productivity initiatives. Fluctuations in the Canadian dollar relative to the US dollar have also affected the conversion of the Company’s US dollar-denominated revenues and expenses and resulted in fluctuations in net income in the rolling eight quarters presented above.
The Company’s quarterly results include items that impacted the quarter-over-quarter comparability of the results of operations as discussed below:

   
2015
Quarter
 
2014
 Quarters
 
2013
 Quarters
In millions, except per share data
 
First
   
Fourth
 
Third
 
Second
 
First
   
Fourth
 
Third
 
Second
Income tax expenses (1)
$
 - 
 
$
 - 
$
 - 
$
 - 
$
 - 
 
$
 - 
$
 (19)
$
 (5)
After-tax gain on disposal of property (2) (3)
 
 - 
   
 - 
 
 - 
 
 - 
 
 72 
   
 - 
 
 - 
 
 18 
Impact on net income
$
 - 
 
$
 - 
$
 - 
$
 - 
$
 72 
 
$
 - 
$
 (19)
$
 13 
                                       
Impact on basic earnings per share
$
 - 
 
$
 - 
$
 - 
$
 - 
$
 0.09 
 
$
 - 
$
 (0.02) 
$
 0.01 
Impact on diluted earnings per share
$
 - 
 
$
 - 
$
 - 
$
 - 
$
 0.09 
 
$
 - 
$
 (0.02) 
$
 0.01 
                                       
(1)
Income tax expenses resulted from the enactment of provincial corporate income tax rate changes.
(2)
In the first quarter of 2014, the Company sold the Deux-Montagnes for $97 million. A gain on disposal of $80 million ($72 million after-tax) was recognized in Other income.
(3)
In the second quarter of 2013, the Company entered into an exchange of easements without monetary consideration. A gain of $29 million ($18 million after-tax) was recognized in Other income.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Canadian National Railway Company

31

 
Management’s Discussion and Analysis

Liquidity and capital resources
An analysis of the Company’s liquidity and capital resources is provided in the section entitled Liquidity and capital resources of the Company’s 2014 Annual MD&A. There were no significant changes during the first quarter of 2015, except as noted below.
As at March 31, 2015 and December 31, 2014, the Company had Cash and cash equivalents of $178 million and $52 million, respectively; Restricted cash and cash equivalents of $473 million and $463 million, respectively; and a working capital deficit of $529 million and $135 million, respectively. The working capital deficit increased by $394 million in the first quarter of 2015, mainly as a result of an increase in Current portion of long-term debt. The cash and cash equivalents pledged as collateral for a minimum term of one month pursuant to the Company’s bilateral letter of credit facilities are recorded as Restricted cash and cash equivalents. There are currently no specific requirements relating to working capital other than in the normal course of business as discussed herein.
The Company is not aware of any trends or expected fluctuations in its liquidity that would impact its ongoing operations or financial condition as at March 31, 2015.

Available financing sources
Revolving credit facility
On March 12, 2015, the Company extended the term of its agreement by one year to May 5, 2020. As at March 31, 2015 and December 31, 2014, the Company had no outstanding borrowings under its revolving credit facility and there were no draws during the three months ended March 31, 2015.

Commercial paper
As at March 31, 2015, the Company had total commercial paper borrowings of $310 million (nil as at December 31, 2014) presented in Current portion of long-term debt on the Consolidated Balance Sheet.

Accounts receivable securitization program
As at March 31, 2015, the Company recorded $50 million ($50 million as at December 31, 2014) of proceeds received under the accounts receivable securitization program in Current portion of long-term debt on the Consolidated Balance Sheet, which is secured by and limited to $56 million ($56 million as at December 31, 2014) of accounts receivable.

Bilateral letter of credit facilities
On March 12, 2015, the Company extended the expiry date of its agreements by one year to April 28, 2018. As at March 31, 2015, the Company had letters of credit drawn of $497 million ($487 million as at December 31, 2014) from a total committed amount of $517 million ($511 million as at December 31, 2014) by the various banks. As at March 31, 2015, cash and cash equivalents of $473 million ($463 million as at December 31, 2014) were pledged as collateral, and recorded as Restricted cash and cash equivalents on the Consolidated Balance Sheet.
 
Additional information relating to these financing sources is provided in the section entitled Liquidity and capital resources – Available financing sources of the Company’s 2014 Annual MD&A as well as Note 6 – Financing activities to the Company’s unaudited Interim Consolidated Financial Statements.

Cash flows

   
Three months ended March 31
In millions
   
2015 
 
2014 
 
Variance
Net cash provided by operating activities
 
$
992 
$
645 
$
347 
Net cash used in investing activities
   
(481)
 
 (174)
 
(307)
Net cash used in financing activities
   
(389)
 
 (484)
 
 95 
Effect of foreign exchange fluctuations on
             
     US dollar-denominated cash and cash equivalents
   
 
 (3)
 
 7 
Net increase (decrease) in cash and cash equivalents
   
126 
 
 (16)
 
 142 
Cash and cash equivalents, beginning of period
   
52 
 
 214 
 
 (162)
Cash and cash equivalents, end of period
 
$
178 
$
198 
$
(20)
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

32

 
Management’s Discussion and Analysis

Operating activities
Net cash provided by operating activities increased by $347 million in the first quarter of 2015 when compared to the same period in 2014, mainly due to higher revenues and improved collections, as well as lower fuel costs. These factors were partly offset by higher payments for purchased services and material and income taxes.

(a) Pension contributions
The Company’s contributions to its various defined benefit pension plans are made in accordance with the applicable legislation in Canada and the U.S. and such contributions follow minimum and maximum thresholds as determined by actuarial valuations.
Actuarial valuations are generally required on an annual basis for all Canadian plans, or when deemed appropriate by the Office of the Superintendent of Financial Institutions. Actuarial valuations are also required annually for the Company’s U.S. pension plans. For funding purposes, the funded status is calculated under going-concern and solvency scenarios as prescribed under pension legislation and subject to guidance issued by the Canadian Institute of Actuaries for all of the Company’s registered Canadian defined benefit pension plans. For accounting purposes, the funded status is calculated under U.S. GAAP for all pension plans.
The Company’s most recently filed actuarial valuations for its Canadian registered pension plans conducted as at December 31, 2013 indicated a funding excess on a going-concern basis of approximately $1.6 billion and a funding deficit on a solvency basis of approximately $1.7 billion calculated using the three-year average of the plans’ hypothetical wind-up ratio in accordance with the Pension Benefit Standards Regulations, 1985. The Company’s actuarial valuations for these plans as at December 31, 2014 will be performed in 2015. Based on the Company’s most recent estimates, these actuarial valuations are expected to identify a going-concern surplus of approximately $1.9 billion and a funding deficit on a solvency basis of approximately $0.7 billion. The federal pension legislation requires funding deficits, as calculated under current pension regulations, to be paid over a number of years. Alternatively, a letter of credit can be subscribed to fulfill required solvency deficit payments.
Voluntary contributions can be treated as a prepayment against the Company's future required special solvency deficit payments. As at December 31, 2014, the Company had $143 million of accumulated prepayments under the CN Pension Plan, which the Company expects to use to satisfy its 2015 required solvency deficit payment, of which approximately $35 million was applied in the first quarter of 2015.
Pension contributions made in the first three months of 2015 and 2014 of $86 million and $93 million, respectively, primarily represent contributions to the Company’s main pension plan, the CN Pension Plan, for the current service cost as determined under the Company’s current actuarial valuations for funding purposes. In 2015, the Company expects to make total cash contributions of approximately $125 million for all of the Company’s pension plans.
Adverse changes to the assumptions used to calculate the Company’s funding status, particularly the discount rate, as well as changes to existing federal pension legislation could significantly impact the Company’s future contributions.
 Additional information relating to the pension plans is provided in Note 12 – Pensions and other postretirement benefits to the Company’s 2014 Annual Consolidated Financial Statements.

(b) Income tax payments
Net income tax payments increased by $96 million, mainly due to a higher final payment for the 2014 fiscal year, made in February 2015. For the 2015 fiscal year, the Company’s net income tax payments are expected to be approximately $975 million.

The Company expects cash from operations and its other sources of financing to be sufficient to meet its funding obligations.

Investing activities
Net cash used in investing activities increased by $307 million in the first quarter of 2015 when compared to the same period in 2014, as a result of higher property additions.

(a) Property additions
     
Three months ended March 31
In millions
   
2015 
 
2014 
Track and roadway
 
$
237 
$
172 
Rolling stock
   
 174 
 
18 
Buildings
   
 7 
 
16 
Information technology
   
 27 
 
24 
Other
   
 23 
 
18 
Property additions
 
$
468 
$
248 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

33

 
Management’s Discussion and Analysis
 
(b) Capital expenditure program
The Company increased its budget for capital spending by $100 million in the first quarter of 2015, to sustain additional rail infrastructure safety investments, and now expects to invest approximately $2.7 billion in its 2015 capital program. On April 16, 2015, the Company announced a new multi-year $500 million capital program to upgrade its Western Canada feeder rail lines in Alberta, Manitoba, and Saskatchewan that are handling rising freight volumes of industrial products, natural resources, and energy-related commodities. The Company will allocate $100 million of its 2015 capital budget to this program, for work on northern Alberta branch lines for infrastructure upgrades and safety improvements. The details of the Company’s 2015 capital program are provided in the section entitled Liquidity and capital resources – Cash flows of the Company’s 2014 Annual MD&A.

(c) Disposal of property
There were no significant disposals of property in the first quarter of 2015. In the first quarter of 2014, cash inflows included proceeds of $97 million from the disposal of the Deux-Montagnes.

Financing activities
Net cash used in financing activities decreased by $95 million in the first quarter of 2015 when compared to the same period in 2014, mainly as a result of higher proceeds from the issuance of commercial paper and less debt repayments, partly offset by higher payments for dividends and share repurchases.

(a) Debt financing activities
Debt financing activities in the first quarter of 2015 included a net issuance of commercial paper of $310 million and $47 million of debt repayment related to capital leases.

Debt financing activities in the first quarter of 2014 included the following transactions:
·  
On January 15, 2014, repaid US$325 million (C$356 million) 4.95% Notes due 2014 upon maturity;
·  
On February 18, 2014, issued $250 million 2.75% Notes due 2021, in the Canadian capital markets, which resulted in net proceeds of $247 million;
·  
Net issuance of commercial paper of $189 million; and
·  
Proceeds of $100 million from the accounts receivable securitization program.

Additional information relating to the Company’s outstanding debt securities is provided in Note 10 – Long-term debt in the Company’s 2014 Annual Consolidated Financial Statements.

 (b) Share repurchase programs
The Company may repurchase shares pursuant to a normal course issuer bid (NCIB) at prevailing market prices plus brokerage fees, or such other prices as may be permitted by the Toronto Stock Exchange. Under its current NCIB, the Company may repurchase up to 28.0 million common shares between October 24, 2014 and October 23, 2015. As at March 31, 2015, the Company had repurchased 11.0 million common shares for $839 million under its current program.
The following table provides the information related to the share repurchase programs for the three months ended March 31, 2015 and 2014:
     
Three months ended March 31
 In millions, except per share data
 
2015 
2014 
Number of common shares repurchased (1)
   
5.4 
 
6.3 
Weighted-average price per share (2)
 
$
79.17 
$
58.22 
Amount of repurchase (3)
 
$
 429 
$
 365 
             
(1)
 Includes common shares purchased in the first quarter of 2015 and 2014 pursuant to private agreements between the Company and arm's length third-party sellers.
(2)
 Includes brokerage fees.
       
(3)
 Includes $19 million for shares purchased in the first quarter of 2015, which will be settled in the second quarter of 2015.

(c) Dividends paid
The Company paid quarterly dividends of $0.3125 per share amounting to $252 million in the first quarter of 2015, compared to $206 million, at the rate of $0.2500 per share, for the same period in 2014.
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Canadian National Railway Company

34

 
Management’s Discussion and Analysis
 
Contractual obligations
In the normal course of business, the Company incurs contractual obligations. The following table sets forth the Company’s contractual obligations for the following items as at March 31, 2015:

In millions
 
Total
 
2015 
 
2016 
 
2017