OPERATIONAL AND SERVICE
EXCELLENCE
2 0 1 1 a n n u a l r e p o r t
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
www.cn.ca
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Contents
1 A message from the Chairman
2 A message from Claude Mongeau
4 Operational and Service Excellence
6 Board of Directors
7 Financial Section (U.S. GAAP)
87 Corporate Governance – Delivering Responsibly
88 Shareholder and Investor Information
Except where otherwise
indicated, all fi nancial
information refl ected in
this document is expressed
in Canadian dollars and
determined on the basis
of United States gener-
ally accepted accounting
principles (U.S. GAAP).
Certain information included in this annual report 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. 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, infl ation, currency and interest rate fl uctuations, 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, fl oods 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 fi led by CN with securities regulators in Canada and the United States. Reference should be made to “Manage-
ment’s Discussion and Analysis” in CN’s annual and interim reports, Annual Information Form and Form 40-F fi led with
Canadian and U.S. securities regulators, available on CN’s website (www.cn.ca), for a summary of major risks.
CN assumes no obligation to update or revise forward-looking statements to refl ect future events, changes in circum-
stances, 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 state-
ment, related matters, or any other forward-looking statement.
As used herein, the word “Company” or “CN” means, as the context requires, Canadian National Railway Company and/
or its subsidiaries.
This report has been printed
on FSC® paper.
A message from the Chairman
Dear fellow shareholders 2011 was a year full of excellent progress on CN’s corporate
agenda to deliver solid shareholder value through operational and service excellence.
The Board was very pleased with the performance of the Leadership Team led by our
CEO, Claude Mongeau. They have worked diligently to improve the relationship with
stakeholders and customers.
We are proud of the progress CN had made on many fronts. Our employees are
motivated to ensure the railroad continues to run efficiently and safely.
The CN Leadership Team has a clear vision of what it takes to create value for
customers and shareholders, and it’s equally clear that the team of CN’s 23,000 rail
roaders buy into it. CN’s role as a transportation backbone of the economy makes it
indispensible to many of the most important industries in North America, transporting
goods throughout the continent in the most environmentally responsible manner. CN’s
sustainability practices have earned it a place on the Dow Jones Sustainability Index (DJSI)
North America for a third straight year, the only railroad to have achieved this distinction.
“ CN’s role as a
transportation
backbone of the
economy makes
it indispensible
to many of the
most important
industries in
North America...”
A critical factor for maintaining CN’s leadership position in the market
place is the renewal of its workforce; the Company hired nearly 3,000 new
employees in 2011 to address the combination of attrition and our growing
business.
The Board also understands the need to renew its own membership, and we
were delighted to add two highly skilled and experienced leaders to our ranks
in 2011 – Donald J. Carty, former Chairman and CEO of American Airlines and
former ViceChairman and Chief Financial Officer of Dell, Inc., as well as James
E. O’Connor, former Chairman and CEO of Republic Services, Inc.
The foundation for our success is a talented management team and a
wellmotivated workforce.
We are confident that CN is well positioned to continue the spirit of
excellence we have developed and to deliver increasing customer satisfaction and share
holder value well into the future.
Sincerely,
David McLean, O.B.C., LL.D.
Chairman of the Board
Canadian National Railway Company
2011 Annual Report 1
A message from Claude Mongeau
OPERATIONAL
AND SERVICE
EXCELLENCE
Dear fellow shareholders CN’s exceptional financial results for 2011 demonstrate
our ability to consistently deliver value to customers and shareholders. Our broadbased
service innovation benefited our customers and allowed us to grow the business faster
than the overall economy, which translated into record annual carloadings, revenues
and earnings. Our focus on Operational and Service Excellence is unwavering and is at
the root of our success in 2011 and our plans for the future.
For many years, CN’s relentless pursuit of efficiency has been the Company’s hallmark.
Our Precision Railroading model, which focuses on improving every process that affects
delivery of the customers’ goods, continues to guide the Company’s performance. In
2011, we strengthened our commitment to Operational and Service Excellence through
a wide range of innovations anchored on our continuous improvement philosophy.
Greater value for the customers
Ultimately, we are in business to help customers win in their own markets. While CN
is a leader in fast and reliable service hub to hub, we are truly distinguishing ourselves
by bringing greater value to the entire range of customer touch points. Our first mile/
last mile efforts are all about quality interaction with our customers, from developing
a sharper outsidein perspective to better monitoring of traffic forecasts; from moving
our car management distribution activities forward to higher and more responsive car
order fulfillment. Our successful Scheduled Grain Service is reflected in much improved
car spotting reliability and is a good example of the way CN is driving fundamental
“ ...CN’s relentless
pursuit of effi-
ciency has been
the Company’s
hallmark.”
innovation in the industry.
Our relentless focus on execution supports all of our activities. Our
investments in capacity contribute to enhancing the fluidity of our
network. We work hard to run more efficient trains, reduce dwell
time at our terminals, and improve overall network velocity. The
reconfiguration of our yards and terminals, including the significant
expansion of Kirk Yard in Gary, Indiana, which is currently underway, is
another key example of such focus. Our Fuel Management Excellence program – which
deploys stateoftheart technology and better trainhandling – results in significant
2
2011 Annual Report
Canadian National Railway Company
productivity gains and helps reduce greenhouse gas emissions.
And because safety enables performance, embedding a safety
culture in all aspects of our operations remains a top priority.
Improving the efficiency of the entire supply chain
The greatest opportunity to take railroading to the next level is
to improve the efficiency of the entire supply chain. We set our
sights on becoming a true supply chain enabler, a player that
“ We set our
sights on be-
coming a true
supply chain
enabler...”
can be a key part of the solution, a railroad that can help elevate logistics performance
end to end. We have an ability – and are well positioned – to use collaboration as a
driver of accountability.
We are at the forefront of groundbreaking supply chain and service level agreements
throughout our North American network. Such agreements are not based on templates
or a onesizefitsall approach. Each is unique and custommade to reflect mutually
agreed upon goals in a complex network business, including, for example, car supply,
dwell time, loading requirements, and more. Customers are starting to see significant
value in this collaborative framework and the positive results will continue to gain
momentum.
We are driving supply chain improvements across all segments of the business. In
Bulk, be it in grain, potash or coal, we are pursuing greater operating efficiencies and
helping our customers find their place in global markets. In Manufacturing, be it in
forest products, metals or petroleum and chemicals, we are focused on better car order
fulfillment to gain market share one carload at a time. In Intermodal, we are taking
advantage of supply chain agreements with every major port and terminal operator in
Canada to open up new gateway markets.
Of course, all the agreements, strategies and commitments in the world are worth
very little if you don’t have the team that can pull it off. Fortunately, CN has what I
consider to be the finest team of railroaders in the business. Our employees bring the
plan to life and make it all happen through our shared passion, pride and teamwork. At
the end of the day, this is what gives me the confidence that CN will continue to bring
solid value to shareholders and customers in 2012 and beyond.
Claude Mongeau
President and CEO
Canadian National Railway Company
2011 Annual Report 3
HELPING OUR CUSTOMERS GROW
OPERATIONAL AND SERVICE ExCELLENCE:
Helping coal customers serve
Innovating for Intermodal
global markets
CN’s domestic, crossborder and
In 2011, CN moved more than
overseas
Intermodal clients are
20 million tons of coal and petro
benefiting from an overall improved
leum coke destined for offshore
customer experience in the move
markets. As capacity limits in West
ment of their goods and interaction
Coast coal export terminals were
with the com pany. Thanks to supply
constraining coal producers, we
chain colla boration, service level
at CN took action rather than just
agree ments and tailored scorecards,
waiting for capacity to expand.
Fairview Container Terminal at the
Building on our innovative endto
CNserved Port of Prince Rupert is
end supply chain agreements, we
on a solid growth path. Operational
developed an exclusive information
and Service Excellence results in
system to better manage the flow
faster transit times to key markets
of coal “from the mine to the ship.”
and distribution hubs, such as
The system is shared by CN and
Memphis and Chicago, as well
each customer individually, so that
as more efficient terminals and
we’re working from the same tool,
handling of containers. Examples
which is unique in the rail industry.
of customerfocused improvements
Working with the customers and the
in 2011
include CN’s busiest
coal terminal operators, we made
Intermodal Terminal in Brampton,
the most of the supply chain by
Ontario, where new track increased
modifying scheduling for ships and
rail capacity by close to 15 per
trains, and making other changes
cent. Other Brampton
initiatives
to improve productivity and fluidity.
include 25 per cent more ground
As a result, CN moved more than
space for international containers,
a million tons of additional coal in
new cranes, and new entry and exit
2011 that may never have made it
lanes for truckers that improved gate
to market, a substantial contribution
throughput by 33 per cent. Adding
to help our customers grow their
to CN’s environmental advantage of
business.
being the most fuel efficient railroad
was the addition of EcoTherm Inter
modal containers that retain the
proper temperature for sensitive
goods without using fuel while
4
2011 Annual Report
Canadian National Railway Company
on rail and EcoRide chassis, which
help improve the supply chain for
consume up to 11 per cent less
exporting grain to world markets
fuel than containers delivered on
while tightly managing costs and
traditional chassis.
network balance.
Gains for Grain
Measuring up for Manufacturing
CN’s Scheduled Grain Service,
CN believes that if something must
introduced in 2010, contributed to
be managed, it must be measured.
the Company’s success in moving
Improvements in car order fulfilment
more than 125,000 grain cars to
in 2011 represent an eloquent
export terminals in Vancouver and
example of Service Excellence, but
Prince Rupert during the 2010
that only tells part of the story. The
2011 crop year ended on July 31 –
range of reports to track car ordering
the most in 20 years. During the
performance was expanded and
fall of 2011, when the crop was
refined, and the bar was raised in
really starting to move, CN handled
what is being measured. Our targets
record weekly volumes of grain
are now more closely aligned with
and achieved high levels of car
an outsidein perspective, so that
spotting reliability. Under what is
shared metrics give all the players a
a much more disciplined approach
more accurate view of performance
to grain service, fully 95 per cent
on a daytoday basis. CN is also
of grain traffic is now scheduled.
extending
its car management
Having a preestablished day of the
expertise to private cars in order to
week for service allows customers
reduce dwell and improve car cycles
to plan more accurately for their
for customers owning their fleet.
own business activities. It facilitates
This includes shared accountability
communications. Transit
times,
on fleet optimization, with the
cycles and reliability have improved
customer sharing loading plans with
as well,
increasing emptycar
CN. A pipeline model drives the
flow and fleet capacity for grain
configuration of empty movements,
customers. The plan allows CN to
with CN facilitating surplus fleet
smooth the network traffic over
decisions and contributing to the
seven days instead of the five
creation of value for the customers.
day period used in the past. CN’s
new grain plan
is
intended to
Canadian National Railway Company
2011 Annual Report 5
Board of Directors As at February 15, 2012
David G.A. McLean, O.B.C., LL.D.
Chairman of the Board
Canadian National Railway Company
Chairman of the Board
The McLean Group
Committees: 2, 3*, 4, 6, 7, 8
Donald J. Carty, O.C., LL.D.
Retired Chairman and CEO
American Airlines and
Retired ViceChairman
Dell, Inc.
Committees: 1, 2, 3, 7
Claude Mongeau
President and
Chief Executive Officer
Canadian National Railway Company
Committees: 4*, 7
Michael R. Armellino, CFA
Retired Partner
The Goldman Sachs Group, LP
Committees: 2, 5, 6, 7*, 8
A. Charles Baillie, O.C., LL.D.
Former Chairman and
Chief Executive Officer
The TorontoDominion Bank
Committees: 2*, 3, 6, 7, 8
Hugh J. Bolton, FCA
Chairman of the Board
EPCOR Utilities Inc.
Committees: 1, 5, 6, 7, 8
Ambassador Gordon D. Giffin
Senior Partner
McKenna Long & Aldridge
Committees: 2, 4, 5, 7, 8
Edith E. Holiday
Corporate Director and Trustee
Former General Counsel
United States Treasury
Department
Secretary of the Cabinet
The White House
Committees: 2, 3, 6, 7, 8
V. Maureen Kempston Darkes,
O.C., D.Comm., LL.D.
Retired Group VicePresident
General Motors Corporation
and President
GM Latin America, Africa
and Middle East
Committees: 1, 5*, 6, 7, 8
The Honourable
Denis Losier, C.M., P.C., LL.D.
President and
Chief Executive Officer
Assumption Life
Committees: 1*, 4, 5, 6, 7
The Honourable
Edward C. Lumley, P.C., LL.D.
ViceChairman
BMO Capital Markets
Committees: 2, 3, 6, 7, 8*
James E. O’Connor
Former Chairman and
Chief Executive Officer
Republic Services Inc.
Committees: 1, 2, 5, 7
Robert Pace
President and
Chief Executive Officer
The Pace Group
Committees: 1, 3, 6*, 7, 8
Directors Emeritus
Purdy Crawford
J.V. Raymond Cyr
James K. Gray
Cedric Ritchie
Committees:
1 Audit
2 Finance
3 Corporate governance
and nominating
4 Donations and
sponsorships
5 Environment, safety
and security
6 Human resources and
compensation
7 Strategic planning
8 Investment
* denotes chairman of
the committee
Chairman of the Board and Select Senior Officers of the Company As at February 15, 2012
David G.A. Mc Lean
Chairman of the Board
Claude Mongeau
President and
Chief Executive Officer
Keith Creel
Executive VicePresident and
Chief Operating Officer
Mike Cory
Senior VicePresident
Western Region
Sean Finn
Executive VicePresident
Corporate Services and
Chief Legal Officer
Sameh Fahmy
Senior VicePresident
Engineering, Mechanical and
Supply Management
Luc Jobin
Executive VicePresident and
Chief Financial Officer
Jeff Liepelt
Senior VicePresident
Eastern Region
Jean-Jacques Ruest
Executive VicePresident and
Chief Marketing Officer
Jim Vena
Senior VicePresident
Southern Region
Kimberly A. Madigan
VicePresident
Human Resources
Robert E. Noorigian
VicePresident
Investor Relations
Russell Hiscock
President and
Chief Executive Officer
CN Investment Division
6
2011 Annual Report
Canadian National Railway Company
Financial Section
(U.S. GAAP)
Contents
8 Selected Railroad Statistics
9 Management’s Discussion and Analysis
49 Management’s Report on Internal Control over Financial Reporting
49 Report of Independent Registered Public Accounting Firm
50 Report of Independent Registered Public Accounting Firm
51 Consolidated Statement of Income
52 Consolidated Statement of Comprehensive Income
53 Consolidated Balance Sheet
54 Consolidated Statement of Changes in Shareholders’ Equity
55 Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
56 1 Summary of significant accounting policies
58 2 Accounting changes
59 3 Acquisition
59 4 Accounts receivable
60 5 Properties
62 6 Intangible and other assets
62 7 Accounts payable and other
62 8 Other liabilities and deferred credits
63 9 Long-term debt
65 10 Capital stock
65 11 Stock plans
70 12 Pensions and other postretirement benefits
76 13 Other income
77 14 Income taxes
78 15 Segmented information
79 16 Earnings per share
80 17 Major commitments and contingencies
84 18 Financial instruments
86 19 Accumulated other comprehensive loss
86 20 Comparative figures
Canadian National Railway Company
2011 Annual Report 7
Selected Railroad Statistics (1)
Year ended December 31,
Statistical operating data
Rail freight revenues ($ millions)
Gross ton miles (GTM) (millions)
Revenue ton miles (RTM) (millions)
Carloads (thousands)
Route miles (includes Canada and the U.S.) (2)
Employees (end of year)
Employees (average for the year)
Productivity
Operating ratio (%)
Rail freight revenue per RTM (cents)
Rail freight revenue per carload ($)
Operating expenses per GTM (cents)
Labor and fringe benefits expense per GTM (cents)
GTMs per average number of employees (thousands)
Diesel fuel consumed (US gallons in millions)
Average fuel price ($/US gallon)
GTMs per US gallon of fuel consumed
Safety indicators
Injury frequency rate per 200,000 person hours (3)
Accident rate per million train miles (3)
(1) Includes data relating to companies acquired as of the date of acquisition.
(2) Rounded to the nearest hundred miles.
(3) Based on Federal Railroad Administration (FRA) reporting criteria.
2011
2010
2009
8,111
7,417
6,632
357,927
341,219
304,690
187,753
179,232
159,862
4,873
4,696
3,991
20,000
20,600
21,100
23,230
22,279
21,501
22,985
21,967
21,793
63.5
4.32
63.6
4.14
67.3
4.15
1,664
1,579
1,662
1.60
0.51
1.55
0.51
1.63
0.56
15,572
15,533
13,981
367.7
355.7
327.3
3.39
973
1.55
2.25
2.64
959
1.72
2.23
2.28
931
1.78
2.27
Certain of the 2010 and 2009 comparative figures have been restated to conform with the 2011 presentation. Such statistical data and related productivity measures are based on estimated
data available at such time and are subject to change as more complete information becomes available.
8
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
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 objec-
tive 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 2011 Annual Consolidated Financial
Statements and Notes thereto.
Business profile
Strategy overview
CN is engaged in the rail and related transportation business.
CN’s focus is on running a safe and efficient railroad. While
CN’s network of approximately 20,000 route miles of track spans
remaining at the forefront of the rail industry, CN’s goal is to be
Canada and mid-America, connecting three coasts: the Atlantic,
internationally regarded as one of the best-performing transpor-
the Pacific and the Gulf of Mexico. CN’s extensive network, and
tation companies.
its co-production arrangements, routing protocols, marketing alli-
CN’s commitment is to create value for both its customers and
ances, and interline agreements, provide CN customers access to
shareholders. By staying engaged with customers and leveraging
all three North American Free Trade Agreement (NAFTA) nations.
the strength of its franchise, the Company seeks to provide qual-
CN’s freight revenues are derived from seven commod-
ity and cost-effective service that creates value for its customers.
ity groups representing a diversified and balanced portfolio of
CN’s corporate goals are generally based on five key financial
goods transported between a wide range of origins and desti-
performance targets: revenues, operating income, earnings per
nations. This product and geographic diversity better positions
share, free cash flow and return on invested capital, as well as
the Company to face economic fluctuations and enhances its
various key operating metrics, including safety metrics, that the
potential for growth opportunities. In 2011, no individual com-
Company focuses on to measure efficiency and quality of service.
modity group accounted for more than 20% of revenues. From a
By striving for sustainable financial performance through prof-
geographic standpoint, 18% of revenues relate to United States
itable growth, adequate free cash flow and return on invested
(U.S.) domestic traffic, 28% transborder traffic, 22% Canadian
capital, CN seeks to deliver increased shareholder value. In 2011,
domestic traffic and 32% overseas traffic. The Company is the
the Company’s Board of Directors approved two share repur-
originating carrier for approximately 85% of traffic moving along
chase programs funded mainly from cash generated from opera-
its network, which allows it both to capitalize on service advan-
tions. The first share repurchase program, which was approved
tages and build on opportunities to efficiently use assets.
in January 2011 was completed by September 30, 2011 and al-
Corporate organization
lowed for the repurchase of up to 16.5 million common shares
to the end of December 2011. On October 25, 2011, the Board
The Company manages its rail operations in Canada and the
of Directors of the Company approved a second share repurchase
United States as one business segment. Financial information
program which allows for the repurchase of up to 17.0 million
reported at this level, such as revenues, operating income and
common shares between October 28, 2011 and October 27,
cash flow from operations, is used by the Company’s corporate
2012. Share repurchases are made pursuant to a normal course
management in evaluating financial and operational performance
issuer bid at prevailing market prices, plus brokerage fees, or such
and allocating resources across CN’s network. The Company’s
other prices as may be permitted by the Toronto Stock Exchange.
strategic initiatives, which drive its operational direction, are de-
In addition, the Company’s Board of Directors approved an in-
veloped and managed centrally by corporate management and
crease of 15% to the quarterly dividend to common shareholders,
are communicated to its regional activity centers (the Western
from $0.325 in 2011 to $0.375 in 2012.
Region, Eastern Region and Southern Region), whose role is to
CN’s business model is anchored on five core principles: pro-
manage the day-to-day service requirements of their respective
viding quality service, controlling costs, focusing on asset uti-
territories, control direct costs incurred locally, and execute the
lization, committing to safety, and developing people. Precision
corporate strategy and operating plan established by corporate
Railroading is at the core of CN’s business model. It is a highly dis-
management.
ciplined process whereby CN handles individual rail shipments ac-
See Note 15 - Segmented information, to the Company’s
cording to a specific trip plan and manages all aspects of railroad
2011 Annual Consolidated Financial Statements for additional
operations to meet customer commitments efficiently and profit-
information on the Company’s corporate organization, as well as
ably. Precision Railroading demands discipline to execute the trip
selected financial information by geographic area.
plan, the relentless measurement of results, and the use of such
results to generate further execution improvements in the ser-
vice provided to customers. Precision Railroading aims to increase
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 9
Management’s Discussion and Analysis
velocity, improve reliability, lower costs, enhance asset utilization
improve productivity extend across all functions in the organiza-
and, ultimately, help the Company to grow the top line. It has
tion. Train productivity is being improved through the acquisition
been a key contributor to CN’s earnings growth and improved
of locomotives that are more fuel-efficient than the ones they
return on invested capital. The success of the business model is
replace, which will also improve service reliability for customers
dependent on commercial principles and a supportive regulatory
and reduce greenhouse gas emissions. In addition, the Company’s
environment, both of which are key to an effective rail transpor-
locomotives are being equipped with distributed power capability,
tation marketplace throughout North America.
which allows the Company to run longer, more efficient trains,
particularly in cold weather conditions, while improving train han-
Providing quality service, controlling costs and focusing on
dling, reducing train separations and improving the overall safety
asset utilization
of operations. These initiatives, combined with CN’s investments
The basic driver of the Company’s business is demand for reli-
in longer sidings over the years, offer train-mile savings, allow
able, efficient, and cost effective transportation. As such, the
for efficient long-train operations and reduce wear on rail and
Company’s focus is the pursuit of its long-term business plan,
wheels. Yard throughput is being improved through SmartYard,
providing a high level of service to customers, operating safe-
an innovative use of real-time traffic information to sequence cars
ly and efficiently, and meeting short- and long-term financial
effectively and get them out on the line more quickly in the face
commitments.
of constantly changing conditions. In Engineering, the Company
In 2011, the Company benefited from a continued recovery
is continuously working to increase the productivity of its field
in many markets reflecting a strengthening global economy, an
forces, through better use of traffic information and the optimi-
increase in North American industrial production, a turnaround
zation of work scheduling, and as a result, better management
in automotive production and a modest improvement in hous-
of its engineering forces on the track. The Company also intends
ing and related segments, as well as from the Company’s per-
to continue focusing on the reduction of accidents and related
formance above market conditions in a number of segments. In
costs, as well as costs for legal claims and health care.
2012, the Company expects growth in North American industri-
CN’s capital expenditure programs support the Company’s
al production will slow to around three percent. The Company
commitment to its core principles and strategy and its ability to
expects moderate growth in automotive production, in part as
grow the business profitably. In 2012, CN plans to invest approxi-
Japanese automakers rebound from the supply chain disrup-
mately $1.75 billion on capital programs, of which over $1 billion
tions caused by the 2011 tsunami, and in U.S. housing starts. The
is targeted towards track infrastructure to continue operating a
2012/2013 crops in both Canada and the U.S. are expected to be
safe railway and improve the productivity and fluidity of the net-
in-line with the 5-year average. With respect to the 2011/2012
work; and includes the replacement of rail, ties, and other track
crop, U.S. corn and soybean production is slightly below, while
materials, bridge improvements, as well as rail-line improvements
exports are projected to be significantly below, the prior year’s
for the Elgin, Joliet and Eastern Railway Company (EJ&E) prop-
crop. Canadian 2011/2012 grain production and export forecasts
erty that was acquired in 2009. This amount also includes funds
are moderately above the prior year’s crop.
for strategic initiatives and additional enhancements to the track
To meet its business plan objectives, the Company’s priority
infrastructure in western and eastern Canada as well as in the
is to grow the business at low incremental cost. The Company’s
U.S. CN’s equipment spending, targeted to reach approximately
strategy to pursue deeper customer engagement and ser-
$150 million in 2012, is intended to improve the quality of the
vice improvements is expected to continue to drive growth.
fleet to meet customer requirements. CN also expects to spend
Improvements are expected to come from several key thrusts in-
approximately $500 million on facilities to grow the business, in-
cluding “first mile-last mile” initiatives that improve customer ser-
cluding transloads, distribution centers and continued develop-
vice at origin and destination, and a supply chain perspective that
ment of its Calgary logistics park started in 2011; on information
emphasizes collaboration and better end-to-end service. In 2012,
technology to improve service and operating efficiency; and on
the Company sees opportunities for growth in overseas container
other projects to increase productivity.
traffic, share gains against truck in domestic intermodal, growth
To meet short- and long-term financial commitments, the
in bulk commodities to export markets such as coal and potash
Company pursues a solid financial policy framework with the goal
and continued opportunities for growth in commodities related
of maintaining a strong balance sheet by monitoring its credit ra-
to oil and gas development.
tios and preserving an investment-grade credit rating to be able
To grow the business at low incremental cost and to operate
to maintain access to public financing. The Company’s principal
efficiently and safely while maintaining a high level of customer
source of liquidity is cash generated from operations, which can
service, the Company continues to invest in capital programs to
be supplemented by its commercial paper program to meet short-
maintain a safe and fluid railway and pursue strategic initiatives
term liquidity needs. The Company’s primary uses of funds are for
to improve its franchise, as well as undertake productivity initia-
working capital requirements, including income tax installments
tives to reduce costs and leverage its assets. Opportunities to
as they become due and pension contributions, contractual
10
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
obligations, capital expenditures relating to track infrastructure
In 2011, the Company’s sustainability practices have earned it a
and other, acquisitions, dividend payouts, and the repurchase of
place on the Dow Jones Sustainability Index (DJSI) North America
shares through share buyback programs, when applicable. The
for the third year in a row.
Company sets priorities on its uses of available funds based on
short-term operational requirements, expenditures to continue to
Developing people
operate a safe railway and pursue strategic initiatives, while also
CN’s ability to develop the best railroaders in the industry has
considering its long-term contractual obligations and returning
been a key contributor to the Company’s success. CN recogniz-
value to its shareholders.
Delivering responsibly
es that without the right people - no matter how good a ser-
vice plan or business model a company may have - it will not be
able to fully execute. The Company is focused on recruiting the
The Company’s commitment to safety is reflected in the wide
right people, developing employees with the right skills, motivat-
range of initiatives that CN is pursuing and in the size of its capi-
ing them to do the right thing, and training them to be the fu-
tal programs. Comprehensive plans are in place to address safety,
ture leaders of the Company. The Company continues to address
security, employee well-being and environmental management.
changes in employee demographics that will span multiple years.
CN’s Safety Management Plan is the framework for putting safety
The Human Resources and Compensation Committee of the
at the center of its day-to-day operations. This proactive plan is
Board of Directors reviews the progress made in developing cur-
designed to minimize risk and drive continuous improvement in
rent and future leaders through the Company’s leadership devel-
the reduction of injuries and accidents, and engages employees
opment programs. These programs and initiatives provide a solid
at all levels of the organization.
platform for the assessment and development of the Company’s
The Company has made sustainability an integral part of its
talent pool. The leadership development programs are tightly in-
business strategy by aligning its sustainability agenda with its
tegrated with the Company’s business strategy.
business model. As part of the Company’s comprehensive sus-
tainability action plan and to comply with the CN Environmental
The forward-looking statements provided in the above section and
Policy, the Company engages in a number of initiatives, includ-
in other parts of this MD&A are subject to risks and uncertainties
ing the use of fuel-efficient locomotives that reduce greenhouse
that could cause actual results or performance to differ materially
gas emissions; increasing operational and building efficiencies;
from those expressed or implied in such statements and are based
investing in virtualization technologies, energy-efficient data
on certain factors and assumptions which the Company considers
centers and recycling programs for information technology sys-
reasonable, about events, developments, prospects and oppor-
tems; reducing, recycling and reusing waste at its facilities and
tunities that may not materialize or that may be offset entirely or
on its network; engaging in modal shift agreements that favor
partially by other events and developments. See the section of this
low emission transport services; and participating in the Carbon
MD&A entitled Forward-looking statements for assumptions and
Disclosure Project to gain a more comprehensive view of its car-
risk factors affecting such forward-looking statements.
bon footprint.
The Company’s Environmental Policy aims to minimize the
Impact of foreign currency translation on reported results
impact of the Company’s activities on the environment. The
Although the Company conducts its business and reports its earn-
Company strives to contribute to the protection of the environ-
ings in Canadian dollars, a large portion of revenues and expenses
ment by integrating environmental priorities into the Company’s
is denominated in US dollars. As such, the Company’s results are
overall business plan and through the specific monitoring and
affected by exchange-rate fluctuations.
measurement of such priorities against historical performance and
Management’s discussion and analysis includes reference
in some cases, specific targets. All employees must demonstrate
to “constant currency,” which allows the financial results to be
commitment to this Policy at all times and it is the Environment,
viewed without the impact of fluctuations in foreign exchange
Safety and Security Committee of the Board of Directors who has
rates, thereby facilitating period-to-period comparisons in the
the responsibility of overseeing the Policy. The Committee is com-
analysis of trends in business performance. Financial results at
posed of CN Directors and its responsibilities, powers and opera-
constant currency are obtained by translating the current period
tion are further described in the charter of such committee, which
results denominated in US dollars at the foreign exchange rate
is included in the Company’s Corporate Governance Manual
of the comparable period of the prior year. The average foreign
available on CN’s website. Certain risk mitigation strategies, such
exchange rate for the year ended December 31, 2011 was $0.99
as periodic audits, employee training programs and emergency
per US$1.00 compared to $1.03 per US$1.00 for 2010. Measures
plans and procedures, are in place to minimize the environmen-
at constant currency are considered non-GAAP measures and do
tal risks to the Company. The Company’s Environmental Policy, its
not have any standardized meaning prescribed by GAAP and may,
Carbon Disclosure Project report, and its Corporate Citizenship
therefore, not be comparable to similar measures presented by
Report “Delivering Responsibly” are available on CN’s website.
other companies.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 11
Management’s Discussion and Analysis
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 state-
ments 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” 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 out-
look or any future results or performance implied by such statements. Key assumptions used in determining forward-looking information
are set forth below.
Forward-looking statements
Key assumptions or expectations
Statements relating to general economic and
business conditions, including those referring
to revenue growth opportunities
• North American and global economic growth
• Long-term growth opportunities being less affected by current economic
conditions
• Year-over-year carload growth
Statements relating to the Company's ability to
meet debt repayments and future obligations
in the foreseeable future, including income tax
payments and capital spending
• North American and global economic growth
• Adequate credit ratios
• Investment grade credit rating
• Access to capital markets
• Adequate cash generated from operations
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 regula-
tory developments; compliance with environmental laws and regulations; actions by regulators; various events which could disrupt opera-
tions, 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. See the section of
this MD&A entitled Business risks 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.
Financial outlook
During the year, the Company issued and updated its financial outlook. The 2011 actual results are in line with the latest financial outlook
as disclosed by the Company.
12
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Financial and statistical highlights
$ in millions, except per share data, or unless otherwise indicated
2011
2010
2009 2011 vs. 2010 2010 vs. 2009
Change
Favorable/(Unfavorable)
Financial results
Revenues
Operating income (1)
Net income (1) (2) (3) (4)
Operating ratio (1)
Basic earnings per share (1) (2) (3) (4)
Diluted earnings per share (1) (2) (3) (4)
Dividend declared per share
Financial position
Total assets
Total long-term financial liabilities
$ 9,028
$ 8,297
$ 7,367
$ 3,296
$ 3,024
$ 2,406
$ 2,457
$ 2,104
$ 1,854
9%
9%
17%
13%
26%
13%
63.5%
63.6%
67.3%
0.1-pts
3.7-pts
$ 5.45
$ 4.51
$ 3.95
$ 5.41
$ 4.48
$ 3.92
$ 1.30
$ 1.08
$ 1.01
$ 26,026
$ 25,206
$ 25,176
$ 13,631
$ 12,016
$ 12,706
21%
21%
20%
3%
(13%)
5%
-
1%
14%
14%
7%
-
5%
1%
11%
3%
Statistical operating data and productivity measures (5)
Employees (average for the year)
22,985
21,967
21,793
Gross ton miles (GTM) per average number of employees (thousands)
15,572
15,533
13,981
GTMs per US gallon of fuel consumed
973
959
931
(1) The 2009 figures include $49 million, or $30 million after-tax ($0.06 per basic or diluted share), for EJ&E acquisition-related costs.
(2) The 2011 figures include a net deferred income tax expense of $40 million ($0.08 per basic or diluted share) resulting from the enactment of state corporate income tax rate changes
and other legislated state tax revisions, a current income tax recovery of $11 million ($0.02 per basic or diluted share) relating to certain fuel costs attributed to various wholly-owned
subsidiaries’ fuel consumption in prior periods, a gain on disposal of a segment of the Company’s Kingston subdivision known as the Lakeshore East of $288 million, or $254 million
after-tax ($0.55 per basic or diluted share), and a gain on disposal of substantially all of the assets of IC RailMarine Terminal Company (ICRMT) of $60 million, or $38 million after-tax
($0.08 per basic or diluted share).
(3) The 2010 figures include a gain on disposal of a portion of the property known as the Oakville subdivision of $152 million, or $131 million after-tax ($0.28 per basic or diluted share).
(4) The 2009 figures include gains on sale of the Company’s Weston subdivision of $157 million, or $135 million after-tax ($0.29 per basic or diluted share) and Lower Newmarket subdivision
of $69 million, or $59 million after-tax ($0.12 per basic or diluted share). The 2009 figures also include a deferred income tax recovery of $157 million ($0.33 per basic or diluted share),
of which $126 million ($0.27 per basic or diluted share) resulted from the enactment of lower provincial corporate income tax rates, $16 million ($0.03 per basic or diluted share) resulted
from the recapitalization of a foreign investment, and $15 million ($0.03 per basic or diluted share) resulted from the resolution of various income tax matters and adjustments related
to tax filings of prior years.
(5) Based on estimated data available at such time and subject to change as more complete information becomes available.
Financial results
2011 compared to 2010
conversion of the Company’s US dollar-denominated revenues
and expenses, has resulted in a negative impact of $39 million
In 2011, net income was $2,457 million, an increase of $353 mil-
($0.09 per basic or diluted share) in 2011.
lion, or 17%, when compared to 2010, with diluted earnings per
Revenues for the year ended December 31, 2011 increased
share rising 21% to $5.41.
by $731 million, or 9%, to $9,028 million, mainly attributable
Included in the 2011 figures were gains on disposal of substan-
to higher freight volumes, due in part to modest improvements
tially all of the assets of IC RailMarine Terminal Company (ICRMT)
in North American and global economies and to the Company’s
of $60 million, or $38 million after-tax ($0.08 per basic or diluted
performance above market conditions in a number of segments;
share) and of a segment of the Company’s Kingston subdivision
the impact of a higher fuel surcharge as a result of year-over-year
known as the Lakeshore East of $288 million, or $254 million after-
increases in applicable fuel prices and higher volumes; and freight
tax ($0.55 per basic or diluted share). The 2011 figures also include
rate increases. These factors were partly offset by the negative
a net deferred income tax expense of $40 million ($0.08 per basic
translation impact of the stronger Canadian dollar on US dollar-
or diluted share) resulting from the enactment of state corporate
denominated revenues in the first nine months of the year.
income tax rate changes and other legislated state tax revisions,
Operating expenses for the year ended December 31, 2011, in-
and a current income tax recovery of $11 million ($0.02 per ba-
creased by $459 million, or 9%, to $5,732 million, mainly due to
sic or diluted share) relating to certain fuel costs attributed to vari-
higher fuel costs, purchased services and material expense as well as
ous wholly-owned subsidiaries’ fuel consumption in prior periods.
higher labor and fringe benefits expense. These factors were partially
Included in the 2010 figures was a gain on disposal of a portion of
offset by the positive translation impact of the stronger Canadian
the property known as the Oakville subdivision of $152 million, or
dollar on US dollar-denominated expenses, particularly in the first
$131 million after-tax ($0.28 per basic or diluted share).
nine months of 2011 and lower casualty and other expense.
Foreign exchange fluctuations continue to have an impact on
The operating ratio, defined as operating expenses as a per-
the comparability of the results of operations. The fluctuation of
centage of revenues, was 63.5% in 2011, compared to 63.6% in
the Canadian dollar relative to the US dollar, which affects the
2010, a 0.1-point reduction.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 13
Management’s Discussion and Analysis
Revenues
In millions, unless otherwise indicated
Year ended December 31,
2011
2010 % Change
% Change
at constant
currency
Rail freight revenues
$ 8,111 $ 7,417
917
880
9%
4%
12%
6%
$ 9,028 $ 8,297
9%
11%
Other revenues
Total revenues
Rail freight revenues
Petroleum and chemicals
$ 1,420 $ 1,322
7%
Metals and minerals
1,006
861
17%
Forest products
1,270
1,183
Coal
618
600
Grain and fertilizers
1,523
1,418
7%
3%
7%
Intermodal
Automotive
1,790
1,576
14%
484
457
6%
10%
20%
10%
5%
10%
15%
9%
Total rail freight revenues
$ 8,111 $ 7,417
9%
12%
Revenue ton miles (RTM)
(millions)
187,753
179,232
Rail freight revenue/RTM
(cents)
Carloads
(thousands)
4.32
4.14
4,873
4,696
Rail freight revenue/carload
(dollars)
1,664
1,579
5%
4%
4%
5%
5%
7%
4%
8%
Petroleum and chemicals
Year ended December 31,
2011
2010 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,420 $ 1,322
RTMs (millions)
32,962
31,190
Revenue/RTM (cents)
4.31
4.24
7%
6%
2%
10%
6%
4%
The petroleum and chemicals commodity group comprises a
wide range of commodities, including chemicals, sulfur, plastics,
petroleum products and liquefied petroleum gas (LPG) products.
The primary markets for these commodities are within North
America, and as such, the performance of this commodity group
is closely correlated with the North American economy. Most of
the Company’s petroleum and chemicals shipments originate in
the Louisiana petrochemical corridor between New Orleans and
Baton Rouge; in northern Alberta, which is a major center for
natural gas feedstock and world-scale petrochemicals and plas-
tics; and in eastern Canadian regional plants. For the year ended
December 31, 2011, revenues for this commodity group increased
by $98 million, or 7%, when compared to 2010. The increase was
mainly due to higher shipments, particularly chemicals products,
as a result of improvements in industrial production, new crude oil
business, particularly in the fourth quarter, and refined petroleum
products; the impact of a higher fuel surcharge; and freight rate
Revenues for the year ended December 31, 2011 totaled
increases. These factors were partly offset by the negative trans-
$9,028 million compared to $8,297 million in 2010. The increase
lation impact of the stronger Canadian dollar and lower volumes
of $731 million was mainly attributable to higher freight volumes,
of condensate in the first half of the year. Revenue per revenue
due in part to modest improvements in North American and
ton mile increased by 2% in 2011, mainly due to the impact of a
global economies and to the Company’s performance above mar-
higher fuel surcharge and freight rate increases that were partly
ket conditions in a number of segments; the impact of a higher
offset by the negative translation impact of the stronger Canadian
fuel surcharge, in the range of $315 million, as a result of year-
dollar and an increase in the average length of haul.
over-year increases in applicable fuel prices and higher volumes;
and freight rate increases. These factors were partly offset by the
Percentage of revenues
Carloads (thousands)
negative translation impact of the stronger Canadian dollar on US
dollar-denominated revenues in the first nine months of the year.
In 2011, revenue ton miles (RTM), measuring the relative
weight and distance of rail freight transported by the Company,
increased by 5% relative to 2010. Rail freight revenue per revenue
ton mile, a measurement of yield defined as revenue earned on
49% Petroleum
36% Chemicals
15% Plastics
49%
36%
the movement of a ton of freight over one mile, increased by 4%
15%
when compared to 2010, driven by the impact of a higher fuel
surcharge and freight rate increases. These were partly offset by
the negative translation impact of the stronger Canadian dollar.
Year ended December 31,
2009 511
2010 549
2011 560
0
100
200
300
400
500
600
14
2011 Annual Report
U.S. GAAP
Management’s Discussion and Analysis
Metals and minerals
Year ended December 31,
2011
2010 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,006 $
861
17%
RTMs (millions)
18,899
16,443
15%
Revenue/RTM (cents)
5.32
5.24
2%
20%
15%
5%
The metals and minerals com-
Forest products
modity group consists primar-
ily of non-ferrous base metals
and ores, concentrates,
iron
ore, steel, construction materi-
als, machinery and dimensional
(large) loads. The Company pro-
Year ended December 31,
2011
2010 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,270 $ 1,183
RTMs (millions)
29,336
28,936
Revenue/RTM (cents)
4.33
4.09
7%
1%
6%
10%
1%
9%
vides unique rail access to alu-
The forest products commodity group includes various types of
minum, mining, steel and iron
lumber, panels, paper, wood pulp and other fibers such as logs,
ore producing regions, which
recycled paper, wood chips, and wood pellets. The Company has
are among the most important
extensive rail access to the western and eastern Canadian fiber-
in North America. This access,
producing regions, which are among the largest fiber source areas
coupled with the Company’s
in North America. In the United States, the Company is strategi-
transload and port facilities, has
made CN a leader in the trans-
portation of copper, lead, zinc,
cally located to serve both the Midwest and southern U.S. corri-
dors with interline connections to other Class I railroads. The key
drivers for the various commodities are: for newsprint, advertising
concentrates, iron ore, refined
lineage, non-print media and overall economic conditions, primar-
metals and aluminum. Mining,
ily in the United States; for fibers (mainly wood pulp), the con-
oil and gas development and
sumption of paper, pulpboard and tissue in North American and
non-residential construction are
offshore markets; and for lumber and panels, housing starts and
the key drivers for metals and
renovation activities primarily in the United States. For the year
minerals. For the year ended December 31, 2011, revenues for
ended December 31, 2011, revenues for this commodity group
this commodity group increased by $145 million, or 17%, when
increased by $87 million, or 7%, when compared to 2010. The
compared to 2010. The increase was mainly due to greater ship-
increase was attributable to the impact of a higher fuel surcharge;
ments, particularly of commodities related to oil and gas develop-
freight rate increases; higher lumber and wood pellet shipments
ment, steel-related products and non-ferrous ore; the impact of
to offshore markets, and increased panel shipments to the U.S.,
freight rate increases; and a higher fuel surcharge. These gains
particularly in the fourth quarter. These factors were partly offset
were partly offset by the negative translation impact of the stron-
by the negative translation impact of the stronger Canadian dollar
ger Canadian dollar. Revenue per revenue ton mile increased by
and reduced volumes of wood pulp in the second half of the year
2% in 2011, mainly due to the impact of freight rate increases
due to extended maintenance at various mills. Revenue per rev-
and a higher fuel surcharge that were offset by the negative
enue ton mile increased by 6% in 2011, mainly due to the impact
translation impact of the stronger Canadian dollar and a signifi-
of a higher fuel surcharge, freight rate increases and a decrease in
cant increase in the average length of haul.
the average length of haul. These factors were partly offset by the
negative translation impact of the stronger Canadian dollar.
Percentage of revenues
Carloads (thousands)
44% Metals
37% Minerals
19%
Iron ore
44%
37%
19%
Year ended December 31,
Percentage of revenues
Carloads (thousands)
2009 721
2010 990
2011 1,013
59% Pulp and paper
Year ended December 31,
41% Lumber and panels
59%
41%
2009 403
2010 423
2011 443
Canadian National Railway Company
U.S. GAAP
0
0
200
400
600
800
1000
1200
100
2011 Annual Report 15
400
200
300
500
Management’s Discussion and Analysis
Coal
Grain and fertilizers
Year ended December 31,
2011
2010 % Change
% Change
at constant
currency
Year ended December 31,
2011
2010 % Change
% Change
at constant
currency
Revenues (millions)
$
618 $
600
RTMs (millions)
19,980
19,766
Revenue/RTM (cents)
3.09
3.04
3%
1%
2%
5%
1%
4%
Revenues (millions)
$ 1,523 $ 1,418
RTMs (millions)
45,468
44,549
Revenue/RTM (cents)
3.35
3.18
7%
2%
5%
10%
2%
8%
The coal commodity group con-
The grain and fertilizers commodity group depends primarily on crops
sists of thermal grades of bitumi-
grown and fertilizers processed in western Canada and the U.S.
nous coal, metallurgical coal and
Midwest. The grain segment consists of three primary segments: food
petroleum coke. Canadian thermal
grains (mainly wheat, oats and malting barley), feed grains (including
coal is delivered to power utilities
feed barley, feed wheat, peas, corn, ethanol and dried distillers grains
primarily in eastern Canada; while
(DDG)), and oilseeds and oilseed products (primarily canola seed, oil
in the United States, thermal coal
and meal, and soybeans). Production of grain varies considerably
is transported from mines served
from year to year, affected primarily by weather conditions, seeded
in southern Illinois, or from west-
and harvested acreage, the mix of grains produced and crop yields.
ern U.S. mines via interchange
Grain exports are sensitive to the size and quality of the crop pro-
with other railroads, to major utili-
duced, international market conditions and foreign government policy.
ties in the Midwest and southeast
The majority of grain produced in western Canada and moved by CN
United States, as well as offshore
is exported via the ports of Vancouver, Prince Rupert and Thunder
markets. The coal business also in-
Bay. Certain of these rail movements are subject to government regu-
cludes the transport of Canadian
lation and to a revenue cap, which effectively establishes a maximum
metallurgical coal, which is largely
revenue entitlement that railways can earn. In the U.S., grain grown
exported via terminals on the west
in Illinois and Iowa is exported as well as transported to domestic pro-
coast of Canada to offshore steel
cessing facilities and feed markets. The Company also serves major
producers. For the year ended
producers of potash in Canada, as well as producers of ammonium
December 31, 2011, revenues for
nitrate, urea and other fertilizers across Canada and the U.S. For the
this commodity group increased
year ended December 31, 2011, revenues for this commodity group
by $18 million, or 3%, when com-
increased by $105 million, or 7%, when compared to 2010. The in-
pared to 2010. The increase was
crease was mainly due to freight rate increases; the impact of a higher
mainly due to the impact of a higher fuel surcharge; freight rate
fuel surcharge; and higher volumes, including record shipments
increases; and new export thermal coal shipments. These factors
of canola to export markets and processed canola products to the
were partly offset by reduced volumes of thermal coal to North
U.S., increased shipments of ethanol and DDG, and higher volumes
American utilities, export metallurgical coal and Canadian petro-
of Canadian oats to U.S. millers. These factors were partly offset by
leum coke; and the negative translation impact of the stronger
the negative translation impact of the stronger Canadian dollar; re-
Canadian dollar. Revenue per revenue ton mile increased by 2%
duced volumes of U.S. soybean and corn exports, mainly in the fourth
in 2011, primarily due to the impact of a higher fuel surcharge
quarter, and lower volumes of Canadian wheat for export markets,
and freight rate increases that were partly offset by the negative
particularly in the first half of the year. Revenue per revenue ton mile
translation impact of the stronger Canadian dollar and an in-
increased by 5% in 2011, mainly due to freight rate increases and the
crease in the average length of haul.
impact of a higher fuel surcharge that were partly offset by the nega-
Percentage of revenues
Carloads (thousands)
89% Coal
Year ended December 31,
Percentage of revenues
Carloads (thousands)
tive translation impact of the stronger Canadian dollar.
11% Petroleum coke
11%
89%
2009 426
2010 499
2011 464
31% Oilseeds
25% Food grains
25% Feed grains
19% Fertilizers
31%
25%
19%
25%
Year ended December 31,
2009 530
2010 579
2011 592
16
2011 Annual Report
U.S. GAAP
0
100
200
300
400
500
0
Canadian National Railway Company
100
200
300
400
500
600
Management’s Discussion and Analysis
Automotive
Year ended December 31,
2011
2010 % Change
% Change
at constant
currency
Revenues (millions)
$
484 $
457
RTMs (millions)
2,545
2,545
Revenue/RTM (cents)
19.02
17.96
6%
-
6%
9%
-
9%
The automotive commodity group moves
both finished vehicles and parts through-
out North America, providing rail ac-
cess to certain vehicle assembly plants in
Canada, and Michigan and Mississippi in
the U.S. The Company also serves vehicle
distribution facilities in Canada and the
U.S., as well as parts production facilities
in Michigan and Ontario. The Company
serves shippers of import vehicles via
the ports of Halifax and Vancouver, and
through interchange with other railroads.
The Company’s automotive revenues are
closely correlated to automotive produc-
tion and sales in North America. For the
year ended December 31, 2011, revenues
Intermodal
Year ended December 31,
2011
2010 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,790 $ 1,576
14%
15%
RTMs (millions)
38,563
35,803
Revenue/RTM (cents)
4.64
4.40
8%
5%
8%
6%
The intermodal commodity group is comprised of two segments:
domestic and international. The domestic segment transports
consumer products and manufactured goods, operating through
both retail and wholesale channels, within domestic Canada, do-
mestic U.S., Mexico and transborder, while the international seg-
ment handles import and export container traffic, directly serving
the major ports of Vancouver, Prince Rupert, Montreal, Halifax and
New Orleans. The domestic segment is driven by consumer mar-
kets, with growth generally tied to the economy. The international
segment is driven by North American economic and trade condi-
tions. For the year ended December 31, 2011, revenues for this
commodity group increased by $214 million, or 14%, when com-
for this commodity group increased by $27 million, or 6%, when
pared to 2010. The increase was mainly due to higher volumes
compared to 2010. The increase was mainly due to higher vol-
of domestic traffic and shipments related to overseas markets;
umes of domestic finished vehicles; freight rate increases; and the
the impact of a higher fuel surcharge; and freight rate increases.
impact of a higher fuel surcharge. These gains were partly offset
These factors were partly offset by the negative translation impact
by the negative translation impact of the stronger Canadian dol-
of the stronger Canadian dollar. Revenue per revenue ton mile in-
lar. Revenue per revenue ton mile increased by 6% in 2011, mainly
creased by 5% in 2011, mainly due to the impact of a higher fuel
due to freight rate increases, the impact of a higher fuel surcharge
surcharge and freight rate increases that were partly offset by the
and a decrease in the average length of haul that were partly offset
negative translation impact of the stronger Canadian dollar.
by the negative translation impact of the stronger Canadian dollar.
Percentage of revenues
Carloads (thousands)
Percentage of revenues
Carloads (thousands)
Year ended December 31,
89% Finished vehicles
Year ended December 31,
2009 1,246
2010 1,455
2011 1,584
11% Auto parts
11%
89%
2009 154
2010 201
2011 217
56%
International
44% Domestic
56%
44%
Other revenues
Year ended December 31,
2011
0
2010 % Change
400
800
% Change
at constant
currency
1200
1600
Other revenues are largely derived from non-rail services that
support CN’s rail business including vessels, docks, warehousing,
Autoport logistic service and trucking as well as from other items
which include interswitching and commuter train revenues. In
0
200
100
150
50
250
Revenues (millions)
$
917 $
880
4%
6%
2011, Other revenues amounted to $917 million, an increase of
Percentage of revenues
48% Other non-rail services
31% Vessels and docks
21%
Interswitching and other revenues
48%
31%
21%
$37 million, or 4%, when compared to 2010, mainly due to in-
creased revenues from vessels and docks, trucking, and warehous-
ing and distribution services, partly offset by lower international
freight forwarding revenues, the negative translation impact of
the stronger Canadian dollar, and lower commuter train revenues.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 17
Management’s Discussion and Analysis
Operating expenses
Operating expenses for the year ended December 31, 2011 amounted to $5,732 million, compared to $5,273 million in 2010. The increase
of $459 million, or 9%, in 2011 was mainly due to higher fuel costs, purchased services and material expense, labor and fringe benefits ex-
pense as well as higher depreciation and amortization. These factors were partially offset by the positive translation impact of the stronger
Canadian dollar on US dollar-denominated expenses, particularly in the first nine months of 2011 and lower casualty and other expense.
In millions
Year ended December 31,
2011
2010
% Change
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Total operating expenses
$ 1,812
$ 1,744
1,120
1,412
884
228
276
1,036
1,048
834
243
368
$ 5,732
$ 5,273
(4%)
(8%)
(35%)
(6%)
6%
25%
(9%)
% Change
at constant
currency
Percentage of revenues
2011
2010
(6%)
20.1%
21.0%
(10%)
12.4%
12.5%
(40%)
15.6%
12.6%
(7%)
3%
23%
9.8%
2.5%
3.1%
10.1%
2.9%
4.5%
(11%)
63.5%
63.6%
Labor and fringe benefits: Labor and fringe benefits expense in-
Fuel: Fuel expense includes fuel consumed by assets, including
cludes wages, payroll taxes, and employee benefits such as incen-
locomotives, vessels, vehicles and other equipment as well as
tive compensation, including stock-based compensation; health
provincial, federal and state fuel taxes. These expenses increased
and welfare; and pensions and other postretirement benefits.
by $364 million, or 35%, in 2011 when compared to 2010. The
Certain incentive and stock-based compensation plans are based
increase was primarily due to a higher average price for fuel and
on financial and market performance targets and the related ex-
higher freight volumes, which were partly offset by the positive
pense is recorded in relation to the attainment of such targets.
translation impact of the stronger Canadian dollar and by produc-
Labor and fringe benefits expense increased by $68 million, or
tivity improvements.
4%, in 2011 when compared to 2010. The increase was primar-
ily due to the impact of increased freight volumes, including a
Depreciation and amortization: Depreciation and amortization
higher workforce level, general wage increases, higher health and
expense relates to the Company’s rail and related operations.
welfare costs, as well as higher incentive compensation, particu-
Depreciation expense is affected by capital additions, railroad
larly in the fourth quarter. These factors were partly offset by the
property retirements from disposal, sale and/or abandonment and
positive translation impact of the stronger Canadian dollar and a
other adjustments including asset impairment write-downs. These
higher income for pensions.
expenses increased by $50 million, or 6%, in 2011 when com-
pared to 2010. The increase was mainly due to the impact of net
Purchased services and material: Purchased services and material
capital additions and the effect of depreciation studies (see the
expense primarily includes the costs of services purchased from
Critical accounting policies section of this MD&A), which were
outside contractors; materials used in the maintenance of the
partly offset by the positive translation impact of the stronger
Company’s track, facilities and equipment, transportation and
Canadian dollar.
lodging for train crew employees; utility costs; and the net costs
of operating facilities jointly used by the Company and other rail-
Equipment rents: Equipment rents expense includes rental ex-
roads. These expenses increased by $84 million, or 8%, in 2011
pense for the use of freight cars owned by other railroads or pri-
when compared to 2010. The increase was mainly due to high-
vate companies and for the short- or long-term lease of freight
er repair and maintenance expenses for track, rolling stock and
cars, locomotives and intermodal equipment, net of rental in-
other equipment, higher derailment related expenses, increased
come from other railroads for the use of the Company’s cars and
contracted services and material expense in the first nine months
locomotives. These expenses decreased by $15 million, or 6%, in
of the year as well as higher costs for snow removal and utilities,
2011 when compared to 2010. The decrease was primarily due to
as a result of more difficult winter conditions in the first quarter
lower lease expense and to the positive translation impact of the
of 2011. These factors were partly offset by the positive transla-
stronger Canadian dollar partly offset by higher car hire expense.
tion impact of the stronger Canadian dollar and lower expenses
for third party carriers.
18
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Casualty and other: Casualty and other expense includes ex-
Included in the 2010 figures was a gain on sale of the Company’s
penses for personal injuries, environmental, freight and property
Oakville subdivision of $152 million, or $131 million after-tax ($0.28
damage, insurance, bad debt, operating taxes, and travel expens-
per basic or diluted share). Included in the 2009 figures were gains
es. These expenses decreased by $92 million, or 25%, in 2011
on sale of the Company’s Weston subdivision of $157 million, or
when compared to 2010. The decrease was mainly due to lower
$135 million after-tax ($0.29 per basic or diluted share) and Lower
charges recorded in 2011 relating to environmental matters, ad-
Newmarket subdivision of $69 million, or $59 million after-tax
justments recorded on billings of certain cost recoveries recorded
($0.12 per basic or diluted share), as well as EJ&E acquisition-relat-
in 2010, lower general and administrative expenses as well as a
ed costs of $49 million, or $30 million after-tax ($0.06 per basic or
charge recorded in the first quarter of 2010 to increase the liabil-
diluted share). The 2009 figures also include a deferred income tax
ity for personal injury claims in Canada pursuant to an actuarial
recovery of $157 million ($0.33 per basic or diluted share), of which
valuation. These factors were partially offset by increased employ-
$126 million ($0.27 per basic or diluted share) resulted from the en-
ee travel costs and higher operating taxes.
actment of lower provincial corporate income tax rates, $16 million
Other
($0.03 per basic or diluted share) resulted from the recapitalization
of a foreign investment, and $15 million ($0.03 per basic or diluted
Interest expense: Interest expense decreased by $19 million, or
share) resulted from the resolution of various income tax matters and
5%, for the year ended December 31, 2011, when compared to
adjustments related to tax filings of prior years.
2010, mainly due to the positive translation impact of the stronger
Foreign exchange fluctuations continue to have an impact on
Canadian dollar on US dollar-denominated interest expense and
the comparability of the results of operations. The fluctuation of
the impact of a debt repayment in the fourth quarter of 2011.
the Canadian dollar relative to the US dollar, which affects the
conversion of the Company’s US dollar-denominated revenues
Other income: In 2011, the Company recorded Other income
and expenses, has resulted in a negative impact of $70 million to
of $401 million, compared to $212 million in 2010. Included in
net income ($0.15 per basic or diluted share) in 2010.
Other income were gains on disposal of substantially all of the as-
Revenues for the year ended December 31, 2010 increased by
sets of ICRMT of $60 million and of a segment of the Company’s
$930 million, or 13%, to $8,297 million, mainly due to signifi-
Kingston subdivision known as the Lakeshore East for $288 mil-
cantly higher freight volumes as a result of improving economic
lion. The 2010 figures include $152 million for the sale of a por-
conditions in North America and globally; the impact of a higher
tion of the property known as the Oakville subdivision.
fuel surcharge as a result of year-over-year increases in applicable
fuel prices and higher volumes; and freight rate increases. These
Income tax expense: The Company recorded income tax expense
factors were partly offset by the negative translation impact of
of $899 million for the year ended December 31, 2011 com-
the stronger Canadian dollar on US dollar-denominated revenues.
pared to $772 million in 2010. The 2011 figure includes a net
Operating expenses for the year ended December 31, 2010
deferred income tax expense of $40 million resulting from the
increased by $312 million, or 6%, to $5,273 million, primarily
enactment of state corporate income tax rate changes and other
due to higher fuel costs, increased labor and fringe benefits ex-
legislated state tax revisions, and a current income tax recovery
pense and higher depreciation and amortization expense. These
of $11 million relating to certain fuel costs attributed to various
factors were partly offset by the positive translation impact of the
wholly-owned subsidiaries’ fuel consumption in prior periods. The
stronger Canadian dollar on US dollar-denominated expenses,
effective tax rate for 2011 was 26.8% for both 2011 and 2010.
the impact of EJ&E acquisition-related costs recorded in 2009 and
Excluding the 2011 net deferred income tax expense of $40 mil-
lower equipment rents.
lion and the current income tax recovery of $11 million discussed
The operating ratio, defined as operating expenses as a per-
herein, the effective tax rate for 2011 was 25.9%.
centage of revenues, was 63.6% in 2010, compared to 67.3% in
2010 compared to 2009
2009, a 3.7-point improvement. Excluding the 2009 EJ&E acqui-
sition-related costs, the operating ratio of 63.6% in 2010 repre-
In 2010, net income was $2,104 million, an increase of $250 mil-
sents a 3.1-point improvement compared to an adjusted operat-
lion, or 13%, when compared to 2009, with diluted earnings per
ing ratio of 66.7% in 2009.
share rising 14% to $4.48.
The Company’s results of operations in 2010 reflect a re-
covery in many of its markets as compared to 2009 when the
Company experienced significant weakness across markets due
to economic conditions.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 19
Management’s Discussion and Analysis
Revenues
In millions, unless otherwise indicated
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
Rail freight revenues
$ 7,417 $ 6,632
12%
880
735
20%
$ 8,297 $ 7,367
13%
19%
18%
26%
Other revenues
Total revenues
Rail freight revenues
Petroleum and chemicals
$ 1,322 $ 1,260
5%
Metals and minerals
861
728
18%
Forest products
1,183
1,147
3%
Coal
600
464
29%
Grain and fertilizers
1,418
1,341
6%
Intermodal
Automotive
1,576
1,337
18%
457
355
29%
12%
27%
11%
35%
11%
20%
39%
For the year ended December 31, 2010, revenues for this com-
modity group increased by $62 million, or 5%, when compared
to 2009. The increase was mainly due to higher shipments of
chemical products, due to improvements in industrial production,
and sulfur and petroleum products; freight rate increases; and the
impact of a higher fuel surcharge. These factors were partly off-
set by the negative translation impact of the stronger Canadian
dollar. Revenue per revenue ton mile decreased by 1% in 2010,
mainly due to the negative translation impact of the stronger
Canadian dollar, that was partly offset by freight rate increases
and the impact of a higher fuel surcharge.
Metals and minerals
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
Total rail freight revenues
$ 7,417 $ 6,632
12%
18%
Revenues (millions)
$
861 $
728
18%
Revenue ton miles (RTM)
RTMs (millions)
16,443
12,994
27%
(millions)
179,232
159,862
12%
12%
Revenue/RTM (cents)
5.24
5.60
(6%)
27%
27%
1%
4.14
4.15
-
5%
For the year ended December 31, 2010, revenues for this com-
Rail freight revenue/RTM
(cents)
Carloads
(thousands)
Rail freight revenue/carload
4,696
3,991
18%
18%
(dollars)
1,579
1,662
(5%)
-
modity group increased by $133 million, or 18%, when com-
pared to 2009. The increase was mainly due to the continual
improvement in the steel industry, which resulted in greater ship-
ments of steel products and iron ore; stronger volumes of con-
Revenues for the year ended December 31, 2010 totaled
struction materials; and the impact of a higher fuel surcharge.
$8,297 million compared to $7,367 million in 2009. The increase
These factors were partly offset by the negative translation im-
of $930 million was mainly due to significantly higher freight
pact of the stronger Canadian dollar. Revenue per revenue ton
volumes as a result of improving economic conditions in North
mile decreased by 6% in 2010, mainly due to the negative trans-
America and globally; the impact of a higher fuel surcharge, in
lation impact of the stronger Canadian dollar that was partly off-
the range of $240 million, as a result of year-over-year increases
set by the impact of a higher fuel surcharge and a decrease in the
in applicable fuel prices and higher volumes; and freight rate
average length of haul.
increases. These factors were partly offset by the negative trans-
lation impact of the stronger Canadian dollar on US dollar-
Forest products
denominated revenues, particularly in the first half of the year.
In 2010, revenue ton miles (RTM), measuring the relative weight
and distance of rail freight transported by the Company, increased
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
by 12% relative to 2009. Rail freight revenue per revenue ton mile,
Revenues (millions)
$ 1,183 $ 1,147
a measurement of yield defined as revenue earned on the move-
RTMs (millions)
28,936
27,594
ment of a ton of freight over one mile, was flat when compared to
Revenue/RTM (cents)
4.09
4.16
3%
5%
(2%)
11%
5%
6%
2009, as the positive impact of a higher fuel surcharge, freight rate
increases, and a decrease in the average length of haul were offset
by the negative translation impact of the stronger Canadian dollar.
Petroleum and chemicals
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,322 $ 1,260
RTMs (millions)
31,190
29,381
Revenue/RTM (cents)
4.24
4.29
5%
6%
(1%)
12%
6%
6%
For the year ended December 31, 2010, revenues for this com-
modity group increased by $36 million, or 3%, when compared
to 2009. The increase was mainly due to higher shipments of
wood pulp and lumber to offshore markets, the impact of a high-
er fuel surcharge, and freight rate increases. These factors were
partly offset by the negative translation impact of the stronger
Canadian dollar. Revenue per revenue ton mile decreased by 2%
in 2010, mainly due to the negative translation impact of the
stronger Canadian dollar, that was partly offset by the impact of a
higher fuel surcharge and freight rate increases.
20
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Coal
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
Revenues (millions)
$
600 $
464
29%
RTMs (millions)
19,766
14,805
34%
Revenue/RTM (cents)
3.04
3.13
(3%)
35%
34%
1%
For the year ended December 31, 2010, revenues for this com-
modity group increased by $136 million, or 29%, when com-
pared to 2009. The increase was mainly due to strong volumes of
Canadian export coal from new origins as well as increased Asian
demand from existing mines, expanding demand for thermal coal
in the U.S., freight rate increases, and the impact of a higher fuel
were partly offset by the negative translation impact of the stron-
ger Canadian dollar. Revenue per revenue ton mile increased by
6% in 2010, mainly due to the impact of a higher fuel surcharge
and freight rate increases that were partly offset by the negative
translation impact of the stronger Canadian dollar.
Automotive
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
Revenues (millions)
$
457 $
355
29%
RTMs (millions)
2,545
2,070
23%
Revenue/RTM (cents)
17.96
17.15
5%
39%
23%
13%
surcharge. These factors were partly offset by the negative transla-
For the year ended December 31, 2010, revenues for this com-
tion impact of the stronger Canadian dollar. Revenue per revenue
modity group increased by $102 million, or 29%, when com-
ton mile decreased by 3% in 2010, mainly due to the negative
pared to 2009. The increase was mainly due to significantly
translation impact of the stronger Canadian dollar and a signifi-
higher volumes of domestic finished vehicles traffic, freight rate
cant increase in the average length of haul that were partly offset
increases, and the impact of a higher fuel surcharge. These fac-
by freight rate increases and the impact of a higher fuel surcharge.
tors were partly offset by the negative translation impact of the
Grain and fertilizers
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
stronger Canadian dollar. Revenue per revenue ton mile increased
by 5% in 2010, mainly due to freight rate increases, the impact
of a higher fuel surcharge, and a significant decrease in the aver-
age length of haul that were partly offset by the negative transla-
tion impact of the stronger Canadian dollar.
Revenues (millions)
$ 1,418 $ 1,341
RTMs (millions)
44,549
40,859
Revenue/RTM (cents)
3.18
3.28
6%
9%
(3%)
11%
9%
2%
Other revenues
For the year ended December 31, 2010, revenues for this commod-
ity group increased by $77 million, or 6%, when compared to 2009.
The increase was mainly due to higher shipments of potash and feed
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
Revenues (millions)
$
880 $
735
20%
26%
grains, the impact of a higher fuel surcharge, and freight rate increas-
In 2010, Other revenues amounted to $880 million, an increase
es. These factors were partly offset by the negative translation impact
of $145 million, or 20%, when compared to 2009, mainly due to
of the stronger Canadian dollar. Revenue per revenue ton mile de-
higher vessel and dock revenues primarily related to strong iron
creased by 3% in 2010, mainly due to the negative translation impact
ore volumes, and increased revenues from warehousing and dis-
of the stronger Canadian dollar that was partly offset by the impact
tribution, primarily related to increased finished vehicle volumes
of a higher fuel surcharge and freight rate increases.
through CN’s network of vehicle distribution facilities. These fac-
tors were partly offset by the negative translation impact of the
Intermodal
stronger Canadian dollar.
Year ended December 31,
2010
2009 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,576 $ 1,337
18%
RTMs (millions)
35,803
32,159
11%
Revenue/RTM (cents)
4.40
4.16
6%
20%
11%
8%
For the year ended December 31, 2010, revenues for this com-
modity group increased by $239 million, or 18%, when compared
to 2009. The increase was mainly due to higher volumes from
overseas markets, particularly through the Ports of Vancouver
and Prince Rupert, and domestic retail shipments; the impact of
a higher fuel surcharge; and freight rate increases. These factors
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 21
Management’s Discussion and Analysis
Operating expenses
Operating expenses for the year ended December 31, 2010 amounted to $5,273 million, compared to $4,961 million in 2009. The increase
of $312 million, or 6%, in 2010 was mainly due to higher fuel costs, increased labor and fringe benefits expense and higher depreciation
and amortization expense. These factors were partly offset by the positive translation impact of the stronger Canadian dollar on US dollar-
denominated expenses, particularly in the first half of the year, the impact of EJ&E acquisition-related costs recorded in 2009 and lower
equipment rents.
In millions
Year ended December 31,
2010
2009
% Change
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Total operating expenses
$ 1,744
$ 1,696
1,036
1,048
834
243
368
1,027
820
790
284
344
$ 5,273
$ 4,961
(3%)
(1%)
(28%)
(6%)
14%
(7%)
(6%)
% Change
at constant
currency
Percentage of revenues
2010
2009
(7%)
(6%)
21.0%
23.0%
12.5%
13.9%
(40%)
12.6%
11.1%
(8%)
10.1%
10.7%
7%
(13%)
2.9%
4.5%
3.9%
4.7%
(12%)
63.6%
67.3%
Labor and fringe benefits: Labor and fringe benefits expense in-
Depreciation and amortization: Depreciation and amortization
creased by $48 million, or 3%, in 2010 when compared to 2009.
expense increased by $44 million, or 6%, in 2010 when com-
The increase was mainly due to higher incentive compensation
pared to 2009. The increase was mainly due to the impact of
and annual wages, the impact of increased freight volumes, and
net capital additions and a change in the expected service life for
higher health and welfare costs. These factors were partly offset
certain assets, which were partly offset by the translation impact
by the translation impact of the stronger Canadian dollar and
of the stronger Canadian dollar.
higher pension income.
Purchased services and material: Purchased services and material
lion, or 14%, in 2010 when compared to 2009. The decrease was
expense increased by $9 million, or 1%, in 2010 when compared
primarily due to the translation impact of the stronger Canadian
to 2009. The increase was mainly a result of higher expenses for
dollar and reduced lease expense for cars and locomotives, partly
Equipment rents: Equipment rents expense decreased by $41 mil-
third-party non-rail transportation services due to higher volumes
due to better asset utilization.
and higher repair and maintenance costs for track and roadway.
These factors were partly offset by the translation impact of the
Casualty and other: Casualty and other expense increased
stronger Canadian dollar and lower expenses for material and
by $24 million, or 7%, in 2010 when compared to 2009. The
utilities as a result of mild winter conditions.
increase was mainly due to an increase in the expense for
Canadian and U.S. personal injury claims, pursuant to the net
Fuel: Fuel expense increased by $228 million, or 28%, in 2010
result of actuarial valuations in both years and an increase in the
when compared to 2009. The increase was primarily due to a
environmental expense. These factors were partly offset by the
higher average price for fuel and higher freight volumes, which
EJ&E acquisition-related costs of $49 million expensed in 2009
were partly offset by the translation impact of the stronger
and the translation impact of the stronger Canadian dollar.
Canadian dollar and productivity improvements.
22
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Other
Income tax expense: The Company recorded income tax expense
Interest expense:
Interest expense decreased by $52 mil-
of $772 million for the year ended December 31, 2010 compared
lion, or 13% (4% at constant currency), for the year ended
to $407 million in 2009. Included in income tax expense in 2009
December 31, 2010 when compared to 2009, mainly due to the
was a deferred income tax recovery of $157 million, of which
positive translation impact of the stronger Canadian dollar on
$126 million resulted from the enactment of lower provincial cor-
US dollar-denominated interest expense, lower interest rates and
porate income tax rates, $16 million resulted from the recapital-
a lower average debt balance.
ization of a foreign investment, and $15 million resulted from the
resolution of various income tax matters and adjustments related
Other income: In 2010, the Company recorded Other income
to tax filings of prior years. The effective tax rate for 2010 was
of $212 million, compared to $267 million in 2009. Included in
26.8% compared to 18.0% in 2009. Excluding the 2009 deferred
Other income were gains on the sale of the Company’s subdivi-
income tax recovery discussed herein, the effective tax rate for
sions of $152 million for the Oakville subdivision in 2010; and
2009 was 24.9%. The year-over-year increase in the effective tax
$157 million and $69 million, respectively, for the Weston and
rates was mainly due to the impact of a higher proportion of the
Lower Newmarket subdivisions in 2009. Higher income from
Company’s pre-tax income earned in higher-taxed jurisdictions
other business activities and gains on disposal of land also partly
and lesser gains on sale of the Company’s properties taxed at the
offset the decrease in 2010.
favorable capital gains inclusion rate.
Summary of fourth quarter 2011 compared to corresponding quarter in 2010 - unaudited
Fourth quarter 2011 net income was $592 million, an increase of $89 million, or 18%, when compared to the same period in 2010, with
diluted earnings per share rising 22% to $1.32.
The fourth-quarter 2011 figures include items affecting the comparability of the results of operations. The 2011 figures include a cur-
rent income tax recovery of $11 million ($0.02 per basic or diluted share) relating to certain fuel costs attributed to various wholly-owned
subsidiaries’ fuel consumption in prior periods.
Foreign exchange fluctuations continued to have an impact on the comparability of the results of operations. The fluctuation of the
Canadian dollar relative to the US dollar, which affects the conversion of the Company’s US dollar-denominated revenues and expenses, has
resulted in a positive impact of $2 million (nil per basic or diluted share) to fourth-quarter 2011 net income.
Revenues for the fourth quarter of 2011 increased by $260 million, or 12%, to $2,377 million, when compared to the same period in
2010. The increase was attributable to higher freight volumes, due in part to modest improvements in North American and global econo-
mies and to the Company’s performance above market conditions in a number of segments; the impact of a higher fuel surcharge, in the
range of $80 million, as a result of year-over-year increases in applicable fuel prices and higher volumes; freight rate increases; and the posi-
tive translation impact of the weaker Canadian dollar on US dollar-denominated revenues.
Operating expenses for the fourth quarter of 2011 increased by $195 million, or 15%, to $1,538 million, when compared to the same
period in 2010. The increase was primarily due to higher fuel costs, labor and fringe benefits expense as well as increased expenses for pur-
chased services and material. These factors were partly offset by lower casualty and other expense.
The operating ratio was 64.7% in the fourth quarter of 2011 compared to 63.4% in the fourth quarter of 2010, a 1.3-point increase.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 23
Management’s Discussion and Analysis
Summary of quarterly financial data - unaudited
In millions, except per share data
2011 Quarters
2010 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
Revenues
Operating income
Net income
$ 2,377
$ 2,307
$ 2,260
$ 2,084
$ 2,117
$ 2,122
$ 2,093
$ 1,965
$ 839
$ 938
$ 874
$ 645
$ 774
$ 834
$ 813
$ 603
$ 592
$ 659
$ 538
$ 668
$ 503
$ 556
$ 534
$ 511
Basic earnings per share
$ 1.33
$ 1.47
$ 1.19
$ 1.46
$ 1.09
$ 1.20
$ 1.14
$ 1.08
Diluted earnings per share
$ 1.32
$ 1.46
$ 1.18
$ 1.45
$ 1.08
$ 1.19
$ 1.13
$ 1.08
Dividend declared per share
$ 0.325
$ 0.325
$ 0.325
$ 0.325
$ 0.270
$ 0.270
$ 0.270
$ 0.270
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 of this MD&A entitled Business risks).
Operating expenses reflect the impact of freight volumes, seasonal weather conditions, labor costs, fuel prices, and the Company’s productiv-
ity initiatives. The continued 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:
In millions, except per share data
2011 Quarters
2010 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
Income tax recoveries (expenses) (1)
$ 11
$ -
$ (40)
$ -
$ -
$ -
$ -
$ -
Gain on disposal of property (after-tax) (2) (3) (4)
-
38
-
254
-
-
-
131
Impact on net income
$ 11
$ 38
$ (40)
$ 254
$ -
$ -
$ -
$ 131
Basic earnings per share
$ 0.02
$ 0.08
$ (0.08)
$ 0.55
$ -
$ -
$ -
$ 0.28
Diluted earnings per share
$ 0.02
$ 0.08
$ (0.08)
$ 0.55
$ -
$ -
$ -
$ 0.28
(1) Income tax recoveries (expenses) resulted mainly from the enactment of state corporate income tax rate changes and other legislated tax revisions in the U.S. and certain fuel costs
attributed to various wholly-owned subsidiaries’ fuel consumption in prior periods.
(2) The Company sold substantially all of the assets of ICRMT for proceeds of $70 million. A gain on disposal of $60 million ($38 million after-tax) was recognized in Other income.
(3) The Company sold a segment of the Company’s Kingston subdivision known as the Lakeshore East of $299 million. A gain on disposal of $288 million ($254 million after-tax) was
recognized in Other income.
(4) The Company sold a portion of the property known as the Oakville subdivision of $168 million. A gain on disposal of $152 million ($131 million after-tax) was recognized in Other income.
24
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Financial position
The following tables provide an analysis of the Company’s balance sheet as at December 31, 2011 as compared to 2010. Assets and li-
abilities denominated in US dollars have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet
date. As at December 31, 2011 and 2010, the foreign exchange rate was $1.0170 per US$1.00 and $0.9946 per US$1.00, respectively.
In millions
As at December 31,
2011
2010
Variance
excluding
foreign
exchange
Foreign
exchange
impact
Explanation of variance,
other than foreign exchange impact
Total assets
$ 26,026
$ 25,206
$ 569
$ 251
Variance mainly due to:
Restricted cash and cash equivalents
$ 499
$ -
$ 499
$ -
Accounts receivable
$ 820
$ 775
$ 39
$ 6
Deferred and receivable income taxes $ 122
$ 53
$ 68
$ 1
Properties
$ 23,917
$ 22,917
$ 779
$ 221
Intangible and other assets
$ 261
$ 699
$ (441)
$ 3
Total liabilities
$ 15,346
$ 13,922
$ 1,184
$ 240
Variance mainly due to:
Accounts payable and other
$ 1,580
$ 1,366
$ 193
$ 21
Deferred income taxes
$ 5,333
$ 5,152
$ 110
$ 71
Pension and other postretirement
benefits, net of current portion
$ 1,095
$ 510
$ 581
$ 4
Other liabilities and deferred credits $ 762
$ 823
$ (72)
$ 11
Total long-term debt, including
$ 6,576
$ 6,071
$ 372
$ 133
the current portion
$499 million pledged as collateral related to letters of
credit issued.
$39 million increase due to the impact of higher rev-
enues partially offset by the impact of an improved
collection cycle.
$76 million increase related to income taxes receiv-
able offset by $8 million for other items.
$1,712 million increase related to property and capi-
tal lease additions, offset by $883 million of deprecia-
tion and $50 million for other items.
Decrease of $995 million related to the recognition of
the funded status of the Company’s pension plans, off-
set by pension contributions of $437 million, pension
income of $116 million and $1 million of other items.
$193 million related to an increase in Trade payables
of $63 million, Stock-based incentives liability of
$46 million, Payroll-related accruals of $45 million,
and $39 million for other items.
Increase due to $522 million of deferred income tax
expense recorded in net income, excluding recog-
nized tax benefits, and $9 million for other items;
offset by a deferred income tax recovery of $421 mil-
lion recorded in Other comprehensive income (loss).
Increase of $577 million related to the recognition
of the funded status of the Company’s pension plans
and $4 million for other items.
$72 million related to a decrease of $39 million in the
personal injury and other claims provision, of $27 mil-
lion in the environmental liability, and of $6 million
for other items.
Increase of $1,453 million related to debt issuances
and $2 million for other items, offset by repayments
of debt totaling $1,083 million.
In millions
As at December 31,
2011
2010
Variance
Explanation of variance
Total shareholders’ equity
$ 10,680
$ 11,284
$ (604)
Variance mainly due to:
Common shares
Accumulated other
comprehensive loss
$ 4,141
$ 4,252
$ (111)
$ (2,839)
$ (1,709)
$ (1,130)
Retained earnings
$ 9,378
$ 8,741
$ 637
Decrease of $185 million due to the share repurchase
programs, offset by $74 million for the issuance of com-
mon shares upon exercise of stock options and other.
$1,130 million related to Other comprehensive loss
for the year, mainly due to an after-tax amount of
$1,156 million recorded to recognize the funded sta-
tus of the Company’s pension and other postretire-
ment benefit plans.
$2,457 million of net income for the year was par-
tially offset by a reduction of $1,235 million due to
the share repurchase programs and $585 million of
dividends paid.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 25
Management’s Discussion and Analysis
Liquidity and capital resources
The Company’s principal source of liquidity is cash generated from operations and is supplemented by borrowings in the money markets and
capital markets. In addition, from time to time, the Company’s liquidity requirements can be supplemented by the disposal of surplus proper-
ties and the monetization of assets. The strong focus on cash generation from all sources gives the Company increased flexibility in terms of
its financing requirements. As part of its financing strategy, the Company regularly reviews its optimal capital structure, cost of capital, and
the need for additional debt financing, and considers from time to time the feasibility of dividend increases and share repurchases.
The Company entered into a four-year $800 million revolving credit facility in May 2011 to replace the US$1 billion credit facility, which
was scheduled to expire in October 2011. To meet short-term liquidity needs, the Company has a commercial paper program, which is
backstopped by its revolving credit facility. Access to commercial paper is dependent on market conditions. If the Company were to lose ac-
cess to its commercial paper program for an extended period of time, the Company could rely on its $800 million revolving credit facility to
meet its short-term liquidity needs. See the section of this MD&A entitled Available financing arrangements for additional information.
The Company has at times had working capital deficits which are considered common in the rail industry because it is capital-intensive, and
not an indication of a lack of liquidity. The Company maintains adequate resources to meet daily cash requirements, and has sufficient financial
capacity to manage its day-to-day cash requirements and current obligations. As at December 31, 2011 and December 31, 2010, the Company
had cash and cash equivalents of $101 million and $490 million, respectively, and a working capital of $133 million and working capital deficit
of $316 million, respectively. As at December 31, 2011, the Company has pledged as collateral, for a term of three months, cash and cash
equivalents of $499 million pursuant to its bilateral letter of credit facilities. The cash and cash equivalents pledged as collateral were recorded as
Restricted cash and cash equivalents. See the section of this MD&A entitled Available financing arrangements for additional information. There
are currently no specific requirements relating to working capital other than in the normal course of business as discussed herein.
The Company’s access to long-term funds in the debt capital markets depends on its credit rating and market conditions. The Company
believes that it continues to have access to the long-term debt capital market. If the Company were unable to borrow funds at acceptable
rates in the long-term debt capital markets, the Company could borrow under its revolving credit facility, raise cash by disposing of surplus
properties or otherwise monetizing assets, reduce discretionary spending or take a combination of these measures to assure that it has ad-
equate funding for its business.
The Company’s U.S. and other foreign subsidiaries hold cash to meet their respective operational requirements. The Company can de-
cide to repatriate funds associated with either undistributed earnings or the liquidation of its foreign operations, including its U.S. and other
foreign subsidiaries. Such repatriation of funds would not cause significant tax implications to the Company under the tax treaties currently
in effect between Canada and the U.S. and other foreign tax jurisdictions. Therefore, the impact on liquidity resulting from the repatriation
of funds held outside Canada would not be significant. Considering the impacts of the current economic environment, the Company does
not have any immediate plans to repatriate funds held outside Canada as the cash flows currently generated within each of the Company’s
jurisdictions are sufficient to meet their respective financial obligations.
Operating activities
In millions
Net cash receipts from customers and other
Net cash payments for:
Employee services, suppliers and other expenses
Interest
Personal injury and other claims
Pensions
Income taxes
Year ended December 31,
2011
2010
Variance
$ 8,995
$ 8,404
$ 591
(4,643)
(4,334)
(329)
(97)
(468)
(482)
(366)
(64)
(427)
(214)
(309)
37
(33)
(41)
(268)
Net cash provided by operating activities
$ 2,976
$ 2,999
$ (23)
Net cash receipts from customers and other increased mainly due to higher revenues and a shorter collection cycle. Payments for employee
services, suppliers and other expenses increased principally due to higher payments for fuel that were partly offset by a lower foreign ex-
change rate on US dollar-denominated payments. In anticipation of its future funding requirements, in 2011 the Company made voluntary
contributions of $350 million in excess of the required contributions mainly to strengthen the financial position of its main pension plan,
the CN Pension Plan. The Company has been advised by the Office of the Superintendent of Financial Institutions (OSFI) that this contribu-
tion can be treated as a prepayment against its 2012 pension deficit funding requirements. As a result, the Company’s cash contributions
26
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
for 2012 are expected to be in the range of approximately $275 million to $575 million for all its pension plans and include a voluntary
contribution of approximately $150 million to $450 million. As at February 3, 2012, the Company contributed $250 million to its defined
benefit pension plans, including a $150 million voluntary contribution. For 2011, net income tax payments increased by $268 million when
compared to 2010, mainly due to installments based on higher pretax income as well as the final payment for Canadian taxes due in
relation to the 2010 fiscal year. In 2012, net income tax payments are expected to be approximately $500 million.
The Company expects cash from operations and its other sources of financing to be sufficient to meet its 2012 funding obligations.
Investing activities
In millions
Year ended December 31,
2011
2010
Variance
Net cash used in investing activities
$ 1,729
$ 1,383
$ (346)
The Company’s investing activities in 2011 included property additions of $1,625 million, an increase of $39 million when compared to
2010, and cash proceeds of $369 million from the disposal of property of which $70 million was from the disposition of substantially
all of the assets of ICRMT and $299 million was from the disposition of a segment of the Company’s Kingston subdivision known as the
Lakeshore East. Investing activities also included restricted cash and cash equivalents of $499 million related to the Company’s bilateral let-
ter of credit facilities. Investing activities in 2010 included cash proceeds of $168 million from the disposition of a portion of the property
known as the Oakville subdivision. See the sections of this MD&A entitled Acquisition and Disposal of property.
The following table details property additions for the years
Expenditures relating to the Company’s properties that do not
meet the Company’s capitalization criteria are considered normal
repairs and maintenance and are expensed. In 2011, approxi-
mately 20% of the Company’s total operating expenses were for
such expenditures (approximately 20% in 2010 and 2009). For
Track and roadway properties, normal repairs and maintenance
include but are not limited to spot tie replacement, spot or bro-
ken rail replacement, physical track inspection for detection of rail
defects and minor track corrections, and other general mainte-
nance of track structure.
For 2012, the Company expects to invest approximately $1.75
billion for its capital programs, of which over $1 billion is targeted
towards track infrastructure to continue to operate a safe rail-
way and to improve the productivity and fluidity of the network.
Implementation costs associated with the U.S. federal govern-
ment legislative requirement to implement positive train control
(PTC) by 2015 will amount to approximately US$220 million, of
which approximately US$30 million has been spent at the end of
2011, with the remainder to be spent over the next four years.
ended December 31, 2011 and 2010:
In millions
Year ended December 31,
2011
2010
Track and roadway
Rolling stock
Buildings
Information technology
Other
Gross property additions
Less: Capital leases (1)
Property additions
$ 1,185
$ 1,031
195
72
135
125
415
43
111
118
1,712
1,718
87
132
$ 1,625
$ 1,586
(1) During 2011, the Company recorded $87 million in assets it acquired through
equipment leases ($132 million in 2010), for which an equivalent amount was
recorded in debt.
On an ongoing basis, the Company invests in capital expen-
diture programs for the renewal of the basic track infrastructure,
the acquisition of rolling stock and other investments to take ad-
vantage of growth opportunities and to improve the Company’s
productivity and the fluidity of its network.
Expenditures are generally capitalized if they meet a minimum
level of activity, extend the life of the asset or provide future bene-
fits such as increased revenue-generating capacity, functionality, or
physical or service capacity. For Track and roadway properties, ex-
penditures to replace and/or upgrade the basic track infrastructure
are generally planned and programmed in advance and carried out
by the Company’s engineering work force. In both 2011 and 2010,
approximately 90% of the Track and roadway capital expenditures
were incurred to renew the basic track infrastructure.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 27
Management’s Discussion and Analysis
Free cash flow
Cash received from stock options exercised during 2011 and
The Company generated $1,175 million of free cash flow for the
2010 was $68 million and $87 million, respectively, and the relat-
year ended December 31, 2011, compared to $1,122 million in
ed tax benefit realized upon exercise was $9 million and $28 mil-
2010. Free cash flow does not have any standardized meaning pre-
lion, respectively.
scribed by GAAP and may, therefore, not be comparable to similar
In 2011, the Company repurchased a total of 19.9 million
measures presented by other companies. The Company believes that
common shares for $1,420 million (weighted-average price of
free cash flow is a useful measure of performance as it demonstrates
$71.33 per share) under its share repurchase programs. See the
the Company’s ability to generate cash after the payment of capi-
section of this MD&A entitled Common shares for the activity
tal expenditures and dividends. The Company defines free cash flow
under the 2011 share repurchase programs, as well as the share
as net cash provided by operating activities, adjusted for changes in
repurchase programs of the prior years.
the accounts receivable securitization program and in cash and cash
During 2011, the Company paid quarterly dividends of
equivalents resulting from foreign exchange fluctuations, less net
$0.325 per share amounting to $585 million, compared to
cash used in investing activities, adjusted for the impact of major ac-
$503 million, at the rate of $0.270 per share, in 2010.
quisitions, and the payment of dividends, calculated as follows:
In millions
Year ended December 31,
2011
2010
Net cash provided by operating activities
$ 2,976
$ 2,999
Net cash used in investing activities
(1,729)
(1,383)
Net cash provided before financing activities
1,247
1,616
Adjustments:
Dividends paid
(585)
(503)
Change in restricted cash and cash equivalents
499
Effect of foreign exchange fluctuations on
US dollar-denominated cash and cash equivalents
Change in accounts receivable securitization
14
-
-
7
2
Credit measures
Management believes that the adjusted debt-to-total capitaliza-
tion 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 amorti-
zation (EBITDA) ratio 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 pre-
scribed by GAAP, they may not be comparable to similar mea-
Free cash flow
$ 1,175
$ 1,122
sures presented by other companies and, as such, should not be
Financing activities
considered in isolation.
Adjusted debt-to-total capitalization ratio
In millions
Year ended December 31,
2011
2010
Variance
December 31,
2011
2010
Net cash used in financing activities
$ 1,650
$ 1,485
$
(165)
Debt-to-total capitalization ratio (1)
38.1%
35.0%
In 2011, the Company issued $659 million of commercial pa-
per. There was no issuance of commercial paper in 2010. In
Add: Present value of operating lease commitments (2)
1.9%
1.8%
Adjusted debt-to-total capitalization ratio
40.0%
36.8%
2011, repayments of debt totaling $1,083 million related to the
Adjusted debt-to-adjusted EBITDA
Company’s repayment of notes, commercial paper and capital
lease obligations. In the fourth quarter of 2011, the Company,
through a wholly-owned subsidiary, repurchased 76% of the
6.38% Notes due in October 2011, with a carrying value of
US$303 million pursuant to a tender offer for a total cost of
US$304 million. The remaining 24% of the 6.38% Notes with
$ in millions, unless otherwise indicated
Year ended December 31,
2011
2010
Debt
$ 6,576
$ 6,071
Add: Present value of operating lease commitments (2)
542
494
Adjusted debt
a carrying value of US$97 million were paid upon maturity. In
Operating income
November 2011, under its new shelf prospectus and registra-
Add: Depreciation and amortization
tion statement, the Company issued US$300 million (C$305 mil-
EBITDA (excluding Other income)
lion) 1.45% Notes due 2016 and US$400 million (C$407 mil-
Add: Deemed interest on operating leases
30
28
lion) 2.85% Notes due 2021 in the U.S. capital markets, which
Adjusted EBITDA
$ 4,210
$ 3,886
resulted in net proceeds of US$691 million. The Company used
Adjusted debt-to-adjusted EBITDA
1.69 times 1.69 times
a portion of the net proceeds to repay all of its then outstanding
commercial paper and for general corporate purposes, including
the partial financing of its share repurchase program. In 2010, re-
payments of debt related entirely to the Company’s capital lease
obligations.
(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.
28
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
7,118
6,565
3,296
3,024
884
834
4,180
3,858
Management’s Discussion and Analysis
The increase in the Company’s adjusted debt-to-total capital-
Bilateral letter of credit facilities
ization ratio at December 31, 2011, as compared to 2010 was
In April 2011, the Company entered into a series of three-year
mainly due to net debt issuances as well as a weaker Canadian-
bilateral letter of credit facility agreements with various banks
to-US dollar foreign exchange rate in effect at the balance sheet
to support its requirements to post letters of credit in the ordi-
date. The operating income earned during 2011 offset the
nary course of business. As at December 31, 2011, from a to-
impact of the increased debt level as at December 31, 2011,
tal committed amount of $520 million by the various banks, the
resulting in a flat adjusted debt-to-adjusted EBITDA multiple, as
Company had letters of credit drawn of $499 million ($436 mil-
compared to 2010.
Available financing arrangements
Revolving credit facility
lion as at December 31, 2010, under its previous US$1 billion
credit facility). 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 three months, equal
to at least the face value of the letters of credit issued. As at
In May 2011, the Company entered into an $800 million four-year
December 31, 2011, cash and cash equivalents of $499 million
revolving credit facility agreement with a consortium of lenders.
were pledged as collateral and recorded as Restricted cash and
The agreement allows for an increase in amount, up to a maxi-
cash equivalents.
mum of $500 million, as well as the option to extend the term by
an additional year at each anniversary date, subject to the con-
Shelf prospectus
sent of individual lenders. The Company plans to use the credit
In November 2011, the Company filed a new shelf prospectus
facility for working capital and general corporate purposes includ-
with Canadian securities regulators and a registration statement
ing backstopping its commercial paper program. This facility, con-
with the United States Securities and Exchange Commission
taining customary terms and conditions, replaces the US$1 billion
(SEC), providing for the issuance by CN of up to $2.5 billion of
credit facility that was scheduled to expire in October 2011. The
debt securities in Canadian and U.S. markets. The shelf prospec-
credit facility agreement has one financial covenant, which lim-
tus expires December 2013. Access to capital markets under the
its debt as a percentage of total capitalization, and with which
shelf is dependent on market conditions at the time of pricing.
the Company is in compliance. As at December 31, 2011, the
Company had no outstanding borrowings under its revolving
All forward-looking information provided in this section is sub-
credit facility (nil as at December 31, 2010).
ject to risks and uncertainties and is based on assumptions about
Commercial paper
events and developments that may not materialize or that may
be offset entirely or partially by other events and developments.
The Company has a commercial paper program, which is backed
See the section of this MD&A entitled Forward-looking state-
by its revolving credit facility, enabling it to issue commercial pa-
ments for a discussion of assumptions and risk factors affecting
per up to a maximum aggregate principal amount of $800 mil-
such forward-looking statements.
lion, or the US dollar equivalent. As at December 31, 2011, the
Company had borrowings of $82 million (US$81 million) of com-
mercial paper (nil as at December 31, 2010) which were present-
ed in Current portion of long-term debt on the Balance Sheet.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 29
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 December 31, 2011:
In millions
Debt obligations (1)
Interest on debt obligations
Capital lease obligations (2)
Operating lease obligations (3)
Purchase obligations (4)
Pension contributions (5)
Other long-term liabilities reflected on the balance sheet (6)
Other commitments (7)
Total obligations
Total
2012
2013
2014
2015
2016
thereafter
$ 5,621
$
82
$
404
$
328
$
-
$
557
$ 4,250
2017 &
5,025
1,254
665
727
1,065
838
323
312
99
128
457
-
77
96
301
151
103
126
225
64
40
284
270
76
101
280
46
57
276
109
61
43
280
42
85
268
297
45
-
280
39
45
3,584
328
252
-
-
570
-
$ 15,518
$ 1,251
$ 1,414
$ 1,442
$
896
$ 1,531
$ 8,984
(1) Presented net of unamortized discounts, of which $834 million relates to non-interest bearing Notes due in 2094, and excludes capital lease obligations of $955 million which are included
in “Capital lease obligations.”
(2) Includes $955 million of minimum lease payments and $299 million of imputed interest at rates ranging from approximately 0.7% to 11.8%.
(3) Includes minimum rental payments for operating leases having initial non-cancelable lease terms of one year or more. The Company also has operating lease agreements for its automotive
fleet with one-year non-cancelable terms for which its practice is to renew monthly thereafter. The estimated annual rental payments for such leases are approximately $30 million and
generally extend over five years.
(4) Includes commitments for railroad ties, rail, freight cars, locomotives and other equipment and services, and outstanding information technology service contracts and licenses.
(5) The Company’s funding requirements are determined upon completion of actuarial valuations. The Company’s next actuarial valuations required as at December 31, 2011 will be performed
in 2012. The estimated minimum required payments for pension contributions, excluding current service cost, are based on the current projected results of actuarial funding valuations on a
solvency basis. Actuarial valuations are required annually and as such, future payments for pension contributions are subject to re-evaluation on an annual basis. These amounts do not include
voluntary contributions in future years. (See the sections of this MD&A entitled Critical accounting policies - Pensions and other postretirement benefits as well as Other risks - Pensions).
(6) Includes expected payments for workers’ compensation, workforce reductions, postretirement benefits other than pensions, net unrecognized tax benefits and environmental liabilities
that have been classified as contractual settlement agreements.
(7) The Company has remaining estimated commitments totaling approximately $130 million in relation to the EJ&E acquisition for railroad infrastructure improvements, grade separation
projects as well as commitments under a series of agreements with individual communities and a comprehensive voluntary mitigation program established to address surrounding
municipalities’ concerns. The commitment for the grade separation projects is based on estimated costs provided by the Surface Transportation Board (STB) at the time of acquisition and
could be subject to adjustment. In addition, remaining implementation costs associated with the U.S. federal government legislative requirement to implement PTC by 2015 are estimated
to be approximately $193 million (US$190 million).
For 2012 and the foreseeable future, the Company expects cash flow from operations and from its various sources of financing to be
sufficient to meet its debt repayments and future obligations, and to fund anticipated capital expenditures.
See the section of this MD&A entitled Forward-looking statements for a discussion of assumptions and risk factors affecting such
forward-looking statements.
Acquisition
2009
The following table summarizes the consideration paid for
EJ&E and the fair value of the assets acquired and liabilities
On January 31, 2009, the Company acquired the principal rail
assumed that were recognized at the acquisition date:
lines of the EJ&E, a short-line railway that operated over 198 miles
of track in and around Chicago, for a total cash consideration of
US$300 million (C$373 million), paid with cash on hand. The
Company accounted for the acquisition using the acquisition
method of accounting pursuant to FASB ASC 805, “Business
Combinations,” which the Company adopted on January 1,
2009. As such, the consolidated financial statements of the
Company include the assets, liabilities and results of operations
of EJ&E as of January 31, 2009, the date of acquisition. The costs
incurred to acquire the EJ&E of approximately $49 million were
expensed and reported in Casualty and other in the Consolidated
Statement of Income for the year ended December 31, 2009 (see
Note 2 - Accounting changes).
In US millions
Consideration
Cash
Fair value of total consideration transferred
Recognized amounts of identifiable assets
acquired and liabilities assumed
Current assets
Properties
Current liabilities
Other noncurrent liabilities
Total identifiable net assets
At January 31, 2009
$ 300
$ 300
$
4
310
(4)
(10)
$ 300
The 2009 revenues and net income of EJ&E included in the
Company’s Consolidated Statement of Income from the acquisi-
tion date to December 31, 2009, were $74 million and $12 mil-
lion, respectively.
30
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Disposal of property
2011
IC RailMarine Terminal
subdivision in Vaughan and Toronto, Ontario, together with the rail
fixtures and certain passenger agreements (collectively the “Lower
Newmarket subdivision”), for cash proceeds of $71 million before
In August 2011, the Company sold substantially all of the assets of IC
transaction costs. Under the agreement, the Company obtained the
RailMarine Terminal Company (ICRMT), an indirect subsidiary of the
perpetual right to operate freight trains over the Lower Newmarket
Company, to Raven Energy, LLC, an affiliate of Foresight Energy, LLC
subdivision at its then current level of operating activity, with the
(Foresight) and the Cline Group (Cline), for cash proceeds of $70 mil-
possibility of increasing its operating activity for additional consider-
lion (US$73 million) before transaction costs. ICRMT is located on the
ation. The transaction resulted in a gain on disposal of $69 million
east bank of the Mississippi River and stores and transfers bulk com-
($59 million after-tax) that was recorded in Other income under the
modities and liquids between rail, ship and barge, serving customers
full accrual method of accounting for real estate transactions.
in North American and global markets. Under the sale agreement,
the Company will benefit from a 10-year rail transportation agree-
Weston subdivision
ment with Savatran LLC, an affiliate of Foresight and Cline, to haul a
In March 2009, the Company entered into an agreement with
minimum annual volume of coal from four Illinois mines to the ICRMT
GO Transit to sell the property known as the Weston subdivision
transfer facility. The transaction resulted in a gain on disposal of
in Toronto, Ontario, together with the rail fixtures and certain pas-
$60 million ($38 million after-tax) that was recorded in Other income.
senger agreements (collectively the “Weston subdivision”), for
Lakeshore East
cash proceeds of $160 million before transaction costs, of which
$50 million placed in escrow at the time of disposal was entirely
In March 2011, the Company entered into an agreement with
released by December 31, 2009 in accordance with the terms of
Metrolinx to sell a segment of the Kingston subdivision known as
the agreement. Under the agreement, the Company obtained the
the Lakeshore East in Pickering and Toronto, Ontario, together with
perpetual right to operate freight trains over the Weston subdivi-
the rail fixtures and certain passenger agreements (collectively the
sion at its then current level of operating activity, with the possibil-
“Lakeshore East”), for cash proceeds of $299 million before trans-
ity of increasing its operating activity for additional consideration.
action costs. Under the agreement, the Company obtained the
The transaction resulted in a gain on disposal of $157 million
perpetual right to operate freight trains over the Lakeshore East
($135 million after-tax) that was recorded in Other income under
at its then current level of operating activity, with the possibility of
the full accrual method of accounting for real estate transactions.
increasing its operating activity for additional consideration. The
transaction resulted in a gain on disposal of $288 million ($254 mil-
Off balance sheet arrangements
lion after-tax) that was recorded in Other income under the full ac-
Accounts receivable securitization program
crual method of accounting for real estate transactions.
The Company had a five-year agreement to sell an undivided co-
2010
Oakville subdivision
ownership interest in a revolving pool of freight receivables to an
unrelated trust for maximum cash proceeds of $600 million. The
agreement expired on May 31, 2011 and was not renewed.
In March 2010, the Company entered into an agreement with
Metrolinx to sell a portion of the property known as the Oakville
Guarantees and indemnifications
subdivision in Toronto, Ontario, together with the rail fixtures and
In the normal course of business, the Company, including certain of
certain passenger agreements (collectively the “Oakville subdivi-
its subsidiaries, enters into agreements that may involve providing
sion”), for proceeds of $168 million before transaction costs, of
guarantees or indemnifications to third parties and others, which may
which $24 million was placed in escrow at the time of disposal and
extend beyond the term of the agreements. These include, but are
was entirely released by December 31, 2010 in accordance with the
not limited to, residual value guarantees on operating leases, standby
terms of the agreement. Under the agreement, the Company ob-
letters of credit and surety and other bonds, and indemnifications that
tained the perpetual right to operate freight trains over the Oakville
are customary for the type of transaction or for the railway business.
subdivision at its then current level of operating activity, with the
The Company is required to recognize a liability for the fair value
possibility of increasing its operating activity for additional consider-
of the obligation undertaken in issuing certain guarantees on the date
ation. The transaction resulted in a gain on disposal of $152 million
the guarantee is issued or modified. In addition, where the Company
($131 million after-tax) that was recorded in Other income under
expects to make a payment in respect of a guarantee, a liability will be
the full accrual method of accounting for real estate transactions.
recognized to the extent that one has not yet been recognized.
2009
Lower Newmarket subdivision
The nature of these guarantees or indemnifications, the maxi-
mum potential amount of future payments, the carrying amount
of the liability, if any, and the nature of any recourse provisions
In November 2009, the Company entered into an agreement with
are disclosed in Note 17 - Major commitments and contingencies
Metrolinx to sell the property known as the Lower Newmarket
to the Company’s Annual Consolidated Financial Statements.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 31
Management’s Discussion and Analysis
Stock plans
See the section of this MD&A entitled Forward-looking state-
The Company has various stock-based incentive plans for eli-
ments for assumptions and risk factors affecting such forward-
gible employees. A description of the Company’s major plans
looking statement.
is provided in Note 11 - Stock plans, to the Company’s Annual
Consolidated Financial Statements. The following table provides
Common shares
the total stock-based compensation expense for awards under all
Share repurchase programs
plans, as well as the related tax benefit recognized in income, for
In January 2011, the Board of Directors of the Company approved
the years ended December 31, 2011, 2010 and 2009:
a share repurchase program which allowed for the repurchase of
In millions
Year ended December 31,
2011
2010
2009
Cash settled awards
Restricted share unit plan
$ 81
$ 77
$ 43
Voluntary Incentive Deferral Plan
Stock option awards
21
102
10
18
95
9
33
76
14
Total stock-based compensation expense
$ 112
$ 104
$ 90
Tax benefit recognized in income
$ 24
$ 27
$ 26
Financial instruments
In the normal course of business, the Company is exposed to vari-
ous risks such as customer credit risk, commodity price risk, inter-
est rate risk, foreign currency risk, and liquidity risk. To manage
these risks, the Company follows a financial risk management
up to 16.5 million common shares to the end of December 2011
pursuant to a normal course issuer bid, at prevailing market prices
plus brokerage fees, or such other prices as may be permitted by
the Toronto Stock Exchange. This share repurchase program was
completed by September 30, 2011.
In October 2011, the Board of Directors of the Company
approved a new share repurchase program which allows for
the repurchase of up to 17.0 million common shares between
October 28, 2011 and October 27, 2012 pursuant to a normal
course issuer bid at prevailing market prices plus brokerage fees,
or such other prices as may be permitted by the Toronto Stock
Exchange.
The following table provides the activity under such share re-
purchase programs, as well as the share repurchase programs of
the prior years:
framework, which is monitored and approved by the Company’s
In millions, except per share data
Finance Committee, with a goal of maintaining a strong balance
Year ended December 31,
2011
2010
2009
sheet, optimizing earnings per share and free cash flow, financing
October 2011 - October 2012 program
its operations at an optimal cost of capital and preserving its liquid-
Number of common shares (1)
3.4
ity. The Company has limited involvement with derivative financial
Weighted-average price per share (2)
$ 75.08
instruments in the management of its risks and does not use them
Amount of repurchase
$ 256
for trading purposes. At December 31, 2011, the Company did
not have any significant derivative financial instruments outstand-
ing. See Note 18 - Financial instruments, to the Company’s Annual
Consolidated Financial Statements for a discussion of such risks.
January 2011 - December 2011 program
Number of common shares (1)
16.5
Weighted-average price per share (2)
$ 70.56
Amount of repurchase
$ 1,164
Payments for income taxes
The Company is required to make scheduled installment pay-
ments as prescribed by the tax authorities. In Canada, the
Company’s domestic jurisdiction, tax installments in a given year
are generally based on the prior year’s pretax income whereas in
the U.S., the Company’s predominate foreign jurisdiction, they
are based on forecasted pretax income of that year.
In 2011, net income tax payments to Canadian tax authorities were
$360 million ($171 million in 2010) and net income tax payments to
U.S. tax authorities were $122 million ($43 million in 2010). For the
2012 fiscal year, the Company’s net income tax payments are expected
to be approximately $500 million. Net income tax payments for 2011
and 2012 both include the impact of recent changes in tax laws,
specifically, the savings attributable to the Tax Relief, Unemployment
January 2010 - December 2010 program
Number of common shares (1)
Weighted-average price per share (2)
Amount of repurchase
July 2008 - July 2009 program
Number of common shares
Weighted-average price per share
Amount of repurchase
Total for the year
N/A
N/A
N/A
N/A
N/A
N/A
Number of common shares (1)
19.9
15.0
-
Weighted-average price per share (2)
$ 71.33
$ 60.86
$ -
Amount of repurchase
$ 1,420
$ 913
$ -
(1) Includes common shares purchased in the first and fourth quarters of 2011 and in
the second and third quarters of 2010 pursuant to private agreements between the
Company and arm’s-length third-party sellers.
Insurance Reauthorization and Job Creation Act in the United States,
(2) Includes brokerage fees.
which increases the accelerated depreciation allowable from 50% to
100% for the period from September 2010 through to the end of
2011, and allows for 50% accelerated depreciation in 2012.
32
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
N/A
N/A
N/A
N/A
N/A
N/A
15.0
$ 60.86
$ 913
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
-
N/A
$ -
N/A
$ -
Management’s Discussion and Analysis
Outstanding share data
Canada
As at February 3, 2012, the Company had 442.0 million common
Employee injuries are governed by the workers’ compensation
shares and 6.3 million stock options outstanding.
legislation in each province whereby employees may be awarded
Recent accounting pronouncement
either a lump sum or future stream of payments depending on
the nature and severity of the injury. As such, the provision for
The Accounting Standards Board of the Canadian Institute of
employee injury claims is discounted. In the provinces where the
Chartered Accountants requires all publicly accountable enter-
Company is self-insured, costs related to employee work-related
prises to report under International Financial Reporting Standards
injuries are accounted for based on actuarially developed esti-
(IFRS) for the fiscal years beginning on or after January 1,
mates of the ultimate cost associated with such injuries, including
2011. However, National Instrument 52-107 issued by the
compensation, health care and third-party administration costs. A
Ontario Securities Commission allows Securities and Exchange
comprehensive actuarial study is generally performed at least on a
Commission (SEC) issuers, as defined by the U.S. Securities and
triennial basis. For all other legal actions, the Company maintains,
Exchange Commission, such as CN, to file with Canadian securi-
and regularly updates on a case-by-case basis, provisions for such
ties regulators financial statements prepared in accordance with
items when the expected loss is both probable and can be rea-
U.S. GAAP. As such, the Company has decided not to report
sonably estimated based on currently available information.
under IFRS by 2011 and to continue reporting under U.S. GAAP.
As at December 31, 2011, 2010 and 2009, the Company’s
The SEC has issued a roadmap for the potential convergence to
provision for personal injury and other claims in Canada was as
IFRS for U.S. issuers. Should the SEC decide it will move forward
follows:
with the convergence to IFRS, the Company will convert its
reporting to IFRS at that time.
Critical accounting policies
The preparation of financial statements in conformity with gener-
ally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
revenues and expenses during the period, the reported amounts
of assets and liabilities, and the disclosure of contingent assets
and liabilities at the date of the financial statements. On an on-
going basis, management reviews its estimates based upon cur-
rently available information. Actual results could differ from these
estimates. The Company’s policies for personal injury and other
claims, environmental matters, depreciation, pensions and other
postretirement benefits, and income taxes, require management’s
more significant judgments and estimates in the preparation of
the Company’s consolidated financial statements and, as such,
are considered to be critical. The following information should
be read in conjunction with the Company’s Annual Consolidated
Financial Statements and Notes thereto.
Management discusses the development and selection of
the Company’s critical accounting estimates with the Audit
Committee of the Company’s Board of Directors, and the Audit
Committee has reviewed the Company’s related disclosures.
Personal injury and other claims
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 prop-
erty damage, arising out of harm to individuals or property alleg-
edly caused by, but not limited to, derailments or other accidents.
In millions
2011
2010
2009
Balance January 1
$ 200
$ 178
$ 189
Accruals and other
Payments
31
(32)
59
(37)
48
(59)
Balance December 31
$ 199
$ 200
$ 178
Current portion - Balance December 31
$ 39
$ 39
$ 34
Assumptions used in estimating the ultimate costs for
Canadian employee injury claims consider, among others, the
discount rate, the rate of inflation, wage increases and health
care costs. The Company periodically reviews its assumptions to
reflect currently available information. Over the past three years,
the Company has not significantly changed any of these assump-
tions. Changes in any of these assumptions could materially
affect Casualty and other expense as reported in the Company’s
results of operations.
For all other legal claims in Canada, estimates are based on
the specifics of the case, trends and judgment.
United States
Personal injury claims by the Company’s employees, including
claims alleging occupational disease and work-related injuries, are
subject to the provisions of the Federal Employers’ Liability Act
(FELA). Employees are compensated under FELA for damages as-
sessed based on a finding of fault through the U.S. jury system
or through individual settlements. As such, the provision is undis-
counted. With limited exceptions where claims are evaluated on
a case-by-case basis, the Company follows an actuarial-based ap-
proach and accrues the expected cost for personal injury, including
asserted and unasserted occupational disease claims, and property
damage claims, based on actuarial estimates of their ultimate cost.
A comprehensive actuarial study is performed annually.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 33
Management’s Discussion and Analysis
For employee work-related injuries, including asserted occu-
Environmental matters
pational disease claims, and third-party claims, including grade
Known existing environmental concerns
crossing, trespasser and property damage claims, the actuarial
The Company has identified approximately 310 sites at which
valuation considers, among other factors, CN’s historical patterns
it is or may be liable for remediation costs, in some cases along
of claims filings and payments. For unasserted occupational dis-
with other potentially responsible parties, associated with alleged
ease claims, the actuarial study includes the projection of CN’s
contamination and is subject to environmental clean-up and en-
experience into the future considering the potentially exposed
forcement actions, including those imposed by the United States
population. The Company adjusts its liability based upon man-
Federal Comprehensive Environmental Response, Compensation
agement’s assessment and the results of the study. On an ongo-
and Liability Act of 1980 (CERCLA), also known as the Superfund
ing basis, management reviews and compares the assumptions
law, or analogous state laws. CERCLA and similar state laws, in
inherent in the latest actuarial study with the current claim experi-
addition to other similar Canadian and U.S. laws, generally im-
ence and, if required, adjustments to the liability are recorded.
pose joint and several liability for clean-up and enforcement costs
Due to the inherent uncertainty involved in projecting future
on current and former owners and operators of a site, as well
events, including events related to occupational diseases, which
as those whose waste is disposed of at the site, without regard
include but are not limited to, the timing and number of actual
to fault or the legality of the original conduct. The Company has
claims, the average cost per claim and the legislative and judi-
been notified that it is a potentially responsible party for study
cial environment, the Company’s future payments may differ from
and clean-up costs at approximately 10 sites governed by the
current amounts recorded.
Superfund law (and analogous state laws) for which investigation
External actuarial studies reflecting favorable claims devel-
and remediation payments are or will be made or are yet to be
opment over recent years have supported net reductions to the
determined and, in many instances, is one of several potentially
Company’s provision for U.S. personal injury and other claims of
responsible parties.
$6 million, $19 million and $60 million in 2011, 2010 and 2009,
The ultimate cost of addressing these known contaminated
respectively. The reductions were mainly attributable to decreases
sites cannot be definitely established given that the estimated en-
in the Company’s estimates of unasserted claims and costs re-
vironmental liability for any given site may vary depending on the
lated to asserted claims as a result of its ongoing risk mitigation
nature and extent of the contamination; the nature of anticipated
strategy focused on reducing the frequency and severity of claims
response actions, taking into account the available clean-up tech-
through injury prevention and containment; mitigation of claims;
niques; evolving regulatory standards governing environmental
and lower settlements for existing claims.
liability; and the number of potentially responsible parties and
As at December 31, 2011, 2010 and 2009, the Company’s
their financial viability. As a result, liabilities are recorded based
provision for personal injury and other claims in the U.S. was as
on the results of a four-phase assessment conducted on a site-
follows:
In millions
2011
2010
2009
Balance January 1
$ 146
$ 166
$ 265
Accruals and other
Payments
30
(65)
7
(27)
(46)
(53)
Balance December 31
$ 111
$ 146
$ 166
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 technol-
ogy 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 ex-
ternal consultants based on the extent of contamination and ex-
Current portion - Balance December 31
$ 45
$ 44
$ 72
pected costs for remedial efforts. In the case of multiple parties,
For the U.S. personal injury and other claims liability, histori-
cal claim data is used to formulate assumptions relating to the
expected number of claims and average cost per claim (severity)
for each year. Changes in any one of these assumptions could
materially affect Casualty and other expense as reported in the
Company’s results of operations. For example, a 5% change in
the asbestos average claim cost or a 1% change in the inflation
trend rate would result in an increase or decrease of approxi-
mately $2 million in the liability recorded for unasserted asbestos
claims.
the Company accrues its allocable share of liability taking into ac-
count the Company’s alleged responsibility, the number of poten-
tially 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 un-
discounted and includes costs for remediation and restoration of
sites, as well as monitoring costs. Environmental accruals, which
are classified as Casualty and other in the Consolidated Statement
of Income, include amounts for newly identified sites or contami-
nants as well as adjustments to initial estimates. Recoveries of en-
vironmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable.
34
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
As at December 31, 2011, 2010 and 2009, the Company’s
incurred in the future, or will not have a material adverse effect
provision for specific environmental sites was as follows:
on the Company’s financial position or results of operations in
In millions
2011
2010
2009
Balance January 1
$ 150
$ 103
$ 125
Accruals and other
Payments
17
(15)
67
(20)
(7)
(15)
Balance December 31
$ 152
$ 150
$ 103
Current portion - Balance December 31
$ 63
$ 34
$ 38
The Company anticipates that the majority of the liability at
December 31, 2011 will be paid out over the next five years.
However, some costs may be paid out over a longer period. The
Company expects to partly recover certain accrued remediation
costs associated with alleged contamination and has recorded
a receivable in Intangible and other assets for such recover-
able amounts. Based on the information currently available, the
Company considers its provisions to be adequate.
As of December 31, 2011, most of the Company’s properties
have reached the final assessment stage; therefore costs related
to such sites have been anticipated. The final assessment stage
can span multiple years.
Unknown existing environmental concerns
While the Company believes that it has identified the costs likely
to be incurred for environmental matters in the next several years
based on known information, the discovery of new facts, future
changes in laws, the possibility of releases of hazardous materi-
als into the environment and the Company’s ongoing efforts to
identify potential environmental liabilities that may be associated
with its properties may result in the identification of additional
environmental liabilities and related costs. The magnitude of such
additional liabilities and the costs of complying with future en-
vironmental laws and containing or remediating contamination
cannot be reasonably estimated due to many factors, including:
(i) the lack of specific technical information available with respect
to many sites;
(ii) the absence of any government authority, third-party orders,
or claims with respect to particular sites;
(iii) the potential for new or changed laws and regulations and for
development of new remediation technologies and uncertainty
regarding the timing of the work with respect to particular
sites; and
(iv) the determination of the Company’s liability in proportion to
other potentially responsible parties and the ability to recover
costs from any third parties with respect to particular sites.
Therefore, the likelihood of any such costs being incurred or
whether such costs would be material to the Company cannot
be determined at this time. There can thus be no assurance that
liabilities or costs related to environmental matters will not be
a particular quarter or fiscal year, or that the Company’s liquid-
ity will not be adversely impacted by such liabilities or costs, al-
though management believes, based on current information, that
the costs to address environmental matters will not have a mate-
rial adverse effect on the Company’s financial position or liquidity.
Costs related to any unknown existing or future contamination
will be accrued in the period in which they become probable and
reasonably estimable.
Future occurrences
In railroad and related transportation operations, it is possible
that derailments or other accidents, including spills and releases
of hazardous materials, may occur that could cause harm to hu-
man health or to the environment. As a result, the Company may
incur costs in the future, which may be material, to address any
such harm, compliance with laws and other risks, including costs
relating to the performance of clean-ups, payment of environ-
mental penalties and remediation obligations, and damages relat-
ing to harm to individuals or property.
Regulatory compliance
The Company may incur significant capital and operating costs
associated with environmental regulatory compliance and clean-
up requirements, in its railroad operations and relating to its past
and present ownership, operation or control of real property.
Environmental expenditures that relate to current operations are
expensed unless they relate to an improvement to the property.
Expenditures that relate to an existing condition caused by past
operations and which are not expected to contribute to current
or future operations are expensed. Operating expenses for envi-
ronmental matters amounted to $4 million in 2011, $23 million
in 2010 and $11 million in 2009. For 2012, the Company expects
to incur approximately $15 million of operating expenses relat-
ing to environmental matters. In addition, based on the results
of its operations and maintenance programs, as well as ongo-
ing environmental audits and other factors, the Company plans
for specific capital improvements on an annual basis. Certain of
these improvements help ensure facilities, such as fuelling sta-
tions and waste water and storm water treatment systems, com-
ply with environmental standards and include new construction
and the updating of existing systems and/or processes. Other
capital expenditures relate to assessing and remediating certain
impaired properties. The Company’s environmental capital expen-
ditures amounted to $11 million in 2011, $14 million in 2010 and
$9 million in 2009. For 2012, the Company expects to incur capi-
tal expenditures relating to environmental matters in the same
range as 2011.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 35
Management’s Discussion and Analysis
Depreciation
In 2011, the Company recorded total depreciation expense of
Properties are carried at cost less accumulated depreciation in-
$883 million ($833 million in 2010 and $789 million in 2009). At
cluding asset impairment write-downs. The cost of properties,
December 31, 2011, the Company had Properties of $23,917 mil-
including those under capital leases, net of asset impairment
lion, net of accumulated depreciation of $9,904 million ($22,917 mil-
write-downs, is depreciated on a straight-line basis over their es-
lion in 2010, net of accumulated depreciation of $9,553 million).
timated service lives, measured in years, except for rail which is
Additional disclosures are provided in Note 5 - Properties, to the
measured in millions of gross tons per mile. The Company fol-
Company’s Annual Consolidated Financial Statements.
lows the group method of depreciation whereby a single com-
U.S. generally accepted accounting principles require the use
posite depreciation rate is applied to the gross investment in a
of historical cost as the basis of reporting in financial statements.
class of similar assets, despite small differences in the service life
As a result, the cumulative effect of inflation, which has sig-
or salvage value of individual property units within the same as-
nificantly increased asset replacement costs for capital-intensive
set class. The Company uses approximately 40 different depre-
companies such as CN, is not reflected in operating expenses.
ciable asset classes.
Depreciation charges on an inflation-adjusted basis, assuming
For all depreciable assets, the depreciation rate is based on
that all operating assets are replaced at current price levels, would
the estimated service lives of the assets. Assessing the reason-
be substantially greater than historically reported amounts.
ableness of the estimated service lives of properties requires
judgment and is based on currently available information, includ-
Pensions and other postretirement benefits
ing periodic depreciation studies conducted by the Company.
The Company’s plans have a measurement date of December 31.
The Company’s U.S. properties are subject to comprehensive
The following table shows the Company’s pension asset, pension
depreciation studies as required by the STB and are conducted
liability and other postretirement benefits liability at December 31,
by external experts. Depreciation studies for Canadian properties
2011, and December 31, 2010:
are not required by regulation and are therefore conducted in-
ternally. Studies are performed on specific asset groups on a pe-
riodic basis. Changes in the estimated service lives of the assets
and their related composite depreciation rates are implemented
prospectively.
The studies consider, among other factors, the analysis of
historical retirement data using recognized life analysis tech-
niques, and the forecasting of asset life characteristics. Changes
in circumstances, such as technological advances, changes to the
Company’s business strategy, changes in the Company’s capital
strategy or changes in regulations can result in the actual service
lives differing from the Company’s estimates.
A change in the remaining service life of a group of assets,
or their estimated net salvage value, will affect the depreciation
rate used to amortize the group of assets and thus affect depre-
ciation expense as reported in the Company’s results of opera-
tions. A change of one year in the composite service life of the
Company’s fixed asset base would impact annual depreciation
In millions
Pension asset
Pension liability
Other postretirement benefits liability
December 31,
2011
2010
$ -
$ 442
$ 829
$ 245
$ 284
$ 283
The descriptions in the following paragraphs pertaining to
pensions relate generally to the Company’s main pension plan,
the CN Pension Plan, unless otherwise specified.
Calculation of net periodic benefit cost (income)
The Company accounts for net periodic benefit cost for pensions
and other postretirement benefits as required by FASB ASC 715
“Compensation - Retirement Benefits.” Under the standard, as-
sumptions are made regarding the valuation of benefit obliga-
tions and performance of plan assets. In the calculation of net pe-
riodic benefit cost, the standard allows for a gradual recognition
of changes in benefit obligations and fund performance over the
expected average remaining service life of the employee group
expense by approximately $23 million.
covered by the plans.
Depreciation studies are a means of ensuring that the as-
sumptions used to estimate the service lives of particular asset
groups are still valid and where they are not, they serve as the
basis to establish the new depreciation rates to be used on a pro-
spective basis. In the first quarter of 2011, the Company com-
pleted the final phase of its depreciation studies that began in
2010 for Canadian properties and U.S. rolling stock and equip-
ment. As a result of this phase of the studies, in the first quar-
ter of 2011, the Company changed the estimated service lives
for various assets and their related composite depreciation rates.
Overall, the depreciation studies resulted in an annualized in-
crease to depreciation expense of approximately $30 million.
In accounting for pensions and other postretirement benefits,
assumptions are required for, among others, the discount rate,
the expected long-term rate of return on plan assets, the rate
of compensation increase, health care cost trend rates, mortal-
ity rates, employee early retirements, terminations and disability.
Changes in these assumptions result in actuarial gains or losses,
which are recognized in Other comprehensive income (loss). The
Company amortizes these gains or losses into net periodic ben-
efit cost over the expected average remaining service life of the
employee group covered by the plans only to the extent that the
unrecognized net actuarial gains and losses are in excess of the
corridor threshold, which is calculated as 10% of the greater of
36
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
the beginning-of-year balances of the projected benefit obliga-
2011, the Company recorded a net actuarial loss of $1,543 mil-
tion or market-related value of plan assets. The Company’s net
lion on its pension plans increasing the net actuarial loss recog-
periodic benefit cost for future periods is dependent on demo-
nized in Accumulated other comprehensive loss to $2,720 mil-
graphic experience, economic conditions and investment perfor-
lion ($1,185 million in 2010). The increase in the net actuarial
mance. Recent demographic experience has revealed no material
loss was primarily due to the negative liability experience resulting
net gains or losses on termination, retirement, disability and mor-
from the decrease in the discount rate from 5.32% to 4.84%, as
tality. Experience with respect to economic conditions and invest-
well as the difference in the actual and expected return on plan
ment performance is further discussed herein.
assets for the year ended December 31, 2011.
For the years ended December 31, 2011, 2010 and 2009, the
For the year ended December 31, 2011, a 0.25% decrease in
consolidated net period benefit cost (income) for pensions and
the 4.84% discount rate used to determine the projected ben-
other postretirement benefits were as follows:
efit obligation would have resulted in a decrease of approximately
In millions
Year ended December 31,
2011
2010
2009
Net periodic benefit cost (income)
for pensions
$ (80)
$ (70)
$ (34)
Net periodic benefit cost for other
postretirement benefits
$385 million to the funded status for pensions and an increase
of approximately $25 million to the 2012 net periodic benefit
cost. A 0.25% increase in the discount rate would have resulted
in an increase of approximately $375 million to the funded status
$ 19
$ 18
$ 19
for pensions and a decrease of approximately $25 million to the
At December 31, 2011 and 2010, the projected pension ben-
efit obligation and accumulated other postretirement benefit obli-
gation (APBO) were as follows:
In millions
December 31,
2011
2010
2012 net periodic benefit cost.
Expected long-term rate of return assumption
To develop its expected long-term rate of return assumption used
in the calculation of net periodic benefit cost applicable to the
Projected pension benefit obligation
$ 15,548 $ 14,895
market-related value of assets, the Company considers multiple
Accumulated other postretirement
benefit obligation
$ 284
$ 283
Discount rate assumption
factors. The expected long-term rate of return is determined
based on expected future performance for each asset class and is
weighted based on the current asset portfolio mix. Consideration
is taken of the historical performance, the premium return gener-
The Company’s discount rate assumption, which is set annually
ated from an actively managed portfolio, as well as current and
at the end of each year, is used to determine the projected ben-
future anticipated asset allocations, economic developments,
efit obligation at the end of the year and the net periodic benefit
inflation rates and administrative expenses. Based on these fac-
cost for the following year. The discount rate is used to measure
tors, the rate is determined by the Company. For 2011, the
the single amount that, if invested at the measurement date in a
Company used a long-term rate of return assumption of 7.50%
portfolio of high-quality debt instruments with a rating of AA or
on the market-related value of plan assets to compute net pe-
better, would provide the necessary cash flows to pay for pension
riodic benefit cost. Effective January 1, 2012, the Company will
benefits as they become due. The discount rate is determined by
reduce the expected long-term rate of return on plan assets from
management with the aid of third-party actuaries. The Company’s
7.50% to 7.25% to reflect management’s current view of long-
methodology for determining the discount rate is based on a ze-
term investment returns. The effect of this change in manage-
ro-coupon bond yield curve, which is derived from semi-annual
ment’s assumption will be to increase 2012 net periodic benefit
bond yields provided by a third party. The portfolio of hypotheti-
cost by approximately $20 million. The Company has elected to
cal zero-coupon bonds is expected to generate cash flows that
use a market-related value of assets, whereby realized and unre-
match the estimated future benefit payments of the plans as the
alized gains/losses and appreciation/depreciation in the value of
bond rate for each maturity year is applied to the plans’ corre-
the investments are recognized over a period of five years, while
sponding expected benefit payments of that year. A discount rate
investment income is recognized immediately. If the Company
of 4.84%, based on bond yields prevailing at December 31, 2011
had elected to use the market value of assets, which for the CN
(5.32% at December 31, 2010) was considered appropriate by
Pension Plan at December 31, 2011 was approximately the same
the Company to match the approximately 10-year average dura-
as the market-related value of assets, there would be no signifi-
tion of estimated future benefit payments. The current estimate
cant impact to the net periodic benefit cost for 2012.
for the expected average remaining service life of the employee
The assets of the Company’s various plans are held in separate
group covered by the plans is approximately nine years.
trust funds which are diversified by asset type, country and in-
The Company amortizes net actuarial gains and losses over
vestment strategies. Each year, the CN Board of Directors reviews
the expected average remaining service life of the employee
and confirms or amends the Statement of Investment Policies and
group covered by the plans, only to the extent they are in ex-
Procedures (SIPP) which includes the plans’ long-term asset class
cess of the corridor threshold. For the year ended December 31,
mix and related benchmark indices (Policy). This Policy is based
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 37
Management’s Discussion and Analysis
on a long-term forward-looking view of the world economy, the
Plan asset allocation
dynamics of the plans’ benefit liabilities, the market return ex-
Based on the fair value of the assets held as at December 31,
pectations of each asset class and the current state of financial
2011, excluding the economic exposure of derivatives, the assets
markets. The Policy mix in 2011 was: 2% cash and short-term
of the Company’s various plans are comprised of 7.0% in cash
investments, 38% bonds, 47% equities, 4% real estate, 5% oil
and short-term investments, 26.3% in bonds, 1.2% in mortgag-
and gas and 4% infrastructure assets.
es, 42.3% in equities, 1.5% in real estate assets, 8.4% in oil and
Annually, the CN Investment Division, a division of the
gas, 4.8% in infrastructure, 8.2% in absolute return investments
Company created to invest and administer the assets of the plans,
and 0.3% in other assets. See Note 12 - Pensions and other
proposes a short-term asset mix target (Strategy) for the com-
postretirement benefits, to the Company’s Annual Consolidated
ing year, which is expected to differ from the Policy, because of
Financial Statements for information on the fair value measure-
current economic and market conditions and expectations. The
ments of such assets.
Investment Committee of the Board (Committee) regularly com-
A significant portion of the plans’ assets are invested in pub-
pares the actual asset mix to the Policy and Strategy asset mixes
licly traded equity securities whose return is primarily driven by
and evaluates the actual performance of the trust funds in rela-
stock market performance. Debt securities also account for a sig-
tion to the performance of the Policy, calculated using Policy asset
nificant portion of the plans’ investments and provide a partial
mix and the performance of the benchmark indices.
offset to the variation in the pension benefit obligation that is
The Committee’s approval is required for all major investments
driven by changes in the discount rate. The funded status of the
in illiquid securities. The SIPP allows for the use of derivative fi-
plan fluctuates with future market conditions and impacts fund-
nancial instruments to implement strategies or to hedge or adjust
ing requirements. The Company will continue to make contribu-
existing or anticipated exposures. The SIPP prohibits investments
tions to the pension plans that as a minimum meet pension legis-
in securities of the Company or its subsidiaries. During the last
lative requirements.
10 years ended December 31, 2011, the CN Pension Plan earned
an annual average rate of return of 6.62%.
Rate of compensation increase and health care cost trend rate
The actual, market-related value, and expected rates of return
The rate of compensation increase is determined by the Company
on plan assets for the last five years were as follows:
based upon its long-term plans for such increases. For 2011, a
Rates of return
2011
2010
2009
2008
2007
Actual
0.3%
8.7%
10.8%
(11.0%)
8.0%
Market-related value
3.0%
4.8%
6.5%
7.8%
12.7%
Expected
7.50%
7.75%
7.75%
8.00%
8.00%
The Company’s expected long-term rate of return on plan as-
sets reflects management’s view of long-term investment returns
and the effect of a 1% variation in such rate of return would re-
sult in a change to the net periodic benefit cost of approximately
rate of compensation increase of 3.25% and 3.50% was used to
determine the projected benefit obligation and the net periodic
benefit cost respectively.
For postretirement benefits other than pensions, the Company
reviews external data and its own historical trends for health care
costs to determine the health care cost trend rates. For measure-
ment purposes, the projected health care cost trend rate for pre-
scription drugs was assumed to be 10% in 2011, and it is as-
sumed that the rate will decrease gradually to 4.5% in 2028 and
$85 million. Management’s assumption of the expected long-
remain at that level thereafter.
term rate of return is subject to risks and uncertainties that could
cause the actual rate of return to differ materially from manage-
ment’s assumption. There can be no assurance that the plan as-
sets will be able to earn the expected long-term rate of return on
plan assets.
For the year ended December 31, 2011, a one-percentage-
point change in either the rate of compensation increase or the
health care cost trend rate would not cause a material change to
the Company’s net periodic benefit cost for both pensions and
other postretirement benefits.
Net periodic benefit cost for pensions for 2012
Funding of pension plans
In 2012, the Company expects a net periodic benefit cost in the
range of approximately $20 million to $35 million for all its de-
fined benefit pension plans. The unfavorable variance compared
to 2011 is mainly due to a decrease in the expected rate of return
from 7.50% to 7.25% as well as the amortization of actuarial
losses resulting from a decrease in the discount rate used from
5.32% to 4.84% and an actual return on plan assets less than
the expected return in 2011, partly offset by lower interest costs.
For accounting purposes, the funded status is calculated under gener-
ally accepted accounting principles for all pension plans. For funding
purposes, the funded status is also calculated under going-concern
and solvency scenarios as prescribed under pension legislation and
subject to guidance issued by the Canadian Institute of Actuaries
(CIA) for all of the Canadian defined benefit pension plans. The
Company’s funding requirements are determined upon completion of
actuarial valuations. Due to recent legislative changes, actuarial valua-
tions will be required on an annual basis as at December 31, 2011 for
all Canadian plans, or when deemed appropriate by the OSFI.
38
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
The latest actuarial valuation of the CN Pension Plan for funding
of the required contributions mainly to strengthen the financial po-
purposes was conducted as at December 31, 2008 and indicated a
sition of its main pension plan, the CN Pension Plan. The Company
funding excess on a going-concern and solvency basis. The Company’s
has been advised by the OSFI that this contribution can be treated
next actuarial valuation required as at December 31, 2011 will be per-
as a prepayment against its 2012 pension deficit funding require-
formed in 2012. While this actuarial valuation is expected to identify a
ments. As a result, the Company’s cash contributions for 2012
going concern surplus of approximately $1 billion, on a solvency basis
are expected to be in the range of approximately $275 million
a funding deficit of approximately $1.4 billion is expected due to the
to $575 million for all its pension plans and include a voluntary
level of interest rates applicable during that measurement period and
contribution of approximately $150 million to $450 million. The
the pension plan asset returns. The federal pension legislation requires
Company expects cash from operations and its other sources of fi-
funding deficits, as calculated under current pension regulations, to be
nancing to be sufficient to meet its 2012 funding obligations.
paid over a number of years. Actuarial valuations are also required an-
Adverse changes to the assumptions used to calculate the
nually for the Company’s U.S. pension plans.
Company’s funding status, particularly the discount rate, as well
In 2011, in anticipation of its future funding requirements, the
as changes to existing federal pension legislation could signifi-
Company made voluntary contributions of $350 million in excess
cantly impact the Company’s future contributions.
Information disclosed by major pension plan
The following table provides the Company’s plan assets by category, projected benefit obligation at end of year, as well as Company and
employee contributions by major defined benefit pension plan:
In millions
Plan assets by category
December 31, 2011
BC Rail Ltd
Pension Plan Pension Plan
CN
U.S. and
other plans
Total
Cash and short-term investments
$ 976
$ 36
$ 14
$ 1,026
Bonds
Mortgages
Equities
Real estate
Oil and gas
Infrastructure
Absolute return
Other
Total plan assets
Projected benefit obligation at end of year
Company contributions in 2011
Employee contributions in 2011
3,636
172
5,945
206
1,186
680
1,158
33
165
6
196
7
42
24
38
14
74
-
91
1
4
3
4
8
3,875
178
6,232
214
1,232
707
1,200
55
$ 13,992
$ 528
$ 199
$ 14,719
$ 14,514
$ 533
$ 501
$ 15,548
$ 422
$ 15
$ 21
$ 458
$ 54
$ -
$ -
$ 54
Additional disclosures are provided in Note 12 - Pensions and other postretirement benefits, to the Company’s Annual Consolidated
Financial Statements.
Income taxes
establish a valuation allowance for its deferred income tax assets,
The Company follows the asset and liability method of account-
and if it is deemed more likely than not that its deferred income
ing for income taxes. Under the asset and liability method, the
tax assets will not be realized, a valuation allowance is recorded.
change in the net deferred income tax asset or liability is in-
The ultimate realization of deferred income tax assets is depen-
cluded in the computation of net income or Other comprehen-
dent upon the generation of future taxable income during the
sive income (loss). Deferred income tax assets and liabilities are
periods in which those temporary differences become deductible.
measured using enacted income tax rates expected to apply to
Management considers the scheduled reversals of deferred in-
taxable income in the years in which temporary differences are
come tax liabilities including the available carryback and carryfor-
expected to be recovered or settled. As a result, a projection of
ward periods, projected future taxable income, and tax planning
taxable income is required for those years, as well as an assump-
strategies in making this assessment. As at December 31, 2011,
tion of the ultimate recovery/settlement period for temporary
in order to fully realize all of the deferred income tax assets, the
differences. The projection of future taxable income is based on
Company will need to generate future taxable income of approxi-
management’s best estimate and may vary from actual taxable
mately $1.6 billion and, based upon the level of historical taxable
income. On an annual basis, the Company assesses the need to
income and projections of future taxable income over the periods
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 39
Management’s Discussion and Analysis
in which the deferred income tax assets are deductible, manage-
future-enacted income tax rates which could change due to fiscal
ment believes it is more likely than not that the Company will re-
budget changes and/or changes in income tax laws. As a result,
alize the benefits of these deductible differences. Management
a change in the timing and/or the income tax rate at which the
has assessed the impacts of the current economic environment
components will reverse, could materially affect deferred income
and concluded there are no significant impacts to its assertions
tax expense as recorded in the Company’s results of operations.
for the realization of deferred income tax assets.
A one-percentage-point change in the Company’s reported effec-
In addition, Canadian, or domestic, tax rules and regulations,
tive income tax rate would have the effect of changing the in-
as well as those relating to foreign jurisdictions, are subject to
come tax expense by $34 million in 2011.
interpretation and require judgment by the Company that may
From time to time, the federal, provincial, and state govern-
be challenged by the taxation authorities upon audit of the filed
ments enact new corporate income tax rates resulting in either
income tax returns. Tax benefits are recognized if it is more likely
lower or higher tax liabilities. Such enactments occurred in each
than not that the tax position will be sustained on examination
of 2011 and 2009 and resulted in a net deferred income tax
by the taxation authorities. As at December 31, 2011, the total
expense of $40 million and a deferred income tax recovery of
amount of gross unrecognized tax benefits was $46 million, be-
$126 million, respectively, with corresponding adjustments to the
fore considering tax treaties and other arrangements between
Company’s net deferred income tax liability.
taxation authorities. The amount of net unrecognized tax benefits
For the year ended December 31, 2011, the Company re-
as at December 31, 2011 was $35 million. If recognized, all of the
corded total income tax expense of $899 million ($772 million
net unrecognized tax benefits as at December 31, 2011 would
in 2010 and $407 million in 2009), of which $531 million was
affect the effective tax rate. The Company believes that it is rea-
a deferred income tax expense and included a net deferred in-
sonably possible that approximately $16 million of the net unrec-
come tax expense of $40 million resulting from the enactment
ognized tax benefits as at December 31, 2011 related to various
of state corporate income tax rate changes and other legislated
federal, state, and provincial income tax matters, each of which
state tax revisions, and a current income tax recovery of $11 mil-
are individually insignificant, may be recognized over the next
lion relating to certain fuel costs attributed to various wholly-
twelve months as a result of settlements and a lapse of the ap-
owned subsidiaries’ fuel consumption in prior periods. In 2010,
plicable statute of limitations. In Canada, the Company’s federal
$418 million of the reported income tax expense was for deferred
income tax returns filed for the years 2007 to 2010 and the pro-
income taxes. In 2009, $138 million of the reported income tax
vincial income tax returns filed for the years 2006 to 2010 remain
expense was for deferred income taxes, and included a deferred
subject to examination by the taxation authorities. In the second
income tax recovery of $157 million. Of this amount, $126 mil-
quarter of 2011, the taxation authorities commenced examina-
lion resulted from the enactment of lower provincial corporate
tions of the Company’s federal income tax returns for 2007 and
income tax rates, $16 million resulted from the recapitalization
2008 which are expected to be completed during 2012. Current
of a foreign investment, and $15 million resulted from the reso-
on-going examinations on specific tax positions taken for federal
lution of various income tax matters and adjustments related to
and provincial income tax returns filed for the 2006 year are also
tax filings of prior years. The Company’s net deferred income tax
expected to be completed during 2012. In the U.S., both the fed-
liability at December 31, 2011 was $5,287 million ($5,099 mil-
eral and state income tax returns filed for the years 2007 to 2010
lion at December 31, 2010). Additional disclosures are provided in
remain subject to examination by the taxation authorities. In the
Note 14 - Income taxes, to the Company’s Annual Consolidated
fourth quarter of 2011, the taxation authorities commenced ex-
Financial Statements.
aminations of the Company’s Indiana state income tax returns for
2008 to 2010 and are expected to be completed during 2012.
Business risks
Current on-going examinations of the Company’s Wisconsin state
In the normal course of business, the Company is exposed to vari-
income tax returns for 2003 to 2006 are also expected to be
ous business risks and uncertainties that can have an effect on
completed during 2012. The Company does not anticipate any
the Company’s results of operations, financial position, or liquid-
significant impacts to its results of operations or financial position
ity. While some exposures may be reduced by the Company’s risk
as a result of the final resolutions of such matters.
management strategies, many risks are driven by external factors
The Company’s deferred income tax assets are mainly com-
beyond the Company’s control or are of a nature which cannot
posed of temporary differences related to the pension liabil-
be eliminated. The following is a discussion of key areas of busi-
ity, accruals for personal injury claims and other reserves, other
ness risks and uncertainties.
postretirement benefits liability, and net operating losses and tax
credit carryforwards. The majority of these accruals will be paid
Competition
out over the next five years. The Company’s deferred income tax
The Company faces significant competition, including from rail
liabilities are mainly composed of temporary differences related
carriers and other modes of transportation, and is also affected
to properties. The reversal of temporary differences is expected at
by its customers’ flexibility to select among various origins and
40
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
destinations, including ports, in getting their products to mar-
operations. As a result, the Company incurs significant operating
ket. Specifically, the Company faces competition from Canadian
and capital costs, on an ongoing basis, associated with environ-
Pacific Railway Company (CP), which operates the other major rail
mental regulatory compliance and clean-up requirements in its
system in Canada and services most of the same industrial areas,
railroad operations and relating to its past and present ownership,
commodity resources and population centers as the Company;
operation or control of real property.
major U.S. railroads and other Canadian and U.S. railroads;
While the Company believes that it has identified the costs
long-distance trucking companies, and transportation via the St.
likely to be incurred for environmental matters in the next several
Lawrence-Great Lakes Seaway and the Mississippi River. In addi-
years based on known information, the discovery of new facts,
tion, while railroads must build or acquire and maintain their rail
changes in laws, the possibility of releases of hazardous materi-
systems, motor carriers and barges are able to use public rights-
als into the environment and the Company’s ongoing efforts to
of-way that are built and maintained by public entities without
identify potential environmental liabilities that may be associated
paying fees covering the entire costs of their usage.
with its properties may result in the identification of additional
Competition is generally based on the quality and the reliabil-
environmental liabilities and related costs.
ity of the service provided, access to markets, as well as price.
In railroad and related transportation operations, it is possible
Factors affecting the competitive position of customers, including
that derailments or other accidents, including spills and releases
exchange rates and energy cost, could materially adversely af-
of hazardous materials, may occur that could cause harm to hu-
fect the demand for goods supplied by the sources served by the
man health or to the environment. In addition, the Company is
Company and, therefore, the Company’s volumes, revenues and
also exposed to potential catastrophic liability risk, faced by the
profit margins. Factors affecting the general market conditions
railroad industry generally, in connection with the transportation of
for our customers can result in an imbalance of transportation ca-
toxic-by-inhalation hazardous materials such as chlorine and anhy-
pacity relative to demand. An extended period of supply/demand
drous ammonia, commodities that the Company may be required
imbalance could negatively impact market rate levels for all trans-
to transport to the extent of its common carrier obligations. As a
portation services, and more specifically the Company’s ability
result, the Company may incur costs in the future, which may be
to maintain or increase rates. This, in turn, could materially and
material, to address any such harm, compliance with laws or other
adversely affect the Company’s business, results of operations or
risks, including costs relating to the performance of clean-ups, pay-
financial position.
ment of environmental penalties and remediation obligations, and
The level of consolidation of rail systems in the United States
damages relating to harm to individuals or property.
has resulted in larger rail systems that are able to offer seamless
The environmental liability for any given contaminated site var-
services in larger market areas and, accordingly, compete ef-
ies depending on the nature and extent of the contamination; the
fectively with the Company in numerous markets. This requires
available clean-up techniques; evolving regulatory standards gov-
the Company to consider arrangements or other initiatives that
erning environmental liability; and the number of potentially re-
would similarly enhance its own service.
sponsible parties and their financial viability. As such, the ultimate
There can be no assurance that the Company will be able to com-
cost of addressing known contaminated sites cannot be definitively
pete effectively against current and future competitors in the trans-
established. Also, additional contaminated sites yet unknown may
portation industry, and that further consolidation within the trans-
be discovered or future operations may result in accidental releases.
portation industry and legislation allowing for more leniency in size
While some exposures may be reduced by the Company’s risk
and weight for motor carriers will not adversely affect the Company’s
mitigation strategies (including periodic audits, employee training
competitive position. No assurance can be given that competitive
programs and emergency plans and procedures), many environ-
pressures will not lead to reduced revenues, profit margins or both.
mental risks are driven by external factors beyond the Company’s
Environmental matters
control or are of a nature which cannot be completely eliminat-
ed. Therefore, there can be no assurance, notwithstanding the
The Company’s operations are subject to numerous federal, pro-
Company’s mitigation strategies that liabilities or costs related to
vincial, state, municipal and local environmental laws and regula-
environmental matters will not be incurred in the future or that
tions in Canada and the United States concerning, among other
environmental matters will not have a material adverse effect on
things, emissions into the air; discharges into waters; the genera-
the Company’s results of operations, financial position or liquidity,
tion, handling, storage, transportation, treatment and disposal
and reputation in a particular quarter or fiscal year.
of waste, hazardous substances and other materials; decommis-
sioning of underground and aboveground storage tanks; and soil
Personal injury and other claims
and groundwater contamination. A risk of environmental liability
In the normal course of business, the Company becomes involved
is inherent in railroad and related transportation operations; real
in various legal actions seeking compensatory and occasionally
estate ownership, operation or control; and other commercial
punitive damages, including actions brought on behalf of various
activities of the Company with respect to both current and past
purported classes of claimants and claims relating to employee
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 41
Management’s Discussion and Analysis
and third-party personal injuries, occupational disease, and prop-
be able to renew and have its collective agreements ratified without
erty damage, arising out of harm to individuals or property alleg-
any strikes or lockouts or that the resolution of these collective bar-
edly caused by, but not limited to, derailments or other accidents.
gaining negotiations will not have a material adverse effect on the
The Company maintains provisions for such items, which it con-
Company’s results of operations or financial position.
siders to be adequate for all of its outstanding or pending claims
and benefits from insurance coverage for occurrences in excess of
U.S. workforce
certain amounts. The final outcome with respect to actions out-
As at December 31, 2011, CN employed a total of 6,917 em-
standing or pending at December 31, 2011, or with respect to
ployees in the United States, of which 5,732 were unionized
future claims, cannot be predicted with certainty, and therefore
employees.
there can be no assurance that their resolution will not have a
As of February 2012, the Company had in place agreements
material adverse effect on the Company’s results of operations,
with bargaining units representing the entire unionized work-
financial position or liquidity, in a particular quarter or fiscal year.
force at Grand Trunk Western Railroad Company (GTW); Duluth,
Labor negotiations
Canadian workforce
Winnipeg and Pacific Railway Company (DWP); Illinois Central
Railroad Company (ICRR); companies owned by CCP Holdings,
Inc. (CCP); Duluth, Missabe & Iron Range Railway Company
As at December 31, 2011, CN employed a total of 16,313 em-
(DMIR); Bessemer & Lake Erie Railroad Company (BLE); The
ployees in Canada, of which 12,301 were unionized employees.
Pittsburgh and Conneaut Dock Company (PCD); EJ&E; and all
From time to time, the Company negotiates to renew collective
but one of the unions at companies owned by Wisconsin Central
agreements with various unionized groups of employees. In such
Transportation Corporation (WC). Agreements in place have vari-
cases, the collective agreements remain in effect until the bargain-
ous moratorium provisions, ranging from 2004 to 2014, which
ing process has been exhausted as per the Canada Labour Code.
preserve the status quo in respect of given areas during the terms
On September 1, 2010, CN and the Canadian Auto Workers
of such moratoriums. Several of these agreements are currently
(CAW) had initiated the bargaining process for the renewal of four
under renegotiation. The WC rail traffic controllers are in the pro-
collective agreements applicable to clerical and intermodal employ-
cess of negotiating their first collective agreement.
ees, shopcraft mechanics and electricians, excavator operators and
In conjunction with a notice of exemption filed with the
owner operator truck drivers working for a CN subsidiary, which
Surface Transportation Board (STB) on April 8, 2011, effective
were to expire on December 31, 2010. On January 24, 2011, the
May 8, 2011, allowing for the intra-corporate merger of DWP,
parties reached agreements for all groups, thus concluding bar-
DMIR and WC, the Company served notice to unions represent-
gaining without a labor disruption. The agreements were ratified
ing train and engine service employees on those properties to
on February 14, 2011 and will expire on December 31, 2014.
consolidate the collective agreements and allow the transaction
On September 15, 2011 and October 11, 2011, CN and the
to be implemented. This process is governed by the New York
Teamsters Canada Rail Conference (TCRC) initiated the bargain-
Dock labor protective conditions which provide a mechanism
ing process for the renewal of the collective agreements covering
to ensure that the change is achieved without disruption in the
approximately 200 rail traffic controllers and 1,500 locomotive
event that new agreements cannot be reached voluntarily.
engineers respectively, which were set to expire on December 31,
Following notice of this transaction, on August 2, 2011, a ten-
2011. On December 12, 2011, the parties reached a tentative
tative agreement was reached with the United Transportation Union
three-year agreement with the locomotive engineers expiring on
(UTU) to merge the collective bargaining agreements of those three
December 31, 2014. The agreement was ratified by the locomotive
properties under the general terms of the WC agreement and to ex-
engineers on January 27, 2012 and the wage increases are retroac-
tend that agreement for a period of three years ending December 31,
tive to January 1, 2012. Bargaining for the renewal of the collective
2014. The agreement was ratified on October 14, 2011.
agreement governing the rail traffic controllers is still ongoing.
As a similar voluntary agreement to consolidate the locomo-
On September 21, 2011, CN and the Steelworkers (USW) initi-
tive engineer’s collective bargaining agreements (on those prop-
ated the bargaining process for the renewal of the collective agree-
erties) was not achieved, the matter was progressed to binding
ment covering approximately 2,900 track maintenance employees,
arbitration for resolution. On November 29, 2011, the Arbitrator
which expired on December 31, 2011. On December 15, 2011, the
assigned to the New York Dock proceedings rendered a decision
parties reached a tentative agreement. The result of the ratification
that allows CN to consolidate the locomotive engineer collective
process by the employees is expected before February 15, 2012.
bargaining agreements effective January 1, 2012. In accordance
with the terms of the agreements and conditions, the merger was
Disputes with bargaining units could potentially result in strikes, work
consummated on December 31, 2011.
stoppages, slowdowns and loss of business. Future labor agree-
ments or renegotiated agreements could increase labor and fringe
The general approach to labor negotiations by U.S. Class I
railroads is to bargain on a collective national basis. GTW, DWP,
benefits expenses. There can be no assurance that the Company will
ICRR, CCP, WC, DMIR, BLE, PCD and EJ&E have bargained on a
42
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
local basis rather than holding national, industry-wide negotia-
and announced that it intended to implement certain steps to im-
tions because they believe it results in agreements that better ad-
prove the entire rail supply chain, including potentially tabling leg-
dress both the employees’ concerns and preferences, and the rail-
islation to give shippers the right to a service agreement. As part
ways’ actual operating environment. However, local negotiations
of its response to the panel’s report, the Government appointed
may not generate federal intervention in a strike or lockout situa-
on October 31, 2011, a facilitator to lead a rail freight service dis-
tion, since a dispute may be localized. The Company believes the
cussion process. To date, the Government has introduced no new
potential mutual benefits of local bargaining outweigh the risks.
legislation.
Where negotiations are ongoing, the terms and conditions of
existing agreements generally continue to apply until new agree-
No assurance can be given that any current or future legislative
ments are reached or the processes of the Railway Labor Act have
action by the federal government or other future government ini-
been exhausted.
tiatives will not materially adversely affect the Company’s results
There can be no assurance that there will not be any work action
by any of the bargaining units with which the Company is cur-
Economic regulation - U.S.
of operations or financial position.
rently in negotiations or that the resolution of these negotiations
The STB serves as both an adjudicatory and regulatory body and
will not have a material adverse effect on the Company’s results
has jurisdiction over railroad rate and service issues and rail re-
of operations or financial position.
Regulation
structuring transactions such as mergers, line sales, line construc-
tion and line abandonments. As such, various Company business
transactions must gain prior regulatory approval, with attendant
The Company’s rail operations in Canada are subject to (i) eco-
risks and uncertainties.
nomic regulation by the Canadian Transportation Agency (the
On April 8, 2011, the Company filed with the STB a notice
Agency) under the Canada Transportation Act (the CTA), and (ii)
of exemption that would allow for the intra-corporate merger of
safety regulation by the federal Minister of Transport under the
WC, DMIR, and DWP. The transaction would simplify the corpo-
Railway Safety Act and certain other statutes. The Company’s U.S.
rate structure of CN’s U.S. operating subsidiaries and allow for
rail operations are subject to (i) economic regulation by the STB
operational efficiencies and service improvements. The notice be-
and (ii) safety regulation by the Federal Railroad Administration
came effective May 8, 2011, and the Company, after completing
(FRA).
labor implementing agreements, consummated the transaction on
December 31, 2011.
Economic regulation - Canada
The STB has undertaken proceedings in a number of areas re-
The CTA provides rate and service remedies, including final offer
cently on rail issues. In 2010, the STB commenced a proceeding
arbitration (FOA), competitive line rates and compulsory inter-
to review the liability of third parties for rail car demurrage, and
switching. In addition, various Company business transactions
on February 24, 2011, it held a hearing to review the commodi-
must gain prior regulatory approval, with attendant risks and
ties and forms of service currently exempt from STB regulation. On
uncertainties.
June 22 - 23, 2011, the STB held a hearing on the current state of
On August 12, 2008, Transport Canada announced the Terms
competition in the railroad industry. The STB will be considering the
of Reference for the Rail Freight Service Review to examine the
comments on these matters and may take further action.
services offered by CN and CP to Canadian shippers and cus-
As part of the Passenger Rail Investment and Improvement
tomers. The review was conducted in two phases. Phase 1 con-
Act of 2008 (PRIIA), the U.S. Congress has authorized the STB to
sisted of analytical work to achieve a better understanding of
investigate any railroad over whose track Amtrak operates that
the state of rail service. Phase 2 commenced on September 23,
fails to meet an 80 percent on-time performance standard for
2009 with the appointment of a panel to develop recommenda-
Amtrak operations extending over two calendar quarters and
tions in consultation with stakeholders. Approximately 110 public
to determine the cause of such failures. Compliance with this
submissions were made, including three from CN, in response to
mandate began with the third quarter of 2010 and is governed
the panel’s invitation to all interested parties to provide written
by performance metrics and standards jointly issued by the FRA
submissions. The panel issued an interim report on October 8,
and Amtrak on May 12, 2010. The Company is participating in a
2010, and filed its final report and recommendations with the
railroad industry lawsuit filed in August 2011 in the U.S. District
Minister of Transport and Infrastructure in December 2010. This
Court in Washington, D.C. challenging the constitutionality of
report, which was released to the public on March 18, 2011, rec-
these performance metrics and standards. Should the STB com-
ommends streamlined commercial dispute resolution, the estab-
mence an investigation and determine that a failure to meet
lishment of service level agreements with customers, and public
these standards is due to the host railroad’s failure to provide
reporting of various system metrics amongst other recommenda-
preference to Amtrak, the STB is authorized to assess damages
tions. The Government of Canada accepted the panel’s report
against the host railroad.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 43
Management’s Discussion and Analysis
The U.S. Congress has had under consideration for several
On April 28, 2010, the STB held a hearing to review CN’s re-
years various pieces of legislation that would increase federal
porting on blocked crossing occurrences along the EJ&E line. On
economic regulation of the railroad industry. During the 111th
December 21, 2010, the STB concurred with the audit’s findings
Congress (2009 - 2010), legislation to repeal the railroad indus-
as to CN’s general compliance with the reporting and mitigation
try’s limited antitrust exemptions was introduced in both Houses
conditions it had imposed. The STB indicated that it will continue
of Congress and was approved by the Senate and House Judiciary
monitoring blocked crossing occurrences, asked for additional in-
Committees. Broader legislation to modify the system of economic
formation from CN on certain crossing areas for future quarterly
regulation of the railroad industry was introduced and approved
environmental reports, and indicated it would commence anoth-
by the Senate Commerce Committee on December 17, 2009. If
er audit in 2011. The STB also extended the original monitoring
enacted, these bills would have made significant changes to the
and oversight condition for an additional year. In a separate deci-
economic regulatory system governing rail operations in the United
sion, the STB imposed a US$250,000 civil penalty on CN, which
States. The 111th Congress adjourned without taking final action
the Company paid in January 2011, based on its finding that
on this legislation. Broad legislation to modify economic regulation
the Company breached the Board’s oversight requirement that
of the rail industry (S. 158) and legislation to repeal the rail indus-
it report all blocked crossing occurrences of 10 minutes or more
try’s limited antitrust exemptions (S. 49) were introduced in 2011 in
on the EJ&E line, regardless of cause. On October 14, 2011, as
the Senate. S. 49 has also been approved by the Senate Judiciary
supplemented on November 14, 2011, the Village of Barrington,
Committee and there is no assurance that this or similar legislation
IL has requested that the STB impose additional mitigation that
will not progress through the legislative process.
would require CN to fund the full cost of a grade separation at
The acquisition of the EJ&E in 2009 followed an extensive regula-
a location along the EJ&E line in Barrington. The Company has
tory approval process by the STB, which included an Environmental
filed comments at the STB responding to Barrington’s request.
Impact Statement (EIS) that resulted in conditions imposed to miti-
In December 2011, the STB directed a second audit of the
gate municipalities’ concerns regarding increased rail activity expect-
Company’s operational and environmental mitigation reporting
ed along the EJ&E line (see Contractual obligations section of this
to commence in early 2012.
MD&A). The Company accepted the STB-imposed conditions with
The resolution of matters that could arise during the STB’s
one exception. The Company filed an appeal at the U.S. Court of
remaining oversight of the transaction cannot be predicted with
Appeals for the District of Columbia Circuit challenging the STB’s con-
certainty, and therefore, there can be no assurance that their res-
dition requiring the installation of grade separations at two locations
olution will not have a material adverse effect on the Company’s
along the EJ&E line at Company funding levels significantly beyond
financial position or results of operations.
prior STB practice. Appeals were also filed by certain communities
The Company’s ownership of the former Great Lakes
challenging the sufficiency of the EIS. On March 15, 2011, the Court
Transportation vessels is subject to regulation by the U.S. Coast Guard
denied the CN and community appeals. As such, the Company esti-
and the Department of Transportation, Maritime Administration,
mates its total remaining commitment related to the acquisition to be
which regulate the ownership and operation of vessels operat-
approximately $130 million. The commitment for the grade separa-
ing on the Great Lakes and in U.S. coastal waters. In addition, the
tion projects is based on estimated costs provided by the STB at the
Environmental Protection Agency (EPA) has authority to regulate air
time of acquisition and could be subject to adjustment.
emissions from these vessels. On August 28, 2009, the EPA issued
The STB also imposed a five-year monitoring and oversight
a proposed rule to extend an ongoing rulemaking to limit sulfur
condition, during which the Company is required to file with
emissions for ocean-going vessels to operations in the Great Lakes.
the STB monthly operational reports as well as quarterly reports
The EPA’s proposed rule would have had an adverse impact on the
on the implementation status of the STB-imposed mitigation
Company’s Great Lakes Fleet operations. The Company’s U.S.-flag
conditions. This permits the STB to take further action if there
vessel operator filed comments on September 28, 2009 in the pro-
is a material change in the facts and circumstances upon which
ceeding. On December 22, 2009, the EPA issued its final emissions
it relied in imposing the specific mitigation conditions. In early
regulations, which addressed many of Great Lakes Fleet’s concerns.
2010, the STB directed an audit of the Company’s EJ&E opera-
In addition, the U.S. Coast Guard on August 28, 2009 proposed to
tional and environmental mitigation reports and released the
amend its regulations on ballast water management; the Company’s
results of the audit to the public in April 2010. The audit gen-
U.S.-flag vessel operator is participating in this rulemaking proceed-
erally confirmed CN’s compliance with the STB’s reporting con-
ing. On November 8, 2011, the Federal Maritime Commission (FMC),
ditions and its cooperation with local communities to mitigate
which has authority over oceanborne transport of cargo into and out
the adverse impacts of additional traffic expected as a result of
of the U.S., initiated a Notice of Inquiry to examine whether the U.S.
the EJ&E transaction. However, the audit recommended clarifica-
Harbor Maintenance tax and other factors may be contributing to the
tion of reporting requirements for blocked crossings on the EJ&E
diversion of U.S.-bound cargo to Canadian and Mexican seaports,
line. Based on the audit and subsequent direction by the STB, CN
which could affect CN rail operations. The Company filed comments
provided requested information to the STB on April 26, 2010.
in this proceeding on January 9, 2012.
44
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
No assurance can be given that these or any future regulatory
No assurance can be given that these or any future regulatory
initiatives by the U.S. federal government will not materially ad-
initiatives by the Canadian and U.S. federal governments will
versely affect the Company’s results of operations, or its competi-
not materially adversely affect the Company’s results of opera-
tive and financial position.
tions, or its competitive and financial position.
Safety regulation - Canada
Security
Rail safety regulation in Canada is the responsibility of Transport
The Company is subject to statutory and regulatory direc-
Canada, which administers the Canadian Railway Safety Act, as
tives in the U.S. addressing homeland security concerns. In
well as the rail portions of other safety-related statutes. The fol-
the U.S., safety matters related to security are overseen by the
lowing actions have been taken by the federal government:
Transportation Security Administration (TSA), which is part of the
(i) In 2008, a full review of the Railway Safety Act was conducted
U.S. Department of Homeland Security (DHS) and the Pipeline
by the Railway Safety Act Review Panel (Review Panel) and
and Hazardous Materials Safety Administration (PHMSA), which,
their report was tabled in the House of Commons. The Report
like the FRA, is part of the U.S. Department of Transportation.
includes more than 50 recommendations to improve rail safety
Border security falls under the jurisdiction of U.S. Customs and
in Canada but concludes that the current framework of the
Border protection (CBP), which is part of the DHS. In Canada, the
Railway Safety Act is sound.
Company is subject to regulation by the Canada Border Services
(ii) On June 4, 2010, the Minister of Transport tabled Bill C-33
Agency (CBSA). More specifically, the Company is subject to:
proposing a number of amendments to the Railway Safety Act
(i) Border security arrangements, pursuant to an agreement the
addressing the recommendations made by the Review Panel.
Company and CP entered into with the CBP and the CBSA.
The Committee completed its study of Bill C-33, but the Bill
(ii) The CBP’s Customs-Trade Partnership Against Terrorism
died on the Order Paper when Parliament was dissolved in
(C-TPAT) program and designation as a low-risk carrier under
March 2011. On October 6, 2011, the Government tabled
CBSA’s Customs Self-Assessment (CSA) program.
Bill S-4 which included essentially the same provisions as those
(iii) Regulations imposed by the CBP requiring advance notifica-
that were in Bill C-33.
tion by all modes of transportation for all shipments into the
U.S. The CBSA is also working on similar requirements for
Safety regulation - U.S.
Canada-bound traffic.
Rail safety regulation in the U.S. is the responsibility of the FRA,
(iv) Inspection for imported fruits and vegetables grown in
which administers the Federal Railroad Safety Act, as well as
Canada and the agricultural quarantine and inspection (AQI)
the rail portions of other safety statutes. In 2008, the U.S. fed-
user fee for all traffic entering the U.S. from Canada.
eral government enacted legislation reauthorizing the Federal
Railroad Safety Act. This legislation covers a broad range of
The Company has worked with the Association of American
safety issues, including fatigue management, PTC, grade cross-
Railroads to develop and put in place an extensive industry-wide
ings, bridge safety, and other matters. The legislation requires all
Class I railroads and intercity passenger and commuter railroads
to implement a PTC system by December 31, 2015 on main-
security plan to address terrorism and security-driven efforts by
state and local governments seeking to restrict the routings of
certain hazardous materials. If such state and local routing restric-
line track where intercity passenger railroads and commuter
tions were to go into force, they would be likely to add to security
railroads operate and where toxic-by-inhalation hazardous ma-
concerns by foreclosing the Company’s most optimal and secure
terials are transported. PTC is a collision avoidance technology
transportation routes, leading to increased yard handling, longer
intended to override locomotive controls and stop a train before
hauls, and the transfer of traffic to lines less suitable for moving
an accident. The Company is taking steps to ensure implemen-
hazardous materials, while also infringing upon the exclusive and
tation in accordance with the new law, including working with
other Class I railroads to satisfy the requirements for U.S. net-
work interoperability. The Company’s PTC Implementation Plan,
uniform federal oversight over railroad security matters.
Transportation of hazardous materials
submitted in April 2010, has been approved by the FRA. Total
The Company may be required to transport toxic-by-inhalation
implementation costs associated with PTC are estimated to be
(TIH) hazardous materials to the extent of its common carrier obli-
US$220 million. The legislation also caps the number of on-duty
gations and, as such, is exposed to additional regulatory oversight.
and limbo time hours for certain rail employees on a monthly
(i) The PHMSA requires carriers operating in the U.S. to report
basis. The Company is taking appropriate steps and working
annually the volume and route-specific data for cars contain-
with the FRA to ensure that its operations conform to the law’s
ing these commodities; conduct a safety and security risk anal-
requirements.
ysis for each used route; identify a commercially practicable
alternative route for each used route; and select for use the
practical route posing the least safety and security risk.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 45
Management’s Discussion and Analysis
(ii) The TSA requires rail carriers to provide upon request, within
Terrorism and international conflicts
five minutes for a single car and 30 minutes for multiple cars,
Potential terrorist actions can have a direct or indirect impact on
location and shipping information on cars on their networks
the transportation infrastructure, including railway infrastructure in
containing TIH materials and certain radioactive or explosive
North America, and interfere with the free flow of goods. Rail lines,
materials; and ensure the secure, attended transfer of all such
facilities and equipment could be directly targeted or become indi-
cars to and from shippers, receivers and other carriers that
rect casualties, which could interfere with the free flow of goods.
will move from, to, or through designated high-threat urban
International conflicts can also have an impact on the Company’s
areas.
markets. Government response to such events could adversely af-
(iii) The PHMSA has issued regulations to enhance the crashwor-
fect the Company’s operations. Insurance coverage and premiums
thiness protection of tank cars used to transport TIH and to
could also increase significantly or become unavailable.
limit the operating conditions of such cars.
(iv) In Canada, the Transportation of Dangerous Goods Act es-
Customer credit risk
tablishes the safety requirements for the transportation of
In the normal course of business, the Company monitors the fi-
goods classified as dangerous and enables the establishment
nancial condition and credit limits of its customers and reviews
of regulations for security training and screening of personnel
the credit history of each new customer. Although the Company
working with dangerous goods, as well as the development
believes there are no significant concentrations of credit risk, eco-
of a program to require a transportation security clearance for
nomic conditions can affect the Company’s customers and can
dangerous goods and that dangerous goods be tracked dur-
result in an increase to the Company’s credit risk and exposure
ing transport.
to business failures of its customers. To manage its credit risk on
an ongoing basis, the Company’s focus is on keeping the average
While the Company will continue to work closely with the CBSA,
daily sales outstanding within an acceptable range and working
CBP, and other Canadian and U.S. agencies, as described above,
with customers to ensure timely payments, and in certain cases,
no assurance can be given that these and future decisions by the
requiring financial security, including letters of credit. A wide-
U.S., Canadian, provincial, state, or local governments on home-
spread deterioration of customer credit and business failures of
land security matters, legislation on security matters enacted by
customers could have a material adverse effect on the Company’s
the U.S. Congress or Parliament, or joint decisions by the industry
results of operations, financial position or liquidity.
in response to threats to the North American rail network, will
not materially adversely affect the Company’s results of opera-
Liquidity
tions, or its competitive and financial position.
Disruptions in the financial markets or deterioration of the
Other risks
Economic conditions
Company’s credit ratings could hinder the Company’s access to
external sources of funding to meet its liquidity needs. There can
be no assurance that changes in the financial markets will not
The Company, like other railroads, is susceptible to changes in
have a negative effect on the Company’s liquidity and its access
the economic conditions of the industries and geographic areas
to capital at acceptable rates.
that produce and consume the freight it transports or the sup-
plies it requires to operate. In addition, many of the goods and
Supplier risk
commodities carried by the Company experience cyclicality in de-
The Company operates in a capital-intensive industry where the
mand. Many of the bulk commodities the Company transports
complexity of rail equipment limits the number of suppliers avail-
move offshore and are affected more by global rather than North
able. The supply market could be disrupted if changes in the
American economic conditions. Adverse North American and
economy caused any of the Company’s suppliers to cease produc-
global economic conditions, or economic or industrial restructur-
tion or to experience capacity or supply shortages. This could also
ing, that affect the producers and consumers of the commodities
result in cost increases to the Company and difficulty in obtain-
carried by the Company, including customer insolvency, may have
ing and maintaining the Company’s rail equipment and materi-
a material adverse effect on the volume of rail shipments and/
als. Since the Company also has foreign suppliers, international
or revenues from commodities carried by the Company, and thus
relations, trade restrictions and global economic and other condi-
materially and negatively affect its results of operations, financial
tions may potentially interfere with the Company’s ability to pro-
position, or liquidity.
Trade restrictions
cure necessary equipment. To manage its supplier risk, it is the
Company’s long-standing practice to ensure that more than one
source of supply for a key product or service, where feasible, is
Global as well as North American trade conditions, including
available. Widespread business failures of, or restrictions on sup-
trade barriers on certain commodities, may interfere with the free
pliers, could have a material adverse effect on the Company’s re-
circulation of goods across Canada and the U.S.
sults of operations or financial position.
46
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Pensions
to retire or leave through normal attrition (death, termination,
Overall return in the capital markets and the level of interest rates
resignation) within the next five-year period. The Company moni-
affect the funded status of the Company’s defined benefit pen-
tors employment levels to ensure that there is an adequate sup-
sion plans.
ply of personnel to meet rail service requirements. However, the
For accounting purposes, the funded status of all pen-
Company’s efforts to attract and retain qualified personnel may
sion plans is calculated at the measurement date, which for the
be hindered by specific conditions in the job market. No assur-
Company is December 31, using generally accepted accounting
ance can be given that demographic or other challenges will not
principles. Adverse changes with respect to pension plan returns
materially adversely affect the Company’s results of operations or
and the level of interest rates from the last measurement date
its financial position.
may have a material adverse effect on the funded status and may
significantly impact future pension income or expense.
Fuel costs
For funding purposes, the funded status of the Canadian pen-
The Company, like other railroads, is susceptible to the volatil-
sion plans is calculated to determine the required level of contri-
ity of fuel prices due to changes in the economy or supply dis-
bution using going-concern and solvency scenarios as prescribed
ruptions. Fuel shortages can occur due to refinery disruptions,
under pension legislation and subject to guidance issued by the
production quota restrictions, climate, and labor and political
Canadian Institute of Actuaries. Adverse changes with respect to
instability. Rising fuel prices could materially adversely affect the
pension plan returns and the level of interest rates from the date
Company’s expenses. As such, CN has implemented a fuel sur-
of the last actuarial valuations as well as changes to existing fed-
charge program with a view of offsetting the impact of rising
eral pension legislation may significantly impact future pension
fuel prices. The surcharge applied to customers is determined in
contributions and have a material adverse effect on the funded
the second calendar month prior to the month in which it is ap-
status of the plans and the Company’s results of operations. The
plied, and is calculated using the average monthly price of West-
Company’s funding requirements are determined upon comple-
Texas Intermediate crude oil (WTI) for revenue-based tariffs and
tion of actuarial valuations. Due to recent legislative changes,
On-Highway Diesel (OHD) for mileage-based tariffs. Increases in
such actuarial valuations will be required on an annual basis ef-
fuel prices or supply disruptions may materially adversely affect
fective for years ending on or after December 31, 2011 for all
the Company’s results of operations, financial position or liquidity.
Canadian plans, or when deemed appropriate by the OSFI. The
federal pension legislation allows funding deficits to be paid over
Foreign currency
a number of years. Actuarial valuations are also required annually
The Company conducts its business in both Canada and the U.S.
for the Company’s U.S. pension plans.
and as a result, is affected by currency fluctuations. The estimated
In 2011, in anticipation of its future funding requirements,
annual impact on net income of a year-over-year one-cent change
the Company made voluntary contributions of $350 million in
in the Canadian dollar relative to the US dollar is in the range of
excess of the required contributions mainly to strengthen the fi-
$5 million to $10 million. Changes in the exchange rate between
nancial position of its main pension plan, the CN Pension Plan.
the Canadian dollar and other currencies (including the US dollar)
The Company has been advised by the OSFI that this contribution
make the goods transported by the Company more or less com-
can be treated as a prepayment against its 2012 pension defi-
petitive in the world marketplace and thereby further affect the
cit funding requirements. As a result, the Company’s cash con-
Company’s revenues and expenses.
tributions for 2012 are expected to be in the range of approxi-
mately $275 million to $575 million for all its pension plans and
Reliance on technology
include a voluntary contribution of approximately $150 million to
The Company relies on information technology in all aspects of
$450 million.
its business. While the Company has business continuity and di-
The Company expects cash from operations and its oth-
saster recovery plans in place, a significant disruption or failure
er sources of financing to be sufficient to meet its funding
of its information technology systems could result in service inter-
obligation.
Availability of qualified personnel
ruptions, safety failures, security violations, regulatory compliance
failures or other operational difficulties and compromise corpo-
rate information and assets against intruders and, as such, could
The Company, like other companies in North America, may ex-
adversely affect the Company’s results of operations, financial
perience demographic challenges in the employment levels of its
position or liquidity. If the Company is unable to acquire or imple-
workforce. Changes in employee demographics, training require-
ment new technology, it may suffer a competitive disadvantage,
ments and the availability of qualified personnel, particularly lo-
which could also have an adverse effect on the Company’s results
comotive engineers and trainmen, could negatively impact the
of operations, financial position or liquidity.
Company’s ability to meet demand for rail service. The Company
expects that approximately 45% of its workforce will be eligible
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 47
Management’s Discussion and Analysis
Transportation network disruptions
Controls and procedures
Due to the integrated nature of the North American freight
The Company’s Chief Executive Officer and its Chief Financial
transportation infrastructure, the Company’s operations may be
Officer, after evaluating the effectiveness of the Company’s “dis-
negatively affected by service disruptions of other transportation
closure controls and procedures” (as defined in Exchange Act
links such as ports and other railroads which interchange with
Rules 13a-15(e) and 15d-15(e)) as of December 31, 2011, have
the Company. A significant prolonged service disruption of one
concluded that the Company’s disclosure controls and procedures
or more of these entities could have an adverse effect on the
were effective.
Company’s results of operations, financial position or liquid-
During the fourth quarter ended December 31, 2011, there
ity. Furthermore, deterioration in the cooperative relationships
was no change in the Company’s internal control over financial
with the Company’s connecting carriers could directly affect the
reporting that has materially affected, or is reasonably likely to
Company’s operations.
materially affect, the Company’s internal control over financial
reporting.
Weather and climate change
As of December 31, 2011, management has assessed the
The Company’s success is dependent on its ability to operate its
effectiveness of the Company’s internal control over finan-
railroad efficiently. Severe weather and natural disasters, such as
cial reporting using the criteria set forth by the Committee of
extreme cold or heat, flooding, drought, hurricanes and earth-
Sponsoring Organizations of the Treadway Commission (COSO)
quakes, can disrupt operations and service for the railroad, af-
in Internal Control - Integrated Framework. Based on this assess-
fect the performance of locomotives and rolling stock, as well
ment, management has determined that the Company’s internal
as disrupt operations for both the Company and its customers.
control over financial reporting was effective as of December 31,
Climate change, including the impact of global warming, has
2011, and issued Management’s Report on Internal Control over
the potential physical risk of increasing the frequency of adverse
Financial Reporting dated February 3, 2012 to that effect.
weather events, which can disrupt the Company’s operations,
damage its infrastructure or properties, or otherwise have a ma-
The Company’s 2011 Annual Information Form (AIF) and Form
terial adverse effect on the Company’s results of operations, fi-
40-F, may be found on SEDAR at www.sedar.com and on EDGAR
nancial position or liquidity. In addition, although the Company
at www.sec.gov, respectively. Copies of such documents, as
believes that the growing support for climate change legisla-
well as the Company’s Notice of Intention to Make a Normal
tion is likely to result in changes to the regulatory framework in
Course Issuer Bid, may be obtained by contacting the Corporate
Canada and the U.S., it is too early to predict the manner or de-
Secretary’s office.
gree of such impact on the Company at this time. Restrictions,
caps, taxes, or other controls on emissions of greenhouse gas-
Montreal, Canada
ses, including diesel exhaust, could significantly increase the
February 3, 2012
Company’s capital and operating costs or affect the markets
for, or the volume of, the goods the Company carries thereby
resulting in a material adverse effect on operations, financial po-
sition, results of operations or liquidity. More specifically, climate
change legislation and regulation could (a) affect CN’s utility coal
customers due to coal capacity being replaced with natural gas
generation and renewable energy; (b) make it difficult for CN’s
customers to produce products in a cost-competitive manner due
to increased energy costs; and (c) increase legal costs related to
defending and resolving legal claims and other litigation related
to climate change.
48
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Report on Internal Control
Report of Independent Registered Public Accounting Firm
over Financial Reporting
Management is responsible for establishing and maintaining ad-
To the Shareholders and Board of Directors of the Canadian
equate internal control over financial reporting. Internal control
National Railway Company
over financial reporting is a process designed to provide reason-
able assurance regarding the reliability of financial reporting and
We have audited the accompanying consolidated balance sheets
the preparation of financial statements for external purposes
of the Canadian National Railway Company (the “Company”)
in accordance with generally accepted accounting principles.
as of December 31, 2011 and 2010, and the related consoli-
Because of its inherent limitations, internal control over financial
dated statements of income, comprehensive income, changes in
reporting may not prevent or detect misstatements.
shareholders’ equity and cash flows for each of the years in the
Management has assessed the effectiveness of the Company’s
three-year period ended December 31, 2011. These consolidated
internal control over financial reporting as of December 31, 2011
financial statements are the responsibility of the Company’s man-
using the criteria set forth by the Committee of Sponsoring
agement. Our responsibility is to express an opinion on these con-
Organizations of the Treadway Commission (COSO) in Internal
solidated financial statements based on our audits.
Control - Integrated Framework. Based on this assessment, man-
We conducted our audits in accordance with Canadian gener-
agement has determined that the Company’s internal control
ally accepted auditing standards and the standards of the Public
over financial reporting was effective as of December 31, 2011.
Company Accounting Oversight Board (United States). Those stan-
KPMG LLP, an independent registered public accounting
dards require that we plan and perform the audit to obtain rea-
firm, has issued an unqualified audit report on the effectiveness
sonable assurance about whether the financial statements are free
of the Company’s internal control over financial reporting as of
of material misstatement. An audit includes examining, on a test
December 31, 2011 and has also expressed an unqualified au-
basis, evidence supporting the amounts and disclosures in the fi-
dit opinion on the Company’s 2011 consolidated financial state-
nancial statements. An audit also includes assessing the accounting
ments as stated in their Reports of Independent Registered Public
principles used and significant estimates made by management, as
Accounting Firm dated February 3, 2012.
well as evaluating the overall financial statement presentation. We
Claude Mongeau
President and Chief Executive Officer
February 3, 2012
Luc Jobin
Executive Vice-President and Chief Financial Officer
February 3, 2012
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial po-
sition of the Company as of December 31, 2011 and 2010,
and its consolidated results of operations and its consolidated
cash flows for each of the years in the three-year period ended
December 31, 2011, in conformity with United States generally
accepted accounting principles.
We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial report-
ing as of December 31, 2011, based on criteria established in
Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated February 3, 2012 expressed an
unqualified opinion on the effectiveness of the Company’s inter-
nal control over financial reporting.
KPMG LLP*
Chartered Accountants
Montreal, Canada
February 3, 2012
* CA Auditor permit no. 10892
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 49
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of the Canadian
financial reporting includes those policies and procedures that
National Railway Company
(1) pertain to the maintenance of records that, in reasonable de-
tail, accurately and fairly reflect the transactions and dispositions
We have audited the Canadian National Railway Company’s
of the assets of the company; (2) provide reasonable assurance
(the “Company”) internal control over financial reporting as of
that transactions are recorded as necessary to permit preparation
December 31, 2011, based on criteria established in Internal
of financial statements in accordance with generally accepted
Control - Integrated Framework issued by the Committee
accounting principles, and that receipts and expenditures of the
of Sponsoring Organizations of the Treadway Commission
company are being made only in accordance with authorizations
(“COSO”). The Company’s management is responsible for main-
of management and directors of the company; and (3) provide
taining effective internal control over financial reporting, and
reasonable assurance regarding prevention or timely detection of
for its assessment of the effectiveness of internal control over
unauthorized acquisition, use, or disposition of the company’s as-
financial reporting included in the accompanying Management’s
sets that could have a material effect on the financial statements.
Report on Internal Control over Financial Reporting. Our respon-
Because of its inherent limitations, internal control over finan-
sibility is to express an opinion on the Company’s internal control
cial reporting may not prevent or detect misstatements. Also, pro-
over financial reporting based on our audit.
jections of any evaluation of effectiveness to future periods are
We conducted our audit in accordance with the standards of
subject to the risk that controls may become inadequate because
the Public Company Accounting Oversight Board (United States).
of changes in conditions, or that the degree of compliance with
Those standards require that we plan and perform the audit to
the policies or procedures may deteriorate.
obtain reasonable assurance about whether effective internal
In our opinion, the Company maintained, in all material re-
control over financial reporting was maintained in all material re-
spects, effective internal control over financial reporting as of
spects. Our audit included obtaining an understanding of internal
December 31, 2011, based on criteria established in Internal
control over financial reporting, assessing the risk that a material
Control - Integrated Framework issued by the COSO.
weakness exists, and testing and evaluating the design and oper-
We also have audited, in accordance with Canadian gener-
ating effectiveness of internal control based on the assessed risk.
ally accepted auditing standards and the standards of the Public
Our audit also included performing such other procedures as we
Company Accounting Oversight Board (United States), the con-
considered necessary in the circumstances. We believe that our
solidated balance sheets of the Company as of December 31,
audit provides a reasonable basis for our opinion.
2011 and 2010, and the related consolidated statements of in-
A company’s internal control over financial reporting is a
come, comprehensive income, changes in shareholders’ equity
process designed to provide reasonable assurance regarding the
and cash flows for each of the years in the three-year period
reliability of financial reporting and the preparation of financial
ended December 31, 2011, and our report dated February 3,
statements for external purposes in accordance with generally ac-
2012 expressed an unqualified opinion on those consolidated
cepted accounting principles. A company’s internal control over
financial statements.
KPMG LLP*
Chartered Accountants
Montreal, Canada
February 3, 2012
* CA Auditor permit no. 10892
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
50
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Consolidated Statement of Income
In millions, except per share data
Year ended December 31,
2011
2010
2009
Revenues
Operating expenses
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Total operating expenses
Operating income
Interest expense
Other income (Note 13)
Income before income taxes
Income tax expense (Note 14)
Net income
Earnings per share (Note 16)
Basic
Diluted
Weighted-average number of shares
Basic
Diluted
$ 9,028
$ 8,297
$ 7,367
1,812
1,744
1,696
1,120
1,036
1,027
1,412
1,048
884
228
276
834
243
368
820
790
284
344
5,732
5,273
4,961
3,296
3,024
2,406
(341)
401
(360)
212
(412)
267
3,356
2,876
2,261
(899)
(772)
(407)
$ 2,457
$ 2,104
$ 1,854
$ 5.45
$ 4.51
$ 3.95
$ 5.41
$ 4.48
$ 3.92
451.1
466.3
469.2
454.4
470.1
473.5
See accompanying notes to consolidated financial statements.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 51
Consolidated Statement of Comprehensive Income
In millions
Net income
Other comprehensive income (loss) (Note 19)
Foreign exchange gain (loss) on:
Year ended December 31,
2011
2010
2009
$ 2,457
$ 2,104
$ 1,854
Translation of the net investment in foreign operations
130
(330)
(998)
Translation of US dollar-denominated long-term debt designated as
a hedge of the net investment in U.S. subsidiaries
(122)
315
976
Pension and other postretirement benefit plans (Note 12):
Net actuarial loss arising during the year
Prior service cost arising during the year
Amortization of net actuarial loss included in net periodic benefit cost (income)
Amortization of prior service cost included in net periodic benefit cost (income)
Derivative instruments (Note 18)
Other comprehensive loss before income taxes
Income tax recovery
Other comprehensive loss
Comprehensive income
(1,541)
(931)
(28)
8
4
(2)
(1,551)
421
(1,130)
(5)
1
2
(1)
(949)
188
(761)
(868)
(2)
2
5
-
(885)
92
(793)
$ 1,327
$ 1,343
$ 1,061
See accompanying notes to consolidated financial statements.
52
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Consolidated Balance Sheet
In millions
Assets
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents (Note 9)
Accounts receivable (Note 4)
Material and supplies
Deferred and receivable income taxes (Note 14)
Other
Total current assets
Properties (Note 5)
Intangible and other assets (Note 6)
Total assets
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and other (Note 7)
Current portion of long-term debt (Note 9)
Total current liabilities
Deferred income taxes (Note 14)
Pension and other postretirement benefits, net of current portion (Note 12)
Other liabilities and deferred credits (Note 8)
Long-term debt (Note 9)
Shareholders’ equity
Common shares (Note 10)
Accumulated other comprehensive loss (Note 19)
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
On behalf of the Board:
David G. A. McLean
Director
Claude Mongeau
Director
December 31,
2011
2010
$
101
$
490
499
820
201
122
105
-
775
210
53
62
1,848
1,590
23,917
22,917
261
699
$ 26,026
$ 25,206
$ 1,580
$ 1,366
135
1,715
5,333
1,095
762
6,441
540
1,906
5,152
510
823
5,531
4,141
4,252
(2,839)
(1,709)
9,378
8,741
10,680
11,284
$ 26,026
$ 25,206
See accompanying notes to consolidated financial statements.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 53
Consolidated Statement of Changes in Shareholders’ Equity
In millions
Issued and
outstanding
common shares
Accumulated
other
Common comprehensive
loss
shares
Retained
earnings
Total
shareholders’
equity
Balances at December 31, 2008
468.2
$ 4,179
$ (155)
$ 6,535
$ 10,559
Net income
Stock options exercised and other (Notes 10, 11)
Other comprehensive loss (Note 19)
Dividends ($1.01 per share)
-
2.8
-
-
-
87
-
-
-
-
(793)
-
1,854
1,854
-
-
(474)
87
(793)
(474)
Balances at December 31, 2009
471.0
4,266
(948)
7,915
11,233
Net income
Stock options exercised and other (Notes 10, 11)
Share repurchase program (Note 10)
Other comprehensive loss (Note 19)
Dividends ($1.08 per share)
-
3.4
(15.0)
-
-
-
124
(138)
-
-
-
-
-
(761)
-
2,104
2,104
-
(775)
-
(503)
124
(913)
(761)
(503)
Balances at December 31, 2010
459.4
4,252
(1,709)
8,741
11,284
Net income
Stock options exercised and other (Notes 10, 11)
Share repurchase programs (Note 10)
Other comprehensive loss (Note 19)
Dividends ($1.30 per share)
-
2.6
(19.9)
-
-
-
74
(185)
-
-
-
-
-
(1,130)
-
2,457
-
(1,235)
-
(585)
2,457
74
(1,420)
(1,130)
(585)
Balances at December 31, 2011
442.1
$ 4,141
$ (2,839)
$ 9,378
$ 10,680
See accompanying notes to consolidated financial statements.
54
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Consolidated Statement of Cash Flows
In millions
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes (Note 14)
Gain on disposal of property (Notes 5, 13)
Changes in operating assets and liabilities:
Accounts receivable
Material and supplies
Accounts payable and other
Other current assets
Other, net
Year ended December 31,
2011
2010
2009
$ 2,457
$ 2,104
$ 1,854
884
531
834
418
(348)
(152)
(51)
11
34
(2)
(3)
(43)
285
13
(540)
(457)
790
138
(226)
39
32
(204)
77
(221)
Net cash provided by operating activities
2,976
2,999
2,279
Investing activities
Property additions
Acquisition, net of cash acquired (Note 3)
Disposal of property (Note 5)
Change in restricted cash and cash equivalents
Other, net
Net cash used in investing activities
Financing activities
Issuance of debt
Repayment of debt
Issuance of common shares due to exercise of stock options and related excess
tax benefits realized (Note 11)
Repurchase of common shares (Note 10)
Dividends paid
Net cash used in financing activities
Effect of foreign exchange fluctuations on US dollar-denominated cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
Net cash receipts from customers and other
Net cash payments for:
(1,625)
(1,586)
(1,402)
-
369
(499)
26
-
168
-
35
(373)
231
-
107
(1,729)
(1,383)
(1,437)
1,361
-
1,626
(1,083)
(184)
(2,109)
77
(1,420)
(585)
115
(913)
(503)
(1,650)
(1,485)
14
(389)
490
7
138
352
73
-
(474)
(884)
(19)
(61)
413
$
101
$
490
$
352
$ 8,995
$ 8,404
$ 7,505
Employee services, suppliers and other expenses
(4,643)
(4,334)
(4,323)
Interest
Personal injury and other claims (Note 17)
Pensions (Note 12)
Income taxes (Note 14)
Net cash provided by operating activities
See accompanying notes to consolidated financial statements.
(329)
(97)
(468)
(482)
(366)
(64)
(427)
(214)
(407)
(112)
(139)
(245)
$ 2,976
$ 2,999
$ 2,279
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 55
Notes to Consolidated Financial Statements
Canadian National Railway Company, together with its wholly-owned subsidiaries, collectively “CN” or “the Company,” is engaged in the
rail and related transportation business. CN spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico,
serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans and Mobile, Alabama, and the key cities of Toronto,
Buffalo, Chicago, Detroit, Duluth, Minnesota/Superior, Wisconsin, Green Bay, Wisconsin, Minneapolis/St. Paul, Memphis, St. Louis, and
Jackson, Mississippi, with connections to all points in North America. CN’s freight revenues are derived from the movement of a diversified
and balanced portfolio of goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products,
intermodal and automotive.
1 Summary of significant accounting policies
Other comprehensive income (loss) (see Note 19 - Accumulated
other comprehensive loss).
These consolidated financial statements are expressed
in
The Company designates the US dollar-denominated long-
Canadian dollars, except where otherwise indicated, and have
term debt of the parent company as a foreign currency hedge
been prepared in accordance with United States generally accept-
of its net investment in U.S. subsidiaries. Accordingly, foreign ex-
ed accounting principles (U.S. GAAP). The preparation of finan-
change gains and losses, from the dates of designation, on the
cial statements in conformity with generally accepted accounting
translation of the US dollar-denominated long-term debt are also
principles requires management to make estimates and assump-
included in Other comprehensive income (loss).
tions that affect the reported amounts of revenues and expenses
during the period, the reported amounts of assets and liabilities,
D. Cash and cash equivalents
and the disclosure of contingent assets and liabilities at the date
Cash and cash equivalents include highly liquid investments pur-
of the financial statements. On an ongoing basis, management
chased three months or less from maturity and are stated at cost,
reviews its estimates, including those related to personal injury
which approximates market value.
and other claims, environmental matters, depreciation, pensions
and other postretirement benefits, and income taxes, based upon
E. Restricted cash and cash equivalents
currently available information. Actual results could differ from
The Company has the option, under its bilateral letter of credit
these estimates.
A. Principles of consolidation
facility agreements with various banks, to pledge collateral in the
form of cash and cash equivalents for a minimum term of three
months, equal to at least the face value of the letters of credit is-
These consolidated financial statements include the accounts of
sued. Restricted cash and cash equivalents are shown separately
all subsidiaries. The Company’s investments in which it has signifi-
on the balance sheet and include highly liquid investments pur-
cant influence are accounted for using the equity method and all
chased three months or less from maturity and are stated at cost,
other investments are accounted for using the cost method.
which approximates market value.
B. Revenues
F. Accounts receivable
Freight revenues are recognized using the percentage of com-
Accounts receivable are recorded at cost net of billing adjustments
pleted service method based on the transit time of freight as it
and an allowance for doubtful accounts. The allowance for doubtful
moves from origin to destination. The allocation of revenues be-
accounts is based on expected collectability and considers historical
tween reporting periods is based on the relative transit time in
experience as well as known trends or uncertainties related to ac-
each period with expenses being recorded as incurred. Revenues
count collectability. When a receivable is deemed uncollectible, it is
related to non-rail transportation services are recognized as ser-
written off against the allowance for doubtful accounts. Subsequent
vice is performed or as contractual obligations are met. Revenues
recoveries of amounts previously written off are credited to the bad
are presented net of taxes collected from customers and remitted
debt expense in the Consolidated Statement of Income.
to governmental authorities.
G. Material and supplies
C. Foreign currency
Material and supplies, which consist mainly of rail, ties, and other
All of the Company’s United States (U.S.) operations are self-
items for construction and maintenance of property and equip-
contained foreign entities with the US dollar as their functional
ment, as well as diesel fuel, are valued at weighted-average cost.
currency. Accordingly, the U.S. operations’ assets and liabilities
are translated into Canadian dollars at the rate in effect at the
H. Properties
balance sheet date and the revenues and expenses are translated
Railroad properties are carried at cost less accumulated depre-
at average exchange rates during the year. All adjustments result-
ciation including asset impairment write-downs. Labor, materials
ing from the translation of the foreign operations are recorded in
and other costs associated with the installation of rail, ties, ballast
56
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
and other structures are capitalized to the extent they meet the
J. Pensions
Company’s capitalization criteria. Major overhauls and large refur-
Pension costs are determined using actuarial methods. Net peri-
bishments of equipment are also capitalized when they result in
odic benefit cost is charged to income and includes:
an extension to the service life or increase the functionality of the
(i) the cost of pension benefits provided in exchange for employ-
asset. Repair and maintenance costs are expensed as incurred.
ees’ services rendered during the year;
The cost of properties, including those under capital leases,
(ii) the interest cost of pension obligations;
net of asset impairment write-downs, is depreciated on a straight-
(iii) the expected long-term return on pension fund assets;
line basis over their estimated service lives, measured in years, ex-
(iv) the amortization of prior service costs and amendments over
cept for rail which is measured in millions of gross tons per mile.
the expected average remaining service life of the employee
The Company follows the group method of depreciation whereby
group covered by the plans; and
a single composite depreciation rate is applied to the gross invest-
(v) the amortization of cumulative net actuarial gains and losses
ment in a class of similar assets, despite small differences in the
in excess of 10% of the greater of the beginning of year bal-
service life or salvage value of individual property units within the
ances of the projected benefit obligation or market-related
same asset class.
value of plan assets, over the expected average remaining ser-
In accordance with the group method of depreciation, upon
vice life of the employee group covered by the plans.
sale or retirement of properties in the normal course of business,
cost less net salvage value is charged to accumulated deprecia-
The pension plans are funded through contributions deter-
tion. As a result, no gain or loss is recognized in income under the
mined in accordance with the projected unit credit actuarial cost
group method as it is assumed that the assets within the group
method.
on average have the same life and characteristics and therefore
that gains or losses offset over time. For retirements of depre-
K. Postretirement benefits other than pensions
ciable properties that do not occur in the normal course of busi-
The Company accrues the cost of postretirement benefits other
ness, a gain or loss may be recognized if the retirement varies
than pensions using actuarial methods. These benefits, which
significantly from the retirement pattern identified through depre-
are funded as they become due, include life insurance programs,
ciation studies. A gain or loss is recognized in Other income for
medical benefits and, for a closed group of employees, free rail
the sale of land or disposal of assets that are not part of railroad
travel benefits.
operations.
The Company amortizes the cumulative net actuarial gains
Assets held for sale are measured at the lower of their carrying
and losses in excess of 10% of the projected benefit obligation at
amount or fair value, less cost to sell. Losses resulting from signifi-
the beginning of the year, over the expected average remaining
cant rail line sales are recognized in income when the asset meets
service life of the employee group covered by the plan.
the criteria for classification as held for sale, whereas losses result-
ing from significant rail line abandonments are recognized in the
L. Personal injury and other claims
statement of income when the asset ceases to be used. Gains are
In Canada, the Company accounts for costs related to employee
recognized in income when they are realized.
work-related injuries based on actuarially developed estimates of
The Company reviews the carrying amounts of properties held
the ultimate cost associated with such injuries, including compen-
and used whenever events or changes in circumstances indicate
sation, health care and third-party administration costs.
that such carrying amounts may not be recoverable based on fu-
In the U.S., the Company accrues the expected cost for per-
ture undiscounted cash flows. Assets that are deemed impaired
sonal injury, property damage and occupational disease claims,
as a result of such review are recorded at the lower of carrying
based on actuarial estimates of their ultimate cost.
amount or fair value.
I. Intangible assets
For all other legal actions in Canada and the U.S., the Company
maintains, and regularly updates on a case-by-case basis, pro-
Intangible assets consist mainly of customer contracts and rela-
visions for such items when the expected loss is both probable
tionships assumed through past acquisitions and are being amor-
and can be reasonably estimated based on currently available
tized on a straight-line basis over 40 to 50 years.
information.
The Company reviews the carrying amounts of intangible as-
sets held and used whenever events or changes in circumstanc-
M. Environmental expenditures
es indicate that such carrying amounts may not be recoverable
Environmental expenditures that relate to current operations,
based on future undiscounted cash flows. Assets that are deemed
or to an existing condition caused by past operations, are ex-
impaired as a result of such review are recorded at the lower of
pensed unless they can contribute to current or future operations.
carrying amount or fair value.
Environmental liabilities are recorded when environmental assess-
ments occur, remedial efforts are probable, and when the costs,
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 57
Notes to Consolidated Financial Statements
1
Summary of significant accounting policies
continued
Q. Recent accounting pronouncement
The Accounting Standards Board of the Canadian Institute of
Chartered Accountants requires all publicly accountable enterprises
based on a specific plan of action in terms of the technology to
to report under International Financial Reporting Standards (IFRS)
be used and the extent of the corrective action required, can be
for the fiscal years beginning on or after January 1, 2011. However,
reasonably estimated. The Company accrues its allocable share of
National Instrument 52-107 issued by the Ontario Securities
liability taking into account the Company’s alleged responsibility,
Commission allows Securities and Exchange Commission (SEC) is-
the number of potentially responsible parties and their ability to
suers, as defined by the U.S. Securities and Exchange Commission,
pay their respective shares of the liability. Recoveries of environ-
such as CN, to file with Canadian securities regulators financial
mental remediation costs from other parties are recorded as as-
statements prepared in accordance with U.S. GAAP. As such, the
sets when their receipt is deemed probable and collectability is
Company has decided not to report under IFRS by 2011 and to
reasonably assured.
N. Income taxes
continue reporting under U.S. GAAP. The SEC has issued a road-
map for the potential convergence to IFRS for U.S. issuers. Should
the SEC decide it will move forward with the convergence to IFRS,
The Company follows the asset and liability method of account-
the Company will convert its reporting to IFRS at that time.
ing for income taxes. Under the asset and liability method, the
change in the net deferred tax asset or liability is included in the
computation of net income or Other comprehensive income
2 Accounting changes
(loss). Deferred tax assets and liabilities are measured using en-
acted tax rates expected to apply to taxable income in the years
2011
in which temporary differences are expected to be recovered or
In June 2011, the Financial Accounting Standards Board (FASB) is-
settled.
O. Derivative financial instruments
sued Accounting Standards Update (ASU) 2011-05, Presentation
of Comprehensive Income, giving companies the option to
present the components of net income and comprehensive in-
The Company uses derivative financial instruments from time to
come in either one or two consecutive financial statements.
time in the management of its interest rate and foreign currency
ASU 2011-05 eliminates the option to present the components
exposures. Derivative instruments are recorded on the balance
of other comprehensive income in the statement of changes in
sheet at fair value and the changes in fair value are recorded in
shareholders’ equity. ASU 2011-05 also requires reclassification
net income or Other comprehensive income (loss) depending on
adjustments for each component of accumulated other com-
the nature and effectiveness of the hedge transaction. Income
prehensive income (AOCI) in both net income and other com-
and expense related to hedged derivative financial instruments
prehensive income (OCI) to be separately disclosed on the face
are recorded in the same category as that generated by the un-
of the financial statements. In December 2011, the FASB issued
derlying asset or liability.
P. Stock-based compensation
ASU 2011-12, Deferral of the Effective Date for Amendments to
the Presentation of Reclassifications of Items Out of Accumulated
Other Comprehensive Income, which deferred the effective date
The Company follows the fair value based approach for stock op-
to present reclassification adjustments in net income. The effec-
tion awards based on the grant-date fair value using the Black-
tive date of the deferral is consistent with the effective date of
Scholes option-pricing model. The Company expenses the fair
ASU 2011-05 which becomes effective for fiscal years beginning
value of its stock option awards on a straight-line basis, over the
on or after December 15, 2011. During the deferral period, the
period during which an employee is required to provide service
FASB plans to re-evaluate the requirement, with a final decision
(requisite service period) or until retirement eligibility is attained,
expected in 2012.
whichever is shorter. The Company also follows the fair value
based approach for cash settled awards using a lattice-based
The Company currently presents the components of net income
valuation model. Compensation cost for cash settled awards is
and other comprehensive income in two separate and consecu-
based on the fair value of the awards at period-end and is rec-
tive financial statements. As such, the Company does not expect
ognized over the period during which an employee is required to
any significant changes to its annual consolidated financial state-
provide service (requisite service period) or until retirement eligi-
ments from implementation of the new standards.
bility is attained, whichever is shorter. See Note 11 - Stock plans,
for the assumptions used to determine fair value and for other
2010
required disclosures.
Accounting standard updates effective in 2010 that were issued
by the FASB had no significant impact on the Company’s consoli-
dated financial statements.
58
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
2009
Business Combinations
The following table summarizes the consideration paid for
EJ&E and the fair value of the assets acquired and liabilities as-
On January 1, 2009, the Company adopted the new require-
sumed that were recognized at the acquisition date:
ments of the FASB Accounting Standards Codification (ASC) 805,
“Business Combinations,” relating to the accounting for busi-
ness combinations (previously Statement of Financial Accounting
Standards (SFAS) No. 141 (R)), which became effective for acqui-
sitions with an acquisition date on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. Until December 31, 2008, the Company was subject to
the requirements of SFAS No. 141, “Business Combinations,”
which required that acquisition-related costs be included as
part of the purchase cost of an acquired business. As such, the
Company had reported acquisition-related costs in Other current
assets pending the closing of its acquisition of the Elgin, Joliet
In US millions
Consideration
Cash
Fair value of total consideration transferred
Recognized amounts of identifiable assets
acquired and liabilities assumed
Current assets
Properties
Current liabilities
Other noncurrent liabilities
Total identifiable net assets
At January 31, 2009
$ 300
$ 300
$
4
310
(4)
(10)
$ 300
and Eastern Railway Company (EJ&E), which had been subject
The 2009 revenues and net income of EJ&E included in the
to an extensive U.S. Surface Transportation Board (STB) approval
Company’s Consolidated Statement of Income from the ac-
process. On January 31, 2009, the Company completed its ac-
quisition date to December 31, 2009, were $74 million and
quisition of the EJ&E and accounted for the acquisition under
$12 million, respectively.
the revised standard. The Company incurred acquisition-relat-
ed costs, including costs to obtain regulatory approval of ap-
proximately $49 million, which were expensed and reported in
4 Accounts receivable
Casualty and other in the Consolidated Statement of Income for
the year ended December 31, 2009 pursuant to FASB ASC 805
requirements. At the time of adoption, this change in account-
ing policy had the effect of decreasing net income by $28 mil-
lion ($0.06 per basic or diluted earnings per share) and Other
current assets by $46 million. This change had no effect on the
Consolidated Statement of Cash Flows. Disclosures prescribed by
FASB ASC 805 are presented in Note 3 - Acquisition.
3 Acquisition
2009
In millions
Freight
Non-freight
Gross accounts receivable
Allowance for doubtful accounts
Net accounts receivable
December 31,
2011
2010
$ 630
$ 585
206
211
836
796
(16)
(21)
$ 820
$ 775
The Company had a five-year agreement to sell an undivided
co-ownership interest in a revolving pool of freight receivables to
an unrelated trust for maximum cash proceeds of $600 million. The
agreement expired on May 31, 2011 and was not renewed. As at
December 31, 2010, the Company had no receivables sold under
On January 31, 2009, the Company acquired the principal rail lines
this program.
of the EJ&E, a short-line railway that operated over 198 miles of track
in and around Chicago, for a total cash consideration of US$300 mil-
lion (C$373 million), paid with cash on hand. The Company ac-
counted for the acquisition using the acquisition method of account-
ing pursuant to FASB ASC 805, “Business Combinations,” which the
Company adopted on January 1, 2009. As such, the consolidated
financial statements of the Company include the assets, liabilities
and results of operations of EJ&E as of January 31, 2009, the date of
acquisition. The costs incurred to acquire the EJ&E of approximately
$49 million were expensed and reported in Casualty and other in the
Consolidated Statement of Income for the year ended December 31,
2009 (see Note 2 - Accounting changes).
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 59
Notes to Consolidated Financial Statements
5 Properties
In millions
Track and roadway (1)
Rolling stock
Buildings
Information technology (2)
Other
2011
depreciation rate
Accumulated
Cost depreciation
Net
December 31, 2011
December 31, 2010
Accumulated
depreciation
Cost
Net
2%
4%
2%
12%
6%
$ 25,534
$ 6,903
$ 18,631
$ 24,568
$ 6,744
$ 17,824
4,923
1,220
931
1,213
1,668
3,255
473
383
477
747
548
736
4,843
1,148
854
1,057
1,565
3,278
467
330
447
681
524
610
Total properties including capital leases
$ 33,821
$ 9,904
$ 23,917
$ 32,470
$ 9,553
$ 22,917
Capital leases included in properties
Track and roadway (3)
$ 417
$ 48
$ 369
$ 427
$ 43
$ 384
Rolling stock
Buildings
Other
1,144
109
102
317
16
15
827
93
87
1,129
108
130
287
13
28
842
95
102
Total capital leases included in properties
$ 1,772
$ 396
$ 1,376
$ 1,794
$ 371
$ 1,423
(1) Includes the cost of land of $1,798 million and $1,712 million as at December 31, 2011 and 2010, respectively.
(2) The Company capitalized $94 million in 2011 and $79 million in 2010 of internally developed software costs pursuant to ASC 350-40, “Intangibles - Goodwill and Other, Internal - Use Software.”
(3) Includes $108 million of right-of-way access in both years.
Accounting policy for capitalization of costs
•
Rail and related track material: installation of 39 or more
The Company’s railroad operations are highly capital intensive.
continuous feet of rail;
The Company’s properties consist mainly of a large base of ho-
• Ties: installation of 5 or more ties per 39 feet;
mogeneous or network-type assets such as rail, ties, ballast and
• Ballast: installation of 171 cubic yards of ballast per mile.
other structures, which form the Company’s Track and roadway
properties, and rolling stock. The Company’s capital expenditures
Expenditures relating to the Company’s properties that do not
are for the replacement of assets and for the purchase or con-
meet the Company’s capitalization criteria are considered normal
struction of assets to enhance operations or provide new service
repairs and maintenance and are expensed. For Track and road-
offerings to customers. A large portion of the Company’s capi-
way properties, such expenditures include but are not limited to
tal expenditures are for self-constructed properties including the
spot tie replacement, spot or broken rail replacement, physical
replacement of existing track and roadway assets and track line
track inspection for detection of rail defects and minor track cor-
expansion, as well as major overhauls and large refurbishments
rections, and other general maintenance of track infrastructure.
of rolling stock.
For the ballast asset, the Company also engages in “shoulder
Expenditures are generally capitalized if they extend the life
ballast undercutting” that consists of removing some or all of the
of the asset or provide future benefits such as increased revenue-
ballast, which has deteriorated over its service life, and replacing
generating capacity, functionality, or physical or service capacity.
it with new ballast. When ballast is installed as part of a shoulder
The Company has a process in place to determine whether its
ballast undercutting project, it represents the addition of a new
capital programs qualify for capitalization. For Track and road-
asset and not the repair or maintenance of an existing asset. As
way properties, the Company establishes basic capital programs
such, the Company capitalizes expenditures related to shoulder
to replace or upgrade the track infrastructure assets which are
ballast undercutting given that an existing asset is retired and re-
capitalized if they meet the capitalization criteria. These basic
placed with a new asset. Under the group method of account-
capital programs are planned in advance and carried out by the
ing for properties, the deteriorated ballast is retired at its average
Company’s engineering work force.
cost measured using the quantities of new ballast added.
In addition, for Track and roadway properties, expendi-
For purchased assets, the Company capitalizes all costs neces-
tures that meet the minimum level of activity as defined by the
sary to make the asset ready for its intended use. Expenditures
Company are also capitalized as detailed below:
that are capitalized as part of self-constructed properties include
• Land: all purchases of land;
direct material, labor, and contracted services, as well as other
•
Grading: installation of road bed, retaining walls,
allocated costs which are not charged directly to capital projects.
drainage structures;
These allocated costs include, but are not limited to, fringe ben-
efits, small tools and supplies, machinery used on projects and
60
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
project supervision. The Company reviews and adjusts its alloca-
incrementally as rail grinding is performed thereon. As such, the
tions, as required, to reflect the actual costs incurred each year.
costs incurred for rail grinding are capitalized given that the ac-
Costs of deconstruction and removal of replaced assets, re-
tivity extends the service life of the rail asset beyond its original
ferred to herein as dismantling costs, are distinguished from
or current condition as additional gross tons can be carried over
installation costs for self-constructed properties based on the
the rail for its remaining service life. The Company amortizes
nature of the related activity. For Track and roadway properties,
the cost of rail grinding over the remaining life of the rail asset,
employees concurrently perform dismantling and installation of
which includes the incremental life extension generated by the
new track and roadway assets and, as such, the Company esti-
rail grinding.
mates the amount of labor and other costs that are related to
dismantling. The Company determines dismantling costs based
Disposal of property
on an analysis of the track and roadway installation process.
2011
IC RailMarine Terminal
Accounting policy for depreciation
In August 2011, the Company sold substantially all of the as-
Properties are carried at cost less accumulated depreciation in-
sets of IC RailMarine Terminal Company (ICRMT), an indirect
cluding asset impairment write-downs. The cost of properties,
subsidiary of the Company, to Raven Energy, LLC, an affiliate of
including those under capital leases, net of asset impairment
Foresight Energy, LLC (Foresight) and the Cline Group (Cline),
write-downs, is depreciated on a straight-line basis over their es-
for cash proceeds of $70 million (US$73 million) before transac-
timated service lives, measured in years, except for rail which is
tion costs. ICRMT is located on the east bank of the Mississippi
measured in millions of gross tons per mile. The Company fol-
River and stores and transfers bulk commodities and liquids be-
lows the group method of depreciation whereby a single com-
tween rail, ship and barge, serving customers in North American
posite depreciation rate is applied to the gross investment in a
and global markets. Under the sale agreement, the Company
class of similar assets, despite small differences in the service life
will benefit from a 10-year rail transportation agreement with
or salvage value of individual property units within the same as-
Savatran LLC, an affiliate of Foresight and Cline, to haul a
set class. The Company uses approximately 40 different depre-
minimum annual volume of coal from four Illinois mines to the
ciable asset classes.
ICRMT transfer facility. The transaction resulted in a gain on dis-
For all depreciable assets, the depreciation rate is based on
posal of $60 million ($38 million after-tax) that was recorded in
the estimated service lives of the assets. Assessing the reason-
Other income.
ableness of the estimated service lives of properties requires
judgment and is based on currently available information, includ-
Lakeshore East
ing periodic depreciation studies conducted by the Company.
In March 2011, the Company entered into an agreement with
The Company’s U.S. properties are subject to comprehensive
Metrolinx to sell a segment of the Kingston subdivision known
depreciation studies as required by the STB and are conducted
as the Lakeshore East in Pickering and Toronto, Ontario, together
by external experts. Depreciation studies for Canadian properties
with the rail fixtures and certain passenger agreements (collec-
are not required by regulation and are therefore conducted in-
tively the “Lakeshore East”), for cash proceeds of $299 million
ternally. Studies are performed on specific asset groups on a pe-
before transaction costs. Under the agreement, the Company
riodic basis. Changes in the estimated service lives of the assets
obtained the perpetual right to operate freight trains over the
and their related composite depreciation rates are implemented
Lakeshore East at its then current level of operating activity, with
prospectively.
the possibility of increasing its operating activity for additional
For the rail asset, the estimated service life is measured in mil-
consideration. The transaction resulted in a gain on disposal of
lions of gross tons per mile and varies based on rail characteris-
$288 million ($254 million after-tax) that was recorded in Other
tics such as weight, curvature and metallurgy. The annual com-
income under the full accrual method of accounting for real es-
posite depreciation rate for rail assets is determined by dividing
tate transactions.
the estimated annual number of gross tons carried over the rail
by the estimated service life of the rail measured in millions of
2010
gross tons per mile. For the rail asset, the Company capitalizes
Oakville subdivision
the costs of rail grinding which consists of restoring and improv-
In March 2010, the Company entered into an agreement with
ing the rail profile and removing irregularities from worn rail to
Metrolinx to sell a portion of the property known as the Oakville
extend the service life. The service life of the rail asset is based
subdivision in Toronto, Ontario, together with the rail fixtures
on expected future usage of the rail in its existing condition, de-
and certain passenger agreements (collectively the “Oakville sub-
termined using railroad industry research and testing, less the rail
division”), for proceeds of $168 million before transaction costs,
asset’s usage to date. The service life of the rail asset is increased
of which $24 million was placed in escrow at the time of disposal
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 61
Notes to Consolidated Financial Statements
5
Properties continued
6
Intangible and other assets
and was entirely released by December 31, 2010 in accordance
In millions
December 31,
2011
2010
with the terms of the agreement. Under the agreement, the
Deferred and long-term receivables
$ 98
$ 101
Company obtained the perpetual right to operate freight trains
over the Oakville subdivision at its then current level of operating
Intangible assets (A)
Investments (B)
activity, with the possibility of increasing its operating activity for
Pension asset (Note 12)
additional consideration. The transaction resulted in a gain on
Other
54
31
-
78
54
25
442
77
disposal of $152 million ($131 million after-tax) that was record-
Total intangible and other assets
$ 261
$ 699
ed in Other income under the full accrual method of accounting
for real estate transactions.
2009
Lower Newmarket subdivision
In November 2009, the Company entered into an agree-
ment with Metrolinx to sell the property known as the Lower
Newmarket subdivision in Vaughan and Toronto, Ontario, to-
gether with the rail fixtures and certain passenger agreements
(collectively the “Lower Newmarket subdivision”), for cash pro-
ceeds of $71 million before transaction costs. Under the agree-
ment, the Company obtained the perpetual right to operate
freight trains over the Lower Newmarket subdivision at its then
current level of operating activity, with the possibility of increas-
ing its operating activity for additional consideration. The trans-
action resulted in a gain on disposal of $69 million ($59 million
after-tax) that was recorded in Other income under the full ac-
crual method of accounting for real estate transactions.
Weston subdivision
In March 2009, the Company entered into an agreement with
GO Transit to sell the property known as the Weston subdivision
in Toronto, Ontario, together with the rail fixtures and certain
passenger agreements (collectively the “Weston subdivision”),
for cash proceeds of $160 million before transaction costs, of
which $50 million placed in escrow at the time of disposal was
entirely released by December 31, 2009 in accordance with the
terms of the agreement. Under the agreement, the Company
obtained the perpetual right to operate freight trains over the
A. Intangible assets
Intangible assets consist mainly of customer contracts and rela-
tionships assumed through past acquisitions.
B. Investments
As at December 31, 2011, the Company had $21 million ($21 mil-
lion as at December 31, 2010) of investments accounted for under
the equity method and $10 million ($4 million as at December 31,
2010) of investments accounted for under the cost method.
7 Accounts payable and other
In millions
Trade payables
Payroll-related accruals
Income and other taxes
Accrued interest
Accrued charges
December 31,
2011
2010
$ 445
$ 383
343
130
123
121
84
84
63
18
292
170
104
97
83
37
34
18
Personal injury and other claims provisions (Note 17)
Stock-based incentives liability (Note 11)
Environmental provisions (Note 17)
Other postretirement benefits liability (Note 12)
Other
Total accounts payable and other
169
148
$ 1,580
$ 1,366
Weston subdivision at its then current level of operating activity,
8 Other liabilities and deferred credits
with the possibility of increasing its operating activity for addi-
tional consideration. The transaction resulted in a gain on dis-
posal of $157 million ($135 million after-tax) that was recorded
in Other income under the full accrual method of accounting for
real estate transactions.
In millions
December 31,
2011
2010
Personal injury and other claims provisions,
net of current portion (Note 17)
Stock-based incentives liability,
net of current portion (Note 11)
Environmental provisions,
net of current portion (Note 17)
Deferred credits and other
Total other liabilities and deferred credits
$ 226
$ 263
180
162
89
116
267
282
$ 762
$ 823
62
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
9 Long-term debt
In millions
Debentures and notes: (A)
Canadian National series:
6.38% 10-year notes (B)
4.40% 10-year notes (B)
4.95% 6-year notes (B)
5.80% 10-year notes (B)
1.45% 5-year notes (B)
5.85% 10-year notes (B)
5.55% 10-year notes (B)
6.80% 20-year notes (B)
5.55% 10-year notes (B)
2.85% 10-year notes (B)
7.63% 30-year debentures
6.90% 30-year notes (B)
7.38% 30-year debentures (B)
6.25% 30-year notes (B)
6.20% 30-year notes (B)
6.71% Puttable Reset Securities PURSSM (B)
6.38% 30-year debentures (B)
Illinois Central series:
5.00% 99-year income debentures
7.70% 100-year debentures
Outstanding
US dollar-
denominated
amount
Maturity
December 31,
2011
2010
Oct. 15, 2011
$
-
$
-
$
398
Mar. 15, 2013
Jan. 15, 2014
June 1, 2016
Dec. 15, 2016
Nov. 15, 2017
May 15, 2018
July 15, 2018
Mar. 1, 2019
Dec. 15, 2021
May 15, 2023
July 15, 2028
Oct. 15, 2031
Aug. 1, 2034
June 1, 2036
July 15, 2036
Nov. 15, 2037
Dec. 1, 2056
Sep. 15, 2096
400
325
250
300
250
325
200
550
400
150
475
200
500
450
250
300
7
125
407
331
254
305
254
331
203
559
407
153
483
203
509
458
254
305
7
127
398
323
249
-
249
323
199
547
-
149
472
199
497
448
249
298
7
124
Total US dollar-denominated debentures and notes
$ 5,457
5,550
5,129
BC Rail series:
Non-interest bearing 90-year subordinated notes (C)
July 14, 2094
842
842
Total debentures and notes
Other:
Commercial paper (G) (H)
Capital lease obligations and other (D)
Total debt, gross
Less:
Net unamortized discount
Total debt (E) (1)
Less:
Current portion of long-term debt (E)
Total long-term debt
(1) See Note 18 - Financial Instruments, for the fair value of debt.
6,392
5,971
82
957
-
952
7,431
6,923
855
852
6,576
6,071
135
540
$ 6,441
$ 5,531
Footnotes to the table follow on the next page.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 63
Notes to Consolidated Financial Statements
9 Long-term debt continued
G. In May 2011, the Company entered into a $800 million
four-year revolving credit facility agreement with a consortium
A. The Company’s debentures, notes and revolving credit facility
of lenders. The agreement allows for an increase in amount,
are unsecured.
up to a maximum of $500 million, as well as the option to ex-
tend the term by an additional year at each anniversary date,
B. These debt securities are redeemable, in whole or in part, at
subject to the consent of individual lenders. The credit facility,
the option of the Company, at any time, at the greater of par
containing customary terms and conditions, is available for gen-
and a formula price based on interest rates prevailing at the time
eral corporate purposes, including back-stopping the Company’s
of redemption.
commercial paper program, and provides for borrowings at
various interest rates, including the Canadian prime rate, bank-
C. The Company records these notes as a discounted debt of
ers’ acceptance rates, the U.S. federal funds effective rate and
$8 million, using an imputed interest rate of 5.75%. The dis-
the London Interbank Offer Rate, plus applicable margins. The
count of $834 million is included in the net unamortized
credit facility agreement has one financial covenant, which limits
discount.
debt as a percentage of total capitalization, and with which the
Company is in compliance. This facility replaces the US$1 billion
D. During 2011, the Company recorded $87 million in assets it
credit facility that was scheduled to expire in October 2011. As
acquired through equipment leases ($132 million in 2010), for
at December 31, 2011 and December 31, 2010, the Company
which an equivalent amount was recorded in debt.
had no outstanding borrowings under its revolving credit facility.
Interest rates for capital lease obligations range from approxi-
mately 0.7% to 11.8% with maturity dates in the years 2012
H. The Company has a commercial paper program, which is
through 2037. The imputed interest on these leases amounted
backed by its revolving credit facility, enabling it to issue com-
to $299 million as at December 31, 2011 and $342 million as at
mercial paper up to a maximum aggregate principal amount of
December 31, 2010.
$800 million, or the US dollar equivalent. As at December 31,
The capital lease obligations are secured by properties with
2011, the Company had borrowings of $82 million (US$81 mil-
a net carrying amount of $993 million as at December 31, 2011
lion) of commercial paper (nil as at December 31, 2010) which
and $1,036 million as at December 31, 2010.
were presented in Current portion of long-term debt on the
Balance Sheet. The weighted-average interest rate on these bor-
E. Long-term debt maturities, including repurchase arrange-
rowings was 0.20%.
ments and capital lease repayments on debt outstanding as at
December 31, 2011, for the next five years and thereafter, are as
I.
In April 2011, the Company entered into a series of three-
follows:
In millions
2012 (1)
2013
2014
2015
2016
year bilateral letter of credit facility agreements with vari-
ous banks to support its requirements to post letters of credit
Debt
Total
in the ordinary course of business. As at December 31, 2011,
Capital
leases
$ 53
$
82
$ 135
from a total committed amount of $520 million by the various
108
209
81
269
404
328
-
557
512
537
81
826
banks, the Company had letters of credit drawn of $499 million
($436 million as at December 31, 2010, under its previous US$1
billion credit facility). 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 three months,
2017 and thereafter
235
4,250
4,485
(1) Current portion of long-term debt.
$ 955
$ 5,621
$ 6,576
equal to at least the face value of the letters of credit issued. As
at December 31, 2011, cash and cash equivalents of $499 mil-
lion were pledged as collateral and recorded as Restricted cash
F. The aggregate amount of debt payable in US currency as at
and cash equivalents.
December 31, 2011 was US$6,295 million (C$6,402 million), in-
cluding US$757 million relating to capital leases and other, and
US$5,914 million (C$5,882 million), including US$757 million re-
lating to capital leases and other, as at December 31, 2010.
64
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
10 Capital stock
11 Stock plans
A. Authorized capital stock
The Company has various stock-based incentive plans for eligible
The authorized capital stock of the Company is as follows:
employees. A description of the Company’s major plans is pro-
•
•
Unlimited number of Common Shares, without par value
vided below:
Unlimited number of Class A Preferred Shares, without par
value, issuable in series
A. Employee Share Investment Plan
•
Unlimited number of Class B Preferred Shares, without par
The Company has an Employee Share Investment Plan (ESIP) giv-
value, issuable in series
ing eligible employees the opportunity to subscribe for up to
10% of their gross salaries to purchase shares of the Company’s
B. Issued and outstanding common shares
common stock on the open market and to have the Company
The following table provides the activity of the issued and out-
invest, on the employees’ behalf, a further 35% of the amount
standing common shares of the Company for the last three years
invested by the employees, up to 6% of their gross salaries.
ended December 31, 2011:
In millions
Year ended December 31,
2011
2010
2009
Issued and outstanding common shares
at beginning of year
459.4
471.0
468.2
Number of shares repurchased through
buyback programs
Stock options exercised
(19.9)
(15.0)
2.6
3.4
-
2.8
Issued and outstanding common shares
at end of year
442.1
459.4
471.0
Share repurchase programs
In January 2011, the Board of Directors of the Company approved
a share repurchase program which allowed for the repurchase of
up to 16.5 million common shares to the end of December 2011
pursuant to a normal course issuer bid, at prevailing market prices
plus brokerage fees, or such other prices as may be permitted by
the Toronto Stock Exchange. This share repurchase program was
completed by September 30, 2011.
In October 2011, the Board of Directors of the Company
approved a new share repurchase program which allows for
the repurchase of up to 17.0 million common shares between
October 28, 2011 and October 27, 2012 pursuant to a normal
course issuer bid at prevailing market prices plus brokerage fees,
or such other prices as may be permitted by the Toronto Stock
Exchange.
The following table provides the activities under such share
repurchase programs, as well as the share repurchase programs
The following table provides the number of participants hold-
ing shares, the total number of ESIP shares purchased on behalf
of employees, including the Company’s contributions, as well as
the resulting expense recorded for the years ended December 31,
2011, 2010 and 2009:
Year ended December 31,
2011
2010
2009
Number of participants holding shares
16,218
14,997
14,152
Total number of ESIP shares purchased
on behalf of employees (millions)
1.3
1.3
1.6
Expense for Company contribution (millions) $ 21
$ 19
$ 18
B. Stock-based compensation plans
The following table provides the total stock-based compensa-
tion expense for awards under all plans, as well as the related tax
benefit recognized in income, for the years ended December 31,
2011, 2010 and 2009:
In millions
Year ended December 31,
2011
2010
2009
Cash settled awards
Restricted share unit plan
$ 81
$ 77
$ 43
Voluntary Incentive Deferral Plan
Stock option awards
21
102
10
18
95
9
33
76
14
Total stock-based compensation expense
$ 112
$ 104
$ 90
Tax benefit recognized in income
$ 24
$ 27
$ 26
(i) Cash settled awards
Restricted share units
2010
2009
The Company has granted restricted share units (RSUs), 0.5 mil-
of the prior years:
In millions,
except per share data
Year ended
December 31,
Number of common shares (1)
2011
19.9
Weighted-average price per share (2)
$ 71.33
$ 60.86
Amount of repurchase
$ 1,420
$ 913
15.0
-
-
-
$
$
(1) Includes common shares purchased in the first and fourth quarters of 2011 and in
the second and third quarters of 2010 pursuant to private agreements between the
Company and arm’s-length third-party sellers.
(2) Includes brokerage fees.
lion in 2011, 0.5 million in 2010 and 0.9 million in 2009, to des-
ignated management employees entitling them to receive payout
in cash based on the Company’s share price. The RSUs granted
are generally scheduled for payout after three years (“plan pe-
riod”) and vest conditionally upon the attainment of a target re-
lating to return on invested capital (ROIC) over the plan period.
Such performance vesting criteria results in a performance vesting
factor that ranges from 0% to 150% depending on the level of
ROIC attained.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 65
Notes to Consolidated Financial Statements
11 Stock plans continued
$18 million included in the above amount, to its former Chief
Executive Officer (CEO) pending resolution with the former CEO
Payout is conditional upon the attainment of a minimum
of issues relating to his compliance with the non-compete, non-
share price, calculated using the average of the last three months
solicitation and non-disclosure of confidential information con-
of the plan period. In addition, commencing at various dates,
ditions contained in the former CEO’s employment agreement
for senior and executive management employees (“executive
and in respect of which the Company has commenced legal
employees”), payout for RSUs is also conditional on compliance
proceedings.
with the conditions of their benefit plans, award or employment
As at December 31, 2011, 0.2 million RSUs remained autho-
agreements, including but not limited to non-compete, non-so-
rized for future issuance under this plan.
licitation and non-disclosure of confidential information condi-
tions. Current or former executive employees who breach such
Voluntary Incentive Deferral Plan
conditions of their benefit plans, award or employment agree-
The Company has a Voluntary Incentive Deferral Plan (VIDP), pro-
ments will forfeit the RSU payout. Should the Company reason-
viding eligible senior management employees the opportunity to
ably determine that a current or former executive employee may
elect to receive their annual incentive bonus payment and oth-
have violated the conditions of their benefit plans, award or em-
er eligible incentive payments in deferred share units (DSUs). A
ployment agreement, the Company may at its discretion change
DSU is equivalent to a common share of the Company and also
the manner of vesting of the RSUs to suspend payout on any
earns dividends when normal cash dividends are paid on com-
RSUs pending resolution of such matter.
mon shares. The number of DSUs received by each participant
The value of the payout is equal to the number of RSUs
is established using the average closing price for the 20 trading
awarded multiplied by the performance vesting factor and by the
days prior to and including the date of the incentive payment.
20-day average closing share price ending on January 31 of the
For each participant, the Company will grant a further 25% of
following year. On December 31, 2011, for the 2009 grant, the
the amount elected in DSUs, which will vest over a period of
level of ROIC attained resulted in a performance vesting factor of
four years. The election to receive eligible incentive payments in
approximately 120%. As the minimum share price condition was
DSUs is no longer available to a participant when the value of
met, payout under the plan of approximately $80 million, calcu-
the participant’s vested DSUs is sufficient to meet the Company’s
lated using the Company’s average share price during the 20-day
stock ownership guidelines. The value of each participant’s DSUs
period ending on January 31, 2012 and will be paid to employ-
is payable in cash at the time of cessation of employment. The
ees meeting the conditions of their benefit plans, award or em-
Company’s liability for DSUs is marked-to-market at each period-
ployment agreements in the first quarter of 2012. In addition,
end based on the Company’s closing stock price.
the Company has suspended the RSU payout of approximately
The following table provides the 2011 activity for all cash settled awards:
In millions
Outstanding at December 31, 2010
Granted (Payout)
Vested during year
Outstanding at December 31, 2011
RSUs
VIDP
Nonvested
Vested
Nonvested
Vested
1.3
0.5
(0.9)
0.9
0.7
(0.7)
0.9
0.9
-
-
-
-
1.5
(0.1)
-
1.4
66
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
The following table provides valuation and expense information for all cash settled awards:
In millions, unless otherwise indicated
RSUs (1)
VIDP (2)
Total
Year of grant
2011
2010
2009
2008
2007
2006
Stock-based compensation expense (recovery)
recognized over requisite service period
Year ended December 31, 2011
$ 19
$ 27
$ 35
$ -
N/A
Year ended December 31, 2010
Year ended December 31, 2009
N/A
N/A
$ 17
$ 34
$ 26
$ -
N/A
$ 13
$ 3
$ 29
$ (2)
$ 33
$ 76
Liability outstanding
December 31, 2011
December 31, 2010
Fair value per unit
December 31, 2011 ($)
$ 19
$ 44
$ 82
N/A
N/A
$ 17
$ 46
$ 37
N/A
N/A
N/A
N/A
$ 119
$ 264
$ 99
$ 199
$ 60.48
$ 77.59
$ 80.15
N/A
N/A
N/A
$ 80.15
N/A
N/A
N/A
$ 21
$ 102
$ 18
$ 95
Fair value of awards vested during the year
Year ended December 31, 2011
$ -
$ -
$ 82
N/A
Year ended December 31, 2010
Year ended December 31, 2009
N/A
N/A
Nonvested awards at December 31, 2011
$ -
$ -
$ 37
N/A
$ -
$ -
$ 38
N/A
N/A
N/A
N/A
N/A
$ 1
$ 83
$ 1
$ 38
$ 3
$ 41
Unrecognized compensation cost
$ 20
$ 14
$ -
Remaining recognition period (years)
2.0
1.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 1
$ 35
N/A (3)
N/A
Assumptions (4)
Stock price ($)
$ 80.15
$ 80.15
$ 80.15
Expected stock price volatility (5)
18%
18%
Expected term (years) (6)
Risk-free interest rate (7)
Dividend rate ($) (8)
2.0
1.0
0.95%
0.92%
$ 1.30
$ 1.30
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 80.15
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Compensation cost is based on the fair value of the awards at period-end using the lattice-based valuation model that uses the assumptions as presented herein.
(2) Compensation cost is based on intrinsic value.
(3) 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.
(4) Assumptions used to determine fair value are at December 31, 2011.
(5) Based on the historical volatility of the Company’s stock over a period commensurate with the expected term of the award.
(6) Represents the remaining period of time that awards are expected to be outstanding.
(7) Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(8) Based on the annualized dividend rate.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 67
Notes to Consolidated Financial Statements
11 Stock plans continued
(ii) Stock option awards
Options issued by the Company include conventional op-
tions, which vest over a period of time; and performance-ac-
celerated stock options. As at December 31, 2011, the perfor-
The Company has stock option plans for eligible employees to
mance-accelerated stock options were fully vested.
acquire common shares of the Company upon vesting at a price
For 2011, 2010 and 2009, the Company granted 0.6 million,
equal to the market value of the common shares at the date of
0.7 million and 1.2 million, respectively, of conventional stock
granting. The options are exercisable during a period not exceed-
options to designated senior management employees that vest
ing 10 years. The right to exercise options generally accrues over
over a period of four years of continuous employment.
a period of four years of continuous employment. Options are not
The total number of options outstanding at December 31,
generally exercisable during the first 12 months after the date of
2011, for conventional and performance-accelerated options
grant. At December 31, 2011, 11.0 million common shares re-
was 5.3 million and 1.6 million, respectively.
mained authorized for future issuances under these plans.
The following table provides the activity of stock option awards during 2011, and for options outstanding and exercisable at
December 31, 2011, the weighted-average exercise price.
Outstanding at December 31, 2010 (1)
Granted
Exercised
Vested
Outstanding at December 31, 2011 (1)
Exercisable at December 31, 2011 (1)
Options outstanding
Weighted-
average
exercise price
Number of
options
In millions
8.9
0.6
(2.6)
N/A
6.9
4.9
$ 34.23
$ 68.94
$ 26.94
N/A
$ 40.80
$ 35.58
Nonvested options
Weighted-
Number of average grant
options date fair value
In millions
2.3
0.6
N/A
(0.9)
2.0
N/A
$ 12.80
$ 15.66
N/A
$ 12.83
$ 13.71
N/A
(1) Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date.
The following table provides the number of stock options outstanding and exercisable as at December 31, 2011 by range of exercise
price and their related intrinsic value, and for options outstanding, the weighted-average years to expiration. The table also provides the
aggregate intrinsic value for in-the-money stock options, which represents the value that would have been received by option holders had
they exercised their options on December 31, 2011 at the Company’s closing stock price of $80.15.
Range of exercise prices
$11.63 - $20.51
$20.52 - $30.19
$30.20 - $40.22
$40.23 - $50.69
$50.70 - $78.24
Balance at December 31, 2011 (1)
Number of
options
In millions
1.5
0.6
0.9
2.0
1.9
6.9
Options outstanding
Weighted-
average years
to expiration
Weighted-
average
exercise price
Aggregate
intrinsic value
In millions
Number of
options
In millions
1.1
1.0
5.9
5.6
7.5
4.8
$ 20.42
$ 92
$ 26.67
$ 35.18
$ 46.11
$ 58.74
29
40
69
40
$ 40.80
$ 270
1.5
0.6
0.5
1.6
0.7
4.9
Options exercisable
Weighted-
average
exercise price
Aggregate
intrinsic value
In millions
$ 20.42
$ 92
$ 26.67
$ 35.46
$ 46.28
$ 52.50
29
24
54
18
$ 35.58
$ 217
(1) Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date. As at December 31, 2011, all
stock options outstanding were in-the-money. The weighted-average years to expiration of exercisable stock options is 3.5 years.
68
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
The following table provides valuation and expense information for all stock option awards:
In millions, unless otherwise indicated
Year of grant
2011
2010
2009
2008
2007
2006
2005
Total
Stock-based compensation expense recognized
over requisite service period (1)
Year ended December 31, 2011
Year ended December 31, 2010
Year ended December 31, 2009
Fair value per unit
At grant date ($)
$
5
N/A
N/A
$
$
2
4
N/A
$
$
$
2
2
9
$
$
$
1
2
1
$
$
$
-
1
2
N/A
-
2
$
$
N/A
N/A
$
-
$
$
$
10
9
14
$ 15.66
$ 13.09
$ 12.60
$ 12.44
$ 13.37
$ 13.80
$ 9.19
N/A
Fair value of awards vested during the year
Year ended December 31, 2011
Year ended December 31, 2010
Year ended December 31, 2009
$
-
N/A
N/A
$
$
2
-
N/A
$
$
$
Nonvested awards at December 31, 2011
Unrecognized compensation cost
$
5
$
3
$
Remaining recognition period (years)
3.0
2.0
4
4
-
2
1.0
$
$
$
$
3
3
3
-
-
$
$
$
$
3
3
3
-
-
$
$
N/A
3
3
N/A
N/A
N/A
N/A
$
3
$
$
$
12
13
12
N/A
N/A
$
10
N/A
Assumptions
Grant price ($)
$ 68.94
$ 54.76
$ 42.14
$ 48.51
$ 52.79
$ 51.51
$ 36.33
N/A
Expected stock price volatility (2)
26%
28%
39%
27%
24%
25%
25%
N/A
Expected term (years) (3)
Risk-free interest rate (4)
Dividend rate ($) (5)
5.3
5.4
5.3
5.3
5.2
5.2
5.2
N/A
2.53%
2.44%
1.97%
3.58%
4.12%
4.04%
3.50%
N/A
$ 1.30
$ 1.08
$ 1.01
$ 0.92
$ 0.84
$ 0.65
$ 0.50
N/A
(1) Compensation cost is based on the grant date fair value using the Black-Scholes option-pricing model that uses the assumptions at the grant date.
(2) Based on the average of the historical volatility of the Company’s stock over a period commensurate with the expected term of the award and the implied volatility from traded options
on the Company’s stock.
(3) Represents the period of time that awards are expected to be outstanding. The Company uses historical data to estimate option exercise and employee termination, and groups of
employees that have similar historical exercise behavior are considered separately.
(4) Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(5) Based on the annualized dividend rate.
The following table provides information related to stock op-
(iii) Stock price volatility
tions exercised during the years ended December 31, 2011, 2010
Compensation cost for the Company’s RSU plans is based on the
and 2009:
In millions
Year ended December 31,
2011
2010
2009
Total intrinsic value
$ 122
$ 125
$ 93
Cash received upon exercise of options
$ 68
$ 87
$ 53
Related excess tax benefit realized
$ 9
$ 28
$ 20
fair value of the awards at period end using the lattice-based val-
uation model for which a primary assumption is the Company’s
share price. In addition, the Company’s liability for the VIDP is
marked-to-market at period-end and, as such, is also reliant on
the Company’s share price. Fluctuations in the Company’s share
price cause volatility to stock-based compensation expense as re-
corded in net income. The Company does not currently hold any
derivative financial instruments to manage this exposure. A $1 in-
crease in the Company’s share price at December 31, 2011 would
have increased stock-based compensation expense by $3 million,
whereas a $1 decrease in the price would have reduced it by
$4 million.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 69
Notes to Consolidated Financial Statements
12 Pensions and other postretirement benefits
B. Funding policy
The Company has various retirement benefit plans under which
substantially all of its employees are entitled to benefits at re-
tirement age, generally based on compensation and length of
service and/or contributions. Senior and executive management
(“executive employees”) subject to certain minimum service and
age requirements, are also eligible for an additional retirement
benefit under their Special Retirement Stipend Agreements
(“SRS”), the Supplemental Executive Retirement Plan (“SERP”)
or the Defined Contribution Supplemental Executive Retirement
Plan (“DC SERP”). Executive employees who breach the non-
compete, non-solicitation and non-disclosure of confidential in-
formation conditions of the SRS, SERP or DC SERP plans or other
employment agreement will forfeit the retirement benefit under
these plans. Should the Company reasonably determine that
a current or former executive employee may have violated the
conditions of their SRS, SERP, or DC SERP plan or other employ-
ment agreement, the Company may at its discretion withhold
or suspend payout of the retirement benefit pending resolution
of such matter. The Company has suspended payment of the
$1.5 million annual retirement benefit due to its former Chief
Executive Officer (CEO) pending resolution with the former CEO
of issues relating to his compliance with the non-compete, non-
solicitation and non-disclosure of confidential information con-
ditions contained in the former CEO’s employment agreement
Employee contributions to the CN Pension Plan are determined
by the plan rules. Company contributions are in accordance
with the requirements of the Government of Canada legis-
lation, The Pension Benefits Standards Act, 1985, including
amendments thereto, and are determined by actuarial valu-
ations. Due to recent legislative changes, actuarial valuations
will be required on an annual basis effective for years ending
on or after December 31, 2011 for all Canadian plans, or when
deemed appropriate by the Office of the Superintendent of
Financial Institutions (OSFI). These actuarial valuations are pre-
pared in accordance with legislative requirements and with the
recommendations of the Canadian Institute of Actuaries for
the valuation of pension plans. The latest actuarial valuation of
the CN Pension Plan for funding purposes was conducted as at
December 31, 2008 and indicated a funding excess on a go-
ing concern and solvency basis. The Company’s next actuarial
valuation required as at December 31, 2011 will be performed
in 2012. While this actuarial valuation is expected to identify a
going concern surplus of approximately $1 billion, on a solvency
basis a funding deficit of approximately $1.4 billion is expected
due to the level of interest rates applicable during that mea-
surement period and the pension plan asset returns. The fed-
eral pension legislation requires funding deficits, as calculated
under current pension regulations, to be paid over a number
of years. Actuarial valuations are also required annually for the
and in respect of which the Company has commenced legal
Company’s U.S. pension plans.
proceedings.
The Company also offers postretirement benefits to certain
employees providing life insurance, medical benefits and, for a
closed group of employees, free rail travel benefits during retire-
ment. These postretirement benefits are funded as they become
due. The information in the tables that follow pertains to all of
the Company’s defined benefit plans. However, the following
descriptions relate solely to the Company’s main pension plan,
the CN Pension Plan, unless otherwise specified.
A. Description of the CN Pension Plan
The CN Pension Plan is a contributory defined benefit pension
plan that covers the majority of CN employees. It provides for
pensions based mainly on years of service and final average pen-
In 2011, in anticipation of its future funding requirements,
the Company made voluntary contributions of $350 million in
excess of the required contributions mainly to strengthen the fi-
nancial position of its main pension plan, the CN Pension Plan.
The Company has been advised by the OSFI that this contri-
bution can be treated as a prepayment against its 2012 pen-
sion deficit funding requirements. As a result, the Company’s
cash contributions for 2012 are expected to be in the range
of approximately $275 million to $575 million for all its pen-
sion plans and include a voluntary contribution of approximate-
ly $150 million to $450 million. As at February 3, 2012, the
Company contributed $250 million to its defined benefit pen-
sion plans including a $150 million voluntary contribution.
sionable earnings and is generally applicable from the first day
C. Plan assets
of employment. Indexation of pensions is provided after retire-
ment through a gain/loss sharing mechanism, subject to guar-
anteed minimum increases. An independent trust company is
the Trustee of the Company’s pension trust funds (including the
CN Pension Trust Fund). As Trustee, the trust company performs
certain duties, which include holding legal title to the assets of
the CN Pension Trust Fund and ensuring that the Company, as
Administrator, complies with the provisions of the CN Pension
Plan and the related legislation. The Company utilizes a measure-
ment date of December 31 for the CN Pension Plan.
The assets of the Company’s various plans are held in separate
trust funds which are diversified by asset type, country and in-
vestment strategies. Each year, the CN Board of Directors re-
views and confirms or amends the Statement of Investment
Policies and Procedures (SIPP) which includes the plans’ long-
term asset class mix and related benchmark indices (Policy).
This Policy is based on a long-term forward-looking view of the
world economy, the dynamics of the plans’ benefit liabilities, the
market return expectations of each asset class and the current
state of financial markets. The Policy mix in 2011 was: 2% cash
70
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
and short-term investments, 38% bonds, 47% equities, 4% real
The plans’ investment manager monitors market events and
estate, 5% oil and gas and 4% infrastructure assets.
exposures to markets, currencies and interest rates daily. When
Annually, the CN Investment Division, a division of the
investing in foreign securities, the plans are exposed to foreign
Company created to invest and administer the assets of the
currency risk that may be adjusted or hedged; the effect of
plans, proposes a short-term asset mix target (Strategy) for the
which is included in the valuation of the foreign securities. Net
coming year, which is expected to differ from the Policy, because
of the effects mentioned above, the plans were 71% exposed to
of current economic and market conditions and expectations.
the Canadian dollar, 7% to European currencies, 11% to the US
The Investment Committee of the Board (Committee) regularly
dollar and 11% to various other currencies as at December 31,
compares the actual asset mix to the Policy and Strategy asset
2011. Interest rate risk represents the risk that the fair value of
mixes and evaluates the actual performance of the trust funds
the investments will fluctuate due to changes in market inter-
in relation to the performance of the Policy, calculated using
est rates. Sensitivity to interest rates is a function of the tim-
Policy asset mix and the performance of the benchmark indices.
ing and amount of cash flows of the assets and liabilities of the
The Committee’s approval is required for all major invest-
plans. To manage credit risk, established policies require deal-
ments in illiquid securities. The SIPP allows for the use of deriva-
ing with counterparties considered to be of high credit quality.
tive financial instruments to implement strategies or to hedge
Derivatives are used from time to time to adjust asset mix or ex-
or adjust existing or anticipated exposures. The SIPP prohib-
posures to foreign currencies, interest rate or market risks of the
its investments in securities of the Company or its subsidiar-
portfolio or anticipated transactions. Derivatives are contractual
ies. Investments held in the trust funds consist mainly of the
agreements whose value is derived from interest rates, foreign
following:
exchange rates, equity or commodity prices. When derivatives
(i)
Cash, short-term investments and bonds consist primarily
are used for hedging purposes, the gains or losses on the deriv-
of highly liquid securities which ensure adequate cash flows
atives are offset by a corresponding change in the value of the
are available to cover near-term benefit payments. Short-
hedged assets. Derivatives may include forwards, futures, swaps
term securities are almost exclusively obligations issued by
and options.
Canadian chartered banks. As at December 31, 2011, 93%
The tables on the following page present the fair value of
of bonds were issued or guaranteed by Canadian, U.S. or
plan assets excluding the economic exposure of derivatives as at
other governments.
December 31, 2011 and 2010 by asset class, their level within
(ii) Mortgages consist of mortgage products which are primari-
the fair value hierarchy and the valuation techniques and inputs
ly conventional or participating loans secured by commercial
used to measure such fair value.
properties and publicly traded REITs (Real Estate Investment
Trust).
(iii) Equity investments are well diversified by country, issuer and
industry sector. The most significant allocation either to an
individual issuer or industry sector was approximately 4%
and 21%, respectively, in 2011.
(iv) Real estate is a diversified portfolio of Canadian land and
commercial properties.
(v) Oil and gas investments include petroleum and natural gas
properties operated by the trusts’ wholly-owned subsidiar-
ies and Canadian marketable securities.
(vi) Infrastructure investments are publically traded trust units,
participations in private infrastructure funds and public debt
and equity securities of infrastructure and utility companies.
(vii) Absolute return investments are a portfolio of units of ex-
ternally managed hedge funds.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 71
Notes to Consolidated Financial Statements
12 Pensions and other postretirement benefits continued
In millions, unless otherwise indicated
Fair value measurements at December 31, 2011
Asset class
Total
Percentage of
total assets
Level 1
Level 2
Level 3
Cash and short-term investments (1)
$ 1,026
7.0%
$
21
$ 1,005
$
Bonds (2)
Canada and supranational
Provinces of Canada
Emerging market debt
Mortgages (3)
Equities (4)
Canadian
U.S.
International
Real estate (5)
Oil and gas (6)
Infrastructure (7)
Absolute return (8)
Multi-strategy funds
Fixed income funds
Equity funds
Global macro funds
Other (9)
Total plan assets
Bonds (2)
Canada and supranational
Provinces of Canada
Corporate
Emerging market debt
Mortgages (3)
Equities (4)
Canadian
U.S.
International
Real estate (5)
Oil and gas (6)
Infrastructure (7)
Absolute return (8)
Multi-strategy funds
Fixed income funds
Commodity funds
Equity funds
Global macro funds
Other (9)
Total plan assets
1,650
1,937
288
178
2,395
1,125
2,712
214
1,232
707
358
214
260
368
11.2%
13.1%
2.0%
1.2%
16.3%
7.6%
18.4%
1.5%
8.4%
4.8%
2.4%
1.5%
1.8%
2.5%
-
-
-
8
2,373
1,087
2,680
-
343
9
-
-
-
-
1,650
1,937
288
170
-
38
32
-
-
79
358
214
260
368
$ 14,664
99.7%
$ 6,521
$ 6,399
$ 1,744
55
$ 14,719
0.3%
100%
2,013
1,292
92
318
205
3,228
1,316
3,076
318
1,141
607
311
197
75
148
292
13.3%
8.6%
0.6%
2.1%
1.4%
21.4%
8.7%
20.4%
2.1%
7.6%
4.0%
2.1%
1.3%
0.5%
1.0%
1.9%
-
-
-
-
30
3,204
1,316
3,076
-
289
29
-
-
-
-
-
2,013
1,292
92
318
175
-
-
-
-
-
85
106
197
75
147
292
-
-
-
-
-
22
-
-
214
889
619
-
-
-
-
-
-
-
-
-
-
24
-
-
318
852
493
205
-
-
1
-
In millions, unless otherwise indicated
Fair value measurements at December 31, 2010
Asset class
Total
Percentage of
total assets
Level 1
Level 2
Level 3
Cash and short-term investments (1)
$
429
2.8%
$
429
$
-
$
$ 15,058
99.8%
$ 8,373
$ 4,792
$ 1,893
34
$ 15,092
0.2%
100%
Level 1: Fair value based on quoted prices in active markets for identical assets
Level 2: Fair value based on significant observable inputs
Level 3: Fair value based on significant unobservable inputs
72
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
The following table reconciles the beginning and ending balances of the fair value of investments classified as Level 3.
Fair value measurements using significant unobservable inputs (Level 3)
In millions
Equities (4)
Real
estate (5)
Oil and
Infra-
Absolute
gas (6) structure (7)
return (8)
Total
Additional
information (10)
Infra-
structure
hedged
Absolute
return
hedged
Beginning balance at December 31, 2009
$
18
$ 266
$ 752
$ 449
$ 182
$ 1,667
$ 449
$ 182
Actual return relating to assets still
held at the reporting date
Purchases, sales and settlements
Transfers in and/or out of Level 3
3
3
-
32
(14)
34
90
(48)
58
19
25
-
(11)
109
(74)
133
75
18
46
1
-
-
99
(74)
Balance at December 31, 2010
$
24
$ 318
$ 852
$ 493
$ 206
$ 1,893
$ 496
$ 207
Actual return relating to assets still
held at the reporting date
Purchases, sales and settlements
Transfers in and/or out of Level 3
2
(4)
-
58
(162)
-
90
(53)
-
74
52
-
(7)
(1)
(198)
217
(168)
(198)
63
62
-
(8)
(1)
(198)
Ending balance at December 31, 2011
$
22
$ 214
$ 889
$ 619
$
-
$ 1,744
$ 621
$
-
(1) Short-term investments consist primarily of securities issued by Canadian chartered banks. Such investments are valued at cost, which approximates fair value.
(2) Bonds are valued using prices obtained from independent pricing data suppliers, predominantly TSX Inc. When prices are not available from independent sources, the bond is valued by
comparison to prices obtained for a bond of similar interest rate, maturity and risk.
(3) Mortgages are secured by real estate. The fair value measurement of $170 million ($175 million in 2010) of mortgages categorized as Level 2 is based on current market yields of financial
instruments of similar maturity, coupon and risk factors. Mortgages denominated in foreign currencies are fully hedged back to the Canadian dollar, the effects of which are reflected in
the values presented in the tables above.
(4) The fair value of equity investments of $22 million ($24 million in 2010) categorized as Level 3 represent units in private equity funds which are valued by their administrators.
(5) The fair value of real estate investments of $214 million ($318 million in 2010) includes land and buildings classified as Level 3. Land is valued based on the fair value of comparable
assets, and buildings are valued based on the present value of estimated future net cash flows or the fair value of comparable assets. Independent valuations of land and buildings are
performed triennially.
(6) The fair value of oil and gas investments of $889 million ($852 million in 2010) classified as Level 3 is valued based on estimated future net cash flows that are discounted using prevailing
market rates for transactions in similar assets. The future net cash flows are based on forecasted oil and gas prices and projected future annual production and costs.
(7)
Infrastructure funds consist of $9 million ($29 million in 2010) of trust units that are publicly traded and classified as Level 1, $79 million ($85 million in 2010) of bank loans and bonds
issued by infrastructure companies classified as Level 2 and $619 million ($493 million in 2010) of infrastructure funds that are classified as Level 3 and are valued based on earnings
multiples. Infrastructure funds cannot be redeemed; distributions will be received from the funds as the underlying investments are liquidated. Infrastructure funds denominated in foreign
currencies are fully hedged back to the Canadian dollar, the effects of which are reflected in the values presented in the additional information table presented above.
(8) Absolute return investments are valued using the net asset value as reported by the fund administrators. All hedge fund investments have contractual redemption frequencies, ranging
from monthly to annually, and redemption notice periods varying from 5 to 90 days. Hedge fund investments that have redemption dates less frequent than every four months or that
have restrictions on contractual redemption features at the reporting date are classified as Level 3. During the year, absolute return investments having a fair value of $198 million (nil
in 2010) were transferred from Level 3 to Level 2 as the restrictions on redemption were lifted.
(9) Other consists of net operating assets required to administer the trust funds’ investment assets and the plans’ benefit and funding activities. Such assets are valued at cost and have not
been assigned to a fair value category.
(10) This additional information demonstrates the fair value of the infrastructure and absolute return funds after considering the effects of foreign currency hedges.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 73
Notes to Consolidated Financial Statements
12 Pensions and other postretirement benefits continued
D. Additional disclosures
(i) Obligations and funded status
In millions
Year ended December 31,
2011
2010
2011
2010
Pensions
Other postretirement benefits
Change in benefit obligation
Projected benefit obligation at beginning of year
$ 14,895
$ 13,708
$
283
$
268
Amendments
Interest cost
Actuarial loss (gain)
Service cost
Curtailment gain
Plan participants’ contributions
Foreign currency changes
Benefit payments, settlements and transfers
27
788
577
124
-
54
5
(922)
5
837
1,118
99
-
50
(12)
(910)
1
14
(2)
4
(1)
-
3
(18)
-
16
22
3
(1)
-
(6)
(19)
Projected benefit obligation at end of year
$ 15,548
$ 14,895
$
284
$
283
Component representing future salary increases
(437)
(439)
-
-
Accumulated benefit obligation at end of year
$ 15,111
$ 14,456
$
284
$
283
Change in plan assets
Fair value of plan assets at beginning of year
$ 15,092
$ 14,332
Employer contributions
Plan participants’ contributions
Foreign currency changes
Actual return on plan assets
Benefit payments, settlements and transfers
458
54
1
36
(922)
411
50
(8)
1,217
(910)
Fair value of plan assets at end of year
$ 14,719
$ 15,092
$
$
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
Funded status (Excess (deficiency) of fair value of plan assets over
projected benefit obligation at end of year)
Measurement date for all plans is December 31.
$
(829)
$
197
$
(284)
$
(283)
The projected benefit obligation and fair value of plan assets for the CN Pension Plan at December 31, 2011 were $14,514 million and $13,992 million respectively ($13,941 million and
$14,343 million, respectively, at December 31, 2010).
(ii) Amounts recognized in the Consolidated Balance Sheet
In millions
Noncurrent assets (Note 6)
Current liabilities (Note 7)
Noncurrent liabilities
Total amount recognized
December 31,
2011
2010
2011
2010
Pensions
Other postretirement benefits
$
-
-
(829)
$
442
$
-
$
-
-
(245)
(18)
(266)
(18)
(265)
$
(829)
$
197
$
(284)
$
(283)
(iii) Amounts recognized in Accumulated other comprehensive loss (Note 19)
In millions
Net actuarial gain (loss)
Prior service cost
Pensions
Other postretirement benefits
December 31,
2011
$ (2,720)
$
(30)
2010
(1,185)
(5)
$
$
2011
2010
$
$
3
(3)
$
$
1
(4)
74
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
(iv) Information for the pension plans with an accumulated benefit obligation in excess of plan assets
In millions
December 31,
2011
2010
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$ 15,015
$ 14,606
$ 14,191
$
$
$
436
386
191
2011
N/A
N/A
N/A
2010
N/A
N/A
N/A
Pensions
Other postretirement benefits
(v) Components of net periodic benefit cost (income)
Year ended December 31,
2011
Pensions
2010
2009
2011
2010
2009
Other postretirement benefits
In millions
Service cost
Interest cost
Curtailment gain
Settlement loss
Expected return on plan assets
Amortization of prior service cost
Recognized net actuarial loss (gain)
$
124
$
99
$
83
$
788
-
3
837
885
-
-
-
-
(1,005)
(1,009)
(1,007)
2
8
-
3
-
5
4
14
(1)
-
-
2
-
$
3
16
(1)
-
-
2
(2)
$
3
17
(3)
-
-
5
(3)
Net periodic benefit cost (income)
$
(80)
$
(70)
$
(34)
$
19
$
18
$
19
The estimated prior service cost and net actuarial loss for defined benefit pension plans that will be amortized from Accumulated other
comprehensive loss into net periodic benefit cost (income) over the next fiscal year are $4 million and $123 million, respectively.
The estimated prior service cost and net actuarial gain for other postretirement benefits that will be amortized from Accumulated other
comprehensive loss into net periodic benefit cost (income) over the next fiscal year are $2 million and nil, respectively.
(vi) Weighted-average assumptions used in accounting for pensions and other postretirement benefits
December 31,
2011
Pensions
2010
2009
2011
2010
2009
Other postretirement benefits
To determine projected benefit obligation
Discount rate (1)
Rate of compensation increase (2)
To determine net periodic benefit cost
Discount rate (1)
Rate of compensation increase (2)
Expected return on plan assets (3)
4.84%
5.32%
3.25%
3.50%
5.32%
6.19%
3.50%
3.50%
7.50%
7.75%
6.19%
3.50%
7.42%
3.50%
7.75%
4.70%
5.29%
6.01%
3.25%
3.50%
3.50%
5.29%
6.01%
6.84%
3.50%
3.50%
3.50%
N/A
N/A
N/A
(1) The Company’s discount rate assumption, which is set annually at the end of each year, is used to determine the projected benefit obligation at the end of the year and the net periodic
benefit cost for the following year. The discount rate is used to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments with
a rating of AA or better, would provide the necessary cash flows to pay for pension benefits as they become due. The discount rate is determined by management with the aid of third-
party actuaries. The Company’s methodology for determining the discount rate is based on a zero-coupon bond yield curve, which is derived from semi-annual bond yields provided by a
third party. The portfolio of hypothetical zero-coupon bonds is expected to generate cash flows that match the estimated future benefit payments of the plans as the bond rate for each
maturity year is applied to the plans’ corresponding expected benefit payments of that year.
(2) The rate of compensation increase is determined by the Company based upon its long-term plans for such increases.
(3) To develop its expected long-term rate of return assumption used in the calculation of net periodic benefit cost applicable to the market-related value of assets, the Company considers
multiple factors. The expected long-term rate of return is determined based on expected future performance for each asset class and is weighted based on the current asset portfolio
mix. Consideration is taken of the historical performance, the premium return generated from an actively managed portfolio, as well as current and future anticipated asset allocations,
economic developments, inflation rates and administrative expenses. Based on these factors, the rate is determined by the Company. For 2011, the Company used a long-term rate of
return assumption of 7.50% on the market-related value of plan assets to compute net periodic benefit cost. The Company has elected to use a market-related value of assets, whereby
realized and unrealized gains/losses and appreciation/depreciation in the value of the investments are recognized over a period of five years, while investment income is recognized
immediately. Effective January 1, 2012 the Company will reduce the expected long-term rate of return on plan assets from 7.50% to 7.25% to reflect management’s current view of long
term investment returns. The effect of this change in management’s assumption will be to increase net periodic benefit cost by approximately $20 million.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 75
Notes to Consolidated Financial Statements
12 Pensions and other postretirement benefits continued
(vii) Health care cost trend rate for other postretirement benefits
For measurement purposes, increases in the per capita cost of covered health care benefits were assumed to be 10% and 9% for 2011 and
2012, respectively. It is assumed that the rate will decrease gradually to 4.5% in 2028 and remain at that level thereafter.
Assumed health care costs have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in
the assumed health care cost trend rate would have the following effect:
In millions
Effect on total service and interest costs
Effect on benefit obligation
(viii) Estimated future benefit payments
In millions
2012
2013
2014
2015
2016
Years 2017 to 2021
One-percentage-point
Increase
Decrease
$
1
$ 16
$
(1)
$ (14)
Other
postretirement
benefits
$ 18
$ 18
$ 19
$ 19
$ 19
$ 98
Pensions
$
$
973
996
$ 1,018
$ 1,040
$ 1,060
$ 5,444
E. Defined contribution and other plans
13 Other income
In millions
Year ended December 31,
2011
2010
2009
Gain on disposals of properties (1)
$ 348
$ 157
$ 226
Gain on disposal of land
Investment income
Other
30
3
20
20
5
30
12
7
22
Total other income
$ 401
$ 212
$ 267
(1) 2011 includes $60 million and $288 million for the disposal of substantially all of the
assets of ICRMT and of a segment of the Company’s Kingston subdivision known as
the Lakeshore East, respectively, 2010 includes $152 million for the sale of a portion
of the property known as the Oakville subdivision and 2009 includes $69 million
and $157 million for the sales of the Lower Newmarket and Weston subdivisions,
respectively. See Note 5 - Properties.
The Company maintains defined contribution pension plans for
certain salaried employees as well as certain employees covered
by collective bargaining agreements. The Company also maintains
other plans including Section 401(k) savings plans for certain U.S.
based employees. The Company’s contributions under these plans
are expensed as incurred and amounted to $10 million, $16 mil-
lion and $8 million for 2011, 2010 and 2009, respectively.
F. Contributions to multi-employer plan
Under collective bargaining agreements, the Company par-
ticipates in a multiemployer benefit plan named the Railroad
Employees National Early Retirement Major Medical Benefit
Plan which is administered by the National Carriers’ Conference
Committee (NCCC), and provides certain postretirement health
care benefits to certain retirees. The Company’s contributions un-
der this plan are expensed as incurred and amounted to $11 mil-
lion, $10 million and $8 million in 2011, 2010 and 2009, respec-
tively. The annual contribution rate for the plan is determined by
the NCCC and for 2011 was $164.41 per month per active
employee ($155.96 in 2010). The plan covered 846 retirees in
2011 (716 in 2010).
76
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
14 Income taxes
As at December 31, 2011, Deferred and receivable income taxes
include a net deferred income tax asset of $46 million ($53 mil-
lion as at December 31, 2010) and an income tax receivable of
$76 million (nil as at December 31, 2010).
The Company’s consolidated effective income tax rate differs
from the Canadian, or domestic, statutory Federal tax rate. The
effective tax rate is affected by recurring items such as tax rates in
provincial, U.S. federal, state and other foreign jurisdictions and
the proportion of income earned in those jurisdictions. The effec-
tive tax rate is also affected by discrete items such as income tax
rate enactments and lower tax rates on capital dispositions that
may occur in any given year. The reconciliation of income tax ex-
pense is as follows:
Significant components of deferred income tax assets and
liabilities are as follows:
In millions
December 31,
2011
2010
Deferred income tax assets
Pension liability
$ 226
$
-
Personal injury claims and other reserves
Other postretirement benefits liability
Net operating losses and tax credit carryforwards (1)
Total deferred income tax assets
Deferred income tax liabilities
Properties
Net pension asset
Other
Total deferred income tax liabilities
Total net deferred income tax liability
134
85
5
450
155
88
11
254
5,618
5,129
-
119
41
183
5,737
5,353
$ 5,287
$ 5,099
$ 2,046
$ 2,162
3,241
2,937
$ 5,287
$ 5,099
In millions
Year ended December 31,
2011
2010
2009
Total net deferred income tax liability
Federal tax rate
16.5%
18.0%
19.0%
Income tax expense at the statutory
Federal tax rate
$ (554)
$
(518)
$
(430)
Domestic
Foreign
Income tax (expense) recovery resulting from:
Provincial and foreign taxes
(360)
(308)
(213)
Deferred income tax adjustments due
to rate enactments
Gain on disposals
Other (1)
(40)
62
(7)
-
32
22
126
42
68
Total net deferred income tax liability
$ 5,287
$ 5,099
Net current deferred income tax asset
46
53
Net noncurrent deferred income tax liability
$ 5,333
$ 5,152
(1) Net operating losses and tax credit carryforwards will expire between the years 2014
and 2031.
Income tax expense
$ (899)
$
(772)
$
(407)
On an annual basis, the Company assesses the need to es-
Cash payments for income taxes
$ 482
$ 214
$ 245
tablish a valuation allowance for its deferred income tax assets,
(1) Comprises adjustments relating to the resolution of matters pertaining to prior years’
and if it is deemed more likely than not that its deferred income
income taxes, including net recognized tax benefits, and other items.
The following table provides tax information on a domestic
and foreign basis:
tax assets will not be realized, a valuation allowance is recorded.
The ultimate realization of deferred income tax assets is depen-
dant upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
In millions
Year ended December 31,
2011
2010
2009
Management considers the scheduled reversals of deferred income
Income before income taxes
Domestic
Foreign
Current income tax expense
Domestic
Foreign
Deferred income tax expense
Domestic
Foreign
tax liabilities including the available carryback and carryforward
$ 2,464
$ 2,052
$ 1,738
periods, projected future taxable income, and tax planning strate-
892
824
523
gies in making this assessment. As at December 31, 2011, in order
$ 3,356
$ 2,876
$ 2,261
to fully realize all of the deferred income tax assets, the Company
$ (340)
$
(306)
$
(244)
(28)
(48)
(25)
$ (368)
$
(354)
$
(269)
$ (288)
$
(248)
$
(58)
(243)
(170)
(80)
$ (531)
$
(418)
$
(138)
will need to generate future taxable income of approximately $1.6
billion and, based upon the level of historical taxable income and
projections of future taxable income over the periods in which the
deferred income tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits
of these deductible differences. Management has assessed the im-
pacts of the current economic environment and concluded there
are no significant impacts to its assertions for the realization of
deferred income tax assets. The Company has not recognized a
deferred income tax asset ($280 million as at December 31, 2011)
on the unrealized foreign exchange loss recorded in Accumulated
other comprehensive loss relating to its permanent investment in
foreign subsidiaries, as the Company does not expect this tempo-
rary difference to reverse in the foreseeable future.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 77
Notes to Consolidated Financial Statements
14 Income taxes continued
which are expected to be completed during 2012. Current on-
going examinations on specific tax positions taken for federal
The Company recognized tax credits of $1 million in each of
and provincial income tax returns filed for the 2006 year are
2011 and 2010, and $6 million in 2009 for eligible research and
also expected to be completed during 2012. In the U.S., both
development expenditures, which reduced the cost of properties.
the federal and state income tax returns filed for the years
The following table provides a reconciliation of unrecog-
2007 to 2010 remain subject to examination by the taxation
nized tax benefits on the Company’s domestic and foreign tax
authorities. In the fourth quarter of 2011, the taxation authori-
positions:
In millions
Year ended December 31,
2011
2010
2009
Gross unrecognized tax benefits at
beginning of year
$ 57
$ 83
$ 79
Increases for:
Tax positions related to the current year
Tax positions related to prior years
Decreases for:
Tax positions related to prior years
Settlements
1
11
-
(21)
Lapse of the applicable statute of limitations
(2)
4
5
(31)
-
(4)
11
4
(2)
(2)
(7)
ties commenced examinations of the Company’s Indiana state
income tax returns for 2008 to 2010 which are expected to be
completed during 2012. Current on-going examinations of the
Company’s Wisconsin state income tax returns for 2003 to 2006
are also expected to be completed during 2012. The Company
does not anticipate any significant impacts to its results of op-
erations or financial position as a result of the final resolutions
of such matters.
15 Segmented information
$ 46
$ 57
$ 83
The Company manages its operations as one business segment
Gross unrecognized tax benefits at
end of year
Adjustments to reflect tax treaties and
other arrangements
(11)
(27)
(46)
Net unrecognized tax benefits at end of year
$ 35
$ 30
$ 37
As at December 31, 2011, the total amount of gross un-
recognized tax benefits was $46 million, before considering
tax treaties and other arrangements between taxation authori-
ties. If recognized, all of the net unrecognized tax benefits as
at December 31, 2011 would affect the effective tax rate. The
Company believes that it is reasonably possible that approxi-
mately $16 million of the net unrecognized tax benefits as at
December 31, 2011 related to various federal, state, and pro-
vincial income tax matters, each of which are individually in-
significant, may be recognized over the next twelve months as
a result of settlements and a lapse of the applicable statute of
limitations.
The Company recognizes accrued interest and penalties re-
lated to unrecognized tax benefits in Income tax expense in the
Company’s Consolidated Statement of Income. The Company
recognized approximately $4 million, $5 million and $4 mil-
lion in accrued interest and penalties during the years ended
December 31, 2011, 2010 and 2009, respectively. The Company
had approximately $13 million and $19 million of accrued
interest and penalties as at December 31, 2011 and 2010,
respectively.
In Canada, the Company’s federal income tax returns filed
for the years 2007 to 2010 and the provincial income tax re-
turns filed for the years 2006 to 2010 remain subject to ex-
amination by the taxation authorities. In the second quarter
of 2011, the taxation authorities commenced examinations of
the Company’s federal income tax returns for 2007 and 2008
over a single network that spans vast geographic distances and
territories, with operations in Canada and the United States.
Financial information reported at this level, such as revenues, op-
erating income, and cash flow from operations, is used by corpo-
rate management, including the Company’s chief operating deci-
sion-maker, in evaluating financial and operational performance
and allocating resources across CN’s network.
The Company’s strategic initiatives, which drive its operation-
al direction, are developed and managed centrally by corporate
management and are communicated to its regional activity cen-
ters (the Western Region, Eastern Region and Southern Region).
Corporate management is responsible for, among others, CN’s
marketing strategy, the management of large customer ac-
counts, overall planning and control of infrastructure and rolling
stock, the allocation of resources, and other functions such as
financial planning, accounting and treasury.
The role of each region is to manage the day-to-day service
requirements within their respective territories and control direct
costs incurred locally. Such cost control is required to ensure that
pre-established efficiency standards set at the corporate level
are met. The regions execute the overall corporate strategy and
operating plan established by corporate management, as their
management of throughput and control of direct costs does
not serve as the platform for the Company’s decision-making
process. Approximately 90% of the Company’s freight revenues
are from national accounts for which freight traffic spans North
America and touches various commodity groups. As a result, the
Company does not manage revenues on a regional basis since a
large number of the movements originate in one region and pass
through and/or terminate in another region.
78
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
The regions also demonstrate common characteristics in each
16 Earnings per share
of the following areas:
(i) each region’s sole business activity is the transportation of
Year ended December 31,
2011
2010
2009
freight over the Company’s extensive rail network;
Basic earnings per share
$ 5.45
$ 4.51
$ 3.95
(ii) the regions service national accounts that extend over the
Diluted earnings per share
$ 5.41
$ 4.48
$ 3.92
Company’s various commodity groups and across its rail
network;
(iii) the services offered by the Company stem predominantly
The following table provides a reconciliation between basic
and diluted earnings per share:
from the transportation of freight by rail with the goal of op-
In millions
Year ended December 31,
2011
2010
2009
timizing the rail network as a whole;
(iv) the Company and its subsidiaries, not its regions, are subject
to single regulatory regimes in both Canada and the U.S.
For the reasons mentioned herein, the Company reports as
one operating segment.
The following tables provide information by geographic area:
In millions
Year ended December 31,
2011
2010
2009
Revenues (1)
Canada
U.S.
$ 6,169 $ 5,630 $ 4,971
2,859
2,667
2,396
$ 9,028 $ 8,297 $ 7,367
(1) For the years ended December 31, 2011, 2010 and 2009, the largest customer
represented approximately 3% of total revenues for each year.
Net income
$ 2,457
$ 2,104
$ 1,854
Weighted-average shares outstanding
451.1
466.3
469.2
Effect of stock options
3.3
3.8
4.3
Weighted-average diluted shares
outstanding
454.4
470.1
473.5
Basic earnings per share are calculated based on the weight-
ed-average number of common shares outstanding over each
period. Diluted earnings per share are calculated based on the
weighted-average diluted shares outstanding using the treasury
stock method, which assumes that any proceeds received from
the exercise of in-the-money stock options would be used to
purchase common shares at the average market price for the pe-
riod. For the years ended December 31, 2011, 2010 and 2009,
the weighted-average number of stock options that were not in-
In millions
Year ended December 31,
2011
2010
2009
cluded in the calculation of diluted earnings per share, as their
inclusion would have had an anti-dilutive impact, were 0.1 mil-
lion, nil and 0.4 million, respectively.
Net income
Canada
U.S.
In millions
Properties
Canada
U.S.
$ 1,836 $ 1,498 $ 1,436
621
606
418
$ 2,457 $ 2,104 $ 1,854
December 31,
2011
2010
$ 13,824 $ 13,312
10,093
9,605
$ 23,917 $ 22,917
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 79
Notes to Consolidated Financial Statements
17 Major commitments and contingencies
A. Leases
The Company has operating and capital leases, mainly for loco-
motives, freight cars and intermodal equipment. Of the capital
leases, many provide the option to purchase the leased items
at fixed values during or at the end of the lease term. As at
to adjustment. In addition, remaining implementation costs as-
sociated with the U.S. federal government legislative require-
ment to implement positive train control (PTC) by 2015 are es-
timated to be approximately $193 million (US$190 million). The
Company also has agreements with fuel suppliers to purchase
approximately 61% of its estimated 2012 volume, 41% of its an-
ticipated 2013 volume and 11% of its anticipated 2014 volume
December 31, 2011, the Company’s commitments under these
at market prices prevailing on the date of the purchase.
operating and capital leases were $665 million and $1,254 mil-
lion, respectively. Minimum rental payments for operating leases
C. Contingencies
having initial non-cancelable lease terms of more than one year
and minimum lease payments for capital leases in each of the
next five years and thereafter are as follows:
In millions
2012
2013
2014
2015
2016
2017 and thereafter
Operating
Capital
$ 128
$ 99
103
151
76
61
45
270
109
297
252
328
$ 665
1,254
Less: imputed interest on capital leases at rates
ranging from approximately 0.7% to 11.8%
Present value of minimum lease payments
included in debt
299
$ 955
In the normal course of business, the Company becomes in-
volved in various legal actions seeking compensatory and occa-
sionally 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 prop-
erty allegedly caused by, but not limited to, derailments or other
accidents.
Canada
Employee injuries are governed by the workers’ compensation
legislation in each province whereby employees may be awarded
either a lump sum or future stream of payments depending on
the nature and severity of the injury. As such, the provision for
employee injury claims is discounted. In the provinces where the
Company is self-insured, costs related to employee work-related
The Company also has operating lease agreements for its
injuries are accounted for based on actuarially developed esti-
automotive fleet with one-year non-cancelable terms for which
mates of the ultimate cost associated with such injuries, includ-
its practice is to renew monthly thereafter. The estimated annual
ing compensation, health care and third-party administration
rental payments for such leases are approximately $30 million
costs. A comprehensive actuarial study is generally performed at
and generally extend over five years.
least on a triennial basis. For all other legal actions, the Company
Rent expense for all operating leases was $143 million,
maintains, and regularly updates on a case-by-case basis, pro-
$176 million and $213 million for the years ended December 31,
visions for such items when the expected loss is both probable
2011, 2010 and 2009, respectively. Contingent rentals and sub-
and can be reasonably estimated based on currently available
lease rentals were not significant.
information.
B. Commitments
As at December 31, 2011, 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 $727 million ($740 million as at December 31, 2010). The
Company also has remaining estimated commitments in relation
to the acquisition of the principal lines of the former Elgin, Joliet
and Eastern Railway Company of approximately $130 million to
be spent over the next few years for railroad infrastructure im-
provements, grade separation projects, as well as commitments
under a series of agreements with individual communities and a
comprehensive voluntary mitigation program established to ad-
dress surrounding municipalities’ concerns. The commitment for
the grade separation projects is based on estimated costs pro-
vided by the STB at the time of acquisition and could be subject
As at December 31, 2011, 2010 and 2009, the Company’s
provision for personal injury and other claims in Canada was as
follows:
In millions
2011
2010
2009
Balance January 1
$ 200
$ 178
$ 189
Accruals and other
Payments
31
(32)
59
(37)
48
(59)
Balance December 31
$ 199
$ 200
$ 178
Current portion - Balance December 31
$ 39
$ 39
$ 34
United States
Personal injury claims by the Company’s employees, including
claims alleging occupational disease and work-related injuries,
are subject to the provisions of the Federal Employers’ Liability
Act (FELA). Employees are compensated under FELA for damages
80
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
assessed based on a finding of fault through the U.S. jury system
Although the Company considers such provisions to be ad-
or through individual settlements. As such, the provision is un-
equate for all its outstanding and pending claims, the final
discounted. With limited exceptions where claims are evaluated
outcome with respect to actions outstanding or pending at
on a case-by-case basis, the Company follows an actuarial-based
December 31, 2011, or with respect to future claims, cannot be
approach and accrues the expected cost for personal injury, in-
reasonably determined. When establishing provisions for contin-
cluding asserted and unasserted occupational disease claims,
gent litigation, the Company considers, where a probable loss
and property damage claims, based on actuarial estimates of
estimate cannot be made with reasonable certainty, a range of
their ultimate cost. A comprehensive actuarial study is performed
potential probable losses for each such matter, and records the
annually.
amount it considers the most reasonable estimate within the
For employee work-related injuries, including asserted occu-
range. However, when no amount within the range is a better
pational disease claims, and third-party claims, including grade
estimate than any other amount, the minimum amount in the
crossing, trespasser and property damage claims, the actuarial
range is accrued. For matters where a loss is reasonably possible
valuation considers, among other factors, CN’s historical patterns
but not probable, a range of potential losses could not be esti-
of claims filings and payments. For unasserted occupational dis-
mated due to various factors which may include the limited avail-
ease claims, the actuarial study includes the projection of CN’s
ability of facts, the lack of demand for specific damages and the
experience into the future considering the potentially exposed
fact that proceedings were at an early stage. Based on informa-
population. The Company adjusts its liability based upon man-
tion currently available, the Company believes that the eventual
agement’s assessment and the results of the study. On an ongo-
outcome of the actions against the Company will not, individu-
ing basis, management reviews and compares the assumptions
ally or in the aggregate, have a material adverse effect on the
inherent in the latest actuarial study with the current claim expe-
Company’s consolidated financial position. However, due to the
rience and, if required, adjustments to the liability are recorded.
inherent inability to predict with certainty unforeseeable future
Due to the inherent uncertainty involved in projecting future
developments, there can be no assurance that the ultimate reso-
events, including events related to occupational diseases, which
lution of these actions will not have a material adverse effect on
include but are not limited to, the timing and number of actual
the Company’s results of operations, financial position or liquid-
claims, the average cost per claim and the legislative and judicial
ity in a particular quarter or fiscal year.
environment, the Company’s future payments may differ from
current amounts recorded.
D. Environmental matters
External actuarial studies reflecting favorable claims devel-
The Company’s operations are subject to numerous federal, pro-
opment over recent years have supported net reductions to the
vincial, state, municipal and local environmental laws and regula-
Company’s provision for U.S. personal injury and other claims of
tions in Canada and the United States concerning, among other
$6 million, $19 million and $60 million in 2011, 2010 and 2009,
things, emissions into the air; discharges into waters; the genera-
respectively. The reductions were mainly attributable to decreas-
tion, handling, storage, transportation, treatment and disposal
es in the Company’s estimates of unasserted claims and costs
of waste, hazardous substances, and other materials; decommis-
related to asserted claims as a result of its ongoing risk mitiga-
sioning of underground and aboveground storage tanks; and soil
tion strategy focused on reducing the frequency and severity of
and groundwater contamination. A risk of environmental liability
claims through injury prevention and containment; mitigation of
is inherent in railroad and related transportation operations; real
claims; and lower settlements for existing claims.
estate ownership, operation or control; and other commercial
As at December 31, 2011, 2010 and 2009, the Company’s
activities of the Company with respect to both current and past
provision for personal injury and other claims in the U.S. was as
operations.
follows:
In millions
2011
2010
2009
Known existing environmental concerns
Balance January 1
$ 146
$ 166
$ 265
Accruals and other
Payments
30
(65)
7
(27)
(46)
(53)
Balance December 31
$ 111
$ 146
$ 166
Current portion - Balance December 31
$ 45
$ 44
$ 72
The Company has identified approximately 310 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 en-
forcement 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 im-
pose joint and several liability for clean-up and enforcement costs
on current and former owners and operators of a site, as well as
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 81
Notes to Consolidated Financial Statements
17 Major commitments and contingencies
continued
The Company anticipates that the majority of the liability at
December 31, 2011 will be paid out over the next five years.
However, some costs may be paid out over a longer period. The
those whose waste is disposed of at the site, without regard to
Company expects to partly recover certain accrued remediation
fault or the legality of the original conduct. The Company has
costs associated with alleged contamination and has recorded
been notified that it is a potentially responsible party for study
a receivable in Intangible and other assets for such recover-
and clean-up costs at approximately 10 sites governed by the
able amounts. Based on the information currently available, the
Superfund law (and analogous state laws) for which investiga-
Company considers its provisions to be adequate.
tion and remediation payments are or will be made or are yet to
be determined and, in many instances, is one of several poten-
Unknown existing environmental concerns
tially responsible parties.
While the Company believes that it has identified the costs like-
The ultimate cost of addressing these known contaminated
ly to be incurred for environmental matters in the next several
sites cannot be definitely established given that the estimated
years based on known information, the discovery of new facts,
environmental liability for any given site may vary depending on
future changes in laws, the possibility of releases of hazardous
the nature and extent of the contamination; the nature of antici-
materials into the environment and the Company’s ongoing ef-
pated response actions, taking into account the available clean-
forts to identify potential environmental liabilities that may be
up techniques; evolving regulatory standards governing environ-
associated with its properties may result in the identification of
mental liability; and the number of potentially responsible parties
additional environmental liabilities and related costs. The mag-
and their financial viability. As a result, liabilities are recorded
nitude of such additional liabilities and the costs of complying
based on the results of a four-phase assessment conducted on
with future environmental laws and containing or remediating
a site-by-site basis. A liability is initially recorded when environ-
contamination cannot be reasonably estimated due to many fac-
mental assessments occur, remedial efforts are probable, and
tors, including:
when the costs, based on a specific plan of action in terms of the
(i) the lack of specific technical information available with re-
technology to be used and the extent of the corrective action re-
spect to many sites;
quired, can be reasonably estimated. The Company estimates the
(ii) the absence of any government authority, third-party orders,
costs related to a particular site using cost scenarios established
or claims with respect to particular sites;
by external consultants based on the extent of contamination
(iii) the potential for new or changed laws and regulations and
and expected costs for remedial efforts. In the case of multiple
parties, the Company accrues its allocable share of liability taking
for development of new remediation technologies and uncer-
tainty regarding the timing of the work with respect to par-
into account the Company’s alleged responsibility, the number
ticular sites; and
of potentially responsible parties and their ability to pay their re-
(iv) the determination of the Company’s liability in proportion to
spective share of the liability. Adjustments to initial estimates are
other potentially responsible parties and the ability to recover
recorded as additional information becomes available.
costs from any third parties with respect to particular sites.
The Company’s provision for specific environmental sites is
undiscounted and includes costs for remediation and restora-
Therefore, the likelihood of any such costs being incurred or
tion of sites, as well as monitoring costs. Environmental accruals,
whether such costs would be material to the Company cannot
which are classified as Casualty and other in the Consolidated
be determined at this time. There can thus be no assurance that
Statement of Income, include amounts for newly identified
liabilities or costs related to environmental matters will not be in-
sites or contaminants as well as adjustments to initial estimates.
curred in the future, or will not have a material adverse effect on
Recoveries of environmental remediation costs from other parties
the Company’s financial position or results of operations in a par-
are recorded as assets when their receipt is deemed probable.
ticular quarter or fiscal year, or that the Company’s liquidity will
As at December 31, 2011, 2010 and 2009, the Company’s
not be adversely impacted by such liabilities or costs, although
provision for specific environmental sites was as follows:
In millions
Balance January 1
Accruals and other
Payments
2011
2010
2009
$ 150
$ 103
$ 125
17
(15)
67
(20)
(7)
(15)
Balance December 31
$ 152
$ 150
$ 103
Current portion - Balance December 31
$ 63
$ 34
$ 38
management believes, based on current information, that the
costs to address environmental matters will not have a material
adverse effect on the Company’s financial position or liquidity.
Costs related to any unknown existing or future contamination
will be accrued in the period in which they become probable and
reasonably estimable.
82
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
Future occurrences
is less than the fair value, as estimated at the inception of the
In railroad and related transportation operations, it is possible
lease, then the Company must, under certain conditions, com-
that derailments or other accidents, including spills and releas-
pensate the lessor for the shortfall. At December 31, 2011, the
es of hazardous materials, may occur that could cause harm to
maximum exposure in respect of these guarantees was $112 mil-
human health or to the environment. As a result, the Company
lion. There are no recourse provisions to recover any amounts
may incur costs in the future, which may be material, to address
from third parties.
any such harm, compliance with laws and other risks, including
costs relating to the performance of clean-ups, payment of envi-
(ii) Other guarantees
ronmental penalties and remediation obligations, and damages
As at December 31, 2011, the Company, including certain of its
relating to harm to individuals or property.
subsidiaries, has granted $499 million of irrevocable standby let-
Regulatory compliance
ters of credit and $10 million of surety and other bonds, issued
by highly rated financial institutions, to third parties to indemnify
The Company may incur significant capital and operating costs
them in the event the Company does not perform its contractual
associated with environmental regulatory compliance and clean-
obligations. As at December 31, 2011, the maximum potential
up requirements, in its railroad operations and relating to its
liability under these guarantee instruments was $509 million, of
past and present ownership, operation or control of real prop-
which $439 million related to workers’ compensation and other
erty. Operating expenses for environmental matters amounted to
employee benefit liabilities and $70 million related to equip-
$4 million in 2011, $23 million in 2010 and $11 million in 2009.
ment under leases and other liabilities. The letters of credit were
In addition based on the results of its operations and mainte-
drawn on the Company’s bilateral letter of credit facilities. The
nance programs, as well as ongoing environmental audits and
Company has not recorded a liability in respect of these guaran-
other factors, the Company plans for specific capital improve-
tee instruments as they relate to the Company’s future perfor-
ments on an annual basis. Certain of these improvements help
mance. In addition, as the Company does not expect to make
ensure facilities, such as fuelling stations and waste water and
any payments under these guarantee instruments, the Company
storm water treatment systems, comply with environmental stan-
has not recorded an additional liability at December 31, 2011
dards and include new construction and the updating of exist-
with respect to such guarantees as they relate to the Company’s
ing systems and/or processes. Other capital expenditures relate
future performance. The majority of the guarantee instruments
to assessing and remediating certain impaired properties. The
mature at various dates between 2012 and 2014.
Company’s environmental capital expenditures amounted to
$11 million in 2011, $14 million in 2010 and $9 million in 2009.
(iii) General indemnifications
E. Guarantees and indemnifications
In the normal course of business, the Company has provided in-
demnifications, customary for the type of transaction or for the
In the normal course of business, the Company, including certain
railway business, in various agreements with third parties, includ-
of its subsidiaries, enters into agreements that may involve pro-
ing indemnification provisions where the Company would be
viding guarantees or indemnifications to third parties and others,
required to indemnify third parties and others. Indemnifications
which may extend beyond the term of the agreements. These
are found in various types of contracts with third parties which
include, but are not limited to, residual value guarantees on
include, but are not limited to:
operating leases, standby letters of credit and surety and other
(a) contracts granting the Company the right to use or enter
bonds, and indemnifications that are customary for the type of
upon property owned by third parties such as leases, ease-
transaction or for the railway business.
ments, trackage rights and sidetrack agreements;
The Company is required to recognize a liability for the fair
(b) contracts granting rights to others to use the Company’s
value of the obligation undertaken in issuing certain guarantees
property, such as leases, licenses and easements;
on the date the guarantee is issued or modified. In addition,
(c) contracts for the sale of assets;
where the Company expects to make a payment in respect of
(d) contracts for the acquisition of services;
a guarantee, a liability will be recognized to the extent that one
(e) financing agreements;
has not yet been recognized.
(f) trust indentures, fiscal agency agreements, underwriting
agree ments or similar agreements relating to debt or equity
(i) Guarantee of residual values of operating leases
securities of the Company and engagement agreements with
The Company has guaranteed a portion of the residual values
financial advisors;
of certain of its assets under operating leases with expiry dates
(g) transfer agent and registrar agreements in respect of the
between 2012 and 2022, for the benefit of the lessor. If the fair
Company’s securities;
value of the assets, at the end of their respective lease term,
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 83
Notes to Consolidated Financial Statements
17 Major commitments and contingencies
continued
18 Financial instruments
(h) trust and other agreements relating to pension plans and
other plans, including those establishing trust funds to secure
payment to certain officers and senior employees of special
retirement compensation arrangements;
(i) pension transfer agreements;
(j) master agreements with financial institutions governing de-
rivative transactions;
(k) settlement agreements with insurance companies or other third
parties whereby such insurer or third party has been indemnified
for any present or future claims relating to insurance policies,
incidents or events covered by the settlement agreements; and
(l) acquisition agreements.
A. Risk management
In the normal course of business, the Company is exposed to vari-
ous risks such as customer credit risk, commodity price risk, interest
rate risk, foreign currency risk, and liquidity risk. To manage these
risks, the Company follows a financial risk management frame-
work, which is monitored and approved by the Company’s Finance
Committee, with a goal of maintaining a strong balance sheet, op-
timizing earnings per share and free cash flow, financing its opera-
tions at an optimal cost of capital and preserving its liquidity. The
Company has limited involvement with derivative financial instru-
ments in the management of its risks and does not use them for
trading purposes. At December 31, 2011, the Company did not
have any significant derivative financial instruments outstanding.
To the extent of any actual claims under these agreements,
(i) Customer credit risk
the Company maintains provisions for such items, which it con-
In the normal course of business, the Company monitors the fi-
siders to be adequate. Due to the nature of the indemnification
nancial condition and credit limits of its customers and reviews
clauses, the maximum exposure for future payments may be ma-
the credit history of each new customer. Although the Company
terial. However, such exposure cannot be reasonably determined.
believes there are no significant concentrations of credit risk, eco-
During the year, the Company entered into various indemni-
nomic conditions can affect the Company’s customers and can
fication contracts with third parties for which the maximum ex-
result in an increase to the Company’s credit risk and exposure
posure for future payments cannot be reasonably determined. As
to business failures of its customers. To manage its credit risk on
a result, the Company was unable to determine the fair value
an ongoing basis, the Company’s focus is on keeping the average
of these guarantees and accordingly, no liability was recorded.
daily sales outstanding within an acceptable range and working
There are no recourse provisions to recover any amounts from
with customers to ensure timely payments, and in certain cases,
third parties.
requiring financial security, including letters of credit.
(ii) Fuel
The Company is exposed to commodity price risk related to pur-
chases of fuel and the potential reduction in net income due to in-
creases in the price of diesel. The impact of variable fuel expense is
mitigated substantially through the Company’s fuel surcharge pro-
gram which apportions incremental changes in fuel prices to ship-
pers within agreed upon guidelines. While this program provides ef-
fective coverage, residual exposure remains given that fuel price risk
cannot be completely mitigated due to timing and given the volatil-
ity in the market. As such, the Company may enter into derivative
instruments to mitigate such risk when considered appropriate.
(iii) Interest rate
The Company is exposed to interest rate risk, which is the risk
that the fair value or future cash flows of a financial instrument
will vary as a result of changes in market interest rates.
Such risk exists in relation to the Company’s pension and postre-
tirement plans and to its long-term debt. Overall return in the capi-
tal markets and the level of interest rates affect the funded status
of the Company’s pension plans, particularly the Company’s main
Canadian pension plan. Adverse changes with respect to pension
plan returns and the level of interest rates from the date of the last
actuarial valuations may have a material adverse effect on the fund-
ed status of the plans and on the Company’s results of operations.
84
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
The Company mainly issues fixed-rate debt, which exposes the
(v) Liquidity risk
Company to variability in the fair value of the debt. The Company
The Company monitors and manages its cash requirements to
also issues debt with variable interest rates through commercial
ensure sufficient access to funds to meet operational and invest-
paper borrowing and capital leases, which exposes the Company
ing requirements. The Company pursues a solid financial policy
to variability in interest expense. To manage its interest rate expo-
framework with the goal of maintaining a strong balance sheet,
sure, the Company manages its borrowings in line with liquidity
by monitoring its adjusted debt-to-total capitalization and ad-
needs, maturity schedule, and currency and interest rate profile. In
justed debt-to-adjusted earnings before interest, income taxes,
anticipation of future debt issuances, the Company may enter into
depreciation and amortization (EBITDA) ratios, and preserving an
forward rate agreements. The Company does not currently hold
investment grade credit rating to be able to maintain access to
any significant derivative financial instruments to manage its inter-
public financing.
est rate risk. At December 31, 2011, Accumulated other compre-
The Company’s principal source of liquidity is cash generated
hensive loss included an unamortized gain of $8 million, $6 million
from operations, which is supplemented by its commercial paper
after-tax ($10 million, $7 million after-tax at December 31, 2010)
program to meet short-term liquidity needs. If the Company were
relating to treasury lock transactions settled in a prior year, which
to lose access to the program for an extended period of time,
are being amortized over the term of the related debt.
the Company could rely on its $800 million revolving credit facil-
(iv) Foreign currency
ity. The Company’s primary uses of funds are for working capital
requirements, including income tax installments as they become
The Company conducts its business in both Canada and the U.S.
due and pension contributions, contractual obligations, capital ex-
and as a result, is affected by currency fluctuations. Changes in
penditures relating to track infrastructure and other, acquisitions,
the exchange rate between the Canadian dollar and other curren-
dividend payouts, and the repurchase of shares through a share
cies (including the US dollar) make the goods transported by the
buyback program, when applicable. The Company sets priorities
Company more or less competitive in the world marketplace and
on its uses of available funds based on short-term operational re-
thereby further affect the Company’s revenues and expenses.
quirements, expenditures to maintain a safe railway and strategic
All of the Company’s U.S. operations are self-contained for-
initiatives, while also considering its long-term contractual obliga-
eign entities with the US dollar as their functional currency.
tions and returning value to its shareholders.
Accordingly, the U.S. operations’ assets and liabilities are translat-
ed into Canadian dollars at the rate in effect at the balance sheet
B. Fair value of financial instruments
date and the revenues and expenses are translated at average ex-
Generally accepted accounting principles define the fair value of
change rates during the year. All adjustments resulting from the
a financial instrument as the amount at which the instrument
translation of the foreign operations are recorded in Other com-
could be exchanged in a current transaction between willing par-
prehensive income (loss). For the purpose of minimizing volatility
ties. The Company uses the following methods and assumptions
of earnings resulting from the conversion of US dollar-denominat-
to estimate the fair value of each class of financial instruments
ed long-term debt into the Canadian dollar, the Company des-
for which the carrying amounts are included in the Consolidated
ignates the US dollar-denominated long-term debt of the parent
Balance Sheet under the following captions:
company as a foreign currency hedge of its net investment in U.S.
(i) Cash and cash equivalents, Restricted cash and cash equiva-
subsidiaries. As a result, from the dates of designation, foreign
lents, Accounts receivable, Other current assets, Accounts
exchange gains and losses on translation of the Company’s US
payable and other:
dollar-denominated long-term debt are recorded in Accumulated
The carrying amounts approximate fair value because of the
other comprehensive loss.
short maturity of these instruments.
Occasionally, the Company enters into short-term foreign
(ii) Intangible and other assets:
exchange contracts as part of its cash management strategy. At
Included in Intangible and other assets are equity investments
December 31, 2011, the Company did not have any foreign ex-
for which the carrying value approximates the fair value, with
change contracts outstanding.
the exception of certain cost investments for which the fair
value was estimated based on the Company’s proportionate
share of the underlying net assets.
(iii) Debt:
The fair value of the Company’s debt is estimated based on
the quoted market prices for the same or similar debt instru-
ments, as well as discounted cash flows using current interest
rates for debt with similar terms, company rating, and remain-
ing maturity.
Canadian National Railway Company
U.S. GAAP
2011 Annual Report 85
Notes to Consolidated Financial Statements
18 Financial instruments continued
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as at December 31,
2011 and December 31, 2010 for which the carrying values on the Consolidated Balance Sheet are different from their fair values:
In millions
Financial assets
Investments (Note 6)
Financial liabilities
Total debt (Note 9)
December 31, 2011
December 31, 2010
Carrying
amount
Fair
value
Carrying
amount
Fair
value
$
31
$
126
$
25
$
114
$ 6,576
$ 7,978
$ 6,071
$ 6,937
19 Accumulated other comprehensive loss
The components of Accumulated other comprehensive loss are as follows:
In millions
Foreign exchange loss
Pension and other postretirement benefit plans
Derivative instruments (Note 18)
Accumulated other comprehensive loss
December 31,
2011
2010
$
(769)
$
(796)
(2,076)
6
(920)
7
$ (2,839)
$ (1,709)
The components of Other comprehensive loss and the related tax effects are as follows:
In millions
Year ended December 31,
2011
2010
2009
Accumulated other comprehensive loss - Balance at January 1
$ (1,709)
$
(948)
$
(155)
Other comprehensive income (loss):
Foreign exchange gain (loss) (net of income tax (expense) recovery of
$19, $(53) and $(131), for 2011, 2010 and 2009, respectively)
Pension and other postretirement benefit plans (net of income tax (expense) recovery of
$401, $241 and $223, for 2011, 2010 and 2009, respectively)
Derivative instruments (net of income tax recovery of
$1, nil and nil for 2011, 2010 and 2009, respectively)
Other comprehensive loss
27
(68)
(1,156)
(692)
(1)
(1,130)
(1)
(761)
(153)
(640)
-
(793)
Accumulated other comprehensive loss - Balance at December 31
$ (2,839)
$ (1,709)
$
(948)
20 Comparative figures
Certain figures previously reported in 2010 and 2009 have been reclassified to conform with the basis of presentation adopted in 2011.
86
2011 Annual Report
U.S. GAAP
Canadian National Railway Company
Corporate Governance – Delivering Responsibly
CN is committed to being a good corporate citizen. At CN, sound
We are proud of our corporate governance practices. For
corporate citizenship touches nearly every aspect of what we
more information on these practices, please refer to our website,
do, from governance to business ethics, from safety to envi-
as well as to our proxy circular – mailed to our shareholders and also
ronmental protection. Central to this comprehensive approach is
available on our website. CN understands that our long-term
our strong belief that good corporate citizenship is simply good
success is connected to our contribution to a sustainable future.
business.
That is why we are committed to the safety of our employees, the
CN has always recognized the importance of good gov-
public and the environment; delivering reliable, efficient service so
ernance. As it evolved from a Canadian institution to a North
our customers succeed in global markets; building stronger com-
American publicly traded company, CN voluntarily followed cer-
munities; and providing a great place to work. Our sustainability
tain corporate governance requirements that, as a company
activities are outlined in our Delivering Responsibly report, which
based in Canada, it was not technically compelled to follow. We
can be found on our website: www.cn.ca
continue to do so today. Since many of our peers – and share-
For the third straight year, CN’s practices have earned it a
holders – are based in the United States, we want to provide the
place on the Dow Jones Sustainability Index (DJSI) North America,
same assurances of sound practices as our U.S. competitors.
which includes an assessment of CN’s governance practices.
Hence, we adopt and adhere to corporate governance
CN received the Best Corporate Governance Award from
practices that either meet or exceed applicable Canadian and
IR Magazine in 2009 and 2010, and in 2011 we received the
U.S. corporate governance standards. As a Canadian reporting
Canadian Coalition for Good Governance Award for Best Disclosure
issuer with securities listed on the Toronto Stock Exchange (TSX)
of Board Governance Practices and Director Qualifications.
and the New York Stock Exchange (NYSE), CN complies with ap-
plicable rules adopted by the Canadian Securities Administrators
and the rules of the U.S. Securities and Exchange Commission
giving effect to the provisions of the U.S. Sarbanes-Oxley Act of
2002.
As a Canadian company, we are not required to comply with
many of the NYSE corporate governance rules, and instead may
comply with Canadian governance practices. However, except
as summarized on our website (www.cn.ca in the Delivering
Responsibly – Governance section), our governance prac tices
comply with the NYSE corporate governance rules in all signifi-
cant respects.
Consistent with the belief that ethical conduct goes be-
yond compliance and resides in a solid governance culture, the
Delivering Responsibly – Governance section on the CN website
contains CN’s Corporate Governance Manual (including the char-
ters of our Board and of our Board committees) and CN’s Code of
Business Conduct. Printed versions of these documents are also
available upon request to CN’s Corporate Secretary.
Because it is important to CN to uphold the highest standards
in corporate governance and that any potential or real wrongdo-
ings be reported, CN has also adopted methods allowing employ-
ees and third parties to report accounting, auditing and other
concerns, as more fully described on our website.
Canadian National Railway Company
2011 Annual Report 87
Shareholder and Investor Information
Annual meeting
Shareholder services
The annual meeting of shareholders will
be held at 10 a.m. ADT on April 24, 2012 at:
The World Trade and Convention Centre
Grand Ballroom, Room 200C
1800 Argyle Street
Halifax, Nova Scotia, Canada
Annual information form
The annual information form may be obtained
on CN's website (www.cn.ca) or by writing to:
The Corporate Secretary
Canadian National Railway Company
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
Transfer agent and registrar
Computershare Trust Company of Canada
Offices in:
Montreal, QC;
Toronto, ON;
Calgary, AB;
Vancouver, BC
Telephone: 1-800-564-6253
www.computershare.com/investorcentrecanada
Co-transfer agent and co-registrar
Computershare Trust Company N.A.
Att: Stock Transfer Department
Overnight Mail Delivery:
250 Royall Street, Canton MA 02021
Regular Mail Delivery: P.O. Box 43070,
Providence, RI 02940-3070
Telephone: 303-262-0600 or
1-800-962-4284
Shareholders having inquiries concerning
their shares, wishing to obtain information
about CN, or to receive dividends by direct
deposit or in U.S. dollars may obtain detailed
information by communicating with:
Computershare Trust Company of Canada
Shareholder Services
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Telephone: 1-800-564-6253
www.computershare.com/investorcentrecanada
Stock exchanges
CN common shares are listed on the Toronto
and New York stock exchanges.
Ticker symbols:
CNR (Toronto Stock Exchange)
CNI (New York Stock Exchange)
Investor relations
Robert Noorigian
Vice-President, Investor Relations
Telephone: 514-399-0052
Head office
Canadian National Railway Company
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
P.O. Box 8100
Montreal, Quebec H3C 3N4
Additional copies of this report are
available from:
CN Public Affairs
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
Telephone: 1-888-888-5909
Email: contact@cn.ca
La version française du présent rapport
est disponible à l’adresse suivante :
Affaires publiques du CN
935, rue de La Gauchetière Ouest
Montréal (Québec) H3B 2M9
Téléphone : 1-888-888-5909
Courriel : contact@cn.ca
88
2011 Annual Report
Canadian National Railway Company
Contents
1 A message from the Chairman
2 A message from Claude Mongeau
4 Operational and Service Excellence
6 Board of Directors
7 Financial Section (U.S. GAAP)
87 Corporate Governance – Delivering Responsibly
88 Shareholder and Investor Information
Except where otherwise
indicated, all fi nancial
information refl ected in
this document is expressed
in Canadian dollars and
determined on the basis
of United States gener-
ally accepted accounting
principles (U.S. GAAP).
Certain information included in this annual report 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. 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, infl ation, currency and interest rate fl uctuations, 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, fl oods 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 fi led by CN with securities regulators in Canada and the United States. Reference should be made to “Manage-
ment’s Discussion and Analysis” in CN’s annual and interim reports, Annual Information Form and Form 40-F fi led with
Canadian and U.S. securities regulators, available on CN’s website (www.cn.ca), for a summary of major risks.
CN assumes no obligation to update or revise forward-looking statements to refl ect future events, changes in circum-
stances, 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 state-
ment, related matters, or any other forward-looking statement.
As used herein, the word “Company” or “CN” means, as the context requires, Canadian National Railway Company and/
or its subsidiaries.
This report has been printed
on FSC® paper.
OPERATIONAL AND SERVICE
EXCELLENCE
2 0 1 1 a n n u a l r e p o r t
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
www.cn.ca
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