BUILDING FOR THE
FUTURE
FUTURE
2 0 1 4 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 Building for the future:
With network capacity
With the next generation
Through innovation
With safety as a priority
8 Expanding our network
10 Board of Directors
11 Financial Section (U.S. GAAP)
96 Corporate Governance – Delivering Responsibly
97 Shareholder and Investor Information
Except where otherwise
indicated, all financial
information reflected 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, inflation, currency and interest rate fluctuations, changes in fuel prices,
legislative and/or regulatory developments, compliance with environmental laws and regulations, actions by regulators,
various events which could disrupt operations, including natural events such as severe weather, droughts, floods and
earthquakes, labor negotiations and disruptions, environmental claims, uncertainties of investigations, proceedings or
other types of claims and litigation, risks and liabilities arising from derailments, and other risks detailed from time to time
in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to “Manage-
ment’s Discussion and Analysis” in CN’s annual and interim reports, Annual Information Form and Form 40-F filed with
Canadian and U.S. securities regulators, available on CN’s website (www.cn.ca), for a summary of major risks.
CN assumes no obligation to update or revise forward-looking statements to reflect 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.
Shareholder and Investor Information
Annual meeting
The annual meeting of shareholders
will be held at 8:30 a.m. CDT on
April 21, 2015 at:
The Peabody Memphis
Venetian Room
149 Union Avenue
Memphis, Tennessee, US
Annual information form
The annual information form may be
obtained by writing to:
The Corporate Secretary
Canadian National Railway Company
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
It is also available on CN’s website.
Transfer agent and registrar
Computershare Trust Company of Canada
Offices in:
Montreal, Quebec;
Toronto, Ontario;
Calgary, Alberta;
Vancouver, British Columbia
Telephone: 1-800-564-6253
www.investorcentre.com
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 43078,
Providence, RI 02940-3078
Telephone: 1-800-962-4284
Shareholder services
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, 8th Floor
Toronto, Ontario M5J 2Y1
Telephone: 1-800-564-6253
www.investorcentre.com
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
Janet Drysdale
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
Canadian National Railway Company
2014 Annual Report 97
This report has been printed on
100% post-consumer paper.
A message from the Chairman
Dear fellow shareholders 2014 was a year of considerable change and tremendous
achievement at CN.
We experienced a noteworthy transition at our Annual General Meeting of shareholders
last April, as we bid farewell to David McLean, who retired as the Chairman of CN’s Board of
Directors, and to retiring Directors Michael Armellino and Hugh Bolton, all of whom made
significant contributions to the Board’s deliberations and the Company’s success over the
last 20 years. At that meeting, we welcomed three new Directors – Kevin Lynch, the Vice
Chair of BMO Financial Group; Robert Phillips, President of R.L. Phillips Investments Inc. and
Chairman of Precision Drilling Inc.; and Laura Stein, Senior Vice President and General Counsel
of the Clorox Company – who are bringing their perspectives and keen insights to the Board.
We onboarded our new Directors with the same philosophy that CN onboards new
employees, instilling a sense of what the Company stands for, such as the importance of
stakeholder engagement and how seriously we take safety. Like true CN railroaders, this
helped prepare them to contribute their talents as quickly as possible.
It has been a remarkable 20 years for CN during which I have been privileged to serve as
a CN Director. A transformational journey has led CN to become the best railway in North
America. CN has continuously strived to deliver responsibly, with an unwavering commitment
to safety and, at the same time, strong sustainability practices. It has also adhered to the
highest standards of corporate governance, including a new policy adopted by the Board to
the effect that tenure of our Board and Committee Chairs will be subject to term limits.
CN is a true backbone of the North American economy, and the Company’s excep-
tional financial performance in 2014 under challenging conditions is evidence of its strong
strategic agenda, solid execution capabilities, and great management team.
As we look ahead to 2015, the 20th anniversary of CN’s privatization, I want to thank our
shareholders for the support you have shown for CN. The Board and CN’s outstanding team
of railroaders are focused on building for the future so that CN will continue to provide the
service our customers need and to deliver shareholder value for many years to come.
Sincerely,
Robert Pace, D.COMM.
Chairman of the Board
Canadian National Railway Company
2014 Annual Report 1
A message from Claude Mongeau
BUILDING
FOR THE
FUTURE
Dear fellow shareholders The year 2014 was an eventful one for CN, and we enter
2015 looking forward to celebrating the 20th anniversary of the Company’s initial public
offering of shares later this year. Our journey since privatization in 1995 has been truly
transformational. Building on our commitment to Operational and Service Excellence,
supply chain enabling and continuous innovation, we are focused on creating the CN
of the future. We are determined to strengthen CN’s role as a true backbone of the
economy, with continued investments in our capacity and our people.
CN’s strong team of railroaders contributed to outstanding financial and operational
results in 2014 amid significant challenges. Chief among them were the winter of a
lifetime that produced a stretch of record-breaking cold snaps, and a 100-year grain
crop in Canada. In spite of these obstacles, our full-year 2014 adjusted diluted earnings
per share increased 23 per cent, with reported 2014 net income of $3,167 million versus
$2,612 million in 2013. CN retained its industry-leading productivity performance, grew
its business faster than the overall economy, and did so at low incremental cost.
CN has made huge strides since its 1995 initial public share offering. Once an
industry laggard and largely a Canada-only enterprise, CN today leads the North
American rail industry in terms of efficiency and operating margins. We span eight
Canadian provinces as well as 16 U.S. states, transporting freight traffic seamlessly over
a 19,600 mile network that reflects more than $8 billion of acquisitions since 1998.
CN has taken the lead in developing new first-mile/last-mile services for merchandise
freight, and scheduled services for bulk commodities. We have entered into innovative
supply chain collaboration agreements with the key ports we serve, many of their
terminal operators, as well as with several of our customers. All this
is helping position ourselves as a true supply chain enabler.
“Our journey
since privatization in
1995 has been truly
transformational.”
We will celebrate the 20th anniversary of CN’s IPO in November
2015. This anniversary will allow us to take stock of what we have
achieved in the last 20 years. It will also be an opportunity to re-
assert what we stand for and our commitment to create value
for customers and shareholders. That commitment requires us to
continue investing in capacity ahead of the curve to support our
2
2014 Annual Report
Canadian National Railway Company
growth agenda, and renewing our workforce with
the same attention and focus we’ve demonstrated
since 2010. We will also have to maintain the same
innovative mindset that has led to the development
of new tools to communicate with customers, and the
same outreach mindset that is behind a comprehensive
and structured community engagement program to
share information about our safety practices across our
network.
“We believe that
a commercial
framework and a
stable regulatory
environment are
essential for an
effective, well-
functioning rail
transportation
marketplace.”
After 20 years of delivering value with a clear vision
and strong commitment to flawless execution, CN’s
plans for the future require supportive government
policy and a stable regulatory environment. It was the
momentum towards de-regulation of the rail industry – first in the United States in 1980
and later in Canada in 1987 and 1996 – that was the turning point that allowed CN
and the overall rail industry to embark on a strong revival. Unfortunately, in 2014 the
Canadian government took a step backward on the regulatory front, imposing minimum
grain volume requirements on the two main railways, extending interswitching limits in
three Western provinces, and re-enforcing a finger-pointing mentality that undermines
collaboration.
In the face of a historic grain crop and a brutal winter, none of this government
action was warranted. Once the cold abated, CN, as it promised, bounced back,
posting a record performance in the 2013-2014 crop-year – our movement of Western
Canadian grain was a full 25 per cent greater than past averages. CN continued its
record-setting grain transportation volume into the new crop-year with the grain supply
chain fully in sync, while continuing to move record volumes of traffic overall.
We believe that a commercial framework and a stable regulatory environment are
essential for an effective, well-functioning rail transportation marketplace. Burdensome
regulation threatens to increase costs, stifle innovation and potentially discourage
investments that are critical to building the strong, safe and resilient supply chains of
the future.
We are proud of our record in the near 20 years since privatization in 1995. We
will continue to work hard to convince governments to create the proper regulatory
environment that will justify and encourage our investments in the business for the
next 20 years. We will strive to convince all our customers that a commercially driven
policy framework is best for them as well. In short, we are building for the future with
confidence to deliver value for our customers and shareholders.
Claude Mongeau
President and CEO
Canadian National Railway Company
2014 Annual Report 3
BUILDING FOR THE FUTURE
WITH NETWORK CAPACITY
Building more robust network
capacity
partners. These advantages drive
Given expectations of continued solid
network fluidity and greatly help
freight volumes in the years ahead,
CN recover from weather-related
CN is investing significantly to build
operational challenges such as those
for the future, increasing network
experienced last winter. In addition,
capacity, resilience and fluidity across
CN’s use of the EJ&E frees up capacity
its network, including its Edmonton–
for other carriers on the Belt Railway
Winnipeg and Winnipeg–Chicago cor-
of Chicago (BRC) and Indiana Harbor
ri dors.
Belt (IHB) – a clear benefit for the entire
In 2014, CN committed more
Greater Chicago rail network.
than C$100 million to improve yards
By the end of 2014, CN had
and install sections of double track,
spent more than US$125 million
crossovers and high-speed switches
on infrastructure improvements to
on main lines in the two corridors. That
the former EJ&E network, such as
followed a C$100-million program in
improved connections, track exten-
2013 to increase capacity on CN’s
sions and signalling. CN has also
main line between Edmonton and
invested more than US$100 million for
Winnipeg and the parallel secondary
upgrades to improve the capacity and
Prairie North Line (PNL). The PNL can
efficiency of the former EJ&E’s Kirk
also serve as a “relief valve” for the
Yard in Gary, Ind., now CN’s principal
main corridor, providing flexibility and
rail car classification and interchange
resilience to the network.
yard in the Chicago area.
CN has invested in the former Elgin,
In addition, CN has spent roughly
Joliet and Eastern (EJ&E) network that
US$80 million to date on environmen-
encircles Chicago. The acquisition of
tal and safety mitigation, as well as
the EJ&E in 2009 allowed CN – for
ful filling CN’s commitment in the
the first time – to link its five rail lines
Voluntary Mitigation Agreements CN
entering Chicago from all directions
reached with 28 EJ&E communities. CN
into one seamless system. The EJ&E
will spend approximately US$45 million
enables CN to avoid congested inner
more in 2015-2016 to complete two
city rail corridors in connecting with
grade separations in Illinois mandated
its lines and principal interchange
by the Surface Transportation Board.
4
2014 Annual Report
Canadian National Railway Company
WITH THE NEXT
GENERATION
CN Campus, Winnipeg
CN Campus, Homewood
Building the next generation of
Winnipeg centre hosts an average
CN railroaders
of 350 students a week from across
CN is devoting significant resources
Canada, while the facility in suburban
to onboarding and training a new
Chicago accommodates an average
generation of CN railroaders across
of 250 students from across the U.S.
its network.
The training centres assure con-
The imperative for the investment
sis tent, quality
training with a
is clear – since 2010 CN has hired
modernized curriculum, coupled with
14,000 people to replace retiring
skilled instructors, offering courses
or departing employees and to
for jobs ranging from conductor to
accommodate the growth in freight
car mechanic, from track supervisor
traffic. In 2014 alone, CN onboarded
to signal maintainer. Employees
more than 3,900 new employees.
receive hands-on training in indoor
The seismic shift in CN’s workforce
learning laboratories with equipment
is evidenced by
the
fact
that
such as locomotive simulators and
Generation Y – people in their 20s
dispatcher stations. Outdoor labs
and 30s – now accounts for 40 per
with dedicated rolling stock and
cent of the Company’s workforce,
other equipment for field training are
the largest overall segment of the
also a key focus.
employee population.
Employees learn about the valu-
As workforce renewal proceeded,
able role peer-to-peer com mun i-
CN recognized the need to insti tute
cations, coaching, and mentoring
new, comprehensive onboarding
play in safe railroading. Experienced
and training programs focused on
Peer Conductor Trainers help ensure
instilling a strong safety culture in
safe environments for student con-
new employees and reinforcing it
ductors, evaluating and guiding them
among current employees who are
during their progress toward full
learning new skills or upgrading
conductor qualification. Workforce
existing ones. To advance
that
renewal is a critical element in CN’s
objective, CN opened new training
objective to hire, retain and develop
centres
in Winnipeg, Man., and
the talented railroaders who will
Homewood, Ill., in 2014, built at a
maintain the Company’s leadership
cost of approximately $55 million. The
role in the industry.
Canadian National Railway Company
2014 Annual Report 5
BUILDING FOR THE FUTURE
THROUGH INNOVATION
Building trust with customers through
Under CN’s iAdvise program, oper-
an innovative tool – iAdvise
ating employees send Local Service
Innovation has been at the centre of
Notifications to customers. These mes-
CN’s business agenda for years. From
sages are automatically sent when the
an initial focus on asset utilization
Daily Operating Plan is committed to
driven by the Precision Railroading
notify customers of work to be done –
business model, CN has shifted its
before the switching assignment leaves
attention to balancing Operational
the clas sifi cation yard.
and Service Excellence. Through a
In addition to receiving this notifi-
portfolio of initiatives called Customer
ca tion, customers also have access to
FIRST, CN is innovating to address
CN’s new first-mile/last-mile report on
key customer pinch points, including
eBusiness which includes CN’s new
the first mile and last mile of the
Delivery Date commitment.
shipment cycle. iAdvise, the latest
Together these tools provide CN
initiative in CN’s first-mile/last-mile
customers with more visibility of traffic
strategy to communicate better with
moving toward the destination yard
customers, built critical mass in 2014
along with the status of the cars at the
when the program was rolled out for
yard and at their facilities. This increased
CN’s largest customers, with smaller
visibility and accuracy – the customer,
customers also coming on stream.
CN Service Delivery Representatives,
iAdvise began with notifying
Account Managers and Trainmasters
custo mers about service exceptions
all share common information – helps
in a timelier manner to help them
customers better plan their operations.
adjust their work plans. It has now
CN believes
timely, accurate
evolved into an innovative set of tools
information is key to building custo-
and processes to further improve the
mers’ confidence. iAdvise has the
way CN works and communicates
potential to build their trust and
with them.
elevate CN ahead of the competition.
FIRST MILE
ON TO CN TRAIN
LAST MILE
INBOUND
OUTBOUND
6
2014 Annual Report
Canadian National Railway Company
WITH SAFETY
AS A PRIORITY
Building safety into all we do
environmentally sensitive areas, and rail-
CN has an unwavering commitment
way operating practices.
to safety. Whether moving dangerous
CN supports regulations requiring the
goods or any other freight on its net-
retrofitting or phase-out of older model
work, CN knows that safe operations
DOT-111 tank cars used to transport flam-
are the first priority and are critical to
mable liquids, and a reinforced stan dard
all stake holders: employees, customers
for new tank cars built in the future. On
and the communities through which its
its own initiative, CN took steps in 2014
trains travel.
to structure freight rates that offer its
Although CN was not involved with
customers an incentive to acquire more
the Lac -Mégantic accident in 2013,
robust tank cars for the transportation
following the tragedy, we took addi tional
of crude oil that meet higher safety
steps to further reduce the potential for
standards. CN also announced a program
and impact of accidents on our net-
to replace its own small fleet of legacy
work. CN’s approach to safety reflects
DOT-111 tank cars used to transport diesel
a three-pronged strategy focusing on
locomotive fuel on its network.
safety enhancements, the replacement
CN believes that the rail industry can
of older model DOT-111 tank cars, and
enhance safety by working more closely
a structured community engagement
with communities. Toward that end,
program. Our drive to enhance safety
CN has been reaching out to muni cipal
has several components, including cap-
officials and their emergency responders
ital spending on our flaw detection
along its North American rail network
capa bilities to ensure a high-quality
to
review
its comprehensive safety
plant across the network. In addition,
programs, to share in confidence relevant
we have strengthened our robust train
information on dangerous goods traffic,
securement practices and
restricted
and to discuss emergency response
the speeds of trains hauling highly-
planning and training. CN arranges to
flammable liquids. We have conducted
conduct training sessions for emergency
corridor risk assessments, under which a
responders when
requested.
The
multifunctional team evaluated the risks
Company’s outreach program in v olves
associated with CN’s transportation of
almost 1,100 communities in Canada
dangerous goods on key route corridors,
and approximately 870 com munities and
with a view towards rail line proximity
counties in the U.S., and supplements
to urban populations and infra structure,
governmental and regulatory direction.
Canadian National Railway Company
2014 Annual Report 7
BUILDING FOR THE FUTURE
EXPANDING OUR NETWORK
Capital expenditures 2010-2014
% of total (including capital leases)
Capital expenditures
1,718M
2010
2011
1,712M
2012
1,825M
2013
2,017M
2014
2,297M
% of total
Track and roadway
Rolling stock
Information technology
Other
60
24
7
9
69
11
8
12
74
11
7
8
69
14
7
10
70
14
6
10
8
2014 Annual Report
Canadian National Railway Company
CN
IC
1998
WC
2001
BC Rail
2004
GLT
2004
EJ&E
2009
Canadian National Railway Company
2014 Annual Report 9
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 committee
of CN’s Pension Trust
Funds
* denotes chair of
the committee
Board of Directors As at December 31, 2014
Robert Pace, D.Comm.
Chairman of the Board
Canadian National Railway Company
President and
Chief Executive Officer
The Pace Group
Committees: 3, 4, 5, 6, 7
Claude Mongeau
President and
Chief Executive Officer
Canadian National Railway Company
Committees: 4*, 7
A. Charles Baillie, O.C., LL.D.
Former Chairman and CEO
The Toronto-Dominion Bank
Committees: 2*, 6, 7, 8
Donald J. Carty, O.C., LL.D.
Retired Vice-Chairman and
Chief Financial Officer
Dell, Inc.
Committees: 1*, 3, 5, 6, 7
Ambassador Gordon D. Giffin
Senior Partner
McKenna, Long & Aldridge
Committees: 1, 4, 6*, 7, 8
Edith E. Holiday
Corporate Director and Trustee,
Former General Counsel,
United States Treasury Department
and 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 Vice-President
General Motors Corporation
and President
GM Latin America,
Africa and Middle East
Committees: 2, 3, 5*, 6, 7
The Honourable
Denis Losier, P.C., LL.D., C.M.
Retired President and
Chief Executive Officer
Assumption Life
Committees: 1, 3*, 6, 7, 8
The Honourable
Edward C. Lumley, P.C., LL.D.
Vice-Chairman
BMO Capital Markets
Committees: 2, 6, 7, 8*
The Honourable Kevin G.
Lynch, P.C., O.C., PH.D., LL.D.
Vice-Chair
BMO Financial Group
Committees: 2, 3, 5, 6, 7
James E. O’Connor
Former Chairman and CEO
Republic Services, Inc.
Committees: 1, 2, 5, 6, 7*
Robert L. Phillips
President
R.L. Phillips Investments Inc.
Committees: 1, 3, 5, 6, 7
Laura Stein
Senior Vice-President,
General Counsel
The Clorox Company
Committees: 1, 2, 5, 6, 7
Chairman of the Board and Select Senior Officers of the Company As at December 31, 2014
Robert Pace
Chairman of the Board
Claude Mongeau
President and
Chief Executive Officer
John Orr
Vice-President
Eastern Region
Russell J. Hiscock
President and
Chief Executive Officer
CN Investment Division
Sean Finn
Executive Vice-President
Corporate Services and
Chief Legal Officer
Luc Jobin
Executive Vice-President and
Chief Financial Officer
Jean-Jacques Ruest
Executive Vice-President and
Chief Marketing Officer
Jim Vena
Executive Vice-President and
Chief Operating Officer
Mike Cory
Senior Vice-President
Western Region
Jeff Liepelt
Senior Vice-President
Southern Region
Janet Drysdale
Vice-President
Investor Relations
Kimberly A. Madigan
Vice-President
Human Resources
10
2014 Annual Report
Canadian National Railway Company
Financial Section
(U.S. GAAP)
Contents
12 Selected Railroad Statistics – unaudited
Management’s Discussion and Analysis
13 Business profile
13 Corporate organization
13 Strategy overview
16 Forward-looking statements
16 Financial outlook
17 Financial highlights
18 Adjusted performance measures
19 Revenues
23 Operating expenses
24 Other income and expenses
24 2013 compared to 2012
28 Summary of quarterly financial data
28 Summary of fourth quarter 2014
29 Financial position
30 Liquidity and capital resources
35 Off balance sheet arrangements
35 Financial instruments
37 Outstanding share data
37 Critical accounting estimates
45 Business risks
55 Controls and procedures
Consolidated Financial Statements
56 Management’s Report on Internal Control over Financial Reporting
56 Report of Independent Registered Public Accounting Firm
57 Report of Independent Registered Public Accounting Firm
58 Consolidated Statement of Income
59 Consolidated Statement of Comprehensive Income
60 Consolidated Balance Sheet
61 Consolidated Statement of Changes in Shareholders’ Equity
62 Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
63 1 Summary of significant accounting policies
66 2 Recent accounting pronouncement
67 3 Other income
68 4
Income taxes
69 5 Earnings per share
69 6 Accounts receivable
70 7 Properties
70 8
Intangible and other assets
70 9 Accounts payable and other
71 10 Long-term debt
73 11 Other liabilities and deferred credits
73 12 Pensions and other postretirement benefits
80 13 Share capital
82 14 Stock plans
89 15 Accumulated other comprehensive loss
90 16 Major commitments and contingencies
94 17 Financial instruments
95 18 Segmented information
Canadian National Railway Company
2014 Annual Report 11
Selected Railroad Statistics – unaudited
Financial measures
Key financial performance indicators
Total revenues ($ millions)
Rail freight revenues ($ millions) (1)
Operating income ($ millions)
Adjusted diluted earnings per share ($) (2)
Free cash flow ($ millions) (3)
Gross property additions ($ millions)
Share repurchases ($ millions)
Dividends per share ($)
Financial position
Total assets ($ millions)
Total liabilities ($ millions)
Shareholders’ equity ($ millions)
Financial ratios
Operating ratio (%)
Adjusted debt-to-total capitalization ratio (%) (4)
Adjusted debt-to-adjusted EBITDA (times) (4)
Operational measures (5)
Statistical operating data
Gross ton miles (GTM) (millions)
Revenue ton miles (RTM) (millions)
Carloads (thousands)
Route miles (includes Canada and the U.S.)
Employees (end of year)
Employees (average for the year)
Key operating measures
Rail freight revenue per RTM (cents) (1)
Rail freight revenue per carload ($) (1)
GTMs per average number of employees (thousands)
Operating expenses per GTM (cents)
Labor and fringe benefits expense per GTM (cents)
Diesel fuel consumed (US gallons in millions)
Average fuel price ($ per US gallon)
GTMs per US gallon of fuel consumed
Terminal dwell (hours)
Train velocity (miles per hour)
Safety indicators
Injury frequency rate (per 200,000 person hours) (6)
Accident rate (per million train miles) (6)
2014
2013
2012
12,134
10,575
9,920
11,455
9,951
9,306
4,624
3,873
3,685
3.76
3.06
2.81
2,220
1,623
1,661
2,297
2,017
1,825
1,505
1,400
1,400
1.00
0.86
0.75
31,792
30,163
26,659
18,322
17,210
15,641
13,470
12,953
11,018
61.9
40.1
1.58
63.4
39.4
1.72
62.9
40.4
1.61
448,765
401,390
383,754
232,138
210,133
201,496
5,625
5,190
5,059
19,600
20,000
20,100
25,530
23,721
23,430
24,635
23,705
23,466
4.93
4.74
4.62
2,036
1,917
1,839
18,217
16,933
16,354
1.67
0.52
1.67
0.54
1.62
0.51
440.5
403.7
388.7
3.72
1,019
16.9
25.7
1.81
2.73
3.55
994
15.8
26.6
1.69
2.11
3.47
987
15.6
27.2
1.42
2.10
(1)
In 2014, certain Other revenues were reclassified to the commodity groups within rail freight revenues. This change has no impact on the Company’s previously reported results of operations
as Total revenues remain unchanged. The 2013 and 2012 comparative figures have been reclassified in order to be consistent with the 2014 presentation.
(2) See the section entitled Adjusted performance measures in the MD&A for an explanation of this non-GAAP measure.
(3) See the section entitled Liquidity and capital resources – Free cash flow in the MD&A for an explanation of this non-GAAP measure.
(4) See the section entitled Liquidity and capital resources – Credit measures in the MD&A for an explanation of this non-GAAP measure.
(5) Statistical operating data, key operating measures and safety indicators are unaudited and based on estimated data available at such time and are subject to change as more complete
information becomes available, as such, certain of the comparative data have been restated. Definitions of these indicators are provided on our website, www.cn.ca/glossary.
(6) Based on Federal Railroad Administration (FRA) reporting criteria.
12
2014 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 objective is to provide meaningful and relevant information reflecting the Company’s financial position and results of operations.
In certain instances, the Company may make reference to certain non-GAAP measures that, from management’s perspective, are useful
measures of performance. The reader is advised to read all information provided in the MD&A in conjunction with the Company’s 2014
Annual Consolidated Financial Statements and Notes thereto.
Business profile
Strategy overview
CN is engaged in the rail and related transportation business.
CN’s business strategy is anchored on the continuous pursuit of
CN’s network of approximately 20,000 route miles of track spans
Operational and Service Excellence, an unwavering commitment
Canada and mid-America, uniquely connecting three coasts:
to safety and sustainability, and the development of a solid team
the Atlantic, the Pacific and the Gulf of Mexico. CN’s extensive
network and efficient connections to all Class I railroads provide
CN customers access to all three North American Free Trade
of motivated and competent railroaders. CN’s goal is to deliver
valuable transportation services for its customers and to grow
the business at low incremental cost. CN thereby creates value
Agreement (NAFTA) nations. A true backbone of the economy,
for its shareholders by striving for sustainable financial perform-
CN handles over $250 billion worth of goods annually and carries
ance through profitable top-line growth, adequate free cash flow
more than 300 million tons of cargo, serving exporters, importers,
and return on invested capital. CN is also focused on returning
retailers, farmers and manufacturers.
value to shareholders through dividend payments and share re-
CN’s freight revenues are derived from seven commodity
purchase programs. With a clear strategic agenda, driven by a
groups representing a diversified and balanced portfolio of goods
commitment to innovation, productivity, supply-chain collabor-
transported between a wide range of origins and destinations. This
ation, and running trains safely while minimizing environmental
product and geographic diversity better positions the Company to
impact, CN aims to create value for its customers as well as its
face economic fluctuations and enhances its potential for growth
shareholders.
opportunities. In 2014, no individual commodity group accounted
CN’s success is dependent on long-term economic viability
for more than 23% of total revenues. From a geographic stand-
and on the presence of a supportive regulatory and policy en-
point, 17% of revenues relate to United States (U.S.) domestic
vironment that drives investment and innovation. CN’s success
traffic, 33% transborder traffic, 19% Canadian domestic traffic
also depends on a stream of capital investments that supports its
and 31% overseas traffic. The Company is the originating carrier
business strategy. These investments cover a wide range of areas,
for approximately 85% of traffic moving along its network, which
from track infrastructure and rolling stock, to information tech-
allows it both to capitalize on service advantages and build on
nology and other equipment and assets that improve the safety,
opportunities to efficiently use assets.
Corporate organization
efficiency and reliability of CN’s service offering. Investments in
track infrastructure enhance the productivity and integrity of the
plant, and increase the capacity and the fluidity of the network,
The Company manages its rail operations in Canada and the U.S.
including track upgrades to accommodate higher volumes and
as one business segment. Financial information reported at this
long sidings that allow for longer trains. The acquisition of new
level, such as revenues, operating income and cash flow from
locomotives and cars generate several key benefits. New motive
operations, is used by the Company’s corporate management in
power increases fuel productivity and efficiency, and improves
evaluating financial and operational performance and allocating
the reliability of service. Units equipped with distributed power
resources across CN’s network. The Company’s strategic initiatives
allow for greater productivity of trains, particularly in cold weath-
are developed and managed centrally by corporate management
er, while improving train handling and safety. Targeted car ac-
and are communicated to its regional activity centers (the Western
quisitions aim to tap growth opportunities, complementing the
Region, Eastern Region and Southern Region), whose role is to
fleet of privately owned railcars that traverse CN’s network. CN’s
manage the day-to-day service requirements of their respective
strategic investments in information technology provide access
territories, control direct costs incurred locally, and execute the
to timely and accurate information which supports CN’s ongoing
strategy and operating plan established by corporate management.
efforts to drive innovation and efficiency in service, cost control,
See Note 18 – Segmented information to the Company’s 2014
asset utilization, safety and employee engagement.
Annual Consolidated Financial Statements for additional informa-
tion on the Company’s corporate organization, as well as selected
financial information by geographic area.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 13
Management’s Discussion and Analysis
Balancing “Operational and Service Excellence”
sharper outside-in perspective; better monitoring of traffic fore-
The basic driver of the Company’s business is demand for reli-
casts; higher and more responsive car order fulfillment; and pro-
able, efficient, and cost-effective transportation for customers.
active customer communication at the local level, supported by
As such, the Company’s focus is the pursuit of Operational and
iAdvise, an information tool that is improving the reliability and
Service Excellence: striving to operate safely and efficiently while
consistency of shipment information.
providing a high level of service to customers.
CN’s broad-based service innovations benefit customers and
For many years, CN has operated with a mindset that drives
support the Company’s goal to grow the business faster than
cost efficiency and asset utilization. That mindset flows naturally
the overall economy. CN understands the importance of being
from CN’s Precision Railroading model, which focuses on improv-
the best operator in the business, and being the best service
ing every process that affects delivery of customers’ goods. It is
innovator as well.
a highly disciplined process whereby CN handles individual rail
shipments according to a specific trip plan and manages all as-
Delivering safely and responsibly
pects of railroad operations to meet customer commitments effi-
CN is committed to the safety of its employees, the communities
ciently and profitably. This calls for the relentless measurement of
in which it operates and the environment. Safety consciousness
results and the use of such results to generate further execution
permeates every aspect of CN’s operations. The Company’s long-
improvements in the service provided to customers. CN’s drive
term safety improvement is driven by continued significant in-
to execute flawlessly is a key factor for the Company to grow
vestments in infrastructure, rigorous safety processes and a focus
the top line at low incremental cost. The Company’s continuous
on employee training and safety awareness. CN continues to
search for efficiency is best captured in its performance accord-
strengthen its safety culture by investing significantly in training,
ing to key operating metrics such as car velocity, train speed and
coaching, recognition and employee involvement initiatives.
locomotive productivity. All are at the center of a highly product-
CN’s Safety Management Plan is the framework for putting
ive and fluid railroad operation, requiring daily engagement in
safety at the center of its day-to-day operations. This proactive
the field. The Company works hard to run more efficient trains,
plan is designed to minimize risk, drive continuous improvement
reduce dwell times at terminals and improve overall network vel-
in the reduction of injuries and accidents, and engage employees
ocity. With CN’s business model, fewer railcars and locomotives
at all levels of the organization. CN believes that the rail industry
are needed to ship the same amount of freight in a tight, reliable
can enhance safety by working more closely with communities.
and efficient operation. The railroad is run based on a disciplined
Under CN’s structured Community Engagement program, the
operating methodology, executing with a sense of urgency and
Company engages with municipal officers and their emergency
accountability. This philosophy is a key contributor to CN’s earn-
responders in an effort to assist them in their emergency re-
ings growth and return on invested capital.
sponse planning. In many cases, this outreach includes face-
CN understands the importance of balancing its drive for
to-face meetings, during which CN discusses its comprehensive
productivity with efforts to enhance customer service. The
safety programs; its safety performance; the nature, volume and
Company’s efforts to deliver Operational and Service Excellence
economic importance of dangerous commodities it transports
are anchored on an end-to-end supply chain mindset, working
through their communities; a review of emergency response
closely with customers and supply chain partners, as well as
planning; and arranging for training sessions for emergency
involving all relevant areas of the Company in the process. By
responders. The outreach builds on CN’s involvement in the
fostering better end-to-end service performance, encouraging
all supply-chain players to move away from a silo mentality
Transportation Community Awareness and Emergency Response
(TRANSCAER®), through which the Company has been working
to daily engagement, information sharing, problem solving,
for many years to help communities in Canada and the U.S.
and execution, CN aims to help customers achieve greater
understand the movement of hazardous materials and what is
competitiveness in their own markets. Supply Chain Collaboration
required in the event of transportation incidents.
Agreements with ports, terminal operators and customers
CN has been deepening its commitment to a sustainable
leverage key performance metrics that drive efficiencies across
opera tion for many years, and has made sustainability an integral
the entire supply chain.
part of its business strategy. The best way in which CN can posi-
The Company is strengthening its commitment to Operational
tively impact the environment is by continuously improving the
and Service Excellence through a wide range of innovations
efficiency of its operations, and reducing its carbon footprint. As
anchored on its continuous improvement philosophy. CN is
part of the Company’s comprehensive sustainability action plan
building on its industry leadership in terms of fast and reliable
and to comply with the CN Environmental Policy, the Company
hub-to-hub service by striving to improve the entire range of cus-
engages in a number of initiatives, including the use of fuel-
tomer touch points, including first-mile/last-mile activities. The
efficient locomotives and trucks that reduce greenhouse gas
Company’s major push in first-mile/last-mile service is all about
emissions; increasing operational and building efficiencies; in-
improving the quality of customer interactions – developing a
vesting in energy-efficient data centers and recycling programs for
14
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
information technology systems; reducing, recycling and reusing
2014 Highlights
waste and scrap at its facilities and on its network; engaging in
• The Company generated the highest volumes and earnings in its
modal shift agreements that favor low emission transport services;
history and CN’s growth continued to outpace that of the overall
and participating in the CDP (“Carbon Disclosure Project”) to gain
economy, mainly attributable to a record 2013/2014 Canadian
a more comprehensive view of its carbon footprint. The Company
grain crop, strong energy markets and new intermodal business.
combines its expert resources, environmental management pro-
• The Company repurchased 22.4 million shares during the year,
cedures, training and audits for employees and contractors, and
returning over $1.5 billion to its shareholders.
emergency preparedness response activities to help ensure that it
• The Company paid quarterly dividends of $0.2500 per share
conducts its operations and activities while protecting the natural
amounting to $818 million.
environment. The Company’s environmental activities include
• CN spent $2.3 billion in its capital program, with $1.25 billion
monitoring CN’s environmental performance in Canada and the
targeted at maintaining the safety and integrity of the network,
U.S. (ensuring compliance), identifying environmental issues in-
particularly track infrastructure; $375 million for equipment capital
side the Company, and managing them in accordance with CN’s
expenditures, including 60 new high-horsepower locomotives, and
Environmental Policy. The Environmental Policy is overseen by
$675 million on initiatives to support growth and drive productivity.
the Environment, Safety and Security Committee of the Board of
• The Company’s sustainability practices earned it a place as the
Directors, and all employees must demonstrate commitment to
leader in the Transportation and Transportation Infrastructure
it at all times. Certain risk mitigation strategies, such as periodic
Industry sector of the Dow Jones Sustainability World Index.
audits, employee training programs and emergency plans and
• CN was awarded with a position on The A List: The CDP Climate
procedures, are in place to minimize the environmental risks to
Performance Leadership Index 2014 for its actions to reduce car-
the Company.
bon emissions and mitigate the business risks of climate change.
The CN Environmental Policy, the Company’s CDP Report, the
• CN opened two new state-of-the-art training facilities, one lo-
Corporate Citizenship Report “Delivering Responsibly” and the
cated in Winnipeg, Manitoba, in April 2014, the other located in
Company’s Corporate Gover nance Manual, which outlines the
suburban Chicago, Illinois, in July 2014, as part of a new revital-
role and responsibility of the Environment, Safety and Security
ized company-wide training program.
Committee of the Board of Directors, are available on CN’s
website.
Growth opportunities and assumptions
In 2014, the Company benefited from an increase in North American
Building a solid team of railroaders
industrial production, U.S. housing starts and U.S. automotive sales.
CN’s ability to develop the best railroaders in the industry has
In 2015, the Company sees opportunities for growth in energy-
been a key contributor to the Company’s success. CN recognizes
related commodities, particularly crude oil and frac sand; intermodal
that without the right people – no matter how good a service
traffic; as well as commodities tied to U.S. housing construction and
plan or business model a company may have – it will not be able
automotive sales. The Company expects North American industrial
to fully execute. The Company is addressing changes in employee
production to increase in the range of three to four percent as well as
demographics that will span multiple years, with the workforce
continued improvements in U.S. housing starts and U.S. automotive
undergoing a major renewal. This is why the Company is focused
sales. The 2014/2015 Canadian grain crop represented a significant
on hiring the right people, onboarding them successfully, help-
reduction toward the historical trend line while the U.S. grain crop was
ing them build positive relationships with their colleagues, and
above trend. The Company assumes that the 2015/2016 grain crops
helping all employees to grow and develop. As part of its strat-
in both Canada and the U.S. will be in line with trend yields.
egy to build a solid team of railroaders, the Company invested
in two new state-of-the-art training facilities in 2014, aimed at
Value creation in 2015
preparing employees to be highly skilled, safety conscious and
• CN plans to invest approximately $2.6 billion in its 2015 capital
confident in their work environment. Curricula for technical
program, of which over $1.3 billion is targeted toward track infra-
training and leadership development has also been improved to
structure, $500 million on equipment capital expenditures, includ-
meet the learning needs of CN’s railroaders – both current and
ing adding 90 new high-horsepower locomotives, and $800 mil-
future. These programs and initiatives provide a solid platform
lion on initiatives to support growth and drive productivity.
for the assessment and development of the Company’s talent
• The Company’s Board of Directors approved an increase of 25% to
pool, and are tightly integrated with the Company’s business
the quarterly dividend to common shareholders, from $0.2500 per
strategy. Progress made in developing current and future leaders
share in 2014 to $0.3125 per share in 2015.
through the Company’s leadership development programs is re-
• The Company’s Board of Directors approved a new share re-
viewed by the Human Resources and Compensation Committee
purchase program which allows for the repurchase of up to
of the Board of Directors.
28.0 million common shares between October 24, 2014 and
October 23, 2015.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 15
Management’s Discussion and Analysis
The forward-looking statements discussed in this MD&A are
events, developments, prospects and opportunities that may not
subject to risks and uncertainties that could cause actual results
materialize or that may be offset entirely or partially by other
or performance to differ materially from those expressed or im-
events and developments. See the sections of this MD&A entitled
plied in such statements and are based on certain factors and
Forward-looking statements and Strategy overview – Growth
assumptions which the Company considers reasonable, about
opportunities and assumptions for assumptions and risk factors.
Forward-looking statements
Certain information included in this MD&A are “forward-looking statements” within the meaning of the United States Private Securities
Litigation Reform Act of 1995 and under Canadian securities laws. CN cautions that, by their nature, forward-looking statements involve
risks, uncertainties and assumptions. The Company cautions that its assumptions may not materialize and that current economic conditions
render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. These forward-looking statements
include, but are not limited to, statements with respect to growth opportunities; statements that the Company will benefit from growth
in North American and global economies; the anticipation that cash flow from operations and from various sources of financing will be
sufficient to meet debt repayments and future obligations in the foreseeable future; statements regarding future payments, including income
taxes and pension contributions; as well as the projected capital spending program. Forward-looking statements could further be identified
by the use of terminology such as the Company “believes,” “expects,” “anticipates,” “assumes” or other similar words.
Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and
other factors which may cause the actual results or performance of the Company or the rail industry to be materially different from the
outlook or any future results or performance implied by such statements. Key assumptions used in determining forward-looking information
are set forth below. See also the section of this MD&A entitled Strategy overview – Growth opportunities and assumptions.
Forward-looking statements
Key assumptions or expectations
Statements relating to general economic and
• North American and global economic growth
business conditions, including those referring to
• Long-term growth opportunities being less affected by current economic
revenue growth opportunities
conditions
• Year-over-year carload growth
Statements relating to the Company’s ability to
• North American and global economic growth
meet debt repayments and future obligations in the
• Adequate credit ratios
foreseeable future, including income tax payments,
•
Investment grade credit rating
and capital spending
• Access to capital markets
Statements relating to pension contributions
• Adequate cash generated from operations and other sources of financing
• Adequate cash generated from operations and other sources of financing
• Adequate long-term return on investment on pension plan assets
• Level of funding as determined by actuarial valuations, particularly
influenced by discount rates for funding purposes
Important risk factors that could affect the forward-looking statements include, but are not limited to, the effects of general economic
and business conditions; industry competition; inflation, currency and interest rate fluctuations; changes in fuel prices; legislative and/or
regulatory developments; compliance with environmental laws and regulations; actions by regulators; various events which could disrupt
operations, including natural events such as severe weather, droughts, floods and earthquakes; labor negotiations and disruptions; environ-
mental claims; uncertainties of investigations, proceedings or other types of claims and litigation; risks and liabilities arising from derailments;
and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the U.S. See the section 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 2014 financial outlook. The 2014 actual results were in line with the Company’s last
2014 financial outlook that was issued on October 21, 2014.
16
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Financial highlights
In millions, except percentage and per share data
2014
2013
2012
2014 vs 2013
2013 vs 2012
Change
Favorable/(Unfavorable)
Revenues
Operating income
Net income
Adjusted net income (1)
Basic earnings per share
Adjusted basic earnings per share (1)
Diluted earnings per share
Adjusted diluted earnings per share (1)
$ 12,134
$ 10,575
$ 9,920
$ 4,624
$ 3,873
$ 3,685
$ 3,167
$ 2,612
$ 2,680
$ 3,095
$ 2,582
$ 2,456
$
$
$
$
3.86
3.77
3.85
3.76
$
$
$
$
3.10
3.07
3.09
3.06
$
$
$
$
3.08
2.82
3.06
2.81
Dividends declared per share
$
1.00
$
0.86
$
0.75
15%
19%
21%
20%
25%
23%
25%
23%
16%
5%
(10%)
7%
5%
(3%)
5%
1%
9%
1%
9%
15%
13%
(9%)
Total assets
Total long-term liabilities
Operating ratio
Free cash flow (2)
$ 31,792
$ 30,163
$ 26,659
$ 16,121
$ 14,712
$ 13,438
61.9%
63.4%
62.9%
1.5-pts
(0.5)-pts
$ 2,220
$ 1,623
$ 1,661
37%
(2%)
(1) See the section of this MD&A entitled Adjusted performance measures for an explanation of this non-GAAP measure.
(2) See the section of this MD&A entitled Liquidity and capital resources – Free cash flow for an explanation of this non-GAAP measure.
2014 compared to 2013
In 2014, net income was $3,167 million, an increase of $555 million, or 21%, when compared to 2013, with diluted earnings per share
rising 25% to $3.85. The $555 million increase was mainly due to an increase in Operating income, net of related income taxes.
Operating income for the year ended December 31, 2014 increased by $751 million, or 19%, to $4,624 million. The operating ratio,
defined as operating expenses as a percentage of revenues, was 61.9% in 2014, compared to 63.4% in 2013, a 1.5-point improvement.
Revenues for the year ended December 31, 2014 increased by $1,559 million or 15%, to $12,134 million, mainly attributable to:
• higher freight volumes due to a record 2013/2014 Canadian grain crop, strong energy markets, particularly crude oil and frac sand, as
well as new intermodal and automotive business;
the positive translation impact of the weaker Canadian dollar on US dollar-denominated revenues; and
freight rate increases.
•
•
Operating expenses for the year ended December 31, 2014 increased by $808 million, or 12%, to $7,510 million, mainly due to:
•
•
the negative translation impact of a weaker Canadian dollar on US dollar-denominated expenses;
increased purchased services and material expense;
• higher fuel costs; and
•
increased labor and fringe benefits expense.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 17
Management’s Discussion and Analysis
Adjusted performance measures
The following table provides a reconciliation of net in-
Management believes that adjusted net income and adjusted
come and earnings per share, as reported for the years ended
earnings per share are useful measures of performance that can
December 31, 2014, 2013 and 2012, to the adjusted perform-
facilitate period-to-period comparisons, as they exclude items
ance measures presented herein.
that do not necessarily arise as part of the normal day-to-day
operations of the Company and could distort the analysis of
trends in business performance. The exclusion of such items in
adjusted net income and adjusted earnings per share does not,
however, imply that such items are necessarily non-recurring.
These adjusted measures do not have any standardized meaning
prescribed by GAAP and therefore, may not be comparable to
similar measures presented by other companies. The reader is
advised to read all information provided in the Company’s 2014
Annual Consolidated Financial Statements, Notes thereto and
this MD&A.
In millions, except per share data
Year ended December 31,
2014
2013
2012
Net income as reported
$ 3,167 $ 2,612 $ 2,680
Adjustments:
Other income
Income tax expense
(80)
8
(69)
39
(281)
57
Adjusted net income
$ 3,095 $ 2,582 $ 2,456
Basic earnings per share as reported
$
3.86 $
3.10 $
3.08
Impact of adjustments, per share
(0.09)
(0.03)
(0.26)
Adjusted basic earnings per share
$
$
3.77 $
3.07 $
2.82
3.85 $
3.09 $
3.06
For the year ended December 31, 2014, the Company re-
Diluted earnings per share as reported
ported adjusted net income of $3,095 million, or $3.76 per dilut-
Impact of adjustments, per share
(0.09)
(0.03)
(0.25)
ed share. The adjusted figures for the year ended December 31,
Adjusted diluted earnings per share
$
3.76 $
3.06 $
2.81
Constant currency
Financial results at constant currency allow results to be viewed
without the impact of fluctuations in foreign currency exchange
rates, thereby facilitating period-to-period comparisons in the
analysis of trends in business performance. Measures at constant
currency are considered non-GAAP measures and do not have
any standardized meaning prescribed by GAAP and therefore,
may not be comparable to similar measures presented by other
companies. Financial results at constant currency are obtained by
translating the current period results denominated in US dollars
at the foreign exchange rates of the comparable period of the
prior year. The average foreign exchange rates were $1.10 and
$1.03 per US$1.00, for the years ended December 31, 2014 and
2013, respectively.
On a constant currency basis, the Company’s net income for
the year ended December 31, 2014 would have been lower by
$121 million, or $0.15 per diluted share.
2014 exclude a gain on disposal of the Deux-Montagnes sub-
division, including the Mont-Royal tunnel, together with the rail
fixtures (collectively the “Deux-Montagnes”), of $80 million, or
$72 million after-tax ($0.09 per diluted share).
For the year ended December 31, 2013, the Company re-
ported adjusted net income of $2,582 million, or $3.06 per dilut-
ed share. The adjusted figures for the year ended December 31,
2013 exclude a gain on exchange of perpetual railroad operating
easements including the track and roadway assets on specific rail
lines (collectively the “exchange of easements”), of $29 million,
or $18 million after-tax ($0.02 per diluted share) and a gain on
disposal of a segment of the Oakville subdivision, together with
the rail fixtures and certain passenger agreements (collectively
the “Lakeshore West”), of $40 million, or $36 million after-tax
($0.04 per diluted share). The adjusted figures also exclude a
$24 million ($0.03 per diluted share) income tax expense from
the enactment of higher provincial corporate income tax rates.
For the year ended December 31, 2012, the Company re-
ported adjusted net income of $2,456 million, or $2.81 per dilut-
ed share. The adjusted figures for the year ended December 31,
2012 exclude a gain on disposal of a segment of the Bala and
a segment of the Oakville subdivisions, together with the rail
fixtures and certain passenger agreements (collectively the “Bala-
Oakville”), of $281 million, or $252 million after-tax ($0.29 per
basic share or $0.28 per diluted share); and a net income tax
expense of $28 million ($0.03 per diluted share) consisting of
a $35 million income tax expense resulting from the enactment
of higher provincial corporate income tax rates that was partly
offset by a $7 million income tax recovery resulting from the re-
capitalization of a foreign investment.
18
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Revenues
In millions, unless otherwise indicated
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Rail freight revenues
$ 11,455 $ 9,951
15%
11%
Other revenues
Total revenues
679
624
9%
4%
$ 12,134 $ 10,575
15%
10%
Rail freight revenues
Petroleum and chemicals
$ 2,354 $ 1,952
21%
15%
Metals and minerals
1,484
1,240
20%
14%
Forest products
1,523
1,424
Coal
740
713
7%
4%
2%
-
Grain and fertilizers
1,986
1,638
21%
17%
Intermodal
Automotive
2,748
2,429
13%
11%
620
555
12%
6%
Total rail freight revenues
$ 11,455 $ 9,951
15%
11%
Revenue ton miles (RTM)
(millions)
232,138
210,133
10%
10%
Rail freight revenue/RTM (cents)
4.93
4.74
Carloads (thousands)
5,625
5,190
4%
8%
Rail freight revenue/carload
(dollars)
2,036
1,917
6%
-
8%
2%
Petroleum and chemicals
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Revenues (millions)
$ 2,354 $ 1,952
21%
15%
RTMs (millions)
53,169
44,634
19%
19%
Revenue/RTM (cents)
4.43
4.37
1%
(3%)
The petroleum and chemicals commodity group comprises a wide
range of commodities, including chemicals and plastics, refined
petroleum products, natural gas liquids, crude oil and sulfur. 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 as well as oil and gas
In order to better represent rail freight and related revenues within the
production. Most of the Company’s petroleum and chemicals ship-
commodity groups and maintain non-rail services that support CN’s rail
ments originate in the Louisiana petrochemical corridor between
business within Other revenues, certain other revenues were reclassified
New Orleans and Baton Rouge; in Western Canada, a key oil and
to the commodity groups within rail freight revenues. Revenues earned
gas development area and a major center for natural gas feed-
from trucking intermodal goods were reclassified from Other revenues
stock and world-scale petrochemicals and plastics; and in eastern
to the Intermodal commodity group and services that relate to the
Canadian regional plants.
movement of rail freight were reclassified from Other revenues to the
For the year ended December 31, 2014, revenues for this
related commodity groups. The 2013 comparative figures have been
commodity group increased by $402 million, or 21%, when com-
reclassified in order to be consistent with the 2014 presentation as dis-
pared to 2013. The increase was mainly due to higher crude oil
cussed herein. This change has no impact on the Company’s previously
and natural gas liquid shipments, the positive translation impact
reported results of operations as Total revenues remain unchanged.
of a weaker Canadian dollar, freight rate increases, and higher
Revenues for the year ended December 31, 2014, totaled
fuel surcharge revenues due to higher freight volumes partly offset
$12,134 million compared to $10,575 million in 2013. The in-
by a lower fuel surcharge rate. These factors were partly offset by
crease of $1,559 million, or 15%, was mainly attributable to
lower volumes of chlorine and sulfur.
higher freight volumes due to a record 2013/2014 Canadian grain
Revenue per revenue ton mile increased by 1% in 2014, mainly
crop, strong energy markets, particularly crude oil and frac sand,
due to the positive translation impact of a weaker Canadian dollar
new intermodal and automotive business; the positive translation
and freight rate increases, partly offset by a significant increase in
impact of the weaker Canadian dollar on US dollar-denominated
the average length of haul.
revenues; and freight rate increases. Fuel surcharge revenues
increased by $72 million in 2014, due to higher freight volumes
partly offset by lower fuel surcharge rates.
In 2014, revenue ton miles (RTM), measuring the relative
weight and distance of rail freight transported by the Company,
increased by 10% relative to 2013.
Rail freight revenue per revenue ton mile, a measurement of yield
Percentage of 2014 revenues
Carloads (thousands)
38% Chemicals and plastics
Year ended December 31,
32% Crude and condensate
25% Refined petroleum products
5% Sulfur
2012 594
2013 611
2014 655
defined as revenue earned on the movement of a ton of freight over
38% 32%
one mile, increased by 4% when compared to 2013, driven by the
positive translation impact of the weaker Canadian dollar and freight
rate increases, partly offset by an increase in the average length of haul.
25%
5%
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 19
Management’s Discussion and Analysis
Management’s Discussion and Analysis
Forest products
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,523 $ 1,424
RTMs (millions)
29,070
29,630
Revenue/RTM (cents)
5.24
4.81
7%
(2%)
9%
2%
(2%)
4%
The forest products commodity
group includes various types of
lumber, panels, paper, wood
pulp and other fibers such as
logs, recycled paper, wood chips,
and wood pellets. The Company
has extensive rail access to the
western and eastern Canadian
fiber-producing
regions, which
are among the largest fiber source
areas in North America. In the
U.S., the Company is strategically
located to serve both the midwest
and southern U.S. corridors with
interline connections to other
Class I railroads. The key drivers
for the various commodities are:
for newsprint, advertising lineage,
non-print media and overall eco-
nomic conditions, primarily
in
the U.S.; for fibers (mainly wood
pulp), the consumption of paper, pulpboard and tissue in North
American and offshore markets; and for lumber and panels, hous-
ing starts and renovation activities primarily in the U.S.
For the year ended December 31, 2014, revenues for this com-
modity group increased by $99 million, or 7%, when compared
to 2013. The increase was mainly due to the positive translation
impact of a weaker Canadian dollar, freight rate increases, and
higher volumes of lumber and panels to U.S. markets. These
factors were partly offset by decreased shipments of lumber and
wood pulp to offshore markets and lower fuel surcharge revenues
Metals and minerals
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,484 $ 1,240
20%
14%
RTMs (millions)
24,686
21,342
16%
16%
Revenue/RTM (cents)
6.01
5.81
3%
(2%)
The metals and minerals commodity group consists primarily
of materials related to oil and gas development, steel, iron ore,
non-ferrous base metals and ores, construction materials and
machinery and dimensional (large) loads. The Company provides
unique rail access to base metals, iron ore and frac sand mining as
well as aluminum and steel producing regions, which are among
the most important in North America. This strong origin franchise,
coupled with the Company’s access to port facilities and the end
markets for these commodities, has made CN a leader in the
transportation of metals and minerals products. The key drivers
for this market segment are oil and gas development, automotive
production, and non-residential construction.
For the year ended December 31, 2014, revenues for this
commodity group increased by $244 million, or 20%, when com-
pared to 2013. The increase was mainly due to higher volumes
of frac sand, increased shipments of semi-finished steel products,
the positive translation impact of a weaker Canadian dollar, and
freight rate increases.
Revenue per revenue ton mile increased by 3% in 2014, mainly
due to the positive translation impact of a weaker Canadian dollar
due to lower freight volumes.
and freight rate increases, partly offset by a significant increase in
the average length of haul.
Revenue per revenue ton mile increased by 9% in 2014, mainly
due to the positive translation impact of a weaker Canadian dollar
and freight rate increases, partly offset by an increase in the aver-
Percentage of 2014 revenues
Carloads (thousands)
age length of haul.
29% Metals
Year ended December 31,
29% Energy materials
25% Minerals
17% Iron ore
29%
29%
17%
25%
2012 1,024
2013 1,048
2014 1,063
Percentage of 2014 revenues
Carloads (thousands)
52% Pulp and paper
Year ended December 31,
48% Lumber and panels
52%
48%
2012 445
2013 446
2014 433
20
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Coal
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Grain and fertilizers
Revenues (millions)
$ 740 $ 713
RTMs (millions)
21,147
22,315
Revenue/RTM (cents)
3.50
3.20
4%
(5%)
9%
-
(5%)
5%
The coal commodity group consists of thermal grades of bitumin-
ous coal, metallurgical coal and petroleum coke. Canadian ther-
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,986 $ 1,638
21%
17%
RTMs (millions)
51,326
43,180
19%
19%
Revenue/RTM (cents)
3.87
3.79
2%
(1%)
mal and metallurgical coal are largely exported via terminals on
The grain and fertilizers commodity group depends primarily on
the west coast of Canada to offshore markets. In the U.S., thermal
crops grown and fertilizers processed in western Canada and the
coal is transported from mines served in southern Illinois, or from
U.S. midwest. The grain segment consists of three primary seg-
western U.S. mines via interchange with other railroads, to major
ments: food grains (mainly wheat, oats and malting barley), feed
utilities in the midwest and southeast U.S., as well as offshore
grains and feed grain products (including feed barley, feed wheat,
markets via terminals in the Gulf and the Port of Prince Rupert.
peas, corn, ethanol and dried distillers grains), and oilseeds and oil-
For the year ended December 31, 2014, revenues for this com-
seed products (primarily canola seed, oil and meal, and soybeans).
modity group increased by $27 million, or 4%, when compared to
Production of grain varies considerably from year to year, affected
2013. The increase was mainly due to freight rate increases and
primarily by weather conditions, seeded and harvested acreage, the
the positive translation impact of a weaker Canadian dollar, partly
mix of grains produced and crop yields. Grain exports are sensitive
offset by lower volumes. Decreased shipments of metallurgical
to the size and quality of the crop produced, international market
coal, thermal coal, and petroleum coke through west coast ports
conditions and foreign government policy. The majority of grain
were partly offset by increased shipments of thermal coal to U.S.
produced in western Canada and moved by CN is exported via
utilities and for export through the Gulf.
the ports of Vancouver, Prince Rupert and Thunder Bay. Certain of
Revenue per revenue ton mile increased by 9% in 2014, mainly
these rail movements are subject to government regulation and to
due to freight rate increases, the positive translation impact of a
a revenue cap, which effectively establishes a maximum revenue
weaker Canadian dollar, and a significant decrease in the average
entitlement that railways can earn. In the U.S., grain grown in Illinois
length of haul.
Percentage of 2014 revenues
Carloads (thousands)
87% Coal
13% Petroleum coke
13%
87%
Year ended December 31,
2012 435
2013 416
2014 519
and Iowa is exported as well as transported to domestic processing
facilities and feed markets. The Company also serves major pro-
ducers of potash in Canada, as well as producers of ammonium
nitrate, urea and other fertilizers across Canada and the U.S.
For the year ended December 31, 2014, revenues for this
commodity group increased by $348 million, or 21%, when com-
pared to 2013. The increase was mainly due to higher volumes of
Canadian wheat and canola due to a record 2013/2014 Canadian
grain crop, as well as increased shipments of corn and soybeans for
export due to higher crop yields in the U.S.; the positive translation
impact of a weaker Canadian dollar; and freight rate increases.
These factors were partly offset by lower volumes of fertilizers.
Revenue per revenue ton mile increased by 2% in 2014, mainly
due to the positive translation impact of a weaker Canadian dollar
and freight rate increases, partly offset by a significant increase in
the average length of haul.
Percentage of 2014 revenues
Carloads (thousands)
31% Oilseeds
28% Food grains
23% Feed grains
18% Fertilizers
31%
28%
18%
23%
Year ended December 31,
2012 597
2013 572
2014 640
U.S. GAAP
2014 Annual Report 21
Management’s Discussion and Analysis
Automotive
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Intermodal
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Revenues (millions)
$ 620 $ 555
12%
6%
RTMs (millions)
3,159
2,741
15%
15%
Revenue/RTM (cents)
19.63
20.25
(3%)
(8%)
Revenues (millions)
$ 2,748 $ 2,429
13%
11%
RTMs (millions)
49,581
46,291
Revenue/RTM (cents)
5.54
5.25
7%
6%
7%
3%
The automotive commodity group
moves both finished vehicles and parts
throughout North America, providing
The intermodal commodity group includes rail and trucking services
rail access to certain vehicle assembly
and is comprised of two segments: domestic and international. The
plants in Canada, and Michigan and
domestic segment transports consumer products and manufactured
Mississippi in the U.S. The Company
goods, serving both retail and wholesale channels, within domestic
also serves vehicle distribution facilities
Canada, domestic U.S., Mexico and transborder, while the inter-
in Canada and the U.S., as well as parts
national segment handles import and export container traffic, directly
production facilities in Michigan and
serving the major ports of Vancouver, Prince Rupert, Montreal, Halifax
Ontario. The Company serves shippers
and New Orleans. The domestic segment is driven by consumer mar-
of import vehicles via the ports of
kets, with growth generally tied to the economy. The international
Halifax and Vancouver, and through
segment is driven by North American economic and trade conditions.
interchange with other railroads. The
For the year ended December 31, 2014, revenues for this com-
Company’s automotive revenues are
modity group increased by $319 million, or 13%, when compared
closely correlated to automotive pro-
to 2013. The increase was mainly due to new business and higher
duction and sales in North America.
shipments through the ports of Vancouver and Montreal, and in-
For the year ended December 31,
creased volumes through the Port of Prince Rupert; the positive
2014, revenues for this commodity group increased by $65 mil-
translation impact of a weaker Canadian dollar; higher fuel sur-
lion, or 12%, when compared to 2013. The increase was mainly
charge revenues due to increased freight volumes; and freight rate
due to higher volumes of domestic finished vehicle traffic as a
increases. These increases were partly offset by reduced domestic
result of new business and the positive translation impact of a
volumes serving wholesale channels.
weaker Canadian dollar.
Revenue per revenue ton mile increased by 6% in 2014, mainly
Revenue per revenue ton mile decreased by 3% in 2014, mainly
due to the positive translation impact of a weaker Canadian dollar
due to a significant increase in the average length of haul, partly off-
and freight rate increases.
set by the positive translation impact of a weaker Canadian dollar.
Percentage of 2014 revenues
Carloads (thousands)
Percentage of 2014 revenues
Carloads (thousands)
62% International
38% Domestic
62%
38%
Year ended December 31,
91% Finished vehicles
Year ended December 31,
2012 1,742
2013 1,875
2014 2,086
9% Auto parts
9%
91%
2012 222
2013 222
2014 229
Other revenues
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Revenues (millions)
$ 679 $ 624
9%
4%
Percentage of 2014 revenues
50% Vessels and docks
39% Other non-rail services
11% Other revenues
50%
39%
11%
Other revenues are largely derived from non-rail services that sup-
port CN’s rail business including vessels and docks, warehousing
and distribution, automotive logistic services, freight forwarding
and transportation management; as well as other revenues includ-
ing commuter train revenues.
For the year ended December 31, 2014, Other revenues increased
by $55 million, or 9%, when compared to 2013, mainly due to the
positive translation impact of a weaker Canadian dollar, higher revenues
from vessels and docks, as well as international freight forwarding.
22
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Operating expenses
Operating expenses for the year ended December 31, 2014 amounted to $7,510 million compared to $6,702 million in 2013. The increase of
$808 million, or 12%, in 2014 was mainly due to the negative translation impact of the weaker Canadian dollar on US dollar-denominated
expenses, increased purchased services and material expense, higher fuel costs, as well as increased labor and fringe benefits expense.
In millions
Year ended December 31,
2014
2013 % Change
% Change
at constant
currency
Percentage of revenues
2014
2013
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Total operating expenses
$ 2,319
$ 2,182
1,598
1,351
1,846
1,619
1,050
329
368
980
275
295
(6%)
(18%)
(14%)
(7%)
(20%)
(25%)
(4%)
19.1%
(15%)
13.2%
(7%)
(5%)
(13%)
(20%)
15.2%
8.7%
2.7%
3.0%
20.6%
12.8%
15.3%
9.3%
2.6%
2.8%
$ 7,510
$ 6,702
(12%)
(8%)
61.9%
63.4%
Labor and fringe benefits
and the negative translation impact of the weaker Canadian dollar,
Labor and fringe benefits expense includes wages, payroll taxes,
partly offset by increased fuel productivity and a lower US dollar
and employee benefits such as incentive compensation, including
average price for fuel.
stock-based compensation; health and welfare; and pension and
other postretirement benefits. Certain incentive and stock-based
Depreciation and amortization
compensation plans are based on financial and market perform-
Depreciation expense is affected by capital additions, railroad
ance targets and the related expense is recorded in relation to the
property retirements from disposal, sale and/or abandonment and
attainment of such targets.
other adjustments including asset impairments.
Labor and fringe benefits expense increased by $137 million, or
Depreciation and amortization expense increased by $70 mil-
6%, in 2014 when compared to 2013. The increase was primarily
lion, or 7%, in 2014 when compared to 2013. The increase was
a result of higher headcount to accommodate volume growth,
mainly due to net capital additions, the negative translation impact
general wage increases, the negative translation impact of the
of the weaker Canadian dollar, as well as the change in composite
weaker Canadian dollar, as well as higher stock-based compen-
depreciation rates resulting from the 2013 depreciation study on
sation expense. The increase was partly offset by a decrease in
certain U.S. track and roadway properties, partly offset by some
pension expense and the impact of improved labor productivity.
asset impairments in 2013.
Purchased services and material
Equipment rents
Purchased services and material expense primarily includes the
Equipment rents expense includes rental expense for the use of
cost of services purchased from outside contractors; materials
freight cars owned by other railroads or private companies and
used in the maintenance of the Company’s track, facilities and
for the short- or long-term lease of freight cars, locomotives and
equipment; transportation and lodging for train crew employees;
intermodal equipment, net of rental income from other railroads
utility costs; and the net costs of operating facilities jointly used
for the use of the Company’s cars and locomotives.
by the Company and other railroads.
Equipment rents expense increased by $54 million, or 20%,
Purchased services and material expense increased by $247 mil-
in 2014 when compared to 2013. The increase was primarily due
lion, or 18%, in 2014 when compared to 2013. The increase was
to increased car hire expense due to higher volumes, the negative
mainly due to weather-related conditions in the first quarter of 2014
translation impact of the weaker Canadian dollar and higher costs
that impacted materials, utilities, and maintenance costs for rolling
for the use of equipment from other railroads, partly offset by
stock; the negative translation impact of the weaker Canadian dol-
increased car hire income.
lar; as well as increased freight volumes that resulted in higher costs
for materials and third-party non-rail transportation carriers.
Casualty and other
Fuel
Casualty and other expense includes expenses for personal injur-
ies, environmental, freight and property damage, insurance, bad
Fuel expense includes fuel consumed by assets, including loco-
debt, operating taxes, and travel expenses.
motives, vessels, vehicles and other equipment as well as federal,
Casualty and other expense increased by $73 million, or 25%,
provincial and state fuel taxes.
in 2014 when compared to 2013. The increase was mainly due
Fuel expense increased by $227 million, or 14%, in 2014 when
to higher accident-related costs, increased property taxes and the
compared to 2013. The increase was due to higher freight volumes
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 23
Management’s Discussion and Analysis
negative impact of the weaker Canadian dollar, partly offset by
Income tax expense
lower workers’ compensation expenses.
The Company recorded income tax expense of $1,193 million for
Other income and expenses
Interest expense
the year ended December 31, 2014, compared to $977 million
in 2013.
Included in the 2014 figure was an income tax recovery of
In 2014, interest expense was $371 million compared to
$18 million resulting from a change in estimate of the deferred
$357 million in 2013. The increase was mainly due to the nega-
income tax liability related to properties.
tive translation impact of the weaker Canadian dollar on US dol-
Included in the 2013 figure was a net income tax recovery
lar-denominated interest expense partly offset by lower interest
of $7 million consisting of a $24 million income tax expense
expense on capital lease obligations.
Other income
resulting from the enactment of higher provincial corporate in-
come tax rates; a $15 million income tax recovery resulting from
the recognition of U.S. state income tax losses; and a $16 million
In 2014, the Company recorded other income of $107 million
income tax recovery resulting from a revision of the apportion-
compared to $73 million in 2013. Included in Other income for
ment of U.S. state income taxes.
2014 was a gain on disposal of the Deux-Montagnes of $80 mil-
The effective tax rate for 2014 was 27.4% compared to
lion. Included in Other income for 2013 was a gain on the ex-
27.2% in 2013. Excluding the net income tax recoveries of
change of easements of $29 million and a gain on disposal of the
$18 million and $7 million in 2014 and 2013, respectively,
Lakeshore West of $40 million.
the effective tax rate for 2014 was 27.8% compared to 27.4%
in 2013.
2013 compared to 2012
In 2013, net income was $2,612 million, a decrease of $68 million, or 3%, when compared to 2012, with diluted earnings per share rising
1% to $3.09. The $68 million decrease was mainly due to a reduction in Other income resulting from lower gains on disposal of rail assets
that was partly offset by an increase in Operating income.
Included in the 2013 figures was a gain on the exchange of easements of $29 million, or $18 million after-tax ($0.02 per diluted share)
and a gain on disposal of the Lakeshore West of $40 million, or $36 million after-tax ($0.04 per diluted share). The 2013 figures also included
a $24 million ($0.03 per diluted share) income tax expense from the enactment of higher provincial corporate income tax rates. Included in
the 2012 figures was a gain on disposal of the Bala-Oakville of $281 million, or $252 million after-tax ($0.28 per diluted share) and a net
income tax expense of $28 million ($0.03 per diluted share) consisting of a $35 million income tax expense resulting from the enactment of
higher provincial corporate income tax rates that was partly offset by a $7 million income tax recovery resulting from the recapitalization of
a foreign investment.
Operating income for the year ended December 31, 2013 increased by $188 million, or 5%, to $3,873 million. The operating ratio was
63.4% in 2013, compared to 62.9% in 2012, a 0.5-point deterioration.
Revenues for the year ended December 31, 2013 increased by $655 million, or 7%, to $10,575 million, mainly attributable to:
•
freight rate increases;
• higher freight volumes due to strong energy markets, market share gains, as well as growth in the North American economy;
•
the positive translation impact of the weaker Canadian dollar on US dollar-denominated revenues; and
• higher fuel surcharge revenues, mainly as a result of higher freight volumes.
Operating expenses for the year ended December 31, 2013 increased by $467 million, or 7%, to $6,702 million, mainly due to:
• higher labor and fringe benefits expense;
•
•
the negative translation impact of the weaker Canadian dollar on US dollar-denominated expenses; and
increased purchased services and material expense, in part due to weather-related conditions;
• partly offset by lower casualty and other expense.
On a constant currency basis, the Company’s net income for the year ended December 31, 2013 would have been lower by $37 million, or
$0.04 per diluted share.
24
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Revenues
Petroleum and chemicals
In millions, unless otherwise indicated
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
Rail freight revenues
$ 9,951 $ 9,306
Other revenues
Total revenues
624
614
$ 10,575 $ 9,920
7%
2%
7%
5%
-
5%
Rail freight revenues
Petroleum and chemicals
$ 1,952 $ 1,655
18%
16%
Metals and minerals
1,240
1,159
Forest products
1,424
1,341
7%
6%
5%
4%
Coal
713
731
(2%)
(4%)
Grain and fertilizers
1,638
1,613
Intermodal
Automotive
2,429
2,261
555
546
Total rail freight revenues
$ 9,951 $ 9,306
2%
7%
2%
7%
Revenue ton miles (RTM)
(millions)
210,133
201,496
4%
Rail freight revenue/RTM
(cents)
Carloads
4.74
4.62
3%
(thousands)
5,190
5,059
3%
Rail freight revenue/carload
(dollars)
1,917
1,839
4%
-
7%
-
5%
4%
1%
3%
3%
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,952 $ 1,655
18%
16%
RTMs (millions)
44,634
37,449
19%
19%
Revenue/RTM (cents)
4.37
4.42
(1%)
(3%)
For the year ended December 31, 2013, revenues for this com-
modity group increased by $297 million, or 18%, when compared
to 2012. The increase was mainly due to significantly higher crude
oil shipments, and increased volumes of propane, freight rate
increases, the positive translation impact of a weaker Canadian
dollar, and higher fuel surcharge revenues due to longer haul vol-
umes. These factors were partly offset by lower volumes of sulfur
and reduced shipments of refined petroleum products due to a
customer conversion to pipeline.
Revenue per revenue ton mile decreased by 1% in 2013, main-
ly due to a significant increase in the average length of haul, offset
by freight rate increases and the positive translation impact of a
weaker Canadian dollar.
Metals and minerals
2012 % Change
% Change
at constant
currency
In order to better represent rail freight and related revenues
Year ended December 31,
2013
within the commodity groups and maintain non-rail services that
Revenues (millions)
$ 1,240 $ 1,159
support CN’s rail business within Other revenues, certain other
RTMs (millions)
revenues were reclassified to the commodity groups within rail
Revenue/RTM (cents)
21,342
20,236
5.81
5.73
7%
5%
1%
5%
5%
(1%)
freight revenues. Revenues earned from trucking intermodal
goods were reclassified from Other revenues to the Intermodal
commodity group and services that relate to the movement of
rail freight were reclassified from Other revenues to the related
commodity groups. The 2013 and 2012 figures have been re-
classified in order to be consistent with the 2014 presentation as
discussed herein. This change has no impact on the Company’s
previously reported results of operations as Total revenues remain
unchanged.
Revenues for the year ended December 31, 2013 totaled
$10,575 million compared to $9,920 million in 2012. The in-
crease of $655 million, or 7%, was mainly attributable to freight
rate increases; higher freight volumes due to strong energy
markets, market share gains, as well as growth in the North
American economy and the positive translation impact of the
weaker Canadian dollar on US dollar-denominated revenues.
Fuel surcharge revenues increased by approximately $35 million
in 2013 mainly as a result of higher freight volumes.
In 2013, RTMs, increased by 4% relative to 2012. Rail freight
revenue per revenue ton mile, increased by 3% when compared
to 2012, driven by freight rate increases and the positive trans-
lation impact of the weaker Canadian dollar, partly offset by an
increase in the average length of haul.
For the year ended December 31, 2013, revenues for this com-
modity group increased by $81 million, or 7%, when compared
to 2012. The increase was mainly due to freight rate increases,
higher volumes of frac sand and the positive translation impact
of a weaker Canadian dollar. These factors were partly offset by
lower shipments of steel products and non-ferrous ores.
Revenue per revenue ton mile increased by 1% in 2013, mainly
due to freight rate increases and the positive translation impact
of a weaker Canadian dollar, partly offset by an increase in the
average length of haul, mainly in the fourth quarter.
Forest products
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,424 $ 1,341
RTMs (millions)
29,630
29,674
Revenue/RTM (cents)
4.81
4.52
6%
-
6%
4%
-
4%
For the year ended December 31, 2013, revenues for this com-
modity group increased by $83 million, or 6%, when compared
to 2012. The increase was mainly due to freight rate increases,
the positive translation impact of a weaker Canadian dollar, and
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 25
Management’s Discussion and Analysis
increased shipments of lumber and panels to the U.S. due to an
Intermodal
improvement in the housing market. These factors were partly
offset by a decrease in shipments of wood pulp, in part due to a
mill closure in western Canada.
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
Revenue per revenue ton mile increased by 6% in 2013, mainly
due to freight rate increases and the positive translation impact
of a weaker Canadian dollar.
Revenues (millions)
$ 2,429 $ 2,261
RTMs (millions)
46,291
42,396
7%
9%
7%
9%
Revenue/RTM (cents)
5.25
5.33
(2%)
(2%)
Coal
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
Revenues (millions)
$ 713 $ 731
RTMs (millions)
22,315
23,570
Revenue/RTM (cents)
3.20
3.10
(2%)
(5%)
3%
(4%)
(5%)
2%
For the year ended December 31, 2013, revenues for this com-
modity group increased by $168 million, or 7%, when compared
to 2012. The increase was mainly due to higher shipments through
the Port of Vancouver, in part as a result of new business, and
increased volumes of domestic intermodal; higher fuel surcharge
revenues due to increased freight volumes; the positive translation
impact of a weaker Canadian dollar; and freight rate increases.
These factors were partly offset by lower volumes through the Port
For the year ended December 31, 2013, revenues for this com-
of Prince Rupert.
modity group decreased by $18 million, or 2%, when compared
Revenue per revenue ton mile decreased by 2% in 2013, main-
to 2012. The decrease was mainly due to lower volumes of export
ly due to an increase in the average length of haul, partly offset
thermal coal through west coast ports and reduced shipments of
by the positive translation impact of a weaker Canadian dollar and
domestic thermal coal to U.S. utilities. These factors were partly
freight rate increases.
offset by higher shipments of export metallurgical coal through
west coast ports; freight rate increases; and the positive trans-
Automotive
lation impact of a weaker Canadian dollar.
Revenue per revenue ton mile increased by 3% in 2013,
mainly due to freight rate increases and the positive translation
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
impact of a weaker Canadian dollar.
Grain and fertilizers
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
Revenues (millions)
$ 1,638 $ 1,613
RTMs (millions)
43,180
45,417
Revenue/RTM (cents)
3.79
3.55
2%
(5%)
7%
-
(5%)
5%
Revenues (millions)
$ 555 $ 546
RTMs (millions)
2,741
2,754
Revenue/RTM (cents)
20.25
19.83
2%
-
2%
-
-
-
For the year ended December 31, 2013, revenues for this com-
modity group increased by $9 million, or 2%, when compared
to 2012. The increase was mainly due to the positive translation
impact of a weaker Canadian dollar and freight rate increases.
These factors were partly offset by a non-recurring movement of
military equipment in 2012.
For the year ended December 31, 2013, revenues for this com-
Revenue per revenue ton mile increased by 2% in 2013, mainly
modity group increased by $25 million, or 2%, when compared
due to the positive translation impact of a weaker Canadian dollar,
to 2012. The increase was mainly due to freight rate increases,
freight rate increases, and a decrease in the average length of haul.
greater volumes of potash for offshore export and the positive
translation impact of a weaker Canadian dollar. These factors
Other revenues
were partly offset by lower shipments of canola and Canadian
wheat, mainly for export, and lower volumes of barley.
Revenue per revenue ton mile increased by 7% in 2013,
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
mainly due to freight rate increases and the positive translation
Revenues (millions)
$ 624 $ 614
2%
-
impact of a weaker Canadian dollar.
In 2013, Other revenues amounted to $624 million, an increase of
$10 million, or 2%, when compared to 2012, mainly due to higher
revenues from vessels and docks, partly offset by lower revenues
from transportation management services.
26
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Operating expenses
Operating expenses for the year ended December 31, 2013 amounted to $6,702 million, compared to $6,235 million in 2012. The increase
of $467 million, or 7%, in 2013 was mainly due to higher labor and fringe benefits expense; the negative translation impact of the weaker
Canadian dollar on US dollar-denominated expenses; and increased purchased services and material expense, in part due to weather-related
conditions. These factors were partly offset by lower casualty and other expense.
In millions
Year ended December 31,
2013
2012 % Change
% Change
at constant
currency
Percentage of revenues
2013
2012
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Total operating expenses
$ 2,182
$ 1,952
(12%)
(11%)
20.6%
1,351
1,248
1,619
1,524
980
275
295
924
249
338
(8%)
(6%)
(6%)
(10%)
(7%)
(3%)
(5%)
(8%)
13%
15%
12.8%
15.3%
9.3%
2.6%
2.8%
$ 6,702
$ 6,235
(7%)
(6%)
63.4%
19.7%
12.6%
15.4%
9.3%
2.5%
3.4%
62.9%
Labor and fringe benefits
increases, higher net car hire expenses, and the negative trans-
Labor and fringe benefits expense increased by $230 million, or
lation impact of the weaker Canadian dollar.
12%, in 2013 when compared to 2012. The increase was pri-
marily a result of increased pension expense, higher wages due
Casualty and other
to the impact of a higher workforce level as a result of volume
Casualty and other expense decreased by $43 million, or 13%,
growth and general wage increases, higher incentive compen-
in 2013 when compared to 2012. The decrease was mainly due
sation, as well as the negative translation impact of the weaker
to a reduction to the liability for U.S. legal claims pursuant to an
Canadian dollar.
Purchased services and material
actuarial valuation, as well as overall lower legal expenses; lower
environmental expenses; and lower workers’ compensation ex-
penses; that were partly offset by the negative translation impact
Purchased services and material expense increased by $103 mil-
of the weaker Canadian dollar.
lion, or 8%, in 2013 when compared to 2012. The increase was
mainly due to weather-related conditions impacting materials,
Other income and expenses
crew accommodation and utilities expenses; higher maintenance
Interest expense
expenses for track, rolling stock and other equipment; the nega-
In 2013, interest expense was $357 million compared to $342 mil-
tive translation impact of the weaker Canadian dollar; and higher
lion in 2012. The increase was mainly due to a higher level of
costs for third-party non-rail transportation providers.
debt and the negative translation impact of the weaker Canadian
Fuel
dollar on US dollar-denominated interest expense, partly offset by
a lower weighted-average interest rate.
Fuel expense increased by $95 million, or 6%, in 2013 when com-
pared to 2012. The increase was primarily due to higher freight vol-
Other income
umes and the negative translation impact of the weaker Canadian
In 2013, the Company recorded other income of $73 million com-
dollar. These factors were partly offset by productivity improvements.
pared to $315 million in 2012. Included in Other income for 2013
Depreciation and amortization
was a gain on exchange of easements in the amount of $29 mil-
lion and a gain on disposal of the Lakeshore West of $40 million.
Depreciation and amortization expense increased by $56 million,
Included in Other income for 2012 was a gain on disposal of the
or 6%, in 2013 when compared to 2012. The increase was mainly
Bala-Oakville of $281 million.
due to the impact of net capital additions, some asset impairments,
as well as the effect of a depreciation study on certain U.S. track
Income tax expense
and roadway properties, which were partly offset by the effect of
The Company recorded income tax expense of $977 million for
a depreciation study on Canadian track and roadway properties.
the year ended December 31, 2013 compared to $978 million
Equipment rents
in 2012. The 2013 figure includes a net income tax recovery of
$7 million which consisted of a $15 million income tax recovery
Equipment rents expense increased by $26 million, or 10%, in
from the recognition of U.S. state income tax losses and a $16 mil-
2013 when compared to 2012. The increase was primarily due to
lion income tax recovery from a revision of the apportionment of
higher lease costs for intermodal equipment on account of volume
U.S. state income taxes, which were partly offset by a combined
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 27
Management’s Discussion and Analysis
$24 million income tax expense resulting from the enactment
enactment of higher provincial corporate income tax rates that
of higher provincial corporate income tax rates. Included in the
was partly offset by a $7 million income tax recovery resulting from
2012 figure was a net income tax expense of $28 million, which
the recapitalization of a foreign investment. The effective tax rate
consisted of a $35 million income tax expense resulting from the
for 2013 was 27.2% compared to 26.7% in 2012.
Summary of quarterly financial data
In millions, except per share data
Fourth
Third
Second
First
Fourth
Third
Second
First
2014 Quarters
2013 Quarters
Revenues
Operating income
Net income
$ 3,207
$ 3,118
$ 3,116
$ 2,693
$ 2,745
$ 2,698
$ 2,666
$ 2,466
$ 1,260
$ 1,286
$ 1,258
$
844
$
853
$
847
$
$
820
623
$
$
967
635
$ 1,084
$ 1,042
$
705
$
717
$
$
780
555
Basic earnings per share
$ 1.04
$ 1.04
$ 1.03
$ 0.75
$ 0.76
$ 0.84
$ 0.85
$ 0.65
Diluted earnings per share
$ 1.03
$ 1.04
$ 1.03
$ 0.75
$ 0.76
$ 0.84
$ 0.84
$ 0.65
Dividends declared per share
$ 0.250
$ 0.250
$ 0.250
$ 0.250
$ 0.215
$ 0.215
$ 0.215
$ 0.215
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
productivity initiatives. Fluctuations in the Canadian dollar relative to the US dollar have also affected the conversion of the Company’s US
dollar-denominated revenues and expenses and resulted in fluctuations in net income in the rolling eight quarters presented above.
The Company’s quarterly results include items that impacted the quarter-over-quarter comparability of the results of operations as dis-
cussed below:
In millions, except per share data
Fourth
Third
Second
First
Fourth
Third
Second
First
2014 Quarters
2013 Quarters
Income tax expenses (1)
After-tax gain on disposal of property (2) (3) (4)
Impact on net income
Impact on basic earnings per share
Impact on diluted earnings per share
$
$
$
$
-
-
-
-
-
$
$
$
$
-
-
-
-
-
$
$
$
$
-
-
-
-
-
$
$
-
72
72
$ 0.09
$ 0.09
$
$
$
$
-
-
-
-
-
$
$
$
$
(19)
$
(5)
$
-
(19)
$
18
13
$
-
36
36
(0.02)
$ 0.01
$ 0.04
(0.02)
$ 0.01
$ 0.04
(1)
Income tax expenses resulted from the enactment of provincial corporate income tax rate changes.
(2) The Company sold the Deux-Montagnes in the first quarter of 2014 for $97 million. A gain on disposal of $80 million ($72 million after-tax) was recognized in Other income.
(3)
In the second quarter of 2013, the Company entered into an exchange of easements without monetary consideration. A gain of $29 million ($18 million after-tax) was recognized in Other income.
(4) The Company sold the Lakeshore West in the first quarter of 2013 for $52 million. A gain on disposal of $40 million ($36 million after-tax) was recognized in Other income.
Summary of fourth quarter 2014
Fourth quarter 2014 net income was $844 million, an increase of $209 million, or 33%, when compared to the same period in 2013, with
diluted earnings per share rising 36% to $1.03.
The operating ratio was 60.7% in the fourth quarter of 2014 compared to 64.8% in the fourth quarter of 2013, a 4.1-point improve-
ment, in part due to favorable winter conditions.
Revenues for the fourth quarter of 2014 increased by $462 million, or 17%, to $3,207 million, when compared to the same period in
2013. The increase was mainly attributable to higher freight volumes due to strong energy markets, a record 2013/2014 Canadian grain
crop, and market share gains in intermodal and automotive; the positive translation impact of the weaker Canadian dollar on US dollar-
denominated revenues; and freight rate increases. Fuel surcharge revenues decreased by $8 million in the fourth quarter of 2014, due to
lower fuel surcharge rates partly offset by higher freight volumes.
Operating expenses for the fourth quarter of 2014 increased by $169 million, or 10%, to $1,947 million, when compared to the same period
in 2013. The increase was primarily due to the negative translation impact of a weaker Canadian dollar on US dollar-denominated expenses;
increased purchased services and material expense; higher casualty and other; as well as increased depreciation and amortization expense.
28
2014 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, 2014 as compared to 2013. Assets and liabilities
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, 2014 and 2013, the foreign exchange rates were $1.1601 and $1.0636 per US$1.00, respectively.
In millions
December 31,
2014
2013
Foreign
exchange
impact
Variance
excluding
foreign
exchange
Explanation of variance,
other than foreign exchange impact
Total assets
$ 31,792
$ 30,163
$ 1,134
$
495
Variance mainly due to:
Properties
28,514
26,227
1,032
1,255
Increase primarily due to gross property additions of
$2,297 mil lion, partly offset by depreciation of
$1,050 mil lion.
Pension asset
882
1,662
-
(780)
Decrease due primarily to the decrease in the year-end
discount rate from 4.73% in 2013 to 3.87% in 2014.
Total liabilities
$ 18,322
$ 17,210
$ 1,057
$
55
Variance mainly due to:
Accounts payable and other
1,657
1,477
49
131
Increase primarily due to higher income and other taxes
payable of $112 million.
Other liabilities and deferred credits
704
815
37
(148)
Decrease primarily due to lower stock-based compen-
sation liabilities of $149 million as a result of the modi-
fication of certain stock-based compensation awards
from cash settled to equity settled.
Pension and other postretirement benefits
650
541
14
95
Increase due primarily to the decrease in the year-end
discount rate from 4.73% in 2013 to 3.87% in 2014.
In millions
December 31,
2014
2013
Variance
Explanation of variance
Total shareholders’ equity
$ 13,470
$ 12,953
$
517
Variance mainly due to:
Common shares
3,718
3,795
(77)
Decrease due to share repurchases.
Additional paid-in capital
439
220
219
Increase primarily due to the modification of certain
stock-based compensation awards from cash settled to
equity settled.
Accumulated other comprehensive loss
(2,427)
(1,850)
(577)
Increase in comprehensive loss due to after-tax amounts
of $728 million to recognize the funded status of the
Company’s pension and other postretirement benefit
plans, offset by $151 million for foreign exchange
gains and other.
Retained earnings
11,740
10,788
952
Increase due to current year net income of $3,167 mil-
lion, partly offset by share repurchases of $1,397 mil-
lion and dividends paid of $818 million.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 29
Management’s Discussion and Analysis
Liquidity and capital resources
The Company’s principal source of liquidity is cash generated from
can decide to repatriate funds associated with either undistribut-
operations, which is supplemented by borrowings in the money
ed earnings or the liquidation of its foreign operations, including
markets and capital markets. To meet its short-term liquidity
its U.S. and other foreign subsidiaries. Such repatriation of funds
needs, the Company has access to various financing sources, in-
would not cause significant tax implications to the Company
cluding a committed revolving credit facility, a commercial paper
under the tax treaties currently in effect between Canada and
program, and an accounts receivable securitization program. In
the U.S. and other foreign tax jurisdictions. Therefore, the impact
addition to these sources, the Company can issue debt securities
on liquidity resulting from the repatriation of funds held outside
to meet its longer-term liquidity needs. The Company’s access
Canada would not be significant as the Company expects to con-
to long-term funds in the debt capital markets depends on its
tinuously invest in these foreign jurisdictions.
credit rating and market conditions. The Company believes that it
The Company is not aware of any trends or expected fluctu-
continues to have access to the long-term debt capital markets. If
ations in its liquidity that would impact its ongoing operations or
the Company were unable to borrow funds at acceptable rates in
financial condition.
the long-term debt capital markets, the Company could borrow
under its revolving credit facility, draw down on its accounts re-
Available financing sources
ceivable securitization program, raise cash by disposing of surplus
Revolving credit facility
properties or otherwise monetizing assets, reduce discretionary
The Company’s revolving credit facility agreement, which expires
spending or take a combination of these measures to assure that
on May 5, 2019, provides access to $800 million of debt, with an
it has adequate funding for its business. The strong focus on cash
accordion feature providing for an additional $500 million subject
generation from all sources gives the Company increased flexibil-
to the consent of individual lenders. The credit facility is available
ity in terms of meeting its financing requirements.
for working capital and general corporate purposes, including
The Company’s primary uses of funds are for working cap-
backstopping the Company’s commercial paper program.
ital requirements, including income tax installments, pension
As at December 31, 2014 and December 31, 2013, the
contributions, and contractual obligations; capital expenditures
Company had no outstanding borrowings under its revolving
relating to track infrastructure and other; acquisitions; dividend
credit facility and there were no draws during the years ended
payouts; and the repurchase of shares through share buyback
December 31, 2014 and 2013.
programs. The Company sets priorities on its uses of available
funds based on short-term operational requirements, expendi-
Commercial paper
tures to continue to operate a safe railway and pursue strategic
The Company’s commercial paper program, which is fully sup-
initiatives, while also considering its long-term contractual obli-
ported by its revolving credit facility, enables it to issue commercial
gations and returning value to its shareholders; and as part of
paper up to a maximum aggregate principal amount of $800 mil-
its financing strategy, the Company regularly reviews its optimal
lion, or the US dollar equivalent. The program provides a flex-
capital structure, cost of capital, and the need for additional debt
ible financing alternative for the Company, and is refinanced at
financing.
market rates in effect. Access to commercial paper is dependent
The Company has at times had working capital deficits
on market conditions. If the Company were to lose access to its
which are considered common in the rail industry because it is
commercial paper program for an extended period of time, the
capital-intensive, and such deficits are not an indication of a lack
Company could rely on its $800 million revolving credit facility to
of liquidity. The Company maintains adequate resources to meet
meet its short-term liquidity needs.
daily cash requirements, and has sufficient financial capacity to
As at December 31, 2014, the Company had no commercial
manage its day-to-day cash requirements and current obligations.
paper borrowings ($273 million as at December 31, 2013) pre-
As at December 31, 2014 and December 31, 2013, the Company
sented in Current portion of long-term debt on the Consolidated
had Cash and cash equivalents of $52 million and $214 million,
Balance Sheet.
respectively; Restricted cash and cash equivalents of $463 million
and $448 million, respectively; and a working capital deficit of
Accounts receivable securitization program
$135 million and $521 million, respectively. The cash and cash
The Company has an agreement to sell an undivided co-
equivalents pledged as collateral for a minimum term of one
ownership interest in a revolving pool of accounts receivable to
month pursuant to the Company’s bilateral letter of credit facilities
unrelated trusts for maximum cash proceeds of $450 million,
are recorded as Restricted cash and cash equivalents. There are
which expires on February 1, 2017. The trusts are multi-seller
currently no specific requirements relating to working capital other
trusts and the Company is not the primary beneficiary. Funding
than in the normal course of business as discussed herein.
for the acquisition of these assets is customarily through
The Company’s U.S. and other foreign subsidiaries hold cash
the issuance of asset-backed commercial paper notes by the
to meet their respective operational requirements. The Company
unrelated trusts.
30
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
The Company has retained the responsibility for servicing,
Shelf prospectus and registration statement
administering and collecting the receivables sold. The average
During 2014,
the Company
issued C$250 million and
servicing period is approximately one month. Subject to
US$600 million in new debt under its current shelf prospectus
customary indemnifications, each trust’s recourse is limited to the
and registration statement which provides for the issuance by
accounts receivable transferred.
CN of up to $3.0 billion of debt securities in the Canadian and
The Company
is subject
to customary credit
rating
U.S. capital markets. The shelf prospectus and registration state-
requirements, which if not met, could result in termination
ment expires in January 2016. Access to capital markets under
of the program. The Company is also subject to customary
the shelf prospectus and registration statement is dependent on
reporting requirements for which failure to perform could also
market conditions at the time of pricing.
result in termination of the program. The Company monitors the
reporting requirements and is currently not aware of any trends,
Cash flows
events or conditions that could cause such termination.
The following table presents a summary of the Company’s cash
The accounts receivable securitization program provides the
flows provided by/used in operating, investing and financing
Company with readily available short-term financing for general
activities:
corporate use. In the event the program is terminated before
its scheduled maturity, the Company expects to meet its future
In millions
Year ended December 31,
2014
2013
Variance
payment obligations through its various sources of financing
Net cash provided by operating activities
$ 4,381
$ 3,548
$ 833
including its revolving credit facility and commercial paper
Net cash used in investing activities
(2,176)
(1,852)
program, and/or access to capital markets.
Net cash used in financing activities
(2,370)
(1,656)
(324)
(714)
As at December 31, 2014, the Company recorded $50 million
Effect of foreign exchange fluctuations
($250 million as at December 31, 2013) of proceeds received
under the accounts receivable securitization program in the
Current portion of long-term debt on the Consolidated Balance
Sheet, which is secured by and limited to $56 million ($281 million
as at December 31, 2013) of accounts receivable.
on US dollar-denominated
cash and cash equivalents
3
19
(16)
Net increase (decrease) in cash and
cash equivalents
(162)
Cash and cash equivalents, beginning of year
214
59
155
(221)
59
Cash and cash equivalents, end of year
$
52
$ 214
$
(162)
Bilateral letter of credit facilities
Operating activities
The Company has a series of bilateral letter of credit facility
Net cash provided by operating activities increased by $833 mil-
agreements with various banks to support its requirements to
lion in 2014, mainly due to higher revenues and lower payments
post letters of credit in the ordinary course of business, which
for income taxes and pensions. These factors were partly offset
expire on April 28, 2017. Under these agreements, the Company
by higher payments for labor and fringe benefits, increased fuel
has the option from time to time to pledge collateral in the form
costs, as well as higher payments for purchased services and
of cash or cash equivalents, for a minimum term of one month,
material.
equal to at least the face value of the letters of credit issued.
As at December 31, 2014, the Company had letters of credit
(a) Pension contributions
drawn of $487 million ($481 million as at December 31, 2013)
Company contributions to its various defined benefit pension
from a total committed amount of $511 million ($503 million as
plans are made in accordance with the applicable legislation in
at December 31, 2013) by the various banks. As at December 31,
Canada and the U.S. and such contributions follow minimum
2014, cash and cash equivalents of $463 million ($448 million as
and maximum thresholds as determined by actuarial valuations.
at December 31, 2013) were pledged as collateral, and record-
Pension contributions made in 2014 and 2013 of $111 million
ed as Restricted cash and cash equivalents on the Consolidated
and $226 million, respectively, mainly represent contributions
Balance Sheet.
to the Company’s main pension plan, the CN Pension Plan, for
the current service cost as determined under the Company’s
Additional information relating to these financing sources is pro-
current actuarial valuations for funding purposes, and also
vided in Note 10 – Long-term debt to the Company’s 2014 Annual
include voluntary contributions of $100 million in 2013. In
Consolidated Financial Statements.
2015, the Company expects to make total cash contributions
of approximately $125 million for all of the Company’s pension
plans. See the section of this MD&A entitled Critical account-
ing estimates – Pensions and other postretirement benefits for
additional information relating to the funding of the Company’s
pension plans.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 31
Management’s Discussion and Analysis
As at December 31, 2014, the Company had $143 million
(a) Property additions
of accumulated prepayments under the CN Pension Plan which
The following table provides the property additions for the years
remain available to offset future required solvency deficit pay-
ended December 31, 2014 and 2013:
ments. The Company expects to use these prepayments to satis-
fy a portion of its 2015 required solvency deficit payment. The
In millions
Year ended December 31,
2014
2013
Company established an irrevocable standby letter of credit in
Track and roadway (1)
$ 1,604
$ 1,400
2014 with a face amount of approximately $3 million in order to
Rolling stock
satisfy the solvency deficit payment for the BC Rail Pension Plan.
Buildings
The Company expects to further subscribe to letters of credit
Information technology
in 2015 to satisfy the solvency deficit payments for certain of
Other
its defined benefit pension plans including the CN Pension Plan.
Gross property additions
Under the CN Pension Plan, considering the prepayments avail-
Less: Capital leases (2)
able, it is expected that the letters of credit will only be required
Property additions
325
104
144
120
286
104
130
97
2,297
2,017
-
44
$ 2,297
$ 1,973
in the third quarter of 2015. The total face amount of the letters
of credit is expected to be approximately $90 million at the end
of 2015.
Additional information relating to the pension plans is pro-
vided in Note 12 – Pensions and other postretirement benefits to
the Company’s 2014 Annual Consolidated Financial Statements.
(1)
In both 2014 and 2013, approximately 90% of the Track and roadway property addi-
tions were incurred to renew the basic infrastructure. Costs relating to normal repairs
and maintenance of Track and roadway properties are expensed as incurred, and
amounted to approximately 12% of the Company’s total operating expenses in both
2014 and 2013.
(2) During 2013, the Company recorded $44 million in assets it acquired through equip-
ment leases for which an equivalent amount was recorded in debt.
(b) Income tax payments
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 taxable income whereas
in the U.S., the Company’s predominant foreign jurisdiction, they
are based on forecasted taxable income of the current year.
In 2014, net income tax payments to Canadian tax authorities
(b) Capital expenditure program
For 2015, the Company expects to invest approximately $2.6 bil-
lion in its capital program, which will be financed with cash gen-
erated from operations, as outlined below:
• $1.3 billion on track infrastructure to continue operating a
safe railway and improve the productivity and fluidity of the
network; including the replacement of rail, ties, and other
track materials, bridge improvements, as well as various
were $427 million ($610 million in 2013) and net income tax
branch line upgrades;
payments to U.S. tax authorities were $295 million ($280 million
in 2013). The overall decrease of $168 million was mainly due to
a lower final payment for the 2013 fiscal year, made in February
2014. For the 2015 fiscal year, the Company’s net income tax
payments are expected to be approximately $950 million. In
2015, U.S. tax payments will reflect the Tax Increase Prevention
Act of 2014 which extended the allowable 50% accelerated
depreciation and the Railroad Track Maintenance Credit until the
end of 2014.
The Company expects cash from operations and its other sources
of financing to be sufficient to meet its funding obligations.
Investing activities
Net cash used in investing activities increased by $324 million in
• $500 million on equipment capital expenditures, allowing
the Company to tap growth opportunities and improve the
quality of the fleet; and in order to handle expected traffic
increase and improve operational efficiency, CN expects to
take delivery of 90 new high-horsepower locomotives; and
• $800 million on initiatives to enable growth and drive pro-
ductivity, such as additional track infrastructure; investments
in yards, intermodal terminals, transload and distribution cen-
ters; and on information technology to improve service and
operating efficiency.
Costs associated with the U.S. federal government legisla-
tive requirement to implement positive train control (PTC) by
December 31, 2015 will amount to approximately US$550 mil-
lion, of which approximately US$100 million was spent at the
2014, as a result of higher property additions, partly offset by
end of 2014.
higher proceeds received from the disposal of property.
(c) Disposal of property
In 2014, cash inflows included proceeds of $76 million before
transaction costs, from a transaction with Metrolinx to sell a seg-
ment of the Guelph subdivision located between Georgetown
and Kitchener, Ontario, together with the rail fixtures and certain
passenger agreements and proceeds of $97 million from the
32
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
disposal of the Deux-Montagnes. In 2013, cash inflows included
(b) Share repurchase programs
proceeds of $52 million from the disposal of the Lakeshore West.
The Company may repurchase shares pursuant to a normal course
See the section of this MD&A entitled Adjusted performance
issuer bid (NCIB) at prevailing market prices plus brokerage fees,
measures for additional information relating to these disposals.
or such other prices as may be permitted by the Toronto Stock
Financing activities
Exchange. Under its current NCIB, the Company may repurchase
up to 28.0 million common shares between October 24, 2014
Net cash used in financing activities increased by $714 million
and October 23, 2015.
in 2014, mainly driven by a net repayment of commercial paper
Previous share repurchase programs allowed for the repur-
and higher payments for share repurchases and dividends.
chase of up to 30.0 million common shares between October 29,
Information about the Company’s debt financing activities, share
2013 and October 23, 2014 and up to $1.4 billion in common
repurchase programs, and dividends paid is as follows:
shares, not to exceed 36.0 million common shares, between
(a) Debt financing activities
October 29, 2012 and October 28, 2013, pursuant to the NCIBs.
The following table provides the information related to the
Debt financing activities in 2014 included the following trans-
share repurchase programs for the years ended December 31,
actions:
• On January 15, 2014, repaid US$325 million 4.95% Notes
due 2014 upon maturity;
2014, 2013 and 2012:
In millions, except per share data
• On February 18, 2014, issued $250 million 2.75% Notes due
Year ended December 31,
2014
2013
Total
2012 program
2021, in the Canadian capital markets, which resulted in net
October 2014 – October 2015 program
proceeds of $247 million;
Number of common shares (1)
5.6
• On November 14, 2014, issued US$250 million (C$284 mil-
Weighted-average price per share (2)
$ 73.29
lion) Floating Rate Notes due 2017, and US$350 million
Amount of repurchase
$ 410
N/A
N/A
N/A
N/A
5.6
N/A $ 73.29
N/A $ 410
(C$398 million) 2.95% Notes due 2024, in the U.S. capital
markets, which resulted in net proceeds of US$593 million
(C$675 million); and
• Net repayment of commercial paper of $277 million.
Debt financing activities in 2013 included the following trans-
actions:
• On March 12, 2013, through a wholly-owned subsidiary, re-
purchased 85% of the 4.40% Notes due 2013, with a carry-
October 2013 – October 2014 program
Number of common shares (1)
16.8
5.5
N/A
22.3
Weighted-average price per share (2)
$ 65.40 $ 55.25
N/A $ 62.88
Amount of repurchase
$ 1,095 $ 305
N/A $ 1,400
October 2012 – October 2013 program
Number of common shares (1)
N/A
22.1
7.2
29.3
Weighted-average price per share (2)
N/A $ 49.51 $ 42.11 $ 47.68
Amount of repurchase
N/A $ 1,095 $ 305 $ 1,400
ing value of US$340 million pursuant to a tender offer for
Total for the year
a total cost of US$341 million, including consent payments.
The remaining 15% of the 4.40% Notes with a carrying value
of US$60 million were repaid upon maturity;
• On November 7, 2013, issued US$350 million (C$365 mil-
lion) Floating Rate Notes due 2015, and US$250 million
(C$260 million) 4.50% Notes due 2043, in the U.S. capital
markets, which resulted in net proceeds of US$592 million
(C$617 million); and
• Net issuance of commercial paper of $268 million.
Cash obtained from the issuance of new debt in 2014 and 2013
was used for general corporate purposes, including the redemp-
tion and refinancing of outstanding indebtedness and share
repurchases. Additional information relating to the Company’s
outstanding debt securities is provided in Note 10 – Long-term
debt to the Company’s 2014 Annual Consolidated Financial
Statements.
Number of common shares (1)
22.4
27.6
33.8 (3)
Weighted-average price per share (2)
$ 67.38 $ 50.65 $ 41.36 (3)
Amount of repurchase
$ 1,505 $ 1,400 $ 1,400 (3)
(1)
Includes common shares purchased in the first and fourth quarters of 2014, 2013
and 2012 pursuant to private agreements between the Company and arm’s-length
third-party sellers.
(2)
Includes brokerage fees.
(3)
Includes repurchases from the October 2011 – October 2012 program, which consists
of 26.6 million common shares, a weighted-average price per share of $41.16 and an
amount of repurchase of $1,095 million.
(c) Dividends paid
During 2014, the Company paid quarterly dividends of $0.2500
per share amounting to $818 million, compared to $724 mil-
lion, at the rate of $0.2150 per share, in 2013. For 2015, the
Company’s Board of Directors approved an increase of 25% to
the quarterly dividend to common shareholders, from $0.2500 per
share in 2014 to $0.3125 per share in 2015.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 33
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, 2014:
In millions
Debt obligations (1)
Interest on debt obligations (2)
Capital lease obligations (3)
Operating lease obligations (4)
Purchase obligations (5)
Pension contributions (6)
Other long-term liabilities reflected on the balance sheet (7)
Total
2015
2016
2017
2018
2019
2020 &
thereafter
$ 7,739
$
456
$
634
$
577
$
606
$
636
$ 4,830
5,571
815
712
1,054
1,005
755
366
107
155
719
87
64
355
343
116
316
228
39
342
164
94
14
230
54
313
15
77
3
230
40
270
3,925
15
56
-
230
37
171
214
2
-
521
Total contractual obligations
$ 17,651
$ 1,954
$ 2,031
$ 1,475
$ 1,284
$ 1,244
$ 9,663
(1) Presented net of unamortized discounts, of which $833 million relates to non-interest bearing Notes due in 2094, and excludes capital lease obligations of $670 million which are included
in “Capital lease obligations“. Also includes $50 million outstanding under the accounts receivable securitization program.
(2)
Interest payments on the floating rate notes are calculated based on the three-month London Interbank Offered Rate effective as at December 31, 2014.
(3)
Includes $670 million of minimum lease payments and $145 million of imputed interest at rates ranging from 0.7% to 8.5%.
(4)
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 $25 million and
generally extend over five years.
(5)
Includes commitments for railroad ties, rail, freight cars, locomotives and other equipment and services, and outstanding information technology service contracts and licenses.
(6) The Company’s pension contributions are based on actuarial funding valuations. The estimated minimum required payments for pension contributions, excluding current service cost, are
based on actuarial funding valuations as at December 31, 2013 that were filed in June 2014. Voluntary contributions can be treated as a prepayment against the Company’s required spe-
cial solvency deficit payments. As at December 31, 2014, the Company had $143 million of accumulated prepayments under the CN Pension Plan which remain available to offset future
required solvency deficit payments. The Company expects to use these prepayments to satisfy a portion of its 2015 required solvency deficit payment. Actuarial valuations are generally
required annually and as such, future payments for pension contributions are subject to re-evaluation on an annual basis. See the sections of this MD&A entitled Business risks – Pension
funding volatility and Critical accounting estimates – Pensions and other postretirement benefits.
(7)
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.
For 2015 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.
Free cash flow
The Company defines its free cash flow measure as the dif-
Free cash flow does not have any standardized meaning pre-
ference between net cash provided by operating activities and
scribed by GAAP and therefore, may not be comparable to
net cash used in investing activities; adjusted for changes in
similar measures presented by other companies. The Company
restricted cash and cash equivalents and the impact of major
believes that free cash flow is a useful measure of performance
acquisitions, if any.
as it demonstrates the Company’s ability to generate cash for
debt obligations and for discretionary uses such as payment of
dividends and strategic opportunities.
In millions
Year ended December 31,
2014
2013
Net cash provided by operating activities
$ 4,381
$ 3,548
Net cash used in investing activities
(2,176)
(1,852)
Net cash provided before financing activities
2,205
1,696
Adjustment: Change in restricted cash and cash equivalents
15
(73)
Free cash flow
$ 2,220
$ 1,623
34
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Credit measures
Off balance sheet arrangements
Management believes that the adjusted debt-to-total capitalization
Guarantees and indemnifications
ratio is a useful credit measure that aims to show the true leverage of
In the normal course of business, the Company, including certain of
the Company. Similarly, the adjusted debt-to-adjusted earnings be-
its subsidiaries, enters into agreements that may involve providing
fore interest, income taxes, depreciation and amortization (EBITDA)
guarantees or indemnifications to third parties and others, which
multiple is another useful credit measure because it reflects the
may extend beyond the term of the agreements. These include, but
Company’s ability to service its debt. The Company excludes Other
are not limited to, residual value guarantees on operating leases,
income in the calculation of EBITDA. However, since these measures
standby letters of credit, surety and other bonds, and indemnifi-
do not have any standardized meaning prescribed by GAAP, they
cations that are customary for the type of transaction or for the
may not be comparable to similar measures presented by other
railway business. As at December 31, 2014, the Company had not
companies and, as such, should not be considered in isolation.
recorded a liability with respect to guarantees and indemnifications.
Adjusted debt-to-total capitalization ratio
December 31,
2014
2013
Debt-to-total capitalization ratio (1)
38.4%
37.7%
Add: Impact of present value of
operating lease commitments (2)
1.7%
1.7%
Adjusted debt-to-total capitalization ratio
40.1%
39.4%
Adjusted debt-to-adjusted EBITDA
In millions, unless otherwise indicated
The nature of these guarantees or indemnifications, the maximum
potential amount of future payments, the carrying amount of the
liability, if any, and the nature of any recourse provisions are dis-
closed in Note 16 – Major commitments and contingencies to the
Company’s 2014 Annual Consolidated Financial Statements.
Financial instruments
Risk management
In the normal course of business, the Company is exposed to various
financial risks from its use of financial instruments, such as credit
risk, liquidity risk, and also market risks such as foreign currency
Twelve months ended December 31,
2014
2013
risk, interest rate risk and commodity price risk. To manage these
Debt
$ 8,409
$ 7,840
Add: Present value of operating lease commitments (2)
607
570
9,016
8,410
Adjusted debt
Operating income
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,
optimizing earnings per share and free cash flow, financing its oper-
4,624
3,873
ations at an optimal cost of capital and preserving its liquidity.
Add: Depreciation and amortization
1,050
980
The Company has limited involvement with derivative financial
EBITDA (excluding Other income)
5,674
4,853
instruments in the management of its risks and does not hold or
Add: Deemed interest on operating leases
28
28
use them for trading or speculative purposes. As at December 31,
Adjusted EBITDA
$ 5,702
$ 4,881
2014, the Company had outstanding foreign exchange forward
Adjusted debt-to-adjusted EBITDA
1.58 times 1.72 times
contracts of US$350 million (US$325 million as at December 31,
(1) Debt-to-total capitalization is calculated as total long-term debt plus current portion of
long-term debt, divided by the sum of total debt plus total shareholders’ equity.
(2) The operating lease commitments have been discounted using the Company’s implicit
interest rate for each of the periods presented.
The increase in the Company’s adjusted debt-to-total capitaliza-
tion ratio at December 31, 2014, as compared to 2013, was main-
2013). As at December 31, 2014 and 2013, the Company did
not have any other significant derivative financial instruments out-
standing. Additional information relating to the Company’s finan-
cial instruments is provided in Note 17 – Financial instruments to
the Company’s 2014 Annual Consolidated Financial Statements.
ly due to an increased debt level and a weaker Canadian-to-US
Credit risk
dollar foreign exchange rate in effect at the balance sheet date.
The Company’s higher operating income earned during 2014,
partly offset by an increased debt level as at December 31, 2014,
resulted in a decrease in the Company’s adjusted debt-to-adjusted
EBITDA multiple, as compared to 2013.
All forward-looking information provided in this section is subject to
risks and uncertainties and is based on assumptions about events and
developments that may not materialize or that may be offset entirely
or partially by other events and developments. See the section of this
MD&A entitled Forward-looking statements for a discussion of as-
sumptions and risk factors affecting such forward-looking statements.
Credit risk arises from cash and temporary investments, accounts
receivable and derivative financial instruments.
To manage credit risk associated with cash and temporary
investments, the Company places these financial assets with
governments, major financial institutions, or other creditworthy
counterparties; and performs ongoing reviews of these entities.
To manage credit risk associated with accounts receivable,
the Company reviews the credit history of each new customer,
monitors the financial condition and credit limits of its custom-
ers, and keeps the average daily sales outstanding within an ac-
ceptable range. The Company works with customers to ensure
timely payments, and in certain cases, requires financial security,
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 35
Management’s Discussion and Analysis
including letters of credit. Although the Company believes there
currency risk. Changes in the fair value of forward contracts, re-
are no significant concentrations of customer credit risk, economic
sulting from changes in foreign exchange rates, are recognized
conditions can affect the Company’s customers and can result in
in the Consolidated Statement of Income as they occur. For the
an increase to the Company’s credit risk and exposure to business
year ended December 31, 2014, a gain of $9 million ($6 million
failures of its customers. A widespread deterioration of customer
in 2013), before tax, related to the fair value of the foreign ex-
credit and business failures of customers could have a material
change forward contracts with a notional value of US$350 million
adverse effect on the Company’s results of operations, financial
(US$325 million as at December 31, 2013), was recorded in Other
position or liquidity. The Company considers the risk due to the
income on the Consolidated Statement of Income.
possible non-performance by its customers to be remote.
The Company has limited involvement with derivative finan-
Interest rate risk
cial instruments, however from time to time, it may enter into
The Company is exposed to interest rate risk, which is the risk that
derivative financial instruments to manage its exposure to interest
the fair value or future cash flows of a financial instrument will
rates or foreign currency exchange rates. To manage the counter-
vary as a result of changes in market interest rates. Such risk exists
party risk associated with the use of derivative financial instru-
in relation to the Company’s long-term debt. The Company mainly
ments, the Company enters into contracts with major financial
issues fixed-rate debt, which exposes the Company to variability
institutions that have been accorded investment grade ratings.
in the fair value of the debt. The Company also issues debt with
Though the Company is exposed to potential credit losses due to
variable interest rates, which exposes the Company to variability in
non-performance of these counterparties, the Company consid-
interest expense. The estimated annual impact on net income of a
ers this risk remote.
Liquidity risk
year-over-year one-percent change in the interest rate on floating
rate debt, is in the range of $10 million to $15 million.
To manage interest rate risk, the Company manages its
Liquidity risk is the risk that sufficient funds will not be available
borrowings in line with liquidity needs, maturity schedule, and
to satisfy financial obligations as they come due. In addition to
currency and interest rate profile; and in anticipation of future
cash generated from operations, which represents its princi-
debt issuances, the Company may enter into forward rate agree-
pal source of liquidity, the Company manages liquidity risk by
ments. The Company does not currently hold any significant
aligning other external sources of funds which can be obtained
derivative financial instruments to manage its interest rate risk.
upon short notice, such as a committed revolving credit facility,
As at December 31, 2014, Accumulated other comprehensive loss
commercial paper, and an accounts receivable securitization
included an unamortized gain of $7 million, $5 million after-tax
program. The Company believes that its investment grade credit
($8 million, $6 million after-tax as at December 31, 2013) relating
ratings contribute to reasonable access to capital markets. See
to treasury lock transactions settled in a prior year, which is being
the section of this MD&A entitled Liquidity and capital resources
amortized over the term of the related debt.
for additional information relating to the Company’s available
financing sources.
Foreign currency risk
Commodity price risk
The Company is exposed to commodity price risk related to pur-
chases of fuel and the potential reduction in net income due to
The Company is exposed to foreign currency risk because it
increases in the price of diesel. Fuel prices are impacted by geo-
conducts its business in both Canada and the U.S. The estimated
political events, changes in the economy or supply disruptions.
annual impact on net income of a year-over-year one-cent change
Fuel shortages can occur due to refinery disruptions, production
in the Canadian dollar relative to the US dollar is in the range of
quota restrictions, climate, and labor and political instability.
$15 million to $20 million.
The Company manages fuel price risk by offsetting the im-
The Company manages foreign currency risk by designating
pact of rising fuel prices with the Company’s fuel surcharge pro-
US dollar-denominated long-term debt of the parent company as
gram. The surcharge applied to customers is determined in the
a foreign currency hedge of its net investment in U.S. subsidiaries.
second calendar month prior to the month in which it is applied,
As a result, from the dates of designation, foreign exchange gains
and is calculated using the average monthly price of West-Texas
and losses on translation of the Company’s US dollar-denominated
Intermediate crude oil (WTI) for revenue-based tariffs and On-
long-term debt are recorded in Accumulated other comprehen-
Highway Diesel (OHD) for mileage-based tariffs. The Company
sive loss, which minimizes volatility of earnings resulting from the
also enters into agreements with fuel suppliers which allow but do
conversion of US dollar-denominated long-term debt into the
not require the Company to purchase approximately 95% of its
Canadian dollar.
estimated 2015 volume, 85% of its anticipated 2016 volume and
While the Company does not hold or issue derivative fi-
20% of its anticipated 2017 volume at market prices prevailing on
nancial instruments for trading or speculative purposes, it
the date of the purchase.
may enter into foreign exchange contracts to manage foreign
36
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
While the Company’s fuel surcharge program provides effective
Outstanding share data
coverage, residual exposure remains given that fuel price risk can-
As at February 2, 2015, the Company had 808.8 million common
not be completely managed due to timing and given the volatility
shares outstanding, and 8.2 million stock options, 1.7 million
in the market. As such, the Company may enter into derivative
deferred share units and 1.4 million performance share units out-
instruments to manage such risk when considered appropriate.
standing under its equity settled stock-based compensation plans.
Fair value of financial instruments
Critical accounting estimates
The Company uses the following methods and assumptions to
The preparation of financial statements in conformity with U.S.
estimate the fair value of each class of financial instruments for
GAAP requires management to make estimates and assumptions
which the carrying amounts are included in the Consolidated
that affect the reported amounts of revenues, expenses, assets
Balance Sheet under the following captions:
and liabilities, and the disclosure of contingent assets and lia-
bilities at the date of the financial statements. On an ongoing
Cash and cash equivalents, Restricted cash and cash equiva-
basis, management reviews its estimates based upon available
lents, Accounts receivable, Other current assets, Accounts
information. Actual results could differ from these estimates. The
payable and other
Company’s policies for income taxes, depreciation, pensions and
The carrying amounts approximate fair value because of the
other postretirement benefits, personal injury and other claims
short maturity of these instruments. Cash and cash equivalents
and environmental matters, require management’s more signifi-
and Restricted cash and cash equivalents include highly liquid in-
cant judgments and estimates in the preparation of the Company’s
vestments purchased three months or less from maturity and are
consolidated financial statements and, as such, are considered to
classified as Level 1. Accounts receivable, Other current assets, and
be critical. The following information should be read in conjunc-
Accounts payable and other are classified as Level 2 as they may
tion with the Company’s 2014 Annual Consolidated Financial
not be priced using quoted prices, but rather determined from
Statements and Notes thereto.
market observable information.
Intangible and other assets
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
Included in Intangible and other assets are equity investments for
has reviewed the Company’s related disclosures.
which the carrying value approximates the fair value, with the
exception of certain cost investments for which the fair value is
Income taxes
estimated based on the Company’s proportionate share of the
The Company follows the asset and liability method of accounting
underlying net assets. Investments are classified as Level 3 as their
for income taxes. Under the asset and liability method, the change
fair value is based on significant unobservable inputs.
in the net deferred income tax asset or liability is included in the
Debt
computation of Net income or Other comprehensive income (loss).
Deferred income tax assets and liabilities are measured using en-
The fair value of the Company’s debt is estimated based on the
acted income tax rates expected to apply to taxable income in the
quoted market prices for the same or similar debt instruments, as
years in which temporary differences are expected to be recovered
well as discounted cash flows using current interest rates for debt
or settled. As a result, a projection of taxable income is required
with similar terms, company rating, and remaining maturity. The
for those years, as well as an assumption of the ultimate recovery/
Company’s debt is classified as Level 2.
settlement period for temporary differences. The projection of fu-
ture taxable income is based on management’s best estimate and
As at December 31, 2014, investments have a carrying value
may vary from actual taxable income.
of $58 million and a fair value of approximately $183 million
On an annual basis, the Company assesses the need to estab-
(carrying value of $57 million and fair value of $164 million as at
lish a valuation allowance for its deferred income tax assets, and
December 31, 2013).
if it is deemed more likely than not that its deferred income tax
As at December 31, 2014, the long-term debt has a carry-
assets will not be realized, a valuation allowance is recorded. The
ing value of $8,409 million and a fair value of approximately
ultimate realization of deferred income tax assets is dependent
$9,767 million (carrying value of $7,840 million and fair value of
upon the generation of future taxable income during the per-
$8,683 million as at December 31, 2013).
iods in which those temporary differences become deductible.
Additional information related to the fair value financial instru-
Management considers the scheduled reversals of deferred
ments, including a description of the fair value hierarchy which
income tax liabilities, the available carryback and carryforward
defines the criteria used to classify financial instruments as Level 1,
periods, and projected future taxable income in making this
Level 2 or Level 3 is provided in Note 17 – Financial instruments to
assessment. As at December 31, 2014, in order to fully realize
the Company’s 2014 Annual Consolidated Financial Statements.
all of the deferred income tax assets, the Company will need to
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 37
Management’s Discussion and Analysis
generate future taxable income of approximately $1.7 billion and,
budget changes and/or changes in income tax laws. As a result,
based upon the level of historical taxable income and projections
a change in the timing and/or the income tax rate at which the
of future taxable income over the periods in which the deferred
components will reverse, could materially affect deferred income
income tax assets are deductible, management believes it is more
tax expense as recorded in the Company’s results of operations. A
likely than not that the Company will realize the benefits of these
one-percentage-point change in the Company’s reported effective
deductible differences. Management has assessed the impacts of
income tax rate would have the effect of changing the income tax
the current economic environment and concluded there are no
expense by $44 million in 2014.
significant impacts to its assertions for the realization of deferred
From time to time, the federal, provincial, and state govern-
income tax assets.
ments enact new corporate income tax rates resulting in either
In addition, Canadian, or domestic, tax rules and regulations,
lower or higher tax liabilities. Included in the 2013 figure was a
as well as those relating to foreign jurisdictions, are subject to
$24 million income tax expense resulting from the enactment of
interpretation and require judgment by the Company that may
higher provincial corporate income tax rates in Canada.
be challenged by the taxation authorities upon audit of the filed
For the year ended December 31, 2014, the Company record-
income tax returns. Tax benefits are recognized if it is more likely
ed total income tax expense of $1,193 million, of which $416 mil-
than not that the tax position will be sustained on examination
lion was a deferred income tax expense which included an income
by the taxation authorities. As at December 31, 2014, the total
tax recovery of $18 million resulting from a change in the esti-
amount of gross unrecognized tax benefits was $35 million be-
mate of the deferred income tax liability related to properties.
fore considering tax treaties and other arrangements between
For the year ended December 31, 2013, the Company recorded
taxation authorities. The amount of net unrecognized tax bene-
total income tax expense of $977 million, of which $331 million
fits as at December 31, 2014 was $29 million. If recognized, all
was a deferred income tax expense and included a net income
of the net unrecognized tax benefits as at December 31, 2014
tax recovery of $7 million which consisted of a $15 million in-
would affect the effective tax rate. The Company believes that it
come tax recovery from the recognition of U.S. state income tax
is reasonably possible that approximately $10 million of the net
losses and a $16 million income tax recovery from a revision of
unrecognized tax benefits as at December 31, 2014 related to
the apportionment of U.S. state income taxes, which were partly
various federal, state, and provincial income tax matters, each of
offset by a combined $24 million income tax expense resulting
which are individually insignificant, may be recognized over the
from the enactment of higher provincial corporate income tax
next twelve months as a result of settlements and a lapse of the
rates. For the year ended December 31, 2012, the Company
applicable statute of limitations.
recorded total income tax expense of $978 million, of which
In Canada, the Company’s federal and provincial income tax re-
$451 million was a deferred income tax expense and included
turns filed for the years 2008 to 2013 remain subject to examina-
a net income tax expense of $28 million, which consisted of a
tion by the taxation authorities. An examination of the Company’s
$35 million income tax expense resulting from the enactment of
federal income tax returns for the years 2010 and 2011 is currently
higher provincial corporate income tax rates that was partly offset
in progress and is expected to be completed during 2015. In the
by a $7 million income tax recovery resulting from the recapit-
U.S., the federal income tax returns filed for the years 2007 to
alization of a foreign investment. The Company’s net deferred
2013 remain subject to examination by the taxation authorities,
income tax liability as at December 31, 2014 was $6,834 million
and the state income tax returns filed for the years 2009 to 2013
($6,463 million as at December 31, 2013). Additional disclosures
remain subject to examination by the taxation authorities. An
are provided in Note 4 – Income taxes to the Company’s 2014
examination of the federal income tax returns for the years 2007
Annual Consolidated Financial Statements.
to 2011 is currently in progress. Examinations of certain state in-
come tax returns by the state taxation authorities are currently
Depreciation
in progress. The Company does not anticipate any significant im-
Properties are carried at cost less accumulated depreciation in-
pacts to its results of operations or financial position as a result of
cluding asset impairment write-downs. The cost of properties,
the final resolutions of such matters.
including those under capital leases, net of asset impairment
The Company’s deferred income tax assets are mainly com-
write-downs, is depreciated on a straight-line basis over their
posed of temporary differences related to the pension liability,
estimated service lives, measured in years, except for rail which
accruals for personal injury claims and other reserves, other
is measured in millions of gross ton miles. The Company follows
post retirement benefits liability, and net operating losses and tax
the group method of depreciation whereby a single composite
credit carryforwards. The majority of these accruals will be paid
depreciation rate is applied to the gross investment in a class
out over the next five years. The Company’s deferred income tax
of similar assets, despite small differences in the service life or
liabilities are mainly composed of temporary differences related
salvage value of individual property units within the same asset
to properties. The reversal of temporary differences is expected at
class. The Company uses approximately 40 different depreciable
future-enacted income tax rates which could change due to fiscal
asset classes.
38
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
For all depreciable assets, the depreciation rate is based on
Pensions and other postretirement benefits
the estimated service lives of the assets. Assessing the reason-
The Company’s plans have a measurement date of December 31.
ableness of the estimated service lives of properties requires
The following table provides the Company’s pension asset,
judgment and is based on currently available information, includ-
pension liability and other postretirement benefits liability as at
ing periodic depreciation studies conducted by the Company.
December 31, 2014, and December 31, 2013:
The Company’s U.S. properties are subject to comprehensive
depreciation studies as required by the Surface Transportation
In millions
December 31,
2014
2013
Board (STB) and are conducted by external experts. Depreciation
Pension asset
studies for Canadian properties are not required by regulation
Pension liability
and are conducted internally. Studies are performed on specific
Other postretirement benefits liability
$
882 $ 1,662
400
267
303
256
asset groups on a periodic basis. Changes in the estimated ser-
vice 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 depreciation
expense as reported in the Company’s results of operations. A
change of one year in the composite service life of the Company’s
fixed asset base would impact annual depreciation expense by
approximately $28 million.
Depreciation studies are a means of ensuring that the assump-
tions 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 prospective
basis. In the fourth quarter of 2014, the Company completed
depreciation studies for equipment properties and as a result, the
Company changed the estimated service lives for various types of
equipment assets and their related composite depreciation rates.
These depreciation studies resulted in an annualized increase to
depreciation expense of approximately $17 million.
In 2014, the Company recorded total depreciation expense
of $1,050 million ($979 million in 2013 and $923 million in
2012). As at December 31, 2014, the Company had Properties of
$28,514 million, net of accumulated depreciation of $11,195 mil-
lion ($26,227 million as at December 31, 2013, net of accumu-
lated depreciation of $10,579 million). Additional disclosures are
provided in Note 7 – Properties, to the Company’s 2014 Annual
Consolidated Financial Statements.
U.S. GAAP requires the use of historical cost as the basis of re-
porting in financial statements. As a result, the cumulative effect of
inflation, which has significantly increased asset replacement costs
for capital-intensive companies such as CN, is not reflected in oper-
ating expenses. Depreciation charges on an inflation-adjusted basis,
assuming that all operating assets are replaced at current price levels,
would be substantially greater than historically reported amounts.
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
periodic benefit cost, the standard allows for a gradual recog-
nition of changes in benefit obligations and fund performance
over the expected average remaining service life of the employee
group covered by the plans.
In accounting for pensions and other postretirement benefits,
assumptions are required for, among other things, the discount
rate, the expected long-term rate of return on plan assets, the
rate of compensation increase, health care cost trend rates, mor-
tality rates, employee early retirements, terminations and disabil-
ity. Changes in these assumptions result in actuarial gains or loss-
es, which are recognized in Other comprehensive income (loss).
The Company amortizes these gains or losses into net periodic
benefit 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 the beginning-of-year balances of the projected benefit obli-
gation or market-related value of plan assets. The Company’s
net periodic benefit cost for future periods is dependent on
demographic experience, economic conditions and investment
performance. Recent demographic experience has revealed no
material net gains or losses on termination, retirement, disability
and mortality. Experience with respect to economic conditions
and investment performance is further discussed herein.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 39
Management’s Discussion and Analysis
For the years ended December 31, 2014, 2013 and 2012, the
a net actuarial loss of $1,114 million on its pension plans, in-
consolidated net periodic benefit cost (income) for pensions and
creasing the net actuarial loss recognized in Accumulated other
other postretirement benefits were as follows:
comprehensive loss to $2,502 million ($1,515 million in 2013).
In millions
Year ended December 31,
2014
2013
2012
Net periodic benefit cost (income)
for pensions
$
(4) $
90 $
(9)
Net periodic benefit cost for other
postretirement benefits
12
14
14
The increase in the net actuarial loss was primarily due to the
negative liability experience resulting from the decrease in the
discount rate from 4.73% to 3.87%, partly offset by the differ-
ence in the actual and expected return on plan assets for the year
ended December 31, 2014.
For the year ended December 31, 2014, a 0.25% decrease in
As at December 31, 2014 and 2013, the projected pension
the 3.87% discount rate used to determine the projected benefit
benefit obligation and accumulated other postretirement benefit
obligation would have resulted in a decrease of approximately
obligation were as follows:
In millions
December 31,
2014
2013
$490 million to the funded status for pensions and would result
in an increase of approximately $30 million to the 2015 net per-
iodic benefit cost. A 0.25% increase in the discount rate would
Projected pension benefit obligation
$ 17,279 $ 15,510
have resulted in an increase of approximately $475 million to
Accumulated other postretirement benefit obligation
267
256
the funded status for pensions and would result in a decrease of
approximately $30 million to the 2015 net periodic benefit cost.
Discount rate assumption
The Company’s discount rate assumption, which is set annually
Expected long-term rate of return assumption
at the end of each year, is used to determine the projected bene-
To develop its expected long-term rate of return assumption used
fit obligation at the end of the year and the net periodic benefit
in the calculation of net periodic benefit cost applicable to the
cost for the following year. The discount rate is used to measure
market-related value of assets, the Company considers multiple
the single amount that, if invested at the measurement date in a
factors. The expected long-term rate of return is determined
portfolio of high-quality debt instruments with a rating of AA or
based on expected future performance for each asset class and is
better, would provide the necessary cash flows to pay for pension
weighted based on the current asset portfolio mix. Consideration
benefits as they become due. The discount rate is determined
is taken of the historical performance, the premium return gener-
by management with the aid of third-party actuaries. For the
ated from an actively managed portfolio, as well as current and
Canadian pension and other postretirement benefit plans, fu-
future anticipated asset allocations, economic developments, in-
ture expected benefit payments at each measurement date are
flation rates and administrative expenses. Based on these factors,
discounted using spot rates from a derived AA corporate bond
the rate is determined by the Company. For 2014, the Company
yield curve. The derived curve is based on observed rates for
used a long-term rate of return assumption of 7.00% on the
AA corporate bonds with short-term maturities and a projected
market-related value of plan assets to compute net periodic
AA corporate curve for longer-term maturities based on spreads
benefit cost. For 2015, the Company will maintain the expected
between observed AA corporate bonds and AA provincial bonds.
long-term rate of return on plan assets at 7.00% to reflect
The derived curve is expected to generate cash flows that match
management’s current view of long-term investment returns. The
the estimated future benefit payments of the plans as the bond
Company has elected to use a market-related value of assets,
rate for each maturity year is applied to the plans’ correspond-
whereby realized and unrealized gains/losses and appreciation/
ing expected benefit payments of that year. A discount rate of
depreciation in the value of the investments are recognized over
3.87%, based on bond yields prevailing at December 31, 2014
a period of five years, while investment income is recognized
(4.73% at December 31, 2013) was considered appropriate by
immediately. If the Company had elected to use the market value
the Company to match the approximately 11-year average dur-
of assets, which for the CN Pension Plan at December 31, 2014
ation of estimated future benefit payments. The current estimate
was above the market-related value of assets by $1,850 million,
for the expected average remaining service life of the employee
the projected net periodic benefit cost for 2015 would decrease
group covered by the plans is approximately 11 years.
by approximately $295 million.
The Company amortizes net actuarial gains and losses over
The assets of the Company’s various plans are held in sep-
the expected average remaining service life of the employee
arate trust funds (“Trusts”) which are diversified by asset type,
group covered by the plans, only to the extent they are in excess
country and investment strategies. Each year, the CN Board
of the corridor threshold. For the year ended December 31, 2014,
of Directors reviews and confirms or amends the Statement
the Company amortized $124 million related to the accumulated
of Investment Policies and Procedures (SIPP) which includes
actuarial losses of its pension plans as part of net periodic benefit
the plans’ long-term asset mix and related benchmark indices
cost. The Company also recognized $3 million of actuarial losses
(“Policy”). This Policy is based on a long-term forward-looking
related to settlements in its various pension plans, and recorded
view of the world economy, the dynamics of the plans’ benefit
40
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
liabilities, the market return expectations of each asset class and
Plan asset allocation
the current state of financial markets. The target long-term asset
Based on the fair value of the assets held as at December 31,
mix in 2014 was: 3% cash and short-term investments, 37%
2014, the assets of the Company’s various plans are comprised of
bonds and mortgages, 45% equities, 4% real estate, 7% oil and
3% in cash and short-term investments, 29% in bonds and mort-
gas and 4% infrastructure investments.
gages, 39% in equities, 2% in real estate assets, 8% in oil and gas,
Annually, the CN Investment Division (“Investment Manager”),
5% in infrastructure, 10% in absolute return investments, and
a division of the Company created to invest and administer
4% in risk-based allocation investments. See Note 12 – Pensions
the assets of the plans, proposes a short-term asset mix target
and other postretirement benefits to the Company’s 2014 Annual
(“Strategy”) for the coming year, which is expected to differ
Consolidated Financial Statements for information on the fair
from the Policy, because of current economic and market condi-
value measurements of such assets.
tions and expectations. The Investment Committee of the Board
A significant portion of the plans’ assets are invested in publicly
(“Committee”) regularly compares the actual asset mix to the
traded equity securities whose return is primarily driven by stock
Policy and Strategy and compares the actual performance of the
market performance. Debt securities also account for a significant
Company’s pension plans to the performance of the benchmark
portion of the plans’ investments and provide a partial offset to
indices.
the variation in the pension benefit obligation that is driven by
The Committee’s approval is required for all major invest-
changes in the discount rate. The funded status of the plan fluc-
ments in illiquid securities. The SIPP allows for the use of deriv-
tuates with market conditions and impacts funding requirements.
ative financial instruments to implement strategies or to hedge
The Company will continue to make contributions to the pension
or adjust existing or anticipated exposures. The SIPP prohibits in-
plans that as a minimum meet pension legislative requirements.
vestments in securities of the Company or its subsidiaries. During
the last 10 years ended December 31, 2014, the CN Pension Plan
Rate of compensation increase and health care cost trend rate
earned an annual average rate of return of 7.41%.
The rate of compensation increase is determined by the Company
The actual, market-related value, and expected rates of return
based upon its long-term plans for such increases. For 2014, a
on plan assets for the last five years were as follows:
rate of compensation increase of 3% was used to determine the
2014
2013
2012
2011
2010
projected benefit obligation and the net periodic benefit cost.
For postretirement benefits other than pensions, the Company
Actual
10.1%
11.2%
Market-related value 7.6%
7.3%
7.7%
2.3%
0.3%
3.0%
8.7%
4.8%
reviews external data and its own historical trends for health care costs
to determine the health care cost trend rates. For measurement pur-
Expected
7.00%
7.00%
7.25%
7.50%
7.75%
poses, the projected health care cost trend rate for prescription drugs
The Company’s expected long-term rate of return on plan
assets reflects management’s view of long-term investment re-
turns and the effect of a 1% variation in such rate of return
would result in a change to the net periodic benefit cost of
approximately $90 million. Management’s assumption of the ex-
pected long-term rate of return is subject to risks and uncertain-
ties that could cause the actual rate of return to differ materially
from management’s assumption. There can be no assurance that
the plan assets will be able to earn the expected long-term rate
of return on plan assets.
Net periodic benefit cost for pensions for 2015
In 2015, the Company expects a net periodic benefit cost of ap-
proximately $80 million for all its defined benefit pension plans.
The unfavorable variance compared to 2014 is mainly the result
of an increase in the amortization of actuarial losses due to a
decrease in the discount rate used from 4.73% to 3.87%, partly
offset by lower interest costs.
was assumed to be 7.5% in 2014, and it is assumed that the rate will
decrease gradually to 4.5% in 2028 and remain at that level thereafter.
For the year ended December 31, 2014, 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.
Mortality
On February 13, 2014, the Canadian Institute of Actuaries (CIA) pub-
lished a final report on Canadian Pensioners’ Mortality (“Report”).
The Report contains Canadian pensioners’ mortality tables and
improvement scales based on experience studies conducted by the
CIA. Based on the CIA’s Report, the overall level of recent mortality
experience is significantly lower than that anticipated by the mortality
tables commonly used. Furthermore, improvement rates experienced
in recent years have been substantially higher than commonly antici-
pated. The conclusions in the final Report are in-line with the draft
Report that was issued in 2013 and that was taken into account in
selecting management’s best estimate mortality assumption used to
calculate the projected benefit obligation for the December 31, 2013
year-end. As expected, the final Report did not have a significant
impact on CN’s projected benefit obligation in 2014.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 41
Management’s Discussion and Analysis
Funding of pension plans
In 2014, the Company made no voluntary contributions
For accounting purposes, the funded status is calculated under
($100 million in 2013) in excess of the required minimum contribu-
generally accepted accounting principles for all pension plans.
tions. Voluntary contributions can be treated as a prepayment against
For funding purposes, the funded status is also calculated under
its future required special solvency payments. As at December 31,
going-concern and solvency scenarios as prescribed under pension
2014, the Company had $143 million of accumulated prepayments
legislation and subject to guidance issued by the CIA for all of the
under the CN Pension Plan which remain available to offset future
registered Canadian defined benefit pension plans. The Company’s
required solvency deficit payments. The Company expects to use
funding requirements are determined upon completion of actu-
these prepayments to satisfy a portion of its 2015 required solvency
arial valuations. Actuarial valuations are generally required on an
deficit payment. The Company established an irrevocable standby
annual basis for all Canadian plans, or when deemed appropriate
letter of credit in 2014 with a face amount of approximately $3 mil-
by the Office of the Superintendent of Financial Institutions.
lion in order to satisfy the solvency deficit payment for the BC Rail
The Company’s latest actuarial valuations for funding purposes
Pension Plan. The Company expects to further subscribe to letters
conducted as at December 31, 2013 indicated a funding excess
of credit in 2015 to satisfy the solvency deficit payments for certain
on a going-concern basis of approximately $1.6 billion and a fund-
of its defined benefit pension plans including the CN Pension Plan.
ing deficit on a solvency basis of approximately $1.7 billion. The
Under the CN Pension Plan, considering the prepayments available,
Company’s next actuarial valuations required as at December 31,
it is expected that the letters of credit will only be required in the
2014 will be performed in 2015. These actuarial valuations are
third quarter of 2015. The total face amount of the letters of credit
expected to identify a going-concern surplus of approximately
is expected to be approximately $90 million at the end of 2015. As
$1.9 billion, while on a solvency basis a funding deficit of ap-
a result, the Company’s cash contributions for 2015 are expected to
proximately $1.1 billion is expected due to the level of interest
be approximately $125 million, for all the Company’s pension plans.
rates applicable at their respective measurement dates. The federal
The Company expects cash from operations and its other sources of
pension legislation requires funding deficits, as calculated under
financing to be sufficient to meet its 2015 funding obligations.
current pension regulations, to be paid over a number of years.
Adverse changes to the assumptions used to calculate the
Alternatively, a letter of credit can be subscribed to fulfill required
Company’s funding status, particularly the discount rate, as well as
solvency deficit payments. Actuarial valuations are also required
changes to existing federal pension legislation could significantly
annually for the Company’s U.S. pension plans.
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
Cash and short-term investments
Bonds
Mortgages
Equities
Real estate
Oil and gas
Infrastructure
Absolute return
Risk-based allocation
Other (1)
Total plan assets
Projected benefit obligation at end of year
Company contributions in 2014
Employee contributions in 2014
December 31, 2014
CN
Pension Plan
BC Rail
Pension Plan
U.S. and
other plans
Total
$
536
$
20
$
4,776
126
6,681
306
1,325
853
1,685
612
5
$ 16,905
$ 16,059
$
$
90
58
196
4
215
10
43
28
54
20
1
591
561
1
-
23
93
1
118
1
6
4
7
3
9
$
579
5,065
131
7,014
317
1,374
885
1,746
635
15
$
$
265
659
20
-
$ 17,761
$ 17,279
111
58
(1) Other consists of operating assets of $145 million ($85 million in 2013) and liabilities of $130 million ($24 million in 2013) required to administer the trust funds’ investment assets and the
plans’ benefit and funding activities.
Additional disclosures are provided in Note 12 – Pensions and other postretirement benefits to the Company’s 2014 Annual Consolidated
Financial Statements.
42
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
Personal injury and other claims
United States
In the normal course of business, the Company becomes involved
Personal injury claims by the Company’s employees, including
in various legal actions seeking compensatory and occasionally
claims alleging occupational disease and work-related injuries,
punitive damages, including actions brought on behalf of various
are subject to the provisions of the Federal Employers’ Liability
purported classes of claimants and claims relating to employee and
Act (FELA). Employees are compensated under FELA for damages
third-party personal injuries, occupational disease and property
assessed based on a finding of fault through the U.S. jury system
damage, arising out of harm to individuals or property allegedly
or through individual settlements. As such, the provision is un-
caused by, but not limited to, derailments or other accidents.
discounted. With limited exceptions where claims are evaluated
Canada
on a case-by-case basis, the Company follows an actuarial-based
approach and accrues the expected cost for personal injury,
Employee injuries are governed by the workers’ compensation
including asserted and unasserted occupational disease claims,
legislation in each province whereby employees may be awarded
and property damage claims, based on actuarial estimates of
either a lump sum or a future stream of payments depending on
their ultimate cost. A comprehensive actuarial study is performed
the nature and severity of the injury. As such, the provision for
annually.
employee injury claims is discounted. In the provinces where the
For employee work-related injuries, including asserted occu-
Company is self-insured, costs related to employee work-related
pational disease claims, and third-party claims, including grade
injuries are accounted for based on actuarially developed esti-
crossing, trespasser and property damage claims, the actuarial
mates of the ultimate cost associated with such injuries, including
valuation considers, among other factors, the Company’s his-
compensation, health care and third-party administration costs. A
torical patterns of claims filings and payments. For unasserted
comprehensive actuarial study is generally performed at least on a
occupational disease claims, the actuarial study includes the
triennial basis. For all other legal actions, the Company maintains,
projection of the Company’s experience into the future consid-
and regularly updates on a case-by-case basis, provisions for such
ering the potentially exposed population. The Company adjusts
items when the expected loss is both probable and can be reason-
its liability based upon management’s assessment and the results
ably estimated based on currently available information.
of the study. On an ongoing basis, management reviews and
In 2014, the Company recorded a $2 million decrease to its
compares the assumptions inherent in the latest actuarial study
provision for personal injuries and other claims in Canada as a re-
with the current claim experience and, if required, adjustments
sult of a comprehensive actuarial study for employee injury claims
to the liability are recorded.
as well as various other claims.
Due to the inherent uncertainty involved in projecting future
As at December 31, 2014, 2013 and 2012, the Company’s
events, including events related to occupational diseases, which
provision for personal injury and other claims in Canada was as
include but are not limited to, the timing and number of actual
follows:
In millions
Beginning of year
Accruals and other
Payments
End of year
claims, the average cost per claim and the legislative and judicial
environment, the Company’s future payments may differ from
2014
2013
2012
current amounts recorded.
$ 210
$ 209
$ 199
In 2014, the Company recorded a $20 million reduction to its
28
(35)
38
(37)
55
(45)
provision for U.S. personal injury and other claims attributable
to non-occupational disease claims, third-party claims and occu-
$ 203
$ 210
$ 209
pational disease claims pursuant to the 2014 external actuarial
Current portion – End of year
$ 28
$ 31
$ 39
The assumptions used in estimating the ultimate costs for
Canadian employee injury claims include, among other factors,
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.
study. In previous years, external actuarial studies have supported
a net decrease of $11 million and a net increase of $1 million
to the Company’s provision for U.S. personal injury and other
claims in 2013 and 2012, respectively. The decrease of $11 mil-
lion from the 2013 actuarial valuation was mainly attributable to
non-occupational disease claims, third-party claims and occupa-
tional disease claims, reflecting a decrease in the Company’s esti-
mates of unasserted claims and costs related to asserted claims.
The Company has an ongoing risk mitigation strategy focused
on reducing the frequency and severity of claims through injury
prevention and containment; mitigation of claims; and lower
For all other legal claims in Canada, estimates are based on the
settlements of existing claims.
specifics of the case, trends and judgment.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 43
Management’s Discussion and Analysis
As at December 31, 2014, 2013 and 2012, the Company’s
assessments occur, remedial efforts are probable, and when the
provision for personal injury and other claims in the U.S. was as
costs, based on a specific plan of action in terms of the technology
follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
2014
2013
2012
to be used and the extent of the corrective action required, can be
reasonably estimated. The Company estimates the costs related
to a particular site using cost scenarios established by external
$ 106
$ 105
$ 111
consultants based on the extent of contamination and expected
2
(22)
9
18
(24)
7
31
(34)
(3)
costs for remedial efforts. In the case of multiple parties, the
Company accrues its allocable share of liability taking into account
the Company’s alleged responsibility, the number of potentially
$ 95
$ 106
$ 105
responsible parties and their ability to pay their respective share of
Current portion – End of year
$ 20
$ 14
$ 43
For the U.S. personal injury and other claims liability, historical
claim data is used to formulate assumptions relating to the expected
number of claims and average cost per claim 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.
A 5% change in the asbestos average claim cost or a 1% change in
the inflation trend rate for all injury types would result in an increase
or decrease in the liability recorded of approximately $1 million.
Environmental matters
Known existing environmental concerns
the liability. Adjustments to initial estimates are recorded as addi-
tional 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 expenses, which
are classified as Casualty and other in the Consolidated Statement
of Income, include amounts for newly identified sites or contam-
inants as well as adjustments to initial estimates. Recoveries of
environmental remediation costs from other parties are recorded
as assets when their receipt is deemed probable.
As at December 31, 2014, 2013 and 2012, the Company’s
provision for specific environmental sites was as follows:
The Company has identified approximately 255 sites at which it
In millions
2014
2013
2012
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
Beginning of year
$ 119
$ 123
$ 152
Accruals and other
Payments
Foreign exchange
11
(19)
3
12
(18)
2
(4)
(24)
(1)
End of year
$ 114
$ 119
$ 123
Current portion – End of year
$ 45
$ 41
$ 31
addition to other similar Canadian and U.S. laws, generally im-
The Company anticipates that the majority of the liability at
pose joint and several liability for clean-up and enforcement costs
December 31, 2014 will be paid out over the next five years.
on current and former owners and operators of a site, as well as
However, some costs may be paid out over a longer period. Based
those whose waste is disposed of at the site, without regard to
on the information currently available, the Company considers its
fault or the legality of the original conduct. The Company has
provisions to be adequate.
been notified that it is a potentially responsible party for study
and clean-up costs at approximately 10 sites governed by the
Unknown existing environmental concerns
Superfund law (and analogous state laws) for which investigation
While the Company believes that it has identified the costs likely to be
and remediation payments are or will be made or are yet to be
incurred for environmental matters based on known information, the
determined and, in many instances, is one of several potentially
discovery of new facts, future changes in laws, the possibility of releas-
responsible parties.
es of hazardous materials into the environment and the Company’s
The ultimate cost of addressing these known contaminated
ongoing efforts to identify potential environmental liabilities that may
sites cannot be definitively established given that the estimated
be associated with its properties may result in the identification of
environmental liability for any given site may vary depending on
additional environmental liabilities and related costs. The magnitude
the nature and extent of the contamination; the nature of antici-
of such additional liabilities and the costs of complying with future
pated response actions, taking into account the available clean-up
environmental laws and containing or remediating contamination
techniques; evolving regulatory standards governing environment-
cannot be reasonably estimated due to many factors, including:
al liability; and the number of potentially responsible parties and
(a) the lack of specific technical information available with respect
their financial viability. As a result, liabilities are recorded based
to many sites;
on the results of a four-phase assessment conducted on a site-
(b) the absence of any government authority, third-party orders, or
by-site basis. A liability is initially recorded when environmental
claims with respect to particular sites;
44
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
(c) the potential for new or changed laws and regulations and for
waste water and storm water treatment systems, comply with
development of new remediation technologies and uncertainty
environmental standards and include new construction and the
regarding the timing of the work with respect to particular
updating of existing systems and/or processes. Other capital ex-
sites; and
penditures relate to assessing and remediating certain impaired
(d) the determination of the Company’s liability in proportion to
properties. The Company’s environmental capital expenditures
other potentially responsible parties and the ability to recover
amounted to $19 million in 2014, $10 million in 2013 and
costs from any third parties with respect to particular sites.
$13 million in 2012. For 2015, the Company expects to incur
capital expenditures relating to environmental matters in the same
Therefore, the likelihood of any such costs being incurred or
range as 2014.
whether such costs would be material to the Company cannot
be determined at this time. There can thus be no assurance that
Business risks
liabilities or costs related to environmental matters will not be
In the normal course of business, the Company is exposed to vari-
incurred in the future, or will not have a material adverse effect
ous business risks and uncertainties that can have an effect on
on the Company’s financial position or results of operations in a
the Company’s results of operations, financial position, or liquidity.
particular quarter or fiscal year, or that the Company’s liquidity
While some exposures may be reduced by the Company’s risk
will not be adversely impacted by such liabilities or costs, although
management strategies, many risks are driven by external factors
management believes, based on current information, that the
beyond the Company’s control or are of a nature which cannot be
costs to address environmental matters will not have a material
eliminated. The following is a discussion of key areas of business
adverse effect on the Company’s financial position or liquidity.
risks and uncertainties.
Costs related to any unknown existing or future contamination
will be accrued in the period in which they become probable and
Competition
reasonably estimable.
Future occurrences
The Company faces significant competition, including from rail
carriers and other modes of transportation, and is also affected
by its customers’ flexibility to select among various origins and
In railroad and related transportation operations, it is possible that
destinations, including ports, in getting their products to market.
derailments or other accidents, including spills and releases of
Specifically, the Company faces competition from Canadian Pacific
hazardous materials, may occur that could cause harm to human
Railway Company, which operates the other major rail system in
health or to the environment. As a result, the Company may incur
Canada and services most of the same industrial areas, commodity
costs in the future, which may be material, to address any such
resources and population centers as the Company; major U.S. rail-
harm, compliance with laws and other risks, including costs relat-
roads and other Canadian and U.S. railroads; long-distance truck-
ing to the performance of clean-ups, payment of environmental
ing companies, transportation via the St. Lawrence-Great Lakes
penalties and remediation obligations, and damages relating to
Seaway and the Mississippi River and transportation via pipelines.
harm to individuals or property.
Regulatory compliance
In addition, while railroads must build or acquire and maintain
their rail systems, motor carriers and barges are able to use public
rights-of-way that are built and maintained by public entities with-
The Company may incur significant capital and operating costs
out paying fees covering the entire costs of their usage.
associated with environmental regulatory compliance and clean-
Competition is generally based on the quality and the reliabil-
up requirements, in its railroad operations and relating to its past
ity of the service provided, access to markets, as well as price.
and present ownership, operation or control of real property.
Factors affecting the competitive position of customers, including
Environmental expenditures that relate to current operations are
exchange rates and energy cost, could materially adversely affect
expensed unless they relate to an improvement to the property.
the demand for goods supplied by the sources served by the
Expenditures that relate to an existing condition caused by past
Company and, therefore, the Company’s volumes, revenues and
operations and which are not expected to contribute to current or
profit margins. Factors affecting the general market conditions for
future operations are expensed. Operating expenses for environ-
the Company’s customers can result in an imbalance of transpor-
mental matters amounted to $20 million in 2014, $18 million in
tation capacity relative to demand. An extended period of supply/
2013 and $16 million in 2012. For 2015, the Company expects
demand imbalance could negatively impact market rate levels for
to incur operating expenses relating to environmental matters
all transportation services, and more specifically the Company’s
in the same range as 2014. In addition, based on the results of
ability to maintain or increase rates. This, in turn, could materially
its operations and maintenance programs, as well as ongoing
and adversely affect the Company’s business, results of operations
environmental audits and other factors, the Company plans for
or financial position.
specific capital improvements on an annual basis. Certain of these
The level of consolidation of rail systems in the U.S. has re-
improvements help ensure facilities, such as fuelling stations and
sulted in larger rail systems that are able to offer seamless services
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 45
Management’s Discussion and Analysis
in larger market areas and, accordingly, compete effectively with
The environmental liability for any given contaminated site
the Company in numerous markets. This requires the Company
varies depending on the nature and extent of the contamination;
to consider arrangements or other initiatives that would similarly
the available clean-up techniques; evolving regulatory standards
enhance its own service.
governing environmental liability; and the number of potentially
There can be no assurance that the Company will be able to
responsible parties and their financial viability. As such, the ultimate
compete effectively against current and future competitors in the
cost of addressing known contaminated sites cannot be definitively
transportation industry, and that further consolidation within the
established. Also, additional contaminated sites yet unknown may
transportation industry and legislation allowing for more leniency
be discovered or future operations may result in accidental releases.
in size and weight for motor carriers will not adversely affect the
While some exposures may be reduced by the Company’s risk
Company’s competitive position. No assurance can be given that
mitigation strategies (including periodic audits, employee training
competitive pressures will not lead to reduced revenues, profit
programs and emergency plans and procedures), many environ-
margins or both.
Environmental matters
mental risks are driven by external factors beyond the Company’s
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, provin-
Company’s mitigation strategies, that liabilities or costs related to
cial, state, municipal and local environmental laws and regulations
environmental matters will not be incurred in the future or that
in Canada and the U.S. concerning, among other things, emissions
environmental matters will not have a material adverse effect on
into the air; discharges into waters; the generation, handling, stor-
the Company’s results of operations, financial position or liquidity,
age, transportation, treatment and disposal of waste, hazardous
and reputation in a particular quarter or fiscal year.
substances and other materials; decommissioning of underground
and aboveground storage tanks; and soil and groundwater contam-
Personal injury and other claims
ination. A risk of environmental liability is inherent in railroad and
In the normal course of business, the Company becomes involved
related transportation operations; real estate ownership, operation
in various legal actions seeking compensatory and occasionally
or control; and other commercial activities of the Company with re-
punitive damages, including actions brought on behalf of various
spect to both current and past operations. As a result, the Company
purported classes of claimants and claims relating to employee and
incurs significant operating and capital costs, on an ongoing basis,
third-party personal injuries, occupational disease, and property
associated with environmental regulatory compliance and clean-up
damage, arising out of harm to individuals or property allegedly
requirements in its railroad operations and relating to its past and
caused by, but not limited to, derailments or other accidents. The
present ownership, operation or control of real property.
Company maintains provisions for such items, which it considers
While the Company believes that it has identified the costs
to be adequate for all of its outstanding or pending claims and
likely to be incurred for environmental matters in the next several
benefits from insurance coverage for occurrences in excess of
years based on known information, the discovery of new facts,
certain amounts. The final outcome with respect to actions out-
future changes in laws, the possibility of releases of hazardous ma-
standing or pending at December 31, 2014, or with respect to
terials into the environment and the Company’s ongoing efforts to
future claims, cannot be predicted with certainty, and therefore
identify potential environmental liabilities that may be associated
there can be no assurance that their resolution will not have a
with its properties may result in the identification of additional
material adverse effect on the Company’s results of operations,
environmental liabilities and related costs.
financial position or liquidity, in a particular quarter or fiscal year.
In railroad and related transportation operations, it is possible
that derailments or other accidents, including spills and releases of
Labor negotiations
hazardous materials, may occur that could cause harm to human
Canadian workforce
health or to the environment. In addition, the Company is also
As at December 31, 2014, CN employed a total of 17,732 em-
exposed to potential catastrophic liability risk, faced by the rail-
ployees in Canada, of which 13,335 were unionized employees.
road industry generally, in connection with the transportation of
From time to time, the Company negotiates to renew collective
toxic inhalation hazard materials such as chlorine and anhydrous
agreements with various unionized groups of employees.
ammonia, or other dangerous commodities like crude oil and pro-
In the fourth quarter of 2014, the bargaining process com-
pane that the Company may be required to transport as a result of
menced for the renewal of CN’s collective agreements which
its common carrier obligations. Therefore, the Company may incur
expired on December 31, 2014, with:
costs in the future, which may be material, to address any such
• Unifor (formerly Canadian Auto Workers (CAW)) governing
harm, compliance with laws or other risks, including costs relating
clerical, intermodal, shopcraft employees and owner operator
to the performance of clean-ups, payment of environmental pen-
truck drivers;
alties and remediation obligations, and damages relating to harm
•
the Teamsters Canada Rail Conference governing rail traffic
to individuals or property.
controllers (TCRC-RCTC);
46
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
•
the Teamsters Canada Rail Conference governing locomotive
Where negotiations are ongoing, the terms and conditions of
engineers (TCRC-LE); and
existing agreements generally continue to apply until new agree-
•
the United Steelworkers of America (USW) governing track
ments are reached or the processes of the Railway Labor Act have
workers.
been exhausted.
On November 7, 2014, CN requested conciliation assistance
There can be no assurance that there will not be any work action
from the Minister of Labour with regards to the bargaining with
by any of the bargaining units with which the Company is cur-
Unifor and the TCRC bargaining units. On November 25, 2014,
rently in negotiations or that the resolution of these negotiations
the Minister of Labour appointed conciliation officers to assist the
will not have a material adverse effect on the Company’s results of
Company and the unions in their negotiations.
operations or financial position.
On January 14, 2015, a tentative agreement was reached to
renew the collective agreement with the TCRC-RCTC, which is
Regulation
subject to ratification by the members. The results of the ratifica-
The Company’s rail operations in Canada are subject to economic
tion vote are expected by February 28, 2015.
regulation by the Canadian Transportation Agency (“Agency”)
On January 30, 2015, the collective agreement with the USW,
under the Canada Transportation Act (CTA), and safety regulation
was ratified by the members. The new collective agreement will
by the Federal Minister of Transport under the Railway Safety Act
expire on December 31, 2018.
and certain other statutes.
The Company’s U.S. rail operations are subject to economic
The other collective agreements remain in effect until the bar-
regulation by the Surface Transportation Board (STB), and safe-
gaining process outlined under the Canada Labour Code has been
ty regulation by the Federal Railroad Administration (FRA), with
exhausted for the respective bargaining units.
the transportation of certain hazardous commodities also gov-
erned by regulations promulgated by the Pipeline and Hazardous
Disputes relating to the renewal of collective agreements could poten-
Materials Safety Administration (PHMSA).
tially result in strikes, work stoppages, slowdowns and loss of business.
Future labor agreements or renegotiated agreements could increase
Economic regulation – Canada
labor and fringe benefits expenses. There can be no assurance that
The CTA provides rate and service remedies, including final
the Company will be able to renew and have its collective agreements
offer arbitration (FOA), competitive line rates and compulsory
ratified without any strikes or lockouts or that the resolution of these
interswitching. The CTA also regulates the maximum revenue
collective bargaining negotiations will not have a material adverse
entitlement for the movement of grain, charges for railway
effect on the Company’s results of operations or financial position.
ancillary services and noise-related disputes. In addition, various
Company business transactions must gain prior regulatory approv-
U.S. workforce
al, with attendant risks and uncertainties.
As at December 31, 2014, CN employed a total of 7,798 employ-
On January 22, 2014, Transport Canada initiated a compre-
ees in the U.S., of which 6,137 were unionized employees.
hensive review and consultation on the liability and compensation
As of February 2, 2015, the Company had in place agreements
regime for rail. On August 1, 2014, Transport Canada launched
with bargaining units representing the entire unionized workforce at
a second stage of consultations with a view to strengthen the
Grand Trunk Western Railroad Company (GTW), companies owned
liability and compensation regime for railways and shippers by
by Illinois Central Railroad Company (ICRR), companies owned
establishing supplementary compensation for incidents involving
by Wisconsin Central Ltd. (WC), Bessemer & Lake Erie Railroad
dangerous goods.
Company (BLE) and The Pittsburgh and Conneaut Dock Company
On March 7, 2014, the Government of Canada issued an Order
(PCD). Agreements in place have various moratorium provisions,
in Council, requiring each of the Company and Canadian Pacific
ranging up to 2018, which preserve the status quo in respect of the
Railway Company to move progressively increasing minimum vol-
given collective agreement during the terms of such moratoriums.
umes of grain up to a prescribed weekly minimum of 500,000
Some of these agreements are currently under renegotiation.
metric tonnes. On May 29, 2014, Bill C-30 came into force. It
The general approach to labor negotiations by U.S. Class I railroads
is to bargain on a collective national basis with the industry, which
amended the CTA by requiring the Company and Canadian Pacific
Railway Company to each move at least 500,000 metric tonnes
GTW, ICRR, WC and BLE have agreed to participate in, effective
of grain weekly through to August 3, 2014. Bill C-30 also allows:
January 2015, for collective agreements covering non-operating em-
(a) the Government to specify minimum amounts of grain to be
ployees. Collective agreements covering operating employees at GTW,
moved in future grain crop years;
ICRR, WC, BLE and all employees at PCD continue to be bargained on
(b) the Agency to extend current interswitching limits for specific
a local (corporate) basis. In either situation, a labor dispute may not
regions or specific commodities;
generate federal intervention in a strike or lockout situation.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 47
Management’s Discussion and Analysis
(c) the Agency to make regulations specifying what constitutes
and uncertainties. The STB has undertaken proceedings in the past
‘operational terms’ for the purpose of the establishment of
few years in a number of areas.
service level agreements; and
On July 25, 2012, following hearings in June 2011 on the
(d) the Agency to order a railway company to pay shippers for
state of competition in the railroad industry, the STB commenced
expenses incurred as a result of the railway’s failure to fulfill its
a proceeding to consider a proposal by the National Industrial
service obligations.
Transportation League for competitive switching. In a first phase,
parties submitted at STB’s request on March 1, 2013, a wide variety
The amendments introduced by Bill C-30 are intended to remain in
of data to assess the scope and potential impact of the proposal
effect up to August 1, 2016, unless further extended by Parliament.
and submitted reply comments on May 30, 2013. The STB held
On August 1, 2014, the Agency issued an amendment to the
hearings on March 25-26, 2014 to further review these matters.
interswitching regulations extending the distance to 160 kilom-
On July 18, 2013, the STB issued a decision raising relief caps and
eters from the current 30 kilometers limits for all commodities
making certain other technical changes for rate complaints brought
in the provinces of Manitoba, Saskatchewan and Alberta. The
under its simplified rate guidelines and on December 12, 2013, the
Agency also issued regulations defining what constitutes ‘oper-
STB instituted a proceeding to invite comments on how to ensure
ational terms’ for the purpose of rail level of service arbitrations.
its rate complaint procedures are accessible to grain shippers and
On August 1, 2014, the Government of Canada also issued
provide effective protection against unreasonable grain rates.
an Order in Council requiring each of the Company and Canadian
On December 20, 2013, the STB instituted a rulemaking to
Pacific Railway Company to move at least 536,250 metric tonnes
review how it determines the rail industry’s cost of equity capital,
of grain weekly, subject to volume demand and corridor capacity
and on April 2, 2014, joined it with a proceeding to explore its
during the period of August 3, 2014 to November 29, 2014. On
methodology for determining railroad revenue adequacy and the
November 27, 2014, the Government of Canada issued a new
revenue adequacy component used in judging the reasonableness
Order in Council prescribing various minimum volumes for the per-
iod of November 29, 2014 to March 28, 2015. Failure to move the
prescribed minimum tonnage potentially subjects the Company to
an administrative monetary penalty of up to $100,000 per violation.
of rail rates. In addition, on September 2, 2014, the STB made
its annual revenue adequacy determination for Class I carriers for
2013. The STB determined that five Class I carriers are revenue
adequate, among them Grand Trunk Corporation, which includes
The Company received letters from a Transport Canada
CN’s U.S. affiliated operations.
Enforcement Officer requiring CN to provide detailed infor-
On April 11, 2014, the STB adopted final rules, effective July 15,
mation and documentary evidence describing the factors that
2014, establishing that any person receiving rail cars from a rail carrier
contributed to CN’s failure to meet the minimum grain volume
for loading or unloading, including third parties in addition to the
requirements in specified weeks and by how much these fac-
consignor and consignee, who detains the cars beyond the period of
tors contributed to the failure. On December 14, 2014, CN was
free time specified in a carrier’s governing demurrage tariff will gen-
issued two notices of violation for the failure to meet the min-
erally be liable for demurrage if the carrier has provided that person
imum volumes of grain for two separate weeks with an assessed
with actual notice of the carrier’s tariff establishing such liability.
penalty of $50,000 for each week.
On May 29, 2014, the STB instituted an advance notice of pro-
On June 25, 2014, the Government launched the statutory
posed rulemaking to invite comments on whether the safe harbor
review of the CTA. The Government appointed a six-person panel
provision of its current fuel surcharge rules should be modified
to conduct this review. The panel’s report is required to be pro-
or removed.
vided to the Federal Minister of Transport 18 months after their
As part of the Passenger Rail Investment and Improvement Act
appointment. CN will be submitting comments early in 2015 on
of 2008 (PRIIA), the U.S. Congress has authorized the STB to investi-
the subjects being examined by the panel.
gate any railroad over whose track Amtrak operates that fails to meet
No assurance can be given that any current or future legislative
extending over two calendar quarters and to determine the cause
action by the federal government or other future government in-
of such failures. Compliance with this mandate began with the
itiatives will not materially adversely affect the Company’s results
third quarter of 2010 and is governed by performance metrics and
an 80 percent on-time performance standard for Amtrak operations
of operations or financial position.
Economic regulation – U.S.
standards jointly issued by the FRA and Amtrak on May 12, 2010.
Should the STB commence an investigation and determine that a
failure to meet these standards is due to the host railroad’s failure
The STB serves as both an adjudicatory and regulatory body and
to provide preference to Amtrak, the STB is authorized to assess
has jurisdiction over railroad rate and service issues and rail restruc-
damages against the host railroad. On January 19, 2012, Amtrak
turing transactions such as mergers, line sales, line construction
filed a complaint with the STB to commence such an investigation,
and line abandonments. As such, various Company business trans-
including a request for damages for preference failures, for allegedly
actions must gain prior regulatory approval, with attendant risks
sub-standard performance of Amtrak trains on CN’s ICRR and GTW
48
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
lines. CN responded on March 9, 2012 to Amtrak’s complaint. CN
(CTCO) contingency protocols and other industry-wide informa-
and Amtrak entered into STB-supervised mediation until October 4,
tion be provided from individual railroads. On December 30, 2014,
2012, and on joint motion of the parties shortly thereafter, the STB
stayed the proceedings until July 31, 2013. The Company partici-
pated in a railroad industry challenge to the constitutionality of the
the STB issued a notice of proposed rulemaking to require the
Class I railroads to permanently report certain service performance
metrics on a weekly basis.
joint FRA/Amtrak performance metrics and standards. On July 2,
The acquisition of the Elgin, Joliet and Eastern Railway Company
2013, the U.S. Court of Appeals for the D.C. Circuit reversed a U.S.
(EJ&E) in 2009 followed an extensive regulatory approval process
District Court decision and determined that Congress’ delegation to
by the STB, which included an Environmental Impact Statement
Amtrak of joint legislative authority with the FRA to promulgate the
(EIS) that resulted in conditions imposed to mitigate municipalities’
metrics and standards to be unconstitutional. In light of that deci-
concerns regarding increased rail activity expected along the EJ&E
sion, and on joint motion of the parties, the STB further stayed the
line. The Company accepted the STB-imposed conditions with
proceedings until July 31, 2014, to provide time that may be neces-
one exception. The Company filed an appeal at the U.S. Court of
sary for a final resolution on the constitutionality of the metrics and
Appeals for the District of Columbia Circuit challenging the STB’s
standards pending further appeals. On June 23, 2014, the Supreme
condition requiring the installation of grade separations at two
Court granted the Government’s petition seeking its review of the
locations along the EJ&E line at Company funding levels signifi-
D.C. Circuit decision and heard the case on December 8, 2014. On
cantly beyond prior STB practice. Appeals were also filed by certain
August 29, 2014, Amtrak filed with the STB a motion to amend
communities challenging the sufficiency of the EIS. On March 15,
its January 19, 2012 complaint against CN to limit it to a single
2011, the Court denied the CN and community appeals. As such,
Amtrak service over CN’s ICRR line. On September 17, 2014, CN
the Company has estimated remaining commitments, through to
moved to dismiss the proceeding on the basis of the D.C. Circuit’s
December 31, 2016, of approximately $65 million (US$56 million),
constitutionality decision or alternatively to stay Amtrak’s motion
in relation to the acquisition.
pending the Supreme Court’s decision. On December 19, 2014, the
On November 8, 2012, the STB denied the request of the
STB issued a decision granting Amtrak’s motion to limit its complaint
Village of Barrington, Illinois (Barrington) that the STB impose
to a single route and concluding that pending litigation involving
additional mitigation that would require CN to fund the full cost of
the constitutionality of the joint FRA/Amtrak performance metrics
a grade separation at a location along the EJ&E line in Barrington.
does not preclude the case from moving forward.
On December 26, 2012, Barrington appealed the STB’s decision to
On July 30, 2013, Amtrak filed an application with the STB
the U.S. Court of Appeals for the D.C. Circuit. On July 18, 2014,
requesting the agency to set terms and compensation for a new
the U.S. Court of Appeals for the D.C. Circuit issued its decision
CN/Amtrak Operating Agreement to replace the one that was
denying Barrington’s petition. On November 26, 2014, Barrington
expiring on August 11, 2013. On August 1, 2013, CN agreed to
asked the STB to impose additional mitigation in the form of a
continue to make its facilities available to Amtrak during the STB’s
grade separation at the intersection of U.S. Highway 14 and the
consideration, under the terms of the expired agreement.
EJ&E line in Barrington at CN’s expense. The Company filed its
The U.S. Congress has had under consideration for several
reply at the STB on December 16, 2014.
years various pieces of legislation that would increase federal
The STB also imposed a five-year monitoring and oversight con-
economic regulation of the railroad industry. In the 2013 – 2014
dition, subsequently extended by one additional year to January
session of Congress, legislation to repeal the rail industry’s limited
2015, during which the Company is required to file with the STB
antitrust exemptions (S. 638) was introduced in the Senate, as well
monthly operational reports as well as quarterly reports on the
as a bill (S. 2777) to reauthorize funding for the STB that also
implementation status of the STB-imposed mitigation conditions.
addresses several economic regulatory matters, such as arbitration
This permits the STB to take further action if there is a material
and STB investigation of complaints. These bills did not progress
change in the facts and circumstances upon which it relied in im-
prior to the adjournment of the 2013 – 2014 session of Congress,
posing the specific mitigation conditions.
but there is no assurance that similar bills or other legislation to
A first oversight audit of the Company’s EJ&E’s operational and
increase federal economic regulation of the railroad industry will
environmental reporting was completed in April 2010, and after
not progress through the legislative process in the future.
public comment was finalized by the STB in December 2010. In
On October 8, 2014, the STB issued a decision requiring all
Class I railroads to provide each week a broad range of operational
data, starting October 22, 2014. The STB is seeking to provide
December 2011, the STB directed a second oversight audit that
commenced on February 17, 2012, which was completed on
April 30, 2012, and released publicly by the STB on June 18, 2012.
access to rail performance data sought by shippers and to meet
On August 28, 2014, Barrington and the TRAC coalition filed a
the STB’s objective of promoting transparency, accountability, and
petition requesting the STB to extend its oversight for two addi-
improvements in rail service. The STB also directed that data specif-
tional years. CN replied on September 16, 2014, in opposition to
ic to Chicago and a narrative summary of operating conditions
the petition. On December 17, 2014, the STB granted the petition,
in Chicago as well as Chicago Transportation Coordination Office
extending oversight until January 23, 2017.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 49
Management’s Discussion and Analysis
The resolution of matters that could arise during the STB’s
Operating Certificate issued by the Federal Minister of Transport.
remaining oversight of the transaction cannot be predicted
The Bill also includes the ability for the government to establish
with certainty, and therefore, there can be no assurance that
Administrative Monetary Penalties in the event of contravention
their resolution will not have a material adverse effect on the
of prescribed provisions of the Act or regulations.
Company’s financial position or results of operations.
On July 23, 2013, following a significant derailment involving
The Company’s ownership of the former Great Lakes
a non-related short-line railroad within the Province of Quebec
Transportation vessels is subject to regulation by the U.S. Coast
(“Lac-Mégantic derailment”), the Federal Minister of Transport
Guard (USCG) and the Department of Transportation, Maritime
issued an Emergency Directive under the Canada Railway Safety
Administration, which regulate the ownership and operation of
Act to enhance the effectiveness of train securement proced-
vessels operating on the Great Lakes and in U.S. coastal waters. In
ures and safety across the Canadian rail industry and to help
addition, the Environmental Protection Agency (EPA) has author-
reduce the risk of unintended train movements that can lead
ity to regulate air emissions from these vessels. Regulatory initia-
to catastrophic accidents. CN has reviewed its safety policies for
tives of these U.S. government agencies may materially adversely
unattended trains and adjusted its safety practices to comply
affect the Company’s financial position or results of operations.
with Transport Canada’s order. Transport Canada also issued an
On November 8, 2011, the Federal Maritime Commission
order requiring all federal railways to formulate or revise rules, as
(FMC), which has authority over oceanborne transport of cargo
the case may be, respecting the securement of unattended loco-
into and out of the U.S., initiated a Notice of Inquiry to examine
motives and crew size requirements. On November 20, 2013, the
whether the U.S. Harbor Maintenance Tax (HMT) and other fac-
Railway Association of Canada filed revised rules on behalf of CN
tors may be contributing to the diversion of U.S.-bound cargo
and its other member railway companies in compliance with this
to Canadian and Mexican seaports, which could affect CN rail
order. On December 26, 2013, the Federal Minister of Transport
operations. The Company filed comments in this proceeding on
issued a notice approving the revised rules.
January 9, 2012. In July 2012, the FMC issued its study, which
On October 17, 2013, Transport Canada issued Protective
found that carriers shipping cargo through Canadian or Mexican
Direction No. 31 under the Transportation of Dangerous Goods
ports violate no U.S. law, treaty, agreement, or FMC regulation.
Act, requiring any person offering crude oil for transport to test
The report stated, however, that the HMT is one of many factors
the classification of the crude oil being offered.
affecting the increased use of foreign ports for cargo bound
On November 20, 2013, Transport Canada issued Protective
for U.S. destinations and that amendment of the current HMT
Direction No. 32 under the Transportation of Dangerous Goods
structure should be considered so as to assist U.S. seaports. On
Act, requiring railway companies to provide designated munici-
September 17, 2013, the Maritime Goods Movement Act (Bill
pal emergency planning officials with yearly aggregate informa-
S. 1509) was introduced and assigned to a congressional com-
tion on the nature and volume of dangerous goods the company
mittee for consideration. The bill proposes to replace the HMT
transports by rail through the municipality.
with a Maritime Goods Movement Fee which would be imposed
On March 15, 2014, Transport Canada published for com-
on any U.S.-destined cargo regardless of its point of entry into
ments proposed new regulations governing railway operating
North America. Among the bill’s goals is to discourage diversion
certificates. They specify the safety and operating requirements
of U.S.-bound goods through Canadian or Mexican ports. A
that must be met in order to obtain a railway operating certificate,
companion bill, H.R. 4105, was introduced on February 27, 2014
which will be an operating requirement for all federally-regulated
in the U.S. House of Representatives. No action was taken on this
railway carriers and local carriers operating on the railway lines of
legislation in the Senate or House prior to adjournment of the
federally regulated carriers.
2013 – 2014 session of Congress.
On April 23, 2014, Transport Canada issued an Emergency
Directive under the Railway Safety Act, requiring railway com-
No assurance can be given that any future regulatory or legis-
panies to operate certain trains carrying dangerous commodities
lative initiatives by the U.S. federal government related to this
at speeds not to exceed 50 miles per hour. In addition, on the
inquiry and proposed legislation will not materially adversely
same date, Transport Canada issued a separate order under the
affect the Company’s results of operations or its competitive and
Railway Safety Act requiring railway companies to formulate rules
financial position.
Safety regulation – Canada
that would replace the Emergency Directive on a permanent basis.
These rules are under development. Transport Canada further or-
dered railway companies to conduct route assessments for rail cor-
Rail safety regulation in Canada is the responsibility of Transport
ridors handling significant volumes of dangerous goods. Transport
Canada, which administers the Canadian Railway Safety Act,
Canada also issued Protective Directions 33 and 34, respectively,
as well as the rail portions of other safety-related statutes. On
requiring an Emergency Response Assistance Plan in order to ship
May 1, 2013, Bill S-4 came into force which prohibits anyone
large volumes of flammable liquids and prohibiting the use of cer-
from operating a railway without having first obtained a Railway
tain DOT-111 tank cars for the transportation of dangerous goods.
50
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
On May 17, 2014, Transport Canada published for comments
In 2012, the Association of American Railroads (AAR) advised
proposed new regulations setting out the administrative monetary
the FRA on behalf of the industry that a nationwide interoperable
penalties that could be issued for violations of the Railway Safety
PTC network could not be completed by the current 2015 deadline.
Act and its associated regulations.
In August 2012, the FRA also reported to Congress that the majority
On July 5, 2014, Transport Canada published for comments
of the carriers would be unable to meet the December 31, 2015 im-
proposed new Railway Safety Management System Regulations
plementation deadline. In August 2013, legislation was introduced
that would require federally regulated railway companies (and
in the Senate that would delay PTC implementation by five years
other carriers operating over federally regulated companies’
to the end of 2020, and in the same month, the U.S. Government
trackage) to implement safety management systems.
Accountability Office published a report recommending that
On July 15, 2014, Transport Canada issued Regulations
Congress give the FRA authority to extend the deadline for individual
Amending the Transportation of Dangerous Goods Regulations,
carriers on a case-by-case basis. The PTC implementation legislation
which specifies new standards for tank cars as well as the pro-
did not progress through the legislative process prior to adjourn-
cedures and processes for classification of dangerous goods and
ment of the 2013 – 2014 session of Congress. The Company con-
sampling methods used by the consignors and carriers of petrol-
tinues its good faith efforts to implement PTC, although it believes
eum crude oil.
that the industry, including the Company, is unlikely to meet the cur-
On October 29, 2014, Transport Canada issued an order under
rent 2015 deadline. The Company will also continue to work with
the Railway Safety Act, requiring railway companies to implement
the industry to obtain an extension of the deadline. The Company
enhanced minimum securement standards for immobilized trains.
notes that noncompliance with the 2015 deadline can subject the
Revisions to railway operating rules are under development to
Company to regulatory sanctions.
comply with those standards.
In May 2013, the Federal Communications Commission (FCC)
On December 17, 2014, Transport Canada issued new regu-
suspended its normal processes to review possible impacts to his-
lations for highway-railway crossings. These regulations establish
toric properties, including tribal historic and cultural artifacts, of
specific standards for new crossings and require that existing
the installation of tens of thousands of poles industry-wide that
crossings be upgraded to basic safety standards within seven
are required to host PTC radio operations while it considered chan-
years of the new regulations taking effect on April 1, 2015.
ges to those procedures needed to accommodate that volume. On
Safety regulation – U.S.
May 16, 2014, the FCC lifted its suspension upon the Advisory
Council on Historic Preservation (ACHP) approval of modifications
Rail safety regulation in the U.S. is the responsibility of the FRA,
to the FCC’s usual procedures for historic preservation review. The
which administers the Federal Railroad Safety Act, as well as the
AAR reported that despite these modifications, the railroad indus-
rail portions of other safety statutes. In 2008, the U.S. federal gov-
try will still not be able to install interoperable PTC on the entire
ernment enacted legislation reauthorizing the Federal Railroad
U.S. network by the December 31, 2015 deadline.
Safety Act. This legislation covers a broad range of safety issues,
In the aftermath of the July 2013 Lac-Mégantic derail ment, the
including fatigue management, Positive Train Control (PTC),
FRA issued Emergency Order No. 28, Notice No. 1 on August 2,
grade crossings, bridge safety, and other matters. The legislation
requires all Class I railroads and intercity passenger and commut-
er railroads to implement a PTC system by December 31, 2015 on
2013 directing that railroads take specific actions regarding un-
attended trains transporting specified hazardous materials, in-
cluding securement of these trains. That same day, the FRA and
mainline track where intercity passenger railroads and commuter
the PHMSA issued Safety Advisory 2013-06, which made recom-
railroads operate and where toxic inhalation hazard materials are
mendations to railroads on issues including crew staffing practices
transported. PTC is a collision avoidance technology intended to
and operational testing to ensure employees’ compliance with
override locomotive controls and stop a train before an accident.
securement-related rules, as well as recommendations to shippers
The Company is taking steps to ensure implementation of PTC
of crude oil to be transported by rail. In addition, the railroad
in accordance with the new law, including working with other
Class I railroads to satisfy the requirements for U.S. network
interoperability. The Company’s PTC Implementation Plan, sub-
industry has acted on its own to enhance rail safety in light of
the Lac-Mégantic derailment and fire. Effective August 5, 2013,
AAR amended the industry’s Recommended Railroad Operating
mitted in April 2010, has been approved by the FRA. CN’s total
Practices for Transportation of Hazardous Materials (Circular No.
implementation costs associated with PTC are estimated to be
OT-55-N) by expanding the definition of a “key train” (for which
US$550 million. The legislation also caps the number of on-duty
heightened operating safeguards are required) to include trains
and limbo time hours for certain rail employees on a monthly
carrying one tank car load of poison or toxic inhalation hazard,
basis. The Company is taking appropriate steps and is working
anhydrous ammonia, or ammonia solutions and to include trains
with the FRA to ensure that its operations conform to the law’s
carrying 20 car loads or portable tank loads of any combination of
requirements.
hazardous materials (including ethanol and crude oil).
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 51
Management’s Discussion and Analysis
On August 12, 2013, the FRA established the Railroad Safety
On September 10, 2014, legislation was introduced in the U.S.
Advisory Committee (RSAC) to provide advice and recommenda-
Senate (S. 2784) that proposes a number of new rail safety require-
tions to the FRA on railroad safety matters. The FRA’s Emergency
ments, including inward and outward facing cameras and redundant
Order No. 28 resulted in four new tasks accepted by the RSAC.
signal protection to protect maintenance of way workers, while also
The four tasks are: train crew size; operational testing for secure-
making significant changes to FRA civil penalty levels, requiring studies
ment; securement and hazardous material issues. Certain of the
on rail operations that block crossings and on train lengths, and man-
RSAC four task groups have produced recommendations that
dating that trains transporting high-hazard flammables and operating
will be considered for future rulemakings. CN is an active partici-
with any legacy DOT-111 tank cars maintain a speed limit of 40 miles
pant in all four task groups.
per hour in areas with a population of 100,000 or more. A second
On September 6, 2013, PHMSA published an Advance Notice
bill introduced in the U.S. Senate (S. 2858) in September 2014 would
of Proposed Rulemaking (ANPRM) considering improvement of
create strong penalties for railroads that violate safety standards,
the regulations related to the transportation by rail of hazardous
would require standardized hazardous materials information
materials in tank cars. On November 14, 2013, CN was a partici-
to support first responders, and improved risk-assessment and
pant in AAR’s comments filed with PHMSA in this proceeding,
decision-making tools for railroads. Neither bill was considered in
which urged PHMSA to require that all tank cars used to trans-
Congress prior to adjournment of the 2013 – 2014 session.
port flammable liquids be retrofitted or phased out, and that new
cars be built to more stringent standards. The AAR comments
No assurance can be given that these or any future regulatory
included specific tank cars safety standard improvements, which
or legislative initiatives by the Canadian and U.S. federal govern-
the AAR maintained will substantially decrease the likelihood of
ments will not materially adversely affect the Company’s results of
a release if a tank car is involved in an accident.
operations, or its competitive and financial position.
On January 23, 2014, the National Transportation Safety
Board (NTSB) issued a series of recommendations to the U.S.
Security
Department of Transportation, to address the safety risk of
The Company is subject to statutory and regulatory directives in
transporting crude oil by rail. The NTSB’s recommendations
the U.S. addressing homeland security concerns. In the U.S., safe-
complement those issued by the Transportation Safety Board
ty matters related to security are overseen by the Transportation
of Canada and specifically: (1) require expanded hazardous ma-
Security Administration (TSA), which is part of the U.S. Department
terials route planning for railroads to avoid populated and other
of Homeland Security (DHS) and the PHMSA, which, like the FRA, is
sensitive areas; (2) development of an FRA/PHMSA audit pro-
part of the U.S. Department of Transportation. Border security falls
gram to ensure that railroads carrying petroleum products have
under the jurisdiction of U.S. Customs and Border Protection (CBP),
adequate emergency response capabilities to address worst-case
which is part of the DHS. In Canada, the Company is subject to
discharges of the product; and (3) require audits of shippers and
regulation by the Canada Border Services Agency (CBSA). Matters
railroads to ensure that they are properly classifying hazardous
related to agriculture-related shipments crossing the Canada/U.S.
materials being transported and that they have adequate safety
border also fall under the jurisdiction of the U.S., Department of
and security plans in place.
Agriculture (USDA) and the Food and Drug Administration (FDA)
On August 1, 2014, PHMSA published a Notice of Proposed
in the U.S. and the Canadian Food Inspection Agency (CFIA) in
Rulemaking aimed at improving the safe transportation of
Canada. More specifically, the Company is subject to:
flammable liquids by rail, addressing operating rules, specifica-
(a) Border security arrangements, pursuant to an agreement the
tions for new tank cars, and the retrofit of existing tank cars.
Company and Canadian Pacific Railway Company entered into
Concurrently, PHMSA issued an ANPRM on comprehensive oil
with the CBP and the CBSA.
spill response planning. CN was a participant in AAR’s comments
(b) The CBP’s Customs-Trade Partnership Against Terrorism
filed with PHMSA in these two proceedings on September 30,
(C-TPAT) program and designation as a low-risk carrier under
2014. AAR addressed speed limits for trains with at least one leg-
CBSA’s Customs Self-Assessment (CSA) program.
acy DOT-111 tank car moving flammable liquids, urged PHMSA
(c) Regulations imposed by the CBP requiring advance notification
to refrain from requiring electronically controlled pneumatic
by all modes of transportation for all shipments into the U.S.
brakes on tank cars used to move flammable liquids, advocated
The CBSA is also working on similar requirements for Canada-
specific increases in federal tank car specifications, requested
bound traffic.
that crude oil routing information not be disclosed to State
(d) Inspection for imported fruits and vegetables grown in Canada
Emergency Response Commissions, and urged a requirement for
and the agricultural quarantine and inspection (AQI) user fee
the aggressive retrofit or phase out of existing flammable liquid
for all traffic entering the U.S. from Canada.
tank cars as soon as possible while still enabling the industry to
(e) Gamma ray screening of cargo entering the U.S. from Canada,
meet the demands for rail movement of flammable liquids.
and potential security and agricultural inspections at the
Canada/U.S. border.
52
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Management’s Discussion and Analysis
The Company has worked with the AAR to develop and put in
Economic conditions
place an extensive industry-wide security plan to address terror-
The Company, like other railroads, is susceptible to changes in
ism and security-driven efforts by state and local governments
the economic conditions of the industries and geographic areas
seeking to restrict the routings of certain hazardous materials.
that produce and consume the freight it transports or the sup-
If such state and local routing restrictions were to go into force,
plies it requires to operate. In addition, many of the goods and
they would be likely to add to security concerns by foreclosing the
commodities carried by the Company experience cyclicality in
Company’s most optimal and secure transportation routes, leading
demand. Many of the bulk commodities the Company transports
to increased yard handling, longer hauls, and the transfer of traffic
move offshore and are affected more by global rather than North
to lines less suitable for moving hazardous materials, while also
American economic conditions. Adverse North American and
infringing upon the exclusive and uniform federal oversight over
global economic conditions, or economic or industrial restructur-
railroad security matters.
ing, that affect the producers and consumers of the commodities
carried by the Company, including customer insolvency, may
Transportation of hazardous materials
have a material adverse effect on the volume of rail shipments
The Company may be required to transport toxic inhalation haz-
and/or revenues from commodities carried by the Company, and
ard materials as a result of its common carrier obligations and, as
thus materially and negatively affect its results of operations,
such, is exposed to additional regulatory oversight.
financial position, or liquidity.
(a) The PHMSA requires carriers operating in the U.S. to report
annually the volume and route-specific data for cars con-
Pension funding volatility
taining these commodities; conduct a safety and security risk
The Company’s funding requirements for its defined benefit
analysis for each used route; identify a commercially practic-
pension plans are determined using actuarial valuations. See the
able alternative route for each used route; and select for use
section of this MD&A entitled Critical accounting estimates –
the practical route posing the least safety and security risk.
Pensions and other postretirement benefits for information
(b) The TSA requires rail carriers to provide upon request, within
relating to the funding of the Company’s defined benefit pension
five minutes for a single car and 30 minutes for multiple cars,
plans.
location and shipping information on cars on their networks
Adverse changes with respect to pension plan returns and
containing toxic inhalation hazard materials and certain radio-
the level of interest rates from the date of the last actuarial valu-
active or explosive materials; and ensure the secure, attended
ations as well as changes to existing federal pension legislation
transfer of all such cars to and from shippers, receivers and
may significantly impact future pension contributions and have
other carriers that will move from, to, or through designated
a material adverse effect on the funding status of the plans and
high-threat urban areas.
the Company’s results of operations. There can be no assurance
(c) The PHMSA has issued regulations to enhance the crash-
that the Company’s pension expense and funding of its defined
worthiness protection of tank cars used to transport toxic in-
benefit pension plans will not increase in the future and thereby
halation hazard materials and to limit the operating conditions
negatively impact earnings and/or cash flow.
of such cars.
(d) In Canada, the Transportation of Dangerous Goods Act es-
Trade restrictions
tablishes the safety requirements for the transportation of
Global as well as North American trade conditions, including
goods classified as dangerous and enables the establishment
trade barriers on certain commodities, may interfere with the
of regulations for security training and screening of personnel
free circulation of goods across Canada and the U.S.
working with dangerous goods, as well as the development
of a program to require a transportation security clearance
Terrorism and international conflicts
for dangerous goods and that dangerous goods be tracked
Potential terrorist actions can have a direct or indirect impact on
during transport.
the transportation infrastructure, including railway infrastructure
in North America, and can interfere with the free flow of goods.
While the Company will continue to work closely with the CBSA,
Rail lines, facilities and equipment could be directly targeted or
CBP, and other Canadian and U.S. agencies, as described above,
become indirect casualties, which could interfere with the free
no assurance can be given that these and future decisions by the
flow of goods. International conflicts can also have an impact on
U.S., Canadian, provincial, state, or local governments on home-
the Company’s markets. Government response to such events
land security matters, legislation on security matters enacted by
could adversely affect the Company’s operations. Insurance pre-
the U.S. Congress or Parliament, or joint decisions by the industry
miums could also increase significantly or coverage could become
in response to threats to the North American rail network, will not
unavailable.
materially adversely affect the Company’s results of operations, or
its competitive and financial position.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 53
Management’s Discussion and Analysis
Customer credit risk
Fuel costs
In the normal course of business, the Company monitors the fi-
The Company, like other railroads, is susceptible to the volatility
nancial condition and credit limits of its customers and reviews
of fuel prices due to changes in the economy or supply disrup-
the credit history of each new customer. Although the Company
tions. Fuel shortages can occur due to refinery disruptions, pro-
believes there are no significant concentrations of credit risk, eco-
duction quota restrictions, climate, and labor and political instab-
nomic conditions can affect the Company’s customers and can
ility. Increases in fuel prices or supply disruptions may materially
result in an increase to the Company’s credit risk and exposure to
adversely affect the Company’s results of operations, financial
the business failures of its customers. A widespread deterioration
position or liquidity.
of customer credit and business failures of customers could have
a material adverse effect on the Company’s results of operations,
Foreign exchange
financial position or liquidity.
Liquidity
The Company conducts its business in both Canada and the U.S.
and as a result, is affected by currency fluctuations. Changes
in the exchange rate between the Canadian dollar and other
Disruptions in the financial markets or deterioration of the
currencies (including the US dollar) make the goods transported
Company’s credit ratings could hinder the Company’s access to
by the Company more or less competitive in the world market-
external sources of funding to meet its liquidity needs. There can
place and thereby may adversely affect the Company’s revenues
be no assurance that changes in the financial markets will not
and expenses.
have a negative effect on the Company’s liquidity and its access to
capital at acceptable rates.
Interest rate
Supplier concentration
The Company is exposed to interest rate risk relating to the
Company’s long-term debt. The Company mainly issues fixed-
The Company operates in a capital-intensive industry where the
rate debt, which exposes the Company to variability in the fair
complexity of rail equipment limits the number of suppliers avail-
value of the debt. The Company also issues debt with variable
able. The supply market could be disrupted if changes in the econ-
interest rates, which exposes the Company to variability in in-
omy caused any of the Company’s suppliers to cease production
terest expense. Adverse changes to market interest rates may
or to experience capacity or supply shortages. This could also result
significantly impact the fair value or future cash flows of the
in cost increases to the Company and difficulty in obtaining and
Company’s financial instruments. There can be no assurance that
maintaining the Company’s rail equipment and materials. Since
changes in the market interest rates will not have a negative ef-
the Company also has foreign suppliers, international relations,
fect on the Company’s liquidity.
trade restrictions and global economic and other conditions may
potentially interfere with the Company’s ability to procure neces-
Reliance on technology
sary equipment. Widespread business failures of, or restrictions on
The Company relies on information technology in all aspects of
suppliers, could have a material adverse effect on the Company’s
its business. While the Company has business continuity and
results of operations or financial position.
disaster recovery plans, as well as other mitigation programs in
Availability of qualified personnel
place, a cyber security attack and significant disruption or failure
of its information technology and communications systems could
The Company, like other companies in North America, may ex-
result in service interruptions, safety failures, security violations,
perience demographic challenges in the employment levels of
regulatory compliance failures or other operational difficulties
its workforce. Changes in employee demographics, training re-
and compromise corporate information and assets against in-
quirements and the availability of qualified personnel, particularly
truders and, as such, could adversely affect the Company’s re-
locomotive engineers and trainmen, could negatively impact the
sults of operations, financial position or liquidity. If the Company
Company’s ability to meet demand for rail service. The Company
is unable to acquire or implement new technology, it may suffer
expects that approximately 30% of its workforce will be eligible to
a competitive disadvantage, which could also have an adverse
retire or leave through normal attrition (death, termination, resig-
effect on the Company’s results of operations, financial position
nation) within the next five-year period. The Company monitors
or liquidity.
employment levels and seeks to ensure that there is an adequate
supply of personnel to meet rail service requirements. However,
the Company’s efforts to attract and retain qualified personnel
may be hindered by specific conditions in the job market. No as-
surance can be given that demographic or other challenges will
not materially adversely affect the Company’s results of operations
or its financial position.
54
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
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, 2014, 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 liquidity.
During the fourth quarter ended December 31, 2014, there was
Furthermore, deterioration in the cooperative relationships with
no change in the Company’s internal control over financial report-
the Company’s connecting carriers could directly affect the
ing that has materially affected, or is reasonably likely to materially
Company’s operations.
Weather and climate change
affect, the Company’s internal control over financial reporting.
As of December 31, 2014, management has assessed the ef-
fectiveness of the Company’s internal control over financial report-
The Company’s success is dependent on its ability to operate its
ing using the criteria set forth by the Committee of Sponsoring
railroad efficiently. Severe weather and natural disasters, such as
Organizations of the Treadway Commission (COSO) in Internal
extreme cold or heat, flooding, drought, hurricanes and earth-
Control – Integrated Framework (2013). Based on this assess-
quakes, can disrupt operations and service for the railroad, affect
ment, management has determined that the Company’s internal
the performance of locomotives and rolling stock, as well as dis-
control over financial reporting was effective as of December 31,
rupt operations for both the Company and its customers. Climate
2014, and issued Management’s Report on Internal Control over
change, including the impact of global warming, has the poten-
Financial Reporting dated February 2, 2015 to that effect.
tial physical risk of increasing the frequency of adverse weather
events, which can disrupt the Company’s operations, damage its
The Company’s 2014 Annual Information Form (AIF) and Form
infrastructure or properties, or otherwise have a material adverse
40-F, may be found on SEDAR at www.sedar.com and on EDGAR
effect on the Company’s results of operations, financial position
at www.sec.gov, respectively. Copies of such documents, as
or liquidity. In addition, although the Company believes that
well as the Company’s Notice of Intention to Make a Normal
the growing support for climate change legislation is likely to
Course Issuer Bid, may be obtained by contacting the Corporate
result in changes to the regulatory framework in Canada and
Secretary’s office.
the U.S., it is too early to predict the manner or degree of such
impact on the Company at this time. Restrictions, caps, taxes,
Montreal, Canada
or other controls on emissions of greenhouse gasses, including
February 2, 2015
diesel exhaust, could significantly increase the 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 position, results of oper-
ations or liquidity. More specifically, climate change legislation
and regulation could affect CN’s utility coal customers due to
coal capacity being replaced with natural gas generation and re-
newable energy; make it difficult for CN’s customers to produce
products in a cost-competitive manner due to increased energy
costs; and increase legal costs related to defending and resolving
legal claims and other litigation related to climate change.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 55
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
equate internal control over financial reporting. Internal control
Canadian 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 in ac-
of the Canadian National Railway Company (the “Company”)
cordance with generally accepted accounting principles. Because
as of December 31, 2014 and 2013, and the related consolidat-
of its inherent limitations, internal control over financial reporting
ed statements of income, comprehensive income, changes in
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, 2014. These consolidat-
internal control over financial reporting as of December 31, 2014
ed financial statements are the responsibility of the Company’s
using the criteria set forth by the Committee of Sponsoring
management. Our responsibility is to express an opinion on these
Organizations of the Treadway Commission (COSO) in Internal
consolidated financial statements based on our audits.
Control – Integrated Framework (2013). Based on this assessment,
We conducted our audits in accordance with Canadian gener-
management 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, 2014.
Company Accounting Oversight Board (United States). Those
KPMG LLP, an independent registered public accounting
standards require that we plan and perform the audit to obtain
firm, has issued an unqualified audit report on the effectiveness
reasonable assurance about whether the financial statements are
of the Company’s internal control over financial reporting as of
free of material misstatement. An audit includes examining, on
December 31, 2014 and has also expressed an unqualified audit
a test basis, evidence supporting the amounts and disclosures
opinion on the Company’s 2014 consolidated financial state-
in the financial statements. An audit also includes assessing the
ments as stated in their Reports of Independent Registered Public
accounting principles used and significant estimates made by
Accounting Firm dated February 2, 2015.
management, as well as evaluating the overall financial statement
Claude Mongeau
President and Chief Executive Officer
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2014 and
2013, and its consolidated results of operations and its consolidat-
ed cash flows for each of the years in the three-year period ended
December 31, 2014, in conformity with United States generally
February 2, 2015
accepted accounting principles.
Luc Jobin
Executive Vice-President and Chief Financial Officer
February 2, 2015
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of
December 31, 2014, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO”), and our report dated February 2, 2015 expressed an
unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
KPMG LLP*
Montreal, Canada
February 2, 2015
* FCPA auditor, FCA, public accountancy permit No. A106087
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.
56
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of the
reporting includes those policies and procedures that (1) pertain to
Canadian National Railway Company
the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of
We have audited the Canadian National Railway Company’s
the company; (2) provide reasonable assurance that transactions
(the “Company”) internal control over financial reporting as of
are recorded as necessary to permit preparation of financial state-
December 31, 2014, based on criteria established in Internal
ments in accordance with generally accepted accounting princi-
Control – Integrated Framework (2013) issued by the Committee
ples, and that receipts and expenditures of the company are being
of Sponsoring Organizations of the Treadway Commission
made only in accordance with authorizations of management and
(“COSO”). The Company’s management is responsible for main-
directors of the company; and (3) provide reasonable assurance
taining effective internal control over financial reporting, and for
regarding prevention or timely detection of unauthorized acquisi-
its assessment of the effectiveness of internal control over financial
tion, use, or disposition of the company’s assets that could have a
reporting included in the accompanying Management’s Report on
material effect on the financial statements.
Internal Control over Financial Reporting. Our responsibility is to
Because of its inherent limitations, internal control over fi-
express an opinion on the Company’s internal control over finan-
nancial reporting may not prevent or detect misstatements. Also,
cial reporting based on our audit.
projections 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 ob-
the policies or procedures may deteriorate.
tain reasonable assurance about whether effective internal control
In our opinion, the Company maintained, in all material re-
over financial reporting was maintained in all material respects.
spects, effective internal control over financial reporting as of
Our audit included obtaining an understanding of internal control
December 31, 2014, based on criteria established in Internal
over financial reporting, assessing the risk that a material weak-
Control – Integrated Framework (2013) issued by the COSO.
ness exists, and testing and evaluating the design and operating
We also have audited, in accordance with Canadian gener-
effectiveness of internal control based on the assessed risk. Our
ally accepted auditing standards and the standards of the Public
audit also included performing such other procedures as we con-
Company Accounting Oversight Board (United States), the con-
sidered necessary in the circumstances. We believe that our audit
solidated balance sheets of the Company as of December 31,
provides a reasonable basis for our opinion.
2014 and 2013, and the related consolidated statements of
A company’s internal control over financial reporting is a pro-
income, comprehensive income, changes in shareholders’ equity
cess designed to provide reasonable assurance regarding the reli-
and cash flows for each of the years in the three-year period end-
ability of financial reporting and the preparation of financial state-
ed December 31, 2014, and our report dated February 2, 2015
ments for external purposes in accordance with generally accepted
expressed an unqualified opinion on those consolidated financial
accounting principles. A company’s internal control over financial
statements.
KPMG LLP*
Montreal, Canada
February 2, 2015
* FCPA auditor, FCA, public accountancy permit No. A106087
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.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 57
Consolidated Statement of Income
In millions, except per share data
Year ended December 31,
2014
2013
2012
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 3)
Income before income taxes
Income tax expense (Note 4)
Net income
Earnings per share (Note 5)
Basic
Diluted
Weighted-average number of shares (Note 5)
Basic
Diluted
See accompanying notes to consolidated financial statements.
$ 12,134
$ 10,575
$ 9,920
2,319
2,182
1,952
1,598
1,351
1,248
1,846
1,619
1,524
1,050
329
368
980
275
295
924
249
338
7,510
6,702
6,235
4,624
3,873
3,685
(371)
(357)
107
73
(342)
315
4,360
3,589
3,658
(1,193)
(977)
(978)
$ 3,167
$ 2,612
$ 2,680
$ 3.86
$ 3.10
$ 3.08
$ 3.85
$ 3.09
$ 3.06
819.9
843.1
871.1
823.5
846.1
875.4
58
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Consolidated Statement of Comprehensive Income
In millions
Net income
Other comprehensive income (loss) (Note 15)
Net gain (loss) on foreign currency translation
Net change in pension and other postretirement benefit plans (Note 12)
Amortization of gain on treasury lock
Other comprehensive income (loss) before income taxes
Income tax recovery (expense)
Other comprehensive income (loss)
Comprehensive income
See accompanying notes to consolidated financial statements.
Year ended December 31,
2014
2013
2012
$ 3,167
$ 2,612
$ 2,680
75
46
(995)
1,775
(1)
-
(921)
1,821
344
(414)
(577)
1,407
(5)
(540)
-
(545)
127
(418)
$ 2,590
$ 4,019
$ 2,262
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 59
Consolidated Balance Sheet
In millions
Assets
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents (Note 10)
Accounts receivable (Note 6)
Material and supplies
Deferred and receivable income taxes (Note 4)
Other
Total current assets
Properties (Note 7)
Pension asset (Note 12)
Intangible and other assets (Note 8)
Total assets
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and other (Note 9)
Current portion of long-term debt (Note 10)
Total current liabilities
Deferred income taxes (Note 4)
Other liabilities and deferred credits (Note 11)
Pension and other postretirement benefits (Note 12)
Long-term debt (Note 10)
Shareholders’ equity
Common shares (Note 13)
Additional paid-in capital (Note 13)
Accumulated other comprehensive loss (Note 15)
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
On behalf of the Board:
Robert Pace
Director
December 31,
2014
2013
$
52 $
463
928
335
163
125
214
448
815
274
137
89
2,066
1,977
28,514
26,227
882
330
1,662
297
$ 31,792 $ 30,163
$ 1,657 $ 1,477
544
2,201
1,021
2,498
6,902
6,537
704
650
815
541
7,865
6,819
3,718
3,795
439
220
(2,427)
(1,850)
11,740
10,788
13,470
12,953
$ 31,792 $ 30,163
Claude Mongeau
Director
60
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Consolidated Statement of Changes in Shareholders’ Equity
Issued and
Common
Accumulated
outstanding
shares and
other
Total
common shares
additional
comprehensive
Retained shareholders’
In millions
(Note 13) paid-in capital
loss
earnings
equity
Balance at December 31, 2011
884.2
$ 4,141
$ (2,839)
$ 9,378
$ 10,680
Net income
Stock-based compensation and other (Notes 13, 14)
Share repurchase programs (Note 13)
Other comprehensive loss (Note 15)
Dividends ($0.75 per share)
6.4
(33.8)
128
(161)
2,680
2,680
128
(1,239)
(1,400)
(652)
(418)
(652)
(418)
Balance at December 31, 2012
856.8
4,108
(3,257)
10,167
11,018
Net income
Stock-based compensation and other (Notes 13, 14)
Share repurchase programs (Note 13)
Other comprehensive income (Note 15)
Dividends ($0.86 per share)
1.4
(27.6)
40
(133)
2,612
2,612
40
(1,267)
(1,400)
1,407
1,407
(724)
(724)
Balance at December 31, 2013
830.6
4,015
(1,850)
10,788
12,953
Net income
Stock-based compensation and other (Notes 13, 14)
Share repurchase programs (Note 13)
Other comprehensive loss (Note 15)
Dividends ($1.00 per share)
1.2
(22.4)
250
(108)
3,167
3,167
250
(1,397)
(1,505)
(818)
(577)
(818)
(577)
Balance at December 31, 2014
809.4
$ 4,157
$ (2,427)
$ 11,740
$ 13,470
See accompanying notes to consolidated financial statements.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 61
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 4)
Gain on disposal of property (Note 3)
Changes in operating assets and liabilities:
Accounts receivable
Material and supplies
Accounts payable and other
Other current assets
Pensions and other, net
Year ended December 31,
2014
2013
2012
$ 3,167
$ 2,612
$ 2,680
1,050
416
(80)
(59)
(51)
-
5
(67)
980
331
(69)
32
(38)
(245)
13
(68)
924
451
(281)
(20)
(30)
129
(13)
(780)
Net cash provided by operating activities
4,381
3,548
3,060
Investing activities
Property additions
Disposal of property (Note 3)
Change in restricted cash and cash equivalents
Other, net
Net cash used in investing activities
Financing activities
Issuance of debt (Note 10)
Repayment of debt (Note 10)
Net issuance (repayment) of commercial paper (Note 10)
Issuance of common shares due to exercise of stock options and
related excess tax benefits realized (Note 14)
Repurchase of common shares (Note 13)
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:
Employee services, suppliers and other expenses
Interest
Personal injury and other claims (Note 16)
Pensions (Note 12)
Income taxes (Note 4)
Net cash provided by operating activities
See accompanying notes to consolidated financial statements.
(2,297)
(1,973)
(1,731)
173
(15)
(37)
52
73
(4)
311
(22)
21
(2,176)
(1,852)
(1,421)
1,022
1,582
(822)
(1,413)
(277)
268
493
(58)
(82)
30
31
117
(1,505)
(1,400)
(1,400)
(818)
(724)
(652)
(2,370)
(1,656)
(1,582)
3
(162)
214
19
59
155
(3)
54
101
$
52
$
214
$
155
$ 12,029
$ 10,640
$ 9,877
(6,333)
(5,558)
(5,241)
(409)
(57)
(127)
(722)
(344)
(61)
(239)
(890)
(364)
(79)
(844)
(289)
$ 4,381
$ 3,548
$ 3,060
62
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
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 (British Columbia), Montreal, Halifax, New Orleans and Mobile (Alabama), and the key metropolitan
areas of Toronto, Buffalo, Chicago, Detroit, Duluth (Minnesota)/Superior (Wisconsin), Green Bay (Wisconsin), Minneapolis/St. Paul, Memphis,
and Jackson (Mississippi), with connections to all points in North America. CN’s freight revenues are derived from the movement of a diversi-
fied 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
Income taxes
Basis of presentation
The Company follows the asset and liability method of account-
ing for income taxes. Under the asset and liability method, the
These consolidated financial statements are expressed in Canadian
change in the net deferred income tax asset or liability is included
dollars, except where otherwise indicated, and have been prepared
in the computation of Net income or Other comprehensive in-
in accordance with United States generally accepted accounting
come (loss). Deferred income tax assets and liabilities are meas-
principles (U.S. GAAP) as codified in the Financial Accounting
ured using enacted tax rates expected to apply to taxable income
Standards Board (FASB) Accounting Standards Codification (ASC).
in the years in which temporary differences are expected to be
Principles of consolidation
These consolidated financial statements include the accounts of all
Earnings per share
recovered or settled.
subsidiaries and variable interest entities for which the Company
Basic earnings per share are calculated based on the weighted-
is the primary beneficiary. The Company is the primary beneficiary
average number of common shares outstanding over each per-
of the Employee Benefit Plan Trusts (the “Share Trusts”) as the
iod. The weighted-average number of basic shares outstanding
Company funds and directs the activities of the Share Trusts. The
excludes shares held in the Share Trusts and includes fully vested
Company’s investments in which it has significant influence are
equity settled stock-based compensation awards excluding stock
accounted for using the equity method and all other investments
options. Diluted earnings per share are calculated based on the
are accounted for using the cost method.
weighted-average number of diluted shares outstanding using the
Use of estimates
treasury stock method. Included in the diluted earnings per share
calculation are the assumed issuances of non-vested stock-based
The preparation of financial statements in conformity with U.S.
compensation awards.
GAAP requires management to make estimates and assumptions
that affect the reported amounts of revenues, expenses, assets
Foreign currency
and liabilities, and the disclosure of contingent assets and liabil-
All of the Company’s operations in the United States (U.S.) are
ities at the date of the financial statements. On an ongoing basis,
foreign entities with the US dollar as their functional currency.
management reviews its estimates, including those related to
Accordingly, the U.S. operations’ assets and liabilities are translat-
income taxes, depreciation, pensions and other postretirement
ed into Canadian dollars at the rate in effect at the balance sheet
benefits, personal injury and other claims, and environmental mat-
date and the revenues and expenses are translated at average
ters, based upon available information. Actual results could differ
exchange rates during the year. All adjustments resulting from the
from these estimates.
translation of the foreign operations are recorded in Other com-
prehensive income (loss).
Revenues
The Company designates the US dollar-denominated long-term
Freight revenues are recognized using the percentage of com-
debt of the parent company as a foreign currency hedge of its
pleted service method based on the transit time of freight as it
net investment in U.S. subsidiaries. Accordingly, foreign exchange
moves from origin to destination. The allocation of revenues be-
gains and losses, from the dates of designation, on the translation
tween reporting periods is based on the relative transit time in
of the US dollar-denominated long-term debt are also included in
each period with expenses being recorded as incurred. Revenues
Other comprehensive income (loss).
related to non-rail transportation services are recognized as service
is performed or as contractual obligations are met. Revenues are
presented net of taxes collected from customers and remitted to
governmental authorities.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 63
Notes to Consolidated Financial Statements
1
Summary of significant accounting policies
continued
Cash and cash equivalents
capital programs qualify for capitalization. For Track and road-
way properties, the Company establishes basic capital programs
to replace or upgrade the track infrastructure assets which are
capitalized if they meet the capitalization criteria.
Cash and cash equivalents include highly liquid investments pur-
chased three months or less from maturity and are stated at cost,
In addition, for Track and roadway properties, expenditures
that meet the minimum level of activity as defined by the
which approximates market value.
Company are also capitalized as follows:
• Grading: installation of road bed, retaining walls, drainage
Restricted cash and cash equivalents
structures;
The Company has the option, under its bilateral letter of cred-
• Rail and related track material: installation of 39 or more con-
it facility agreements with various banks, to pledge collateral in
tinuous feet of rail;
the form of cash and cash equivalents for a minimum term of
• Ties: installation of 5 or more ties per 39 feet;
one month, equal to at least the face value of the letters of credit
issued. Restricted cash and cash equivalents are shown separately
on the balance sheet and include highly liquid investments pur-
chased three months or less from maturity and are stated at cost,
which approximates market value.
Accounts receivable
Accounts receivable are recorded at cost net of billing adjust-
ments and an allowance for doubtful accounts. The allowance for
doubtful accounts is based on expected collectability and consid-
ers historical experience as well as known trends or uncertainties
• Ballast: installation of 171 cubic yards of ballast per mile.
For purchased assets, the Company capitalizes all costs neces-
sary to make the asset ready for its intended use. Expenditures
that are capitalized as part of self-constructed properties include
direct material, labor, and contracted services, as well as other
allocated costs which are not charged directly to capital projects.
These allocated costs include, but are not limited to, fringe bene-
fits, small tools and supplies, maintenance on equipment used
on projects and project supervision. The Company reviews and
adjusts its allocations, as required, to reflect the actual costs in-
related to account collectability. When a receivable is deemed
curred each year.
uncollectible, it is written off against the allowance for doubtful
accounts. Subsequent recoveries of amounts previously written
off are credited to bad debt expense in Casualty and other in the
Consolidated Statement of Income.
Material and supplies
Material and supplies, which consist mainly of rail, ties, and other
items for construction and maintenance of property and equip-
ment, as well as diesel fuel, are valued at weighted-average cost.
Properties
Accounting policy for capitalization of costs
The Company’s railroad operations are highly capital intensive.
The Company’s properties mainly consist of homogeneous or
network-type assets such as rail, ties, ballast and other struc-
tures, which form the Company’s Track and roadway properties,
and Rolling stock. The Company’s capital expenditures are for the
replacement of existing assets and for the purchase or construc-
For the rail asset, the Company capitalizes the costs of rail
grinding which consists of restoring and improving the rail profile
and removing irregularities from worn rail to extend the service
life. The service life of the rail asset is increased incrementally as
rail grinding is performed thereon, and as such, the costs incurred
are capitalized given that the activity extends the service life of
the rail asset beyond its original or current condition as additional
gross tons can be carried over the rail for its remaining service life.
For the ballast asset, the Company engages in shoulder ballast
undercutting that consists of removing some or all of the ballast,
which has deteriorated over its service life, and replacing it with
new ballast. When ballast is installed as part of a shoulder ballast
undercutting project, it represents the addition of a new asset
and not the repair or maintenance of an existing asset. As such,
the Company capitalizes expenditures related to shoulder ballast
undercutting given that an existing asset is retired and replaced
with a new asset. Under the group method of accounting for
properties, the deteriorated ballast is retired at its average cost
tion of new assets to enhance operations or provide new service
measured using the quantities of new ballast added.
offerings to customers. A large portion of the Company’s capital
expenditures are for self-constructed properties including the
replacement of existing track and roadway assets and track line
expansion, as well as major overhauls and large refurbishments
of rolling stock.
Expenditures are generally capitalized if they extend the life
of the asset or provide future benefits such as increased revenue-
generating capacity, functionality, or physical or service capacity.
Costs of deconstruction and removal of replaced assets, re-
ferred to herein as dismantling costs, are distinguished from instal-
lation costs for self-constructed properties based on the nature of
the related activity. For Track and roadway properties, employees
concurrently perform dismantling and installation of new track
and roadway assets and, as such, the Company estimates the
amount of labor and other costs that are related to dismantling.
The Company determines dismantling costs based on an analysis
The Company has a process in place to determine whether its
of the track and roadway installation process.
64
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
Expenditures relating to the Company’s properties that do not
Intangible assets
meet the Company’s capitalization criteria are considered normal
Intangible assets consist mainly of customer contracts and re-
repairs and maintenance and are expensed. For Track and road-
lationships assumed through past acquisitions and are being
way properties, such expenditures include but are not limited to
amortized on a straight-line basis over 40 to 50 years.
spot tie replacement, spot or broken rail replacement, physical
The Company reviews the carrying amounts of intangible
track inspection for detection of rail defects and minor track cor-
assets held and used whenever events or changes in circum-
rections, and other general maintenance of track infrastructure.
stances indicate that such carrying amounts may not be recover-
Accounting policy for depreciation
able based on future undiscounted cash flows. Assets that are
deemed impaired as a result of such review are recorded at the
Railroad properties are carried at cost less accumulated deprecia-
lower of carrying amount or fair value.
tion including asset impairment write-downs. The cost of proper-
ties, including those under capital leases, net of asset impairment
Accounts receivable securitization
write-downs, is depreciated on a straight-line basis over their
The Company accounts for its accounts receivable securitization
estimated service lives, measured in years, except for rail which
program under FASB ASC 860, Transfers and Servicing. Based
is measured in millions of gross ton miles. The Company follows
on the structure of the program, the Company accounts for the
the group method of depreciation whereby a single composite
proceeds as a secured borrowing.
depreciation rate is applied to the gross investment in a class
of similar assets, despite small differences in the service life or
Pensions
salvage value of individual property units within the same asset
Pension costs are determined using actuarial methods. Net per-
class. The Company uses approximately 40 different depreciable
iodic benefit cost is charged to income and includes:
asset classes.
(a) the cost of pension benefits provided in exchange for employ-
For all depreciable assets, the depreciation rate is based on
ees’ services rendered during the year;
the estimated service lives of the assets. Assessing the reason-
(b) the interest cost of pension obligations;
ableness of the estimated service lives of properties requires
(c) the expected long-term return on pension fund assets;
judgment and is based on currently available information, includ-
(d) the amortization of prior service costs and amendments over
ing periodic depreciation studies conducted by the Company.
the expected average remaining service life of the employee
The Company’s U.S. properties are subject to comprehensive
group covered by the plans; and
depreciation studies as required by the Surface Transportation
(e) the amortization of cumulative net actuarial gains and losses
Board (STB) and are conducted by external experts. Depreciation
in excess of 10% of the greater of the beginning of year bal-
studies for Canadian properties are not required by regulation
ances of the projected benefit obligation or market-related
and are conducted internally. Studies are performed on specific
value of plan assets, over the expected average remaining
asset groups on a periodic basis. Changes in the estimated ser-
service life of the employee group covered by the plans.
vice lives of the assets and their related composite depreciation
rates are implemented prospectively.
The pension plans are funded through contributions deter-
The service life of the rail asset is based on expected future
mined in accordance with the projected unit credit actuarial cost
usage of the rail in its existing condition, determined using rail-
method.
road industry research and testing (based on rail characteristics
such as weight, curvature and metallurgy), less the rail asset’s
Postretirement benefits other than pensions
usage to date. The annual composite depreciation rate for rail
The Company accrues the cost of postretirement benefits other
assets is determined by dividing the estimated annual number
than pensions using actuarial methods. These benefits, which
of gross tons carried over the rail by the estimated service life of
are funded as they become due, include life insurance programs,
the rail measured in millions of gross ton miles. The Company
medical benefits and, for a closed group of employees, free rail
amortizes the cost of rail grinding over the remaining life of the
travel benefits.
rail asset, which includes the incremental life extension generat-
The Company amortizes the cumulative net actuarial gains
ed by rail grinding.
and losses in excess of 10% of the projected benefit obligation at
the beginning of the year, over the expected average remaining
service life of the employee group covered by the plan.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 65
Notes to Consolidated Financial Statements
1
Summary of significant accounting policies
continued
Stock-based compensation
Stock-based compensation costs are determined using a fair value
based approach and are charged to income over the period during
which an employee is required to provide service in exchange for
an award (requisite service period). For cash settled awards, stock-
based compensation costs are accrued over the requisite service
Derivative financial instruments
The Company uses derivative financial instruments from time to
time in the management of its interest rate and foreign currency
exposures. Derivative instruments are recorded on the balance
sheet at fair value and the changes in fair value are recorded in
Net income or Other comprehensive income (loss) depending on
the nature and effectiveness of the hedge transaction. Income
and expense related to hedged derivative financial instruments
are recorded in the same category as that generated by the
period based on the fair value of the awards at period-end. For
underlying asset or liability.
equity settled awards, stock-based compensation costs are ac-
crued over the requisite service period based on the fair value of
the awards at grant date. The fair value of stock option awards is
determined using the Black-Scholes option-pricing model. The fair
value of performance share unit (PSU) awards is determined using
a lattice-based model. The fair value of deferred share unit (DSU)
awards is determined using an intrinsic value model.
Personal injury and other claims
In Canada, the Company accounts for costs related to employee
work-related injuries based on actuarially developed estimates
on a discounted basis of the ultimate cost associated with such
injuries, including compensation, health care and third-party ad-
ministration costs.
In the U.S., the Company accrues the expected cost for personal
injury, property damage and occupational disease claims, based on
actuarial estimates of their ultimate cost on an undiscounted basis.
For all other legal actions in Canada and the U.S., the Company
maintains, and regularly updates on a case-by-case basis, provisions
for such items when the expected loss is both probable and can
2 Recent accounting pronouncement
On May 28, 2014, the FASB issued Accounting Standards Update
(ASU) 2014-09, Revenue from Contracts with Customers, which
establishes principles for reporting the nature, amount, timing
and uncertainty of revenues and cash flows arising from an en-
tity’s contracts with customers. The core principle of the new
standard is that an entity recognizes revenue to represent the
transfer of goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. This standard
is effective for annual and interim reporting periods beginning
after December 15, 2016 and will replace most existing revenue
recognition guidance within U.S. GAAP. Early adoption is not per-
mitted. The standard permits the use of either the retrospective
or cumulative effect transition method. The Company is evalu-
ating the effect that ASU 2014-09 will have on its Consolidated
Financial Statements, related disclosures, as well as which transi-
tion method to apply. The Company does not expect a significant
be reasonably estimated based on currently available information.
impact from the adoption of this standard.
Environmental expenditures
Environmental expenditures that relate to current operations, or
to an existing condition caused by past operations, are expensed
unless they can contribute to current or future operations.
Environmental liabilities are recorded when environmental assess-
ments occur, remedial efforts are probable, and when the costs,
based on a specific plan of action in terms of the technology to
be used and the extent of the corrective action required, can be
reasonably estimated. The Company accrues its allocable share of
liability taking into account the Company’s alleged responsibility,
the number of potentially responsible parties and their ability
to pay their respective shares of the liability. Recoveries of en-
vironmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable and collectability is
reasonably assured.
66
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
3 Other income
In millions
Year ended December 31,
2014
2013
2012
Gain on disposal of property (1)
$ 99
$ 64
$ 295
Gain on disposal of land
Other (2)
Total other income
21
(13)
19
(10)
20
-
$ 107
$ 73
$ 315
(1)
In addition to the disposals of property described herein, 2014 includes other gains of
$19 million; 2013 includes other losses of $5 million; and 2012 includes other gains of
$14 million.
(2)
Includes foreign exchange gains and losses.
Disposal of property
2014
Guelph
On September 4, 2014, the Company closed a transaction with
Metrolinx to sell a segment of the Guelph subdivision located
between Georgetown and Kitchener, Ontario, together with the
rail fixtures and certain passenger agreements (collectively the
“Guelph”), for cash proceeds of $76 million before transaction
costs. The Company did not meet all the conditions to record the
sale under the full accrual method for real estate transactions as
it continues to have substantial continuing involvement on the
Guelph. The Company will have relinquished substantially all of
the risks and rewards of ownership on the Guelph in 2018, at
which time the gain on the sale is expected to be recognized.
Deux-Montagnes
On February 28, 2014, the Company closed a transaction with
Agence Métropolitaine de Transport to sell the Deux-Montagnes
subdivision between Saint-Eustache and Montreal, Quebec,
including the Mont-Royal tunnel, together with the rail fixtures
(collectively the “Deux-Montagnes”), for cash proceeds of
$97 million before transaction costs. Under the agreement, the
Company obtained the perpetual right to operate freight trains
over the Deux-Montagnes at its then current level of operating
activity, with the possibility of increasing its operating activity for
additional consideration. The transaction resulted in a gain on
disposal of $80 million ($72 million after-tax) that was recorded
in Other income under the full accrual method of accounting for
real estate transactions.
2013
Exchange of easements
On June 8, 2013, the Company entered into an agreement with
another Class I railroad to exchange perpetual railroad operating
easements including the track and roadway assets on specific rail
lines (collectively the “exchange of easements”) without monet-
ary consideration. The Company accounted for the exchange of
easements at fair value pursuant to FASB ASC 845, Nonmonetary
Transactions. The transaction resulted in a gain on exchange of
easements of $29 million ($18 million after-tax) that was record-
ed in Other income.
Lakeshore West
On March 19, 2013, the Company entered into an agreement
with Metrolinx to sell a segment of the Oakville subdivision in
Oakville and Burlington, Ontario, together with the rail fixtures
and certain passenger agreements (collectively the “Lakeshore
West”), for cash proceeds of $52 million before transaction
costs. Under the agreement, the Company obtained the perpet-
ual right to operate freight trains over the Lakeshore West at
its then current level of operating activity, with the possibility of
increasing its operating activity for additional consideration. The
transaction resulted in a gain on disposal of $40 million ($36 mil-
lion after-tax) that was recorded in Other income under the full
accrual method of accounting for real estate transactions.
2012
Bala-Oakville
On March 23, 2012, the Company entered into an agreement
with Metrolinx to sell a segment of the Bala and a segment of
the Oakville subdivisions in Toronto, Ontario, together with the
rail fixtures and certain passenger agreements (collectively the
“Bala-Oakville”), for cash proceeds of $311 million before trans-
action costs. Under the agreement, the Company obtained the
perpetual right to operate freight trains over the Bala-Oakville
at its then current level of operating activity, with the possibility
of increasing its operating activity for additional consideration.
The transaction resulted in a gain on disposal of $281 million
($252 million after-tax) that was recorded in Other income under
the full accrual method of accounting for real estate transactions.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 67
Notes to Consolidated Financial Statements
4
Income taxes
As at December 31, 2014, Deferred and receivable income taxes
include a net deferred income tax asset of $68 million ($74 mil-
The following table provides the significant components of
deferred income tax assets and liabilities:
In millions
December 31,
2014
2013
lion as at December 31, 2013) and an income tax receivable of
Deferred income tax assets
$95 million ($63 million as at December 31, 2013).
Pension liability
$ 120
$
The Company’s consolidated effective income tax rate differs
Personal injury and legal claims
from the Canadian, or domestic, statutory federal tax rate. The
Environmental and other reserves
effective tax rate is affected by recurring items such as tax rates in
Other postretirement benefits liability
provincial, U.S. federal, state and other foreign jurisdictions and
Net operating losses and tax credit carryforwards (1)
60
173
80
20
89
64
171
77
19
the proportion of income earned in those jurisdictions. The effect-
Total deferred income tax assets
$ 453
$ 420
ive tax rate is also affected by discrete items such as income tax
Deferred income tax liabilities
rate enactments and lower tax rates on capital dispositions that
may occur in any given year.
The following table provides a reconciliation of income tax expense:
Properties
Pension asset
Other
In millions
Year ended December 31,
2014
2013
2012
Canadian statutory federal tax rate
15.0%
15.0%
15.0%
Income tax expense at the
Canadian statutory federal tax rate
$ 654
$ 538
$ 549
Income tax expense (recovery) resulting from:
Total deferred income tax liabilities
Total net deferred income tax liability
Total net deferred income tax liability
Domestic
Foreign
Provincial and foreign taxes (1)
531
423
425
Total net deferred income tax liability
$ 6,946
$ 6,232
232
109
438
213
$ 7,287
$ 6,883
$ 6,834
$ 6,463
$ 2,841
$ 2,920
3,993
3,543
$ 6,834
$ 6,463
Deferred income tax adjustments due
to rate enactments (2)
Gain on disposals (3)
Other (4)
-
(19)
27
24
(9)
1
35
(44)
13
Income tax expense
$ 1,193
$ 977
$ 978
Cash payments for income taxes
$ 722
$ 890
$ 289
(1)
Includes mainly Canadian provincial taxes and U.S. federal and state taxes.
(2)
Includes the net income tax expense resulting from the enactment of provincial and
state corporate tax rates.
(3) Relates to the permanent differences arising from lower capital gain tax rates on the
gain on disposal of the Company’s properties in Canada.
(4)
Includes adjustments relating to the resolution of matters pertaining to prior years’
income taxes, including net recognized tax benefits, and other items.
Total net deferred income tax liability
$ 6,834
$ 6,463
Net current deferred income tax asset
68
74
Net noncurrent deferred income tax liability
$ 6,902
$ 6,537
(1) Net operating losses and tax credit carryforwards will expire between the years 2017
and 2034.
On an annual basis, the Company assesses the need to estab-
lish a valuation allowance for its deferred income tax assets, and
if it is deemed more likely than not that its deferred income tax
assets will not be realized, a valuation allowance is recorded. The
ultimate realization of deferred income tax assets is dependent
upon the generation of future taxable income during the per-
iods in which those temporary differences become deductible.
The following table provides tax information on a domestic and
Management considers the scheduled reversals of deferred
foreign basis:
In millions
Year ended December 31,
2014
2013
2012
income tax liabilities, the available carryback and carryforward
periods, and projected future taxable income in making this
assessment. As at December 31, 2014, in order to fully realize
all of the deferred income tax assets, the Company will need
Income before income taxes
Domestic
Foreign
$ 3,042
$ 2,445
$ 2,656
to generate future taxable income of approximately $1.7 bil-
1,318
1,144
1,002
lion and, based upon the level of historical taxable income and
Total income before income taxes
$ 4,360
$ 3,589
$ 3,658
projections of future taxable income over the periods in which
Current income tax expense
Domestic
Foreign
$ 522
$ 404
$ 314
255
242
213
Total current income tax expense
$ 777
$ 646
$ 527
Deferred income tax expense
Domestic
Foreign
$ 271
$ 279
$ 370
145
52
81
Total deferred income tax expense
$ 416
$ 331
$ 451
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 impacts 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 of $158 million as at
December 31, 2014 ($243 million as at December 31, 2013) on
the unrealized foreign exchange loss recorded in Accumulated
68
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
other comprehensive loss relating to its net investment in foreign
the taxation authorities. An examination of the federal income
subsidiaries, as the Company does not expect this temporary
tax returns for the years 2007 to 2011 is currently in progress.
difference to reverse in the foreseeable future.
Examinations of certain state income tax returns by the state
The following table provides a reconciliation of unrecognized tax
not anticipate any significant impacts to its results of operations
benefits on the Company’s domestic and foreign tax positions:
or financial position as a result of the final resolutions of such
taxation authorities are currently in progress. The Company does
In millions
Year ended December 31,
2014
2013
2012
matters.
Gross unrecognized tax benefits at
beginning of year
$
30
$
36
$
46
5 Earnings per share
Increases for:
Tax positions related to the current year
Tax positions related to prior years
Decreases for:
Tax positions related to prior years
Settlements
3
3
-
-
Lapse of the applicable statute of limitations
(1)
2
4
(4)
(8)
-
1
3
-
(13)
(1)
The following table provides a reconciliation between basic and
diluted earnings per share:
In millions, except per share data
Year ended December 31,
2014
2013
2012
Net income
$ 3,167
$ 2,612
$ 2,680
Gross unrecognized tax benefits at
end of year
Adjustments to reflect tax treaties and
$
35
$
30
$
36
Weighted-average basic shares outstanding 819.9
843.1
871.1
Effect of stock-based compensation
3.6
3.0
4.3
other arrangements
(6)
(5)
(6)
Weighted-average diluted shares
Net unrecognized tax benefits at end of year $
29
$
25
$
30
outstanding
823.5
846.1
875.4
Basic earnings per share
$ 3.86
$ 3.10
$ 3.08
Diluted earnings per share
$ 3.85
$ 3.09
$ 3.06
6 Accounts receivable
In millions
Freight
Non-freight
Gross accounts receivable
Allowance for doubtful accounts
December 31,
2014
2013
$ 777
$ 675
160
937
(9)
147
822
(7)
Net accounts receivable
$ 928
$ 815
As at December 31, 2014, the total amount of gross un-
recognized tax benefits was $35 million, before considering tax
treaties and other arrangements between taxation authorities.
The amount of net unrecognized tax benefits as at December 31,
2014 was $29 million. If recognized, all of the net unrecognized
tax benefits as at December 31, 2014 would affect the effective
tax rate. The Company believes that it is reasonably possible that
approximately $10 million of the net unrecognized tax benefits
as at December 31, 2014 related to various federal, state, and
provincial income tax matters, each of which are individually
insignificant, 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 relat-
ed to gross unrecognized tax benefits in Income tax expense in
the Company’s Consolidated Statement of Income. The Company
recognized approximately $1 million, $2 million and $3 mil-
lion in accrued interest and penalties during the years ended
December 31, 2014, 2013 and 2012, respectively. The Company
had approximately $6 million and $5 million of accrued interest
and penalties as at December 31, 2014 and 2013, respectively.
In Canada, the Company’s federal and provincial income
tax returns filed for the years 2008 to 2013 remain subject to
examination by the taxation authorities. An examination of the
Company’s federal income tax returns for the years 2010 and
2011 is currently in progress and is expected to be completed
during 2015. In the U.S., the federal income tax returns filed
for the years 2007 to 2013 remain subject to examination by
the taxation authorities, and the state income tax returns filed
for the years 2009 to 2013 remain subject to examination by
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 69
Notes to Consolidated Financial Statements
7 Properties
In millions
Properties including capital leases
Track and roadway (1)
Rolling stock
Buildings
Information technology (2)
Other
Depreciation
rate
December 31, 2014
Accumulated
Cost depreciation
Net
December 31, 2013
Accumulated
depreciation
Cost
Net
2%
5%
2%
11%
5%
$ 29,995
$ 7,332
$ 22,663
$ 27,833
$ 7,103
$ 20,730
5,552
1,545
1,068
1,549
2,107
3,445
560
492
704
985
576
845
5,193
1,392
1,000
1,388
1,894
3,299
521
455
606
871
545
782
Total properties including capital leases
$ 39,709
$ 11,195
$ 28,514
$ 36,806
$ 10,579
$ 26,227
Capital leases included in properties
Track and roadway (3)
$
417
$
63
$
354
$
417
$
58
$
Rolling stock
Buildings
Other
808
109
108
292
23
29
516
86
79
982
109
102
358
21
22
359
624
88
80
Total capital leases included in properties
$ 1,442
$
407
$ 1,035
$ 1,610
$
459
$ 1,151
(1)
Includes $2,079 million and $1,911 million of land as at December 31, 2014 and December 31, 2013, respectively.
(2) The Company capitalized $102 million in 2014 and $85 million in 2013 of internally developed software costs pursuant to FASB ASC 350-40, Intangibles – Goodwill and Other, Internal – Use
Software.
(3)
Includes $108 million of right-of-way access in both years.
8
Intangible and other assets
9 Accounts payable and other
In millions
December 31,
2014
2013
In millions
December 31,
2014
2013
Deferred and long-term receivables
$
141 $
109
Trade payables
$
464 $
Intangible assets
Investments (1) (2)
Other
62
58
69
59
57
72
Payroll-related accruals
Income and other taxes
Accrued charges
Total intangible and other assets
$
330 $
297
Stock-based compensation liability (Note 14)
(1) As at December 31, 2014, the Company had $47 million ($46 million as at December 31,
2013) of investments accounted for under the equity method and $11 million ($11 mil-
lion as at December 31, 2013) of investments accounted for under the cost method.
(2) See Note 17 – Financial instruments, for the fair value of Investments.
Accrued interest
Personal injury and other claims provisions (Note 16)
Environmental provisions (Note 16)
Other postretirement benefits liability (Note 12)
317
208
166
106
95
48
45
17
408
351
96
156
80
125
45
41
18
Other
191
157
Total accounts payable and other
$ 1,657 $ 1,477
70
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
10 Long-term debt
In millions
Notes and debentures (1)
Canadian National series:
4.95%
6-year notes (2)
-
2-year floating rate notes (3)
5.80%
10-year notes (2)
1.45%
5-year notes (2)
-
3-year floating rate notes (3)
5.85%
10-year notes (2)
5.55%
10-year notes (2)
6.80%
20-year notes (2)
5.55%
10-year notes (2)
2.75%
7-year notes (2)
2.85%
10-year notes (2)
2.25%
10-year notes (2)
7.63%
30-year debentures
2.95%
10-year notes (2)
6.90%
30-year notes (2)
7.38%
30-year debentures (2)
6.25%
30-year notes (2)
6.20%
30-year notes (2)
6.71%
Puttable Reset Securities PURSSM (2)
6.38%
30-year debentures (2)
3.50%
30-year notes (2)
4.50%
30-year notes (2)
Illinois Central series:
5.00%
99-year income debentures
7.70%
100-year debentures
BC Rail series:
Outstanding
US dollar-
denominated
amount
Maturity
December 31,
2014
2013
Jan. 15, 2014
US$
-
$
-
$ 346
Nov. 6, 2015
June 1, 2016
Dec. 15, 2016
Nov. 14, 2017
Nov. 15, 2017
May 15, 2018
July 15, 2018
Mar. 1, 2019
Feb. 18, 2021
Dec. 15, 2021
Nov. 15, 2022
May 15, 2023
Nov. 21, 2024
July 15, 2028
Oct. 15, 2031
Aug. 1, 2034
June 1, 2036
July 15, 2036
Nov. 15, 2037
Nov. 15, 2042
Nov. 7, 2043
Dec. 1, 2056
Sep. 15, 2096
350
250
300
250
250
325
200
550
400
250
150
350
475
200
500
450
250
300
250
250
-
125
406
290
348
290
290
377
232
638
250
464
290
174
406
551
232
581
522
290
348
290
290
-
145
372
266
319
-
266
346
213
585
-
425
266
159
-
505
213
532
479
266
319
266
266
7
133
Non-interest bearing 90-year subordinated notes (4)
July 14, 2094
842
842
Total notes and debentures
Other
Commercial paper
Accounts receivable securitization
Capital lease obligations
Total debt, gross
Less: Net unamortized discount
Total debt (5)
Less: Current portion of long-term debt
Total long-term debt
US$ 6,425
$ 8,546
$ 7,391
-
50
670
273
250
783
9,266
8,697
857
8,409
544
$ 7,865
857
7,840
1,021
$ 6,819
(1) The Company’s notes, debentures and revolving credit facility are unsecured.
(2) The fixed rate debt securities are redeemable, in whole or in part, at the option of the Company, at any time, at the greater of par and a formula price based on interest rates prevailing at
the time of redemption.
(3) These 2-year and 3-year floating rate notes bear interest at the three-month London Interbank Offered Rate (LIBOR) plus 0.20% and LIBOR plus 0.17%, respectively. The interest rate on the
2-year floating rate notes as at December 31, 2014 was 0.43% (0.44% as at December 31, 2013). The interest rate on the 3-year floating rate notes issued in 2014 was 0.40%.
(4) The Company records these notes as a discounted debt of $9 million, using an imputed interest rate of 5.75%. The discount of $833 million is included in the net unamortized discount.
(5) See Note 17 – Financial instruments, for the fair value of debt.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 71
Notes to Consolidated Financial Statements
10 Long-term debt continued
Revolving credit facility
The Company has an $800 million revolving credit facility agree-
ment with a consortium of lenders. The agreement, which con-
Accounts receivable securitization program
The Company has an agreement to sell an undivided co-ownership
interest in a revolving pool of accounts receivable to unrelated
trusts for maximum cash proceeds of $450 million. On July 23,
2014, the expiry date of the agreement was extended by one
tains customary terms and conditions, allows for an increase in
year to February 1, 2017.
the facility amount, up to a maximum of $1.3 billion, as well as
the option to extend the term by an additional year at each an-
niversary date, subject to the consent of individual lenders. The
Company exercised such option and on March 14, 2014, the ex-
piry date of the agreement was extended by one year to May 5,
2019. The credit facility is available for general corporate pur-
poses, including back-stopping the Company’s commercial paper
As at December 31, 2014, the Company recorded $50 million
($250 million as at December 31, 2013) of proceeds received
under the accounts receivable securitization program in the
Current portion of long-term debt on the Consolidated Balance
Sheet at a weighted-average interest rate of 1.24% (1.18%
as at December 31, 2013) which is secured by and limited to
$56 million ($281 million as at December 31, 2013) of accounts
program, and provides for borrowings at various interest rates,
receivable.
including the Canadian prime rate, bankers’ acceptance rates,
the U.S. federal funds effective rate and the London Interbank
Bilateral letter of credit facilities
Offered Rate (LIBOR), plus applicable margins. The credit facility
agreement has one financial covenant, which limits debt as a
percentage of total capitalization, and with which the Company
is in compliance. As at December 31, 2014 and December 31,
2013, the Company had no outstanding borrowings under its
revolving credit facility and there were no draws during the years
ended December 31, 2014 and 2013.
Commercial paper
The Company has a commercial paper program, which is back-
stopped by its revolving credit facility, enabling it to issue com-
mercial paper up to a maximum aggregate principal amount of
$800 million, or the US dollar equivalent. As at December 31,
2014, the Company had no commercial paper borrowings
($273 million at a weighted-average interest rate of 1.14% as
The Company has a series of bilateral letter of credit facility agree-
ments with various banks to support its requirements to post
letters of credit in the ordinary course of business. On March 14,
2014, the expiry date of these agreements was extended by one
year to April 28, 2017. Under these agreements, the Company
has the option from time to time to pledge collateral in the form
of cash or cash equivalents, for a minimum term of one month,
equal to at least the face value of the letters of credit issued. As
at December 31, 2014, the Company had letters of credit drawn
of $487 million ($481 million as at December 31, 2013) from
a total committed amount of $511 million ($503 million as at
December 31, 2013) by the various banks. As at December 31,
2014, cash and cash equivalents of $463 million ($448 million as
at December 31, 2013) were pledged as collateral and record-
ed as Restricted cash and cash equivalents on the Consolidated
at December 31, 2013) presented in Current portion of long-
Balance Sheet.
term debt on the Consolidated Balance Sheet. The Company’s
commercial paper has a maturity less than 90 days.
Capital lease obligations
The following table presents the issuances and repayments of
commercial paper:
During 2014, the Company had no acquisitions of assets through
equipment leases ($44 million in 2013 for which an equivalent
amount was recorded in debt).
In millions
Year ended December 31,
2014
2013
2012
Interest rates for capital lease obligations range from 0.7% to
Issuances of commercial paper
$ 2,443
$ 3,255
$ 1,861
Repayments of commercial paper
(2,720)
(2,987)
(1,943)
Net issuance (repayment) of
commercial paper
8.5% with maturity dates in the years 2015 through 2037. The
imputed interest on these leases amounted to $145 million as at
December 31, 2014 and $209 million as at December 31, 2013.
$ (277) $ 268
$
(82)
The capital lease obligations are secured by properties with a
net carrying amount of $668 million as at December 31, 2014
and $779 million as at December 31, 2013.
72
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
Long-term debt maturities
The following table provides the long-term debt maturities, including capital lease repayments on debt outstanding as at December 31,
2014, for the next five years and thereafter:
In millions
2015 (1)
2016
2017
2018
2019
2020 and thereafter
Total
(1) Current portion of long-term debt.
Amount of US dollar-denominated debt
In millions
Notes and debentures
Capital lease obligations
Total amount of US dollar-denominated debt in US$
Total amount of US dollar-denominated debt in C$
Capital
leases
Debt
Total
$
88
$
456
$
311
152
8
8
103
$
670
634
577
606
636
544
945
729
614
644
4,830
$ 7,739
4,933
$ 8,409
December 31,
2014
2013
US $ 6,425
US $ 6,157
448
573
US $ 6,873
US $ 6,730
$ 7,973
$ 7,158
11 Other liabilities and deferred credits
In millions
December 31,
2014
2013
current or former executive employee may have violated the con-
ditions of their SRS, SERP, or DC SERP plan, the Company may at
its discretion withhold or suspend payout of the retirement benefit
Personal injury and other claims provisions,
pending resolution of such matter.
net of current portion (Note 16)
$ 250
$ 271
Stock-based compensation liability,
net of current portion (Note 14)
Environmental provisions,
net of current portion (Note 16)
Deferred credits and other
91
240
69
294
78
226
Total other liabilities and deferred credits
$ 704
$ 815
12 Pensions and other postretirement benefits
The Company has various retirement benefit plans under which sub-
stantially all of its employees are entitled to benefits at retirement age,
generally based on compensation and length of service and/or con-
tributions. Senior and executive management employees (“executive
employees”) subject to certain minimum service and age requirements,
are also eligible for an additional retirement benefit under their Special
Retirement Stipend Agreements (SRS), the Supplemental Executive
Retirement Plan (SERP) or the Defined Contribution Supplemental
Executive Retirement Plan (DC SERP). Current or former executive
employees who breach the non-compete, non-solicitation and
non-disclosure of confidential information conditions of the SRS,
SERP or DC SERP plans will forfeit the retirement benefit under
these plans. Should the Company reasonably determine that a
On February 4, 2013, the Company’s Chief Operating Officer
(COO) resigned to join the Company’s major competitor in Canada.
As a result, compensation amounts accumulated under the non-
registered pension plans subject to non-compete and non-solicitation
agreements were forfeited. The Company has recorded an actuarial
gain related to the amounts forfeited. In 2012, the Company cancelled
the $1.5 million annual retirement benefit otherwise due to its former
Chief Executive Officer (CEO) after determining that the former CEO
was likely in breach of the non-compete, non-solicitation and non-
disclosure of confidential information conditions contained in the for-
mer CEO’s employment agreement. The Company recorded a settle-
ment gain of $20 million from the termination of the former CEO’s
retirement benefit plan for the period beyond June 28, 2012, which
was partially offset by the recognition of past accumulated actuarial
losses of approximately $4 million. In February 2013, the Company
entered into confidential agreements to settle these matters.
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.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 73
Notes to Consolidated Financial Statements
12 Pensions and other postretirement benefits
In 2014, the Company made no voluntary contributions
continued
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-
sionable earnings and is generally applicable from the first day
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.
Funding policy
Employee contributions to the CN Pension Plan are determined
by the plan rules. Company contributions are in accordance with
($100 million in 2013) in excess of the required minimum contri-
butions. Voluntary contributions can be treated as a prepayment
against its future required special solvency deficit payments. As
at December 31, 2014, the Company had $143 million of ac-
cumulated prepayments under the CN Pension Plan which remain
available to offset future required solvency deficit payments. The
Company expects to use these prepayments to satisfy a portion
of its 2015 required solvency deficit payment. The Company
established an irrevocable standby letter of credit in 2014 with
a face amount of approximately $3 million in order to satisfy
the solvency deficit payment for the BC Rail Pension Plan. The
Company expects to further subscribe to letters of credit in 2015
to satisfy the solvency deficit payments for certain of its defined
benefit pension plans including the CN Pension Plan. Under the
CN Pension Plan, considering the prepayments available, it is ex-
pected that the letters of credit will only be required in the third
quarter of 2015. The total face amount of the letters of credit is
expected to be approximately $90 million at the end of 2015. As
a result, the Company’s cash contributions for 2015 are expected
to be $125 million, for all the Company’s pension plans. As at
February 2, 2015, the Company contributed $80 million to its
the requirements of the Government of Canada legislation, the
defined benefit pension plans for 2015.
Pension Benefits Standards Act, 1985, including amendments
and regulations thereto, and such contributions follow minimum
Plan assets
and maximum thresholds as determined by actuarial valuations.
Actuarial valuations are generally required on an annual basis for
all Canadian plans, or when deemed appropriate by the Office
of the Superintendent of Financial Institutions. These actuarial
valuations are prepared in accordance with legislative require-
ments and with the recommendations of the Canadian Institute
of Actuaries for the valuation of pension plans. The Company’s
most recently filed actuarial valuations conducted as at
December 31, 2013 indicated a funding excess on a going-con-
cern basis of approximately $1.6 billion and a funding deficit on
a solvency basis of approximately $1.7 billion calculated using
the three-year average of the plans’ hypothetical wind-up ratio
in accordance with the Pension Benefit Standards Regulations,
1985. The Company’s next actuarial valuations required as at
December 31, 2014 will be performed in 2015. These actuarial
valuations are expected to identify a going-concern surplus of
approximately $1.9 billion, while on a solvency basis a funding
deficit of approximately $1.1 billion is expected. The federal
pension legislation requires funding deficits, as calculated under
The assets of the Company’s various Canadian defined benefit
pension plans are primarily held in separate trust funds (“Trusts”)
which are diversified by asset type, country and investment strat-
egies. Each year, the CN Board of Directors reviews and confirms
or amends the Statement of Investment Policies and Procedures
(SIPP) which includes the plans’ long-term asset 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 obligations, the market return expectations of
each asset class and the current state of financial markets.
Annually, the CN Investment Division (“Investment Manager”),
a division of the Company created to invest and administer
the assets of the plans, proposes a short-term asset mix target
(“Strategy”) for the coming year, which is expected to differ
from the Policy, because of current economic and market condi-
tions and expectations. The Investment Committee of the Board
(“Committee”) regularly compares the actual asset mix to the
Policy and Strategy and compares the actual performance of the
Company’s pension plans to the performance of the benchmark
current pension regulations, to be paid over a number of years.
indices.
Alternatively, a letter of credit can be subscribed to fulfill required
solvency deficit payments. Actuarial valuations are also required
annually for the Company’s U.S. qualified pension plans.
74
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
The Company’s 2014 target long-term asset mix and actual
(g) Absolute return investments are primarily a portfolio of units
asset allocation for the Company’s pension plans based on fair
of externally managed hedge funds, which are invested in
value, are as follows:
Cash and short-term investments
Bonds and mortgages
Equities
Real estate
Oil and gas
Infrastructure
Absolute return
Risk-based allocation
Total
Target
long-term
asset mix
Percentage
of plan assets
2013
2014
3%
37%
45%
4%
7%
4%
-
-
3%
29%
39%
2%
8%
5%
10%
4%
5%
25%
41%
2%
8%
5%
10%
4%
100%
100%
100%
various long/short strategies within multi-strategy, fixed
income, equities, global macro and commodity funds, as
presented in the table of fair value measurement. Managers
are monitored on a continuous basis through investment and
operational due diligence.
(h) Risk-based allocation investments are a portfolio of units of
externally managed funds where the overall risk of the asset
class is managed in order to capture over time different asset
classes risk premiums. Some of these investments are held by
the Trusts’ wholly-owned subsidiaries.
The plans’ Investment Manager monitors market events and
exposures to markets, currencies and interest rates daily. When
The Committee’s approval is required for all major investments
investing in foreign securities, the plans are exposed to foreign
in illiquid securities. The SIPP allows for the use of derivative fi-
currency risk that may be adjusted or hedged; the effect of which
nancial instruments to implement strategies, hedge, and adjust
is included in the valuation of the foreign securities. Net of the
existing or anticipated exposures. The SIPP prohibits investments
effects mentioned above, the plans were 65% exposed to the
in securities of the Company or its subsidiaries. Investments held
Canadian dollar, 16% to the US dollar, 7% to European curren-
in the Company’s pension plans consist mainly of the following:
cies, and 12% to various other currencies as at December 31,
(a) Cash and short-term investments consist primarily of highly li-
2014. Interest rate risk represents the risk that the fair value of
quid securities which ensure adequate cash flows are available
the investments will fluctuate due to changes in market interest
to cover near-term benefit payments. Short-term investments
rates. Sensitivity to interest rates is a function of the timing and
are mainly obligations issued by Canadian chartered banks.
amount of cash flows of the assets and liabilities of the plans.
(b) Bonds include bond instruments, issued or guaranteed by
Overall return in the capital markets and the level of interest
governments and corporate entities, as well as corporate
rates affect the funded status of the Company’s pension plans,
notes. As at December 31, 2014, 82% of bonds were issued
particularly the Company’s main Canadian pension plan. Adverse
or guaranteed by Canadian, U.S. or other governments.
changes with respect to pension plan returns and the level of
Mortgages consist of mortgage products which are primarily
interest rates from the date of the last actuarial valuations may
conventional or participating loans secured by commercial
have a material adverse effect on the funded status of the plans
properties.
and on the Company’s results of operations. Derivatives are used
(c) Equity investments are primarily publicly traded securities,
from time to time to adjust asset mix or exposures to foreign
well diversified by country, issuer and industry sector. In
currencies, interest rate or market risks of the portfolio or antici-
2014, the most significant allocation to an individual issuer
pated transactions. Derivatives are contractual agreements whose
was approximately 2% and the most significant allocation to
value is derived from interest rates, foreign exchange rates, and
an industry sector was approximately 23%.
equity or commodity prices. They may include forwards, futures,
(d) Real estate is a diversified portfolio of Canadian land and
options and swaps and are included in investment categories
commercial properties held by the Trusts’ wholly-owned
based on their underlying exposure. When derivatives are used
subsidiaries.
for hedging purposes, the gains or losses on the derivatives are
(e) Oil and gas investments include petroleum and natural gas
offset by a corresponding change in the value of the hedged
properties operated by the Trusts’ wholly-owned subsidiaries
assets. To manage credit risk, established policies require dealing
and listed and non-listed Canadian securities of oil and gas
with counterparties considered to be of high credit quality.
companies.
The tables on the following pages present the fair value of
(f) Infrastructure investments include participations in private
plan assets as at December 31, 2014 and 2013 by asset class,
infrastructure funds, public and private debt and publicly
their level within the fair value hierarchy and the valuation tech-
traded equity securities of infrastructure and utility compan-
niques and inputs used to measure such fair value:
ies. Some of these investments are held by the Trusts’ wholly-
owned subsidiaries.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 75
Notes to Consolidated Financial Statements
12 Pensions and other postretirement benefits continued
In millions
Cash and short-term investments (1)
Bonds (2)
Canada, U.S. and supranational
Provinces of Canada and municipalities
Corporate
Emerging market debt
Mortgages (3)
Equities (4)
Canadian
U.S.
International
Real estate (5)
Oil and gas (6)
Infrastructure (7)
Absolute return funds (8)
Multi-strategy
Fixed income
Equity
Global macro
Commodity
Risk-based allocation (9)
Total
Other (10)
Total plan assets
In millions
Cash and short-term investments (1)
Bonds (2)
Canada, U.S. and supranational
Provinces of Canada and municipalities
Corporate
Emerging market debt
Mortgages (3)
Equities (4)
Canadian
U.S.
International
Real estate (5)
Oil and gas (6)
Infrastructure (7)
Absolute return funds (8)
Multi-strategy
Fixed income
Equity
Global macro
Risk-based allocation (9)
Total
Other (10)
Total plan assets
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.
Fair value measurements at December 31, 2014
Total
Level 1
Level 2
Level 3
$
579
$
64
$
515
$
1,450
2,701
618
296
131
2,096
1,493
3,425
317
1,374
885
591
471
299
384
1
635
-
-
-
-
-
2,072
1,493
3,425
-
349
14
-
-
-
-
-
-
1,450
2,701
618
296
131
-
-
-
-
17
107
591
428
299
384
1
635
-
-
-
-
-
-
24
-
-
317
1,008
764
-
43
-
-
-
-
$ 17,746
$ 7,417
$ 8,173
$ 2,156
15
$ 17,761
Fair value measurements at December 31, 2013
Total
Level 1
Level 2
Level 3
$
897
$
16
$
881
$
1,416
2,297
111
261
166
2,160
1,307
3,421
299
1,380
788
460
519
391
328
607
-
-
-
-
-
2,138
1,307
3,421
-
379
10
-
-
2
-
-
1,416
2,297
111
261
166
-
-
-
-
40
115
460
486
389
328
607
-
-
-
-
-
-
22
-
-
299
961
663
-
33
-
-
-
$ 16,808
$ 7,273
$ 7,557
$ 1,978
61
$ 16,869
Footnotes to the table follow on the next page.
76
2014 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:
In millions
Equities (4)
Real estate (5)
Oil and gas (6)
Infrastructure (7)
return (8)
Total
Balance at December 31, 2012
$
22
$ 279
$ 940
$ 577
$
10
$ 1,828
Fair value measurements based on significant unobservable inputs (Level 3)
Absolute
Actual return relating to assets still
held at the reporting date
Purchases
Sales
2
2
(4)
26
-
(6)
72
-
(51)
43
120
(77)
3
20
-
146
142
(138)
Balance at December 31, 2013
$
22
$ 299
$ 961
$ 663
$
33
$ 1,978
Actual return relating to assets still
held at the reporting date
Purchases
Sales
1
4
(3)
21
-
(3)
-
47
-
2
159
(60)
1
9
-
25
219
(66)
Balance at December 31, 2014
$
24
$ 317
$ 1,008
$ 764
$
43
$ 2,156
(1) Cash and short-term investments are valued at cost, which approximates fair value, and are categorized as Level 1 for cash and Level 2 for short-term investments.
(2) Bonds are valued using mid-price bids obtained from independent pricing data suppliers. When prices are not available from independent sources, the fair value is based on the present
value of future cash flows using current market yields for comparable instruments. All bonds are categorized as Level 2.
(3) Mortgages are secured by real estate. The fair value of $131 million ($166 million in 2013) of mortgages categorized as Level 2 is based on the present value of future cash flows using
current market yields for comparable instruments.
(4) The fair value of equity investments categorized as Level 1 is based on quoted prices in active markets. The fair value of equity investments of $24 million ($22 million in 2013) categorized
as Level 3 represent units in private equity funds which are valued by their independent administrators.
(5) The fair value of real estate investments of $317 million ($299 million in 2013) includes land and buildings net of related mortgage debt of $34 million ($41 million in 2013) and is
categorized 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 on a rotational basis. Mortgage debt is valued based on the present value of future cash flows
using current market yields for comparable instruments.
(6) Oil and gas investments categorized as Level 1 are valued based on quoted prices in active markets. Investments in oil and gas equities traded on a secondary market are valued based on the
most recent transaction price and are categorized as Level 2. Investments of $1,008 million ($961 million in 2013) categorized as Level 3 consist of operating oil and gas properties and the
fair value is 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 investments consist of $14 million ($10 million in 2013) of publicly traded equity securities of infrastructure companies categorized as Level 1, $107 million ($115 million
in 2013) of term loans, bonds and infrastructure funds issued by infrastructure companies categorized as Level 2 and $764 million ($663 million in 2013) of infrastructure funds that are
categorized as Level 3 and are valued based on discounted cash flows or earnings multiples. Distributions may be received throughout the term of the funds and/or upon the sale of the
underlying investments.
(8) Absolute return investments are valued using the net asset value as reported by the independent fund administrators. All absolute return investments have contractual redemption frequen-
cies, ranging from monthly to annually, and redemption notice periods varying from 5 to 90 days. Absolute return investments that have redemption dates less frequent than every four
months or that have restrictions on contractual redemption features at the reporting date are categorized as Level 3.
(9) Risk-based allocation investments are valued using the net asset value as reported by the independent fund administrators and are categorized as Level 2. All funds have contractual
redemption frequencies ranging from daily to annually, and redemption notice periods varying from 5 to 60 days.
(10) Other consists of operating assets of $145 million ($85 million in 2013) and liabilities of $130 million ($24 million in 2013) required to administer the Trusts’ 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.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 77
Notes to Consolidated Financial Statements
12 Pensions and other postretirement benefits continued
Additional disclosures
Obligations and funded status
In millions
Year ended December 31,
2014
2013
Pensions
Other postretirement benefits
2013
2014
Change in benefit obligation
Projected benefit obligation at beginning of year
$ 15,510
$ 16,335
$
256
$
277
Amendments
Interest cost
Actuarial loss (gain) on projected benefit obligation
Service cost
Plan participants’ contributions
Foreign currency changes
2
711
1,815
132
58
22
-
658
(747)
155
56
16
2
12
6
2
-
7
-
11
(22)
3
-
5
Benefit payments, settlements and transfers
(971)
(963)
(18)
(18)
Projected benefit obligation at end of year
$ 17,279
$ 15,510
$
267
$
256
Component representing future salary increases
(349)
(344)
-
-
Accumulated benefit obligation at end of year
$ 16,930
$ 15,166
$
267
$
256
Change in plan assets
Fair value of plan assets at beginning of year
$ 16,869
$ 15,811
Employer contributions
Plan participants’ contributions
Foreign currency changes
Actual return on plan assets
Benefit payments, settlements and transfers
111
58
15
1,679
(971)
226
56
10
1,728
(962)
Fair value of plan assets at end of year
$ 17,761
$ 16,869
$
$
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
Funded status – Excess (deficiency) of fair value of plan assets
over projected benefit obligation at end of year
$
482
$ 1,359
$
(267)
$
(256)
Measurement date for all plans is December 31.
The projected benefit obligation and fair value of plan assets for the CN Pension Plan at December 31, 2014 were $16,059 million and
$16,905 million, respectively ($14,458 million and $16,059 million, respectively, at December 31, 2013).
Amounts recognized in the Consolidated Balance Sheet
In millions
Noncurrent assets – Pension asset
Current liabilities (Note 9)
Noncurrent liabilities – Pension and other postretirement benefits
Total amount recognized
December 31,
2014
2013
Pensions
Other postretirement benefits
2013
2014
$
882
$ 1,662
$
-
$
-
-
(400)
-
(303)
(17)
(250)
(18)
(238)
$
482
$ 1,359
$
(267)
$
(256)
Amounts recognized in Accumulated other comprehensive loss (Note 15)
In millions
Net actuarial gain (loss)
Prior service cost
December 31,
2014
2013
Pensions
Other postretirement benefits
2013
2014
$ (2,502)
$ (1,515)
$
17
$
(20)
(22)
(5)
27
(5)
78
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
Information for the pension plans with an accumulated benefit obligation in excess of plan assets
In millions
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
December 31,
2014
2013
Pensions
Other postretirement benefits
2013
2014
$
646
$
527
585
246
475
224
N/A
N/A
N/A
N/A
N/A
N/A
Components of net periodic benefit cost (income)
In millions
Year ended December 31,
2014
Pensions
2013
2012
Other postretirement benefits
2012
2013
2014
Current service cost
Interest cost
Curtailment gain
Settlement loss (gain) (1)
Expected return on plan assets
Amortization of prior service cost
Amortization of net actuarial loss (gain)
$
132
$
155
$
134
$
711
658
-
3
(978)
4
124
-
4
(958)
4
227
740
-
(12)
(994)
4
119
2
12
-
-
-
2
(4)
$
$
3
11
-
-
-
1
(1)
4
13
(6)
-
-
3
-
Net periodic benefit cost (income)
$
(4)
$
90
$
(9)
$
12
$
14
$
14
(1) The 2012 figure includes the settlement gain related to the termination of the former CEO’s retirement benefit plan.
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 $253 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 $1 million and $4 million, respectively.
Weighted-average assumptions used in accounting for Pensions and 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)
December 31,
2014
Pensions
2013
2012
Other postretirement benefits
2012
2013
2014
3.87%
4.73%
4.15%
3.86%
4.69%
4.01%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
4.73%
4.15%
4.84%
4.69%
4.01%
4.70%
3.00%
3.00%
3.25%
3.00%
3.00%
3.25%
7.00%
7.00%
7.25%
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. For the Canadian pension and other postretirement benefit plans, future expected benefit payments at each measurement date are discounted using spot rates from a derived AA
corporate bond yield curve. The derived curve is based on observed rates for AA corporate bonds with short-term maturities and a projected AA corporate curve for longer-term maturities
based on spreads between observed AA corporate bonds and AA provincial bonds. The derived curve 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 2014, the Company used a long-term rate of return assump-
tion of 7.00% on the market-related value of plan assets to compute net periodic benefit cost (income). 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. In
2015, the Company will maintain the expected long-term rate of return on plan assets at 7.00% to reflect management’s current view of long-term investment returns.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 79
Notes to Consolidated Financial Statements
12 Pensions and other postretirement benefits
Defined contribution and other plans
continued
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 7.5% for 2014
and 2015. 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 an effect on the amounts re-
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 $16 million, $13 mil-
lion and $11 million for 2014, 2013 and 2012, respectively.
ported for the health care plan. A one-percentage-point change
Contributions to multi-employer plan
in the assumed health care cost trend rate would have the fol-
lowing effect:
In millions
One-percentage-point
Increase
Decrease
Under collective bargaining agreements, the Company participates
in a multi-employer 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
Effect on total service and interest costs
$
Effect on benefit obligation
1
12
$
(1)
to certain retirees. The Company’s contributions under this plan
(10)
are expensed as incurred and amounted to $10 million, $10 mil-
lion and $11 million in 2014, 2013 and 2012, respectively. The an-
nual contribution rate for the plan is determined by the NCCC and
for 2014 was $141.29 per month per active employee ($143.21 in
2013). The plan covered 807 retirees in 2014 (867 in 2013).
Estimated future benefit payments
Other
postretirement
benefits
$
17
17
18
18
18
81
Pensions
$ 1,011
1,034
1,048
1,059
1,067
5,379
In millions
2015
2016
2017
2018
2019
Years 2020 to 2024
13 Share capital
Authorized capital stock
The authorized capital stock of the Company is as follows:
• Unlimited number of Common Shares, without par value
• Unlimited number of Class A Preferred Shares, without par value, issuable in series
• Unlimited number of Class B Preferred Shares, without par value, issuable in series
Issued and outstanding common shares
In millions
Year ended December 31,
2014
Issued and outstanding common shares at beginning of year
Number of common shares repurchased
Stock options exercised
Issued and outstanding common shares at end of year
830.6
(22.4)
1.2
809.4
2013
856.8
(27.6)
1.4
830.6
2012
884.2
(33.8)
6.4
856.8
80
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
Share purchases
Share repurchase programs
Share purchases by Share Trusts
In 2014, the Company established Share Trusts to purchase common
The Company may repurchase shares pursuant to a normal course
shares on the open market, which will be used to deliver common
issuer bid (NCIB) at prevailing market prices plus brokerage fees,
shares under the Share Units Plan (see Note 14 – Stock plans). Shares
or such other prices as may be permitted by the Toronto Stock
purchased by the Share Trusts are retained until the Company instructs
Exchange. Under its current NCIB, the Company may repurchase
the trustee to transfer shares to participants of the Share Units Plan.
up to 28.0 million common shares between October 24, 2014
As at December 31, 2014, the Share Trusts held nil common
and October 23, 2015. As at December 31, 2014, the Company
shares of the Company. Common shares purchased by the Share
repurchased 5.6 million common shares under its current
Trusts will be accounted for as treasury stock. The Share Trusts may
program.
sell shares on the open market to facilitate the remittance of the
The following table provides the information related to the
Company’s employee tax withholding obligations.
share repurchase programs for the years ended December 31,
In 2015, the Share Trusts could purchase up to 2.0 million com-
2014, 2013 and 2012:
In millions, except per share data
Year ended December 31,
2014
2013
2012
Number of common shares repurchased (1)
22.4
27.6
33.8
Weighted-average price per share (2)
$ 67.38
$ 50.65
$ 41.36
Amount of repurchase
$ 1,505
$ 1,400
$ 1,400
mon shares on the open market in anticipation of future settle-
ments of equity settled PSU awards.
Additional paid-in capital
Additional paid-in capital includes the stock-based compensation
expense on equity settled awards; the excess tax benefits on
stock-based compensation; and the impact of the modification
(1)
Includes common shares purchased in the first and fourth quarters of 2014, 2013
and 2012 pursuant to private agreements between the Company and arm’s-length
third-party sellers.
of certain cash settled awards to equity settled awards. Upon the
exercise of stock options, the expense related to those options
(2)
Includes brokerage fees.
is reclassified from Additional paid-in capital to Common shares.
The Company reclassified prior year balances from Common
shares to Additional paid-in capital in the Consolidated Balance
Sheet to conform with the 2014 presentation.
Stock-based compensation and other
In millions
Stock options exercised
Equity settled stock-based compensation expense
Excess tax benefits on stock-based compensation
Modification of stock-based compensation awards (1)
Total stock-based compensation and other
2014
2013
2012
Issued and
outstanding
common
Common
shares and
additional
shares paid-in capital
Issued and
outstanding
common
shares
Common
shares and
additional
paid-in capital
Issued and
outstanding
common
shares
Common
shares and
additional
paid-in capital
1.2
$ 25
1.4
$ 28
6.4
$ 102
-
-
-
1.2
11
5
209
$ 250
-
-
-
9
3
-
-
-
-
10
16
-
1.4
$ 40
6.4
$ 128
(1) Represents the fair value of cash settled stock-based compensation awards modified in 2014 to settle in common shares of the Company and includes $132 million related to deferred share
units (DSUs), $60 million related to performance share units (PSUs) and $17 million related to other plans. See Note 14 – Stock plans.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 81
Notes to Consolidated Financial Statements
14 Stock plans
Cash settled awards
(a) Share Units Plan
The Company has various stock-based compensation plans for
eligible employees. A description of the Company’s major plans
is provided herein.
Employee Share Investment Plan
The Company has an Employee Share Investment Plan (ESIP) giving
eligible employees the opportunity to subscribe for up to 10% of
their gross salaries to purchase shares of the Company’s common
The objective of the Share Units Plan is to enhance the Company’s
ability to attract and retain talented employees and to provide
alignment of interests between such employees and the share-
holders of the Company. The PSUs granted are scheduled for pay-
out after three years (“plan period”) and vest conditionally upon
the attainment of a target relating to return on invested capital
(ROIC) over the plan period. Such performance vesting criteria
results in a performance vesting factor that ranges from 0% to
stock on the open market and to have the Company invest, on the
150% depending on the level of ROIC attained.
employees’ behalf, a further 35% of the amount invested by the
employees, up to 6% of their gross salaries.
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,
2014, 2013 and 2012:
Payout is conditional upon the attainment of a minimum share
price, calculated using the average of the last three months of the
plan period. In addition, commencing at various dates, for senior
and executive management employees (“executive employees”),
payout for PSUs is also conditional on compliance with the con-
ditions of their award agreements, including but not limited to
non-compete, non-solicitation and non-disclosure of confidential
information conditions. Current or former executive employees
Year ended December 31,
2014
2013
2012
who breach such conditions of their award agreements will for-
Number of participants holding shares
18,488
18,488
17,423
Total number of ESIP shares purchased
on behalf of employees (millions)
2.1
2.3
Expense for Company contribution (millions) $
34 $
30 $
feit the PSU payout. Should the Company reasonably determine
that a current or former executive employee may have violated
2.5
24
the conditions of their award agreement, the Company may at its
discretion change the manner of vesting of the PSUs to suspend
Stock-based compensation plans
The following table provides the total stock-based compensation
expense for awards under all plans, as well as the related tax bene-
fit recognized in income, for the years ended December 31, 2014,
2013 and 2012:
In millions
Year ended December 31,
2014
2013
2012
Cash settled awards
Share Units Plan
$
117 $
92 $
Voluntary Incentive Deferral Plan (VIDP)
33
35
Total cash settled awards
$
150 $
127 $
Equity settled awards
Share Units Plan
Stock option awards
$
2 $
- $
9
9
Total equity settled awards
$
11 $
9 $
76
19
95
-
10
10
Total stock-based compensation expense $
161 $
136 $
105
Tax benefit recognized in income
$
43 $
35 $
25
payout on any PSUs pending resolution of such matter.
In 2014, the Company granted 0.8 million PSUs, previously
known as restricted share units (RSUs), (0.8 million in 2013 and
0.9 million in 2012) to designated management employees en-
titling them to receive payout in cash based on the Company’s
share price.
The value of the payout is equal to the number of PSUs award-
ed multiplied by the performance vesting factor and by the 20-day
average closing share price ending on January 31 of the follow-
ing year. For the plan period ended December 31, 2014, for the
2012 grant, the level of ROIC attained resulted in a performance
vesting factor of 150%. As the minimum share price condition
under the plan was met, payout of approximately $106 million,
calculated using the Company’s average closing share price for the
last 20 trading days ending on January 31, 2015, will be paid to
employees meeting the conditions of their benefit plans, award or
employment agreements in the first quarter of 2015.
On December 9, 2014, 0.5 million cash settled PSUs granted in
2013 and 0.4 million cash settled PSUs granted in 2014 were modi-
fied to settle in common shares of the Company. From the modifica-
tion date, these units are accounted for as equity settled awards. As
a result, the Company reclassified $60 million from Other liabilities
and deferred credits to Additional paid-in capital in the Consolidated
Balance Sheet, which represents the fair value of these PSU awards
at the modification date. In the future, the Company does not plan
to grant additional cash settled PSU awards.
82
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
(b) Voluntary Incentive Deferral Plan
the Company’s stock ownership guidelines. The value of each
The Company’s Voluntary Incentive Deferral Plan (VIDP) provides
participant’s DSUs is payable in cash at the time of cessation of
eligible senior management employees the opportunity to elect
employment.
to receive their annual incentive bonus payment and other eli-
On December 9, 2014, 1.7 million cash settled DSUs were
gible incentive payments in DSUs up to specific deferral limits. A
modified to settle in common shares of the Company. From the
DSU is equivalent to a common share of the Company and also
modification date, these units are accounted for as equity settled
earns dividends when normal cash dividends are paid on com-
awards. As a result, the Company reclassified $132 million from
mon shares. The number of DSUs received by each participant
Other liabilities and deferred credits to Additional paid-in capital
is calculated using the Company’s average closing share price
in the Consolidated Balance Sheet, which represents the fair value
for the 20 trading days prior to and including the date of the in-
of these DSU awards at the modification date. Notwithstanding
centive payment. For each participant, the Company will grant a
deferrals made in 2014 related to incentive payments of 2015,
further 25% of the amount elected in DSUs, which will vest over
the Company does not plan to provide participants the option
a period of four years. The election to receive eligible incentive
to defer their incentive payments into cash settled DSU awards
payments in DSUs is no longer available to a participant when
in the future.
the value of the participant’s vested DSUs is sufficient to meet
The following table provides the number of units outstanding and the 2014 activity for all cash settled awards:
In millions
Outstanding at December 31, 2013
Granted (Payout)
Modifications (1)
Forfeited/Settled
Vested during year
Outstanding at December 31, 2014
PSUs
DSUs
Nonvested
Vested
Nonvested
Vested
1.7
0.8
(0.9)
-
(0.9)
0.7
0.9
(0.9)
-
-
0.9
0.9
-
-
-
-
-
-
2.3
(0.1)
(1.7)
-
-
0.5
(1) On December 9, 2014, certain cash settled awards were modified to settle in common shares of the Company. From the modification date, these units are accounted for as equity
settled awards.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 83
Notes to Consolidated Financial Statements
14 Stock plans continued
The following table provides valuation and expense information for all cash settled awards:
In millions, unless otherwise indicated
PSUs (1)
DSUs (2)
Total
Year of grant
2014
2013
2012
2011
2010
2009
Stock-based compensation expense (recovery)
recognized over requisite service period
Year ended December 31, 2014
Year ended December 31, 2013 (3)
Year ended December 31, 2012
Liability outstanding
December 31, 2014
December 31, 2013
Fair value per unit
December 31, 2014 ($)
$
42
N/A
N/A
$
19
N/A
$
$
$
$
33
34
N/A
$
$
$
44
37
24
32
34
$ 106
$
61
$
$
$
$
$
34
26
-
80
(2)
N/A
N/A
$
$
(4)
26
$
$
(9)
-
$
$
$
33
35
19
$ 150
$ 127
$
95
N/A
N/A
$
-
$
-
$
40
$ 145
$ 197
$ 320
$ 72.00
$ 79.01
$ 80.02
N/A
N/A
N/A
$ 80.02
N/A
Fair value of awards vested during the year
Year ended December 31, 2014
Year ended December 31, 2013
Year ended December 31, 2012
$
-
N/A
N/A
$
$
-
-
N/A
$ 106
$
$
$
$
$
-
80
-
N/A
N/A
$
70
Nonvested awards at December 31, 2014
Unrecognized compensation cost
Remaining recognition period (years)
$
17
2.0
$
10
$
$
-
1.0
N/A
N/A
Assumptions (5)
Stock price ($)
Expected stock price volatility (6)
Expected term (years) (7)
Risk-free interest rate (8)
Dividend rate ($) (9)
$ 80.02
$ 80.02
$ 80.02
16%
17%
2.0
1.0
1.02%
0.99%
$ 1.00
$ 1.00
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
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$
$
$
-
1
1
$ 106
$
$
81
71
$
-
$
27
N/A (4)
N/A
$ 80.02
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)
Includes the reversal of approximately $20 million of stock-based compensation expense related to the forfeiture of PSUs by former executives.
(4) The remaining recognition period has not been quantified as it relates solely to the 25% Company grant and the dividends earned thereon, representing a minimal number of units.
(5) Assumptions used to determine fair value are at December 31, 2014.
(6) Based on the historical volatility of the Company’s stock over a period commensurate with the expected term of the award.
(7) Represents the remaining period of time that awards are expected to be outstanding.
(8) Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(9) Based on the annualized dividend rate.
84
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
Equity settled awards
(a) Share Units Plan
PSUs are settled in common shares of the Company by way of
disbursement from the Share Trusts (see Note 13 – Share capital).
The objective of the Share Units Plan is to enhance the Company’s
The number of shares remitted to the participant upon settlement
ability to attract and retain talented employees and to provide align-
is equal to the number of PSUs awarded multiplied by the per-
ment of interests between such employees and the shareholders of
formance vesting factor less shares withheld to satisfy the partici-
the Company. The PSUs granted are scheduled to settle at the end
pant’s minimum statutory withholding tax requirement.
of the plan period and vest conditionally upon the attainment of
a target relating to ROIC over the plan period. Such performance
(b) Voluntary Incentive Deferral Plan
vesting criteria results in a performance vesting factor that ranges
The Company’s VIDP provides eligible senior management em-
from 0% to 150% depending on the level of ROIC attained.
ployees the opportunity to elect to receive their annual incentive
Settlement is conditional upon the attainment of a min-
bonus payment and other eligible incentive payments in DSUs
imum share price, calculated using the average of the last three
up to specific deferral limits. A DSU is equivalent to a common
months of the plan period. In addition, commencing at various
share of the Company and also earns dividends when normal
dates, for executive employees, settlement for PSUs is also con-
cash dividends are paid on common shares. The number of DSUs
ditional on compliance with the conditions of their benefit plans,
received by each participant is established at time of deferral.
award or employment agreements, including but not limited to
For each participant, the Company will grant a further 25% of
non-compete, non-solicitation and non-disclosure of confidential
the amount elected in DSUs, which will vest over a period of
information conditions. Current or former executive employees
four years. The election to receive eligible incentive payments in
who breach such conditions of their benefit plans, award or em-
DSUs is no longer available to a participant when the value of
ployment agreements will forfeit the PSU settlement. Should the
the participant’s vested DSUs is sufficient to meet the Company’s
Company reasonably determine that a current or former execu-
stock ownership guidelines.
tive employee may have violated the conditions of their benefit
On December 9, 2014, 1.7 million cash settled DSUs were modi-
plans, award or employment agreement, the Company may at its
fied to settle in common shares of the Company. From the modifi-
discretion change the manner of vesting of the PSUs to suspend
cation date, these units are accounted for as equity settled awards.
settlement on any PSUs pending resolution of such matter.
DSUs are settled in common shares of the Company at the time
On December 9, 2014, 0.5 million cash settled PSUs granted in
of cessation of employment by way of an open market purchase by
2013 and 0.4 million cash settled PSUs granted in 2014 were modi-
the Company. The number of shares remitted to the participant is
fied to settle in common shares of the Company. From the modifi-
equal to the number of DSUs awarded less shares withheld to satisfy
cation date, these units are accounted for as equity settled awards.
the participant’s minimum statutory withholding tax requirement.
The following table provides the number of units outstanding and the 2014 activity for all equity settled awards, other than stock options:
PSUs
DSUs
Outstanding at December 31, 2013
Modification (1) (2)
Outstanding at December 31, 2014
Units
Nonvested
In millions
-
0.9
0.9
Units
Vested
In millions
-
Weighted-
average
grant date
fair value
N/A
$ 71.05
$ 71.05
-
-
Units
Nonvested
In millions
-
Units
Vested
In millions
-
-
-
1.7
1.7
Weighted-
average
grant date
fair value
N/A
$ 76.29
$ 76.29
(1) On December 9, 2014, 0.9 million cash-settled PSUs were modified to settle in common shares of the Company. From the modification date, these units are accounted for as equity
settled awards. The modification affected PSUs held by 133 employees and did not result in the recognition of incremental compensation cost as the settlement conditions of these
awards was unchanged.
(2) On December 9, 2014, 1.7 million cash-settled DSUs were modified to settle in common shares of the Company. From the modification date, these units are accounted for as equity settled
awards. The modification affected DSUs held by 104 employees and did not result in the recognition of incremental compensation cost as the settlement conditions of these awards was
unchanged. Vested DSUs are convertible into common shares of the Company at the time of cessation of employment. As at December 31, 2014, the aggregate intrinsic value of vested
DSUs amounted to $138 million.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 85
Notes to Consolidated Financial Statements
14 Stock plans continued
The following table provides valuation and expense information for all equity settled awards, other than stock options:
In millions, unless otherwise indicated
PSUs (1)
DSUs (2)
Total
Year of grant
2014
2013
Stock-based compensation expense
recognized over requisite service period
Year ended December 31, 2014 (3)
Fair value per unit
At grant date ($) (4)
Fair value of awards vested during the year
Year ended December 31, 2014
Nonvested awards at December 31, 2014
Unrecognized compensation cost
Remaining recognition period (years)
Assumptions
Grant price ($) (6)
Expected stock price volatility (7)
Expected term (years) (8)
Risk-free interest rate (9)
Dividend rate ($) (10)
$
1
$
1
$
-
$
2
$ 66.84
$ 75.15
$ 76.29
N/A
$
-
$
-
$
1
$
1
$
15
$
8
2.0
1.0
$
1
$
24
N/A (5)
N/A
$ 76.29
$ 76.29
15%
17%
2.0
1.0
1.02%
0.98%
$ 1.00
$ 1.00
$ 76.29
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 the modification date using the lattice-based valuation model that uses the assumptions as presented herein.
(2) Compensation cost is based on intrinsic value at the modification date.
(3) Comparative information for the years ended December 31, 2013 and 2012 has not been provided as no equity settled PSUs or DSUs were outstanding.
(4) Grant date is December 9, 2014 which is the modification date of the cash settled awards to equity settled awards.
(5) 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.
(6) Stock price at the modification date.
(7) Based on the historical volatility of the Company’s stock over a period commensurate with the expected term of the award.
(8) Represents the remaining period of time that awards are expected to be outstanding.
(9) Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(10) Based on the annualized dividend rate.
86
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
(c) Stock option awards
at December 31, 2014, 19.2 million common shares remained
The Company has stock option plans for eligible employees to
authorized for future issuances under these plans.
acquire common shares of the Company upon vesting at a price
For 2014, 2013 and 2012, the Company granted 1.0 million,
equal to the market value of the common shares at the date of
1.1 million and 1.2 million, respectively, of conventional stock op-
granting. The options issued by the Company are conventional
tions to designated executive employees that vest over a period of
options that vest over a period of time. The right to exercise op-
four years of continuous employment.
tions generally accrues over a period of four years of continuous
The total number of conventional options outstanding as at
employment. Options are not generally exercisable during the first
December 31, 2014 was 7.5 million.
12 months after the date of grant and expire after 10 years. As
The following table provides the activity of stock option awards during 2014, and for options outstanding and exercisable at December 31,
2014, the weighted-average exercise price:
Outstanding at December 31, 2013 (1)
Granted
Exercised
Vested
Outstanding at December 31, 2014 (1)
Exercisable at December 31, 2014 (1)
Options outstanding
Number
Weighted-
average
of options exercise price
In millions
7.7
1.0
$ 30.97
$ 58.74
(1.2)
$ 22.97
N/A
7.5
5.0
N/A
$ 37.37
$ 30.31
Nonvested options
Weighted-
Number average grant
of options date fair value
In millions
2.7
1.0
N/A
(1.2)
2.5
N/A
$ 7.89
$ 11.09
N/A
$ 7.59
$ 9.25
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, 2014 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, 2014 at the Company’s closing stock price of $80.02.
Range of exercise prices
$16.93 – $23.03
$23.04 – $30.75
$30.76 – $41.85
$41.86 – $57.61
$57.62 – $80.15
Balance at December 31, 2014 (1)
of options
In millions
0.9
2.6
1.5
1.5
1.0
7.5
Options outstanding
Weighted-
Number average years
Weighted-
average
to expiration exercise price
Aggregate
intrinsic value
In millions
$
52
139
62
49
20
$ 322
Options exercisable
Number
Weighted-
average
of options exercise price
In millions
0.9
2.6
1.0
0.5
-
5.0
$ 20.19
$ 27.04
$ 38.19
$ 47.40
$ 58.18
$ 30.31
Aggregate
intrinsic value
In millions
$
52
139
41
18
-
$ 250
3.7
3.3
6.3
7.6
9.1
5.6
$ 20.19
$ 27.04
$ 38.19
$ 48.71
$ 60.29
$ 37.37
(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, 2014,
substantially all stock options outstanding were in-the-money. The weighted-average years to expiration of exercisable stock options was 4.4 years.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 87
Notes to Consolidated Financial Statements
14 Stock plans continued
The following table provides valuation and expense information for all stock option awards:
In millions, unless otherwise indicated
Year of grant
2014
2013
2012
2011
2010
2009
2008
Total
Stock-based compensation expense
recognized over requisite service period (1)
Year ended December 31, 2014
$
6
Year ended December 31, 2013
Year ended December 31, 2012
N/A
N/A
$
$
1
5
N/A
$
$
$
1
2
4
$
$
$
1
1
2
$
$
$
-
1
2
N/A
N/A
$
$
-
2
N/A
$
-
$
$
$
9
9
10
Fair value per unit
At grant date ($)
$ 11.09
$ 8.52
$ 7.74
$ 7.83
$ 6.55
$ 6.30
$ 6.22
N/A
Fair value of awards vested during the year
Year ended December 31, 2014
$
-
Year ended December 31, 2013
Year ended December 31, 2012
N/A
N/A
$
$
2
-
N/A
$
$
$
2
2
-
Nonvested awards at December 31, 2014
Unrecognized compensation cost
$
4
$
2
$
1
Remaining recognition period (years)
3.0
2.0
1.0
$
$
$
$
3
3
2
-
-
$
$
$
$
2
2
2
-
-
$
$
N/A
4
4
N/A
N/A
N/A
N/A
$
3
$
$
$
9
11
11
N/A
N/A
$
7
N/A
Assumptions
Grant price ($)
$ 58.74
$ 47.47
$ 38.35
$ 34.47
$ 27.38
$ 21.07
$ 24.25
Expected stock price volatility (2)
23%
23%
26%
26%
28%
39%
27%
Expected term (years) (3)
Risk-free interest rate (4)
Dividend rate ($) (5)
5.4
5.4
5.4
5.3
5.4
5.3
1.51%
1.41%
1.33%
2.53%
2.44%
1.97%
$ 1.00
$ 0.86
$ 0.75
$ 0.65
$ 0.54
$ 0.51
5.3
3.58%
$ 0.46
N/A
N/A
N/A
N/A
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 options
Stock price volatility
exercised for the years ended December 31, 2014, 2013 and 2012:
Compensation cost for the Company’s cash settled Share Units
In millions
Year ended December 31,
2014
2013
2012
Total intrinsic value
Cash received upon exercise of options
Related excess tax benefit realized
$ 50
$ 45
25
5
28
3
$ 167
102
16
Plan is based on the fair value of the awards at period end using
the lattice-based valuation model for which a primary assumption
is the Company’s share price. In addition, the Company’s liability
for the cash settled 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 com-
pensation expense as recorded in Net income. The Company does
not currently hold any derivative financial instruments to manage
this exposure. A $1 increase in the Company’s share price at
December 31, 2014 would have increased stock-based compen-
sation expense by $2 million, whereas a $1 decrease in the price
would have reduced it by $3 million.
88
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
15 Accumulated other comprehensive loss
In millions
Foreign
currency
Pension
and other
translation postretirement
benefit plans
adjustments
Derivative
instruments
Total
before
tax
Income tax
recovery
(expense)
Total
net of
tax
Balance at December 31, 2011
$
(574)
$ (2,750)
$
8
$ (3,316)
$
477 $
(2,839)
Other comprehensive income (loss) before reclassifications:
Unrealized foreign exchange loss on translation of
net investment in foreign operations
Unrealized foreign exchange gain on translation of
US dollar-denominated long-term debt designated
as a hedge of the net investment in U.S. subsidiaries
Actuarial loss arising during year
Prior service costs from plan amendment arising during year
Amounts reclassified from Accumulated other comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service cost
Other comprehensive income (loss)
Balance at December 31, 2012
Other comprehensive income (loss) before reclassifications:
Unrealized foreign exchange gain on translation of
net investment in foreign operations
Unrealized foreign exchange loss on translation of
US dollar-denominated long-term debt designated
as a hedge of the net investment in U.S. subsidiaries
Actuarial gain arising during year
Amounts reclassified from Accumulated other comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service cost
Other comprehensive income (loss)
(128)
123
(5)
(660)
(6)
119
7
(540)
$
(579)
$ (3,290)
$
440
(394)
46
1,544
226
5
1,775
Balance at December 31, 2013
$
(533)
$ (1,515)
$
Other comprehensive income (loss) before reclassifications:
Unrealized foreign exchange gain on translation of
net investment in foreign operations
Unrealized foreign exchange loss on translation of
US dollar-denominated long-term debt designated
as a hedge of the net investment in U.S. subsidiaries
Actuarial loss arising during year
Prior service costs from plan amendment arising during year
Amounts reclassified from Accumulated other comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service cost
Amortization of gain on treasury lock
Other comprehensive income (loss)
644
(569)
(1,117)
(4)
120
6
75
(995)
Balance at December 31, 2014
$
(458)
$ (2,510)
$
(128)
2
(126)
123
(660)
(6)
119 (1)
7 (1)
(19)
176
2
(32) (2)
(2) (2)
104
(484)
(4)
87
5
(545)
127
(418)
$ (3,861)
$
604
$ (3,257)
440
7
447
(394)
1,544
52
(412)
(342)
1,132
226 (1)
5 (1)
(60) (2)
(1) (2)
166
4
1,821
(414)
1,407
$ (2,040)
$
190
$ (1,850)
-
8
-
8
644
4
648
(569)
(1,117)
(4)
120 (1)
6 (1)
(1)
(921)
73
300
1
(32) (2)
(2) (2)
-
344
(496)
(817)
(3)
88
4
(1)
(577)
$ (2,961)
$
534
$ (2,427)
(1) (3)
(1)
7
(1) Reclassified to Labor and fringe benefits on the Consolidated Statement of Income and included in components of net periodic benefit cost. See Note 12 – Pensions and other postretirement benefits.
(2)
Included in Income tax expense on the Consolidated Statement of Income.
(3) Related to treasury lock transactions settled in prior years, which are being amortized over the terms of the related debt to Interest expense on the Consolidated Statement of Income.
.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 89
Notes to Consolidated Financial Statements
16 Major commitments and contingencies
individual communities and a comprehensive voluntary mitigation
program established to address surrounding municipalities’ concerns.
Leases
The Company has operating and capital leases, mainly for loco-
Contingencies
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
December 31, 2014, the Company’s commitments under these
operating and capital leases were $712 million and $815 million,
respectively. Minimum rental payments for operating leases having
initial non-cancelable lease terms of more than one year and min-
imum lease payments for capital leases for the next five years and
In the normal course of business, the Company becomes involved
in various legal actions seeking compensatory and occasionally
punitive damages, including actions brought on behalf of various
purported classes of claimants and claims relating to employee and
third-party personal injuries, occupational disease and property
damage, arising out of harm to individuals or property allegedly
caused by, but not limited to, derailments or other accidents.
thereafter, are as follows:
Canada
In millions
Operating
Capital
2015
2016
2017
2018
2019
2020 and thereafter
Total
Less: Imputed interest on capital leases at rates
ranging from approximately 0.7% to 8.5%
Present value of minimum lease payments
included in debt (Note 10)
$ 155
116
94
77
56
214
$ 712
$ 107
343
164
15
15
171
815
145
$ 670
Employee injuries are governed by the workers’ compensation
legislation in each province whereby employees may be awarded
either a lump sum or a future stream of payments depending on
the nature and severity of the injury. As such, the provision for
employee injury claims is discounted. In the provinces where the
Company is self-insured, costs related to employee work-related
injuries are accounted for based on actuarially developed esti-
mates of the ultimate cost associated with such injuries, including
compensation, health care and third-party administration costs. A
comprehensive actuarial study is generally performed at least on a
triennial basis. For all other legal actions, the Company maintains,
and regularly updates on a case-by-case basis, provisions for such
items when the expected loss is both probable and can be reason-
The Company also has operating lease agreements for its
ably estimated based on currently available information.
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 $25 million and
In 2014, the Company recorded a $2 million decrease to its
provision for personal injuries and other claims in Canada as a re-
sult of a comprehensive actuarial study for employee injury claims
generally extend over five years.
Rent expense for all operating leases was $201 million,
$179 million and $162 million for the years ended December 31,
2014, 2013 and 2012, respectively. Contingent rentals and sub-
as well as various other legal claims.
As at December 31, 2014, 2013 and 2012, the Company’s pro-
vision for personal injury and other claims in Canada was as follows:
lease rentals were not significant.
In millions
2014
2013
2012
Commitments
As at December 31, 2014, the Company had commitments to ac-
quire railroad ties, rail, freight cars, locomotives, and other equip-
ment and services, as well as outstanding information technology
service contracts and licenses, at an aggregate cost of $1,054 mil-
lion ($482 million as at December 31, 2013). The Company also
Beginning of year
Accruals and other
Payments
End of year
$ 210
$ 209
$ 199
28
(35)
38
(37)
55
(45)
$ 203
$ 210
$ 209
Current portion – End of year
$ 28
$ 31
$ 39
has estimated remaining commitments of approximately $522 mil-
United States
lion (US$450 million), in relation to the U.S. federal government
Personal injury claims by the Company’s employees, including
legislative requirement to implement Positive Train Control (PTC)
claims alleging occupational disease and work-related injuries, are
by December 31, 2015.
subject to the provisions of the Federal Employers’ Liability Act
In addition, the Company has estimated remaining commit-
(FELA). Employees are compensated under FELA for damages as-
ments, through to December 31, 2016, of approximately $65 million
sessed based on a finding of fault through the U.S. jury system
(US$56 million), in relation to the acquisition of the principal lines of
or through individual settlements. As such, the provision is undis-
the former Elgin, Joliet and Eastern Railway Company. These commit-
counted. With limited exceptions where claims are evaluated on
ments are for railroad infrastructure improvements, grade separation
a case-by-case basis, the Company follows an actuarial-based ap-
projects as well as commitments under a series of agreements with
proach and accrues the expected cost for personal injury, including
90
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
asserted and unasserted occupational disease claims, and property
considers, where a probable loss estimate cannot be made with rea-
damage claims, based on actuarial estimates of their ultimate cost.
sonable certainty, a range of potential probable losses for each such
A comprehensive actuarial study is performed annually.
matter, and records the amount it considers the most reasonable esti-
For employee work-related injuries, including asserted occupa-
mate within the range. However, when no amount within the range
tional disease claims, and third-party claims, including grade cross-
is a better estimate than any other amount, the minimum amount in
ing, trespasser and property damage claims, the actuarial valuation
the range is accrued. For matters where a loss is reasonably possible
considers, among other factors, the Company’s historical patterns
but not probable, a range of potential losses cannot be estimated
of claims filings and payments. For unasserted occupational disease
due to various factors which may include the limited availability of
claims, the actuarial study includes the projection of the Company’s
facts, the lack of demand for specific damages and the fact that
experience into the future considering the potentially exposed
proceedings were at an early stage. Based on information currently
population. The Company adjusts its liability based upon manage-
available, the Company believes that the eventual outcome of the
ment’s assessment and the results of the study. On an ongoing
actions against the Company will not, individually or in the aggre-
basis, management reviews and compares the assumptions inher-
gate, have a material adverse effect on the Company’s consolidated
ent in the latest actuarial study with the current claim experience
financial position. However, due to the inherent inability to predict
and, if required, adjustments to the liability are recorded.
with certainty unforeseeable future developments, there can be no
Due to the inherent uncertainty involved in projecting future
assurance that the ultimate resolution of these actions will not have a
events, including events related to occupational diseases, which
material adverse effect on the Company’s results of operations, finan-
include but are not limited to, the timing and number of actual
cial position or liquidity in a particular quarter or fiscal year.
claims, the average cost per claim and the legislative and judicial en-
vironment, the Company’s future payments may differ from current
Environmental matters
amounts recorded.
The Company’s operations are subject to numerous federal, provin-
In 2014, the Company recorded a $20 million reduction to its
cial, state, municipal and local environmental laws and regulations
provision for U.S. personal injury and other claims attributable to
in Canada and the U.S. concerning, among other things, emissions
non-occupational disease claims, third-party claims and occupa-
into the air; discharges into waters; the generation, handling, stor-
tional disease claims pursuant to the 2014 external actuarial study.
age, transportation, treatment and disposal of waste, hazardous
In previous years, external actuarial studies have supported a net
substances, and other materials; decommissioning of underground
decrease of $11 million and a net increase of $1 million to the
and aboveground storage tanks; and soil and groundwater con-
Company’s provision for U.S. personal injury and other claims in
tamination. A risk of environmental liability is inherent in railroad
2013 and 2012, respectively. The decrease of $11 million from the
and related transportation operations; real estate ownership, oper-
2013 actuarial valuation was mainly attributable to non-occupation-
ation or control; and other commercial activities of the Company
al disease claims, third-party claims and occupational disease claims,
with respect to both current and past operations.
reflecting a decrease in the Company’s estimates of unasserted
claims and costs related to asserted claims. The Company has an
Known existing environmental concerns
ongoing risk mitigation strategy focused on reducing the frequency
The Company has identified approximately 255 sites at which it
and severity of claims through injury prevention and containment;
is or may be liable for remediation costs, in some cases along
mitigation of claims; and lower settlements of existing claims.
with other potentially responsible parties, associated with alleged
As at December 31, 2014, 2013 and 2012, the Company’s pro-
contamination and is subject to environmental clean-up and en-
vision for personal injury and other claims in the U.S. was as follows:
forcement actions, including those imposed by the United States
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
2014
2013
2012
Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (CERCLA), also known as the Superfund
$ 106
$ 105
$ 111
law, or analogous state laws. CERCLA and similar state laws, in
2
(22)
9
18
(24)
7
31
(34)
(3)
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
$ 95
$ 106
$ 105
those whose waste is disposed of at the site, without regard to
Current portion – End of year
$ 20
$ 14
$ 43
Although the Company considers such provisions to be adequate
for all its outstanding and pending claims, the final outcome with
respect to actions outstanding or pending at December 31, 2014,
or with respect to future claims, cannot be reasonably determined.
fault or the legality of the original conduct. The Company has
been notified that it is a potentially responsible party for study
and clean-up costs at approximately 10 sites governed by the
Superfund law (and analogous state laws) for which investigation
and remediation payments are or will be made or are yet to be
determined and, in many instances, is one of several potentially
When establishing provisions for contingent liabilities the Company
responsible parties.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 91
Notes to Consolidated Financial Statements
16 Major commitments and contingencies
Unknown existing environmental concerns
continued
The ultimate cost of addressing these known contaminated
sites cannot be definitively established given that the estimated
environmental liability for any given site may vary depending on
the nature and extent of the contamination; the nature of antici-
pated response actions, taking into account the available clean-
up techniques; evolving regulatory standards governing environ-
mental liability; and the number of potentially responsible parties
and their financial viability. As a result, liabilities are recorded
While the Company believes that it has identified the costs likely to
be incurred for environmental matters based on known informa-
tion, the discovery of new facts, future changes in laws, the possi-
bility of releases of hazardous materials into the environment and
the Company’s ongoing efforts to identify potential environmental
liabilities that may be associated with its properties may result in
the identification of additional environmental liabilities and related
costs. The magnitude of such additional liabilities and the costs
of complying with future environmental laws and containing or
remediating contamination cannot be reasonably estimated due
based on the results of a four-phase assessment conducted on
to many factors, including:
a site-by-site basis. A liability is initially recorded when environ-
(a) the lack of specific technical information available with respect
mental assessments occur, remedial efforts are probable, and
to many sites;
when the costs, based on a specific plan of action in terms of the
(b) the absence of any government authority, third-party orders, or
technology to be used and the extent of the corrective action re-
claims with respect to particular sites;
quired, can be reasonably estimated. The Company estimates the
costs related to a particular site using cost scenarios established
by external consultants based on the extent of contamination
(c) the potential for new or changed laws and regulations and for
development of new remediation technologies and uncertainty
regarding the timing of the work with respect to particular
and expected costs for remedial efforts. In the case of multiple
sites; and
parties, the Company accrues its allocable share of liability taking
into account the Company’s alleged responsibility, the number
of potentially responsible parties and their ability to pay their
respective share of the liability. Adjustments to initial estimates
are recorded as additional information becomes available.
The Company’s provision for specific environmental sites is
undiscounted and includes costs for remediation and restoration
of sites, as well as monitoring costs. Environmental expenses,
which are classified as Casualty and other in the Consolidated
Statement of Income, include amounts for newly identified
sites or contaminants as well as adjustments to initial estimates.
Recoveries of environmental remediation costs from other parties
are recorded as assets when their receipt is deemed probable.
As at December 31, 2014, 2013 and 2012, the Company’s
provision for specific environmental sites was as follows:
(d) 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 incurred in the future,
or will not have a material adverse effect on the Company’s finan-
cial position or results of operations in a particular quarter or fiscal
year, or that the Company’s liquidity will not be adversely impacted
by such liabilities or costs, although management believes, based
on current information, that the costs to address environmental
matters will not have a material adverse effect on the Company’s
financial position or liquidity. Costs related to any unknown existing
or future contamination will be accrued in the period in which they
In millions
2014
2013
2012
become probable and reasonably estimable.
Beginning of year
$ 119
$ 123
$ 152
Accruals and other
Payments
Foreign exchange
11
(19)
3
12
(18)
2
(4)
(24)
(1)
End of year
$ 114
$ 119
$ 123
Current portion – End of year
$ 45
$ 41
$ 31
Future occurrences
In railroad and related transportation operations, it is possible that
derailments or other accidents, including spills and releases of hazard-
ous materials, may occur that could cause harm to human 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
The Company anticipates that the majority of the liability at
with laws and other risks, including costs relating to the performance
December 31, 2014 will be paid out over the next five years.
of clean-ups, payment of environmental penalties and remediation
However, some costs may be paid out over a longer period. Based
obligations, and damages relating to harm to individuals or property.
on the information currently available, the Company considers its
provisions to be adequate.
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
92
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
present ownership, operation or control of real property. Operating
expects to make a payment in respect of a guarantee, a liability will
expenses for environmental matters amounted to $20 million in
be recognized to the extent that one has not yet been recognized.
2014, $18 million in 2013 and $16 million in 2012. In addition, based
The Company had not recorded a liability as at December 31, 2014,
on the results of its operations and maintenance programs, as well
with respect to its guarantee instruments as they related to the
as ongoing environmental audits and other factors, the Company
Company’s future performance and the Company did not expect to
plans for specific capital improvements on an annual basis. Certain
make any payments under its guarantee instruments.
of these improvements help ensure facilities, such as fuelling sta-
tions and waste water and storm water treatment systems, comply
General indemnifications
with environmental standards and include new construction and the
In the normal course of business, the Company has provided
updating of existing systems and/or processes. Other capital expendi-
indemnifications, customary for the type of transaction or for
tures relate to assessing and remediating certain impaired properties.
the railway business, in various agreements with third parties,
The Company’s environmental capital expenditures amounted to
including indemnification provisions where the Company would
$19 million in 2014, $10 million in 2013 and $13 million in 2012.
be required to indemnify third parties and others. Indemnifications
are found in various types of contracts with third parties which
Guarantees and indemnifications
include, but are not limited to:
In the normal course of business, the Company, including certain of
• contracts granting the Company the right to use or enter upon
its subsidiaries, enters into agreements that may involve providing
property owned by third parties such as leases, easements,
guarantees or indemnifications to third parties and others, which may
trackage rights and sidetrack agreements;
extend beyond the term of the agreements. These include, but are
• contracts granting rights to others to use the Company’s prop-
not limited to, residual value guarantees on operating leases, standby
erty, such as leases, licenses and easements;
letters of credit, surety and other bonds, and indemnifications that
• contracts for the sale of assets;
are customary for the type of transaction or for the railway business.
• contracts for the acquisition of services;
• financing agreements;
Guarantees
•
trust indentures, fiscal agency agreements, underwriting
(a) Guarantee of residual values of operating leases
agreements or similar agreements relating to debt or equity
The Company has guaranteed a portion of the residual values of
securities of the Company and engagement agreements with
certain of its assets under operating leases with expiry dates be-
financial advisors;
tween 2015 and 2022, for the benefit of the lessor. If the fair value
•
transfer agent and registrar agreements in respect of the
of the assets at the end of their respective lease term is less than
Company’s securities;
the fair value, as estimated at the inception of the lease, then the
•
trust and other agreements relating to pension plans and
Company must, under certain conditions, compensate the lessor
other plans, including those establishing trust funds to secure
for the shortfall. As at December 31, 2014, the maximum expos-
payment to certain officers and senior employees of special
ure in respect of these guarantees was $194 million. There are
retirement compensation arrangements;
no recourse provisions to recover any amounts from third parties.
• pension transfer agreements;
• master agreements with financial institutions governing deriv-
(b) Other guarantees
ative transactions;
As at December 31, 2014, the Company, including certain of its
• settlement agreements with insurance companies or other third
subsidiaries, had granted $487 million of irrevocable standby let-
parties whereby such insurer or third-party has been indemnified
ters of credit and $106 million of surety and other bonds, issued
for any present or future claims relating to insurance policies,
by highly rated financial institutions, to third parties to indemnify
incidents or events covered by the settlement agreements; and
them in the event the Company does not perform its contractual
• acquisition agreements.
obligations. As at December 31, 2014, the maximum potential
liability under these guarantee instruments was $593 million, of
To the extent of any actual claims under these agreements, the
which $525 million related to workers’ compensation and other
Company maintains provisions for such items, which it considers
employee benefit liabilities and $68 million related to other liabil-
to be adequate. Due to the nature of the indemnification clauses,
ities. The letters of credit were drawn on the Company’s bilateral
the maximum exposure for future payments may be material.
letter of credit facilities. The majority of the guarantee instruments
However, such exposure cannot be reasonably determined.
mature at various dates between 2015 and 2016.
During the year, the Company entered into various indemnifi-
cation contracts with third parties for which the maximum expos-
The Company is required to recognize a liability for the fair value of
ure for future payments cannot be reasonably determined. As a
the obligation undertaken in issuing certain guarantees on the date
result, no liability was recorded. There are no recourse provisions
the guarantee is issued or modified. In addition, where the Company
to recover any amounts from third parties.
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 93
Notes to Consolidated Financial Statements
17 Financial instruments
Risk management
In the normal course of business, the Company is exposed to vari-
As at December 31, 2014, Accumulated other comprehensive
loss included an unamortized gain of $7 million, $5 million af-
ter-tax ($8 million, $6 million after-tax as at December 31, 2013)
relating to treasury lock transactions settled in a prior year, which
ous risks from its use of financial instruments. To manage these
is being amortized over the term of the related debt.
risks, the Company follows a financial risk management frame-
work, which is monitored and approved by the Company’s Finance
Fair value of financial instruments
Committee, with a goal of maintaining a strong balance sheet,
optimizing earnings per share and free cash flow, financing its
operations at an optimal cost of capital and preserving its liquidity.
The Company has limited involvement with derivative financial
instruments in the management of its risks and does not hold or
issue them for trading or speculative purposes.
Foreign currency risk
The Company conducts its business in both Canada and the U.S.
and as a result, is affected by currency fluctuations. Changes in the
exchange rate between the Canadian dollar and other currencies
affect the Company’s revenues and expenses.
For financial assets and liabilities measured at fair value on a recur-
ring basis, fair value is the price the Company would receive to sell
an asset or pay to transfer a liability in an orderly transaction with
a market participant at the measurement date. In the absence of
active markets for identical assets or liabilities, such measurements
involve developing assumptions based on market observable data
and, in the absence of such data, internal information that is be-
lieved to be consistent with what market participants would use in
a hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Company’s market
assumptions. Preference is given to observable inputs. These two
To manage foreign currency risk, the Company designates US
types of inputs create the following fair value hierarchy:
dollar-denominated long-term debt of the parent company as a
foreign currency hedge of its net investment in U.S. subsidiaries.
As a result, from the dates of designation, foreign exchange gains
and losses on translation of the Company’s US dollar-denominated
long-term debt are recorded in Accumulated other comprehen-
sive loss, which minimizes volatility of earnings resulting from the
conversion of US dollar-denominated long-term debt into the
Canadian dollar; and enters into foreign exchange contracts as
part of its cash management strategy.
As at December 31, 2014, the Company had outstanding foreign
exchange forward contracts with a notional value of US$350 million
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in mar-
kets that are not active; and model-derived valuations
whose inputs are observable or whose significant value
drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable.
The Company uses the following methods and assumptions to
estimate the fair value of each class of financial instruments for
which the carrying amounts are included in the Consolidated
(US$325 million as at December 31, 2013). Changes in the fair value
Balance Sheet under the following captions:
of forward contracts, resulting from changes in foreign exchange
rates, are recognized in Other income in the Consolidated Statement
of Income as they occur. For the year ended December 31, 2014, the
Cash and cash equivalents, Restricted cash and cash equiva-
lents, Accounts receivable, Other current assets, Accounts
Company recorded a gain of $9 million ($6 million in 2013), before
payable and other
tax, related to the fair value of the foreign exchange forward contracts.
As at December 31, 2014 and 2013, the Company did not have
any other significant derivative financial instruments outstanding.
Interest rate risk
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
The carrying amounts approximate fair value because of the
short maturity of these instruments. Cash and cash equivalents
and Restricted cash and cash equivalents include highly liquid in-
vestments purchased three months or less from maturity and are
classified as Level 1. Accounts receivable, Other current assets, and
Accounts payable and other are classified as Level 2 as they may
not be priced using quoted prices, but rather determined from
result of changes in market interest rates. Such risk exists in relation to
market observable information.
the Company’s long-term debt. The Company mainly issues fixed-rate
debt, which exposes the Company to variability in the fair value of
Intangible and other assets
the debt. The Company also issues debt with variable interest rates,
which exposes the Company to variability in interest expense.
To manage interest rate risk, the Company manages its bor-
rowings in line with liquidity needs, maturity schedule, and cur-
rency and interest rate profile; and in anticipation of future debt
issuances, may enter into forward rate agreements.
Included in Intangible and other assets are equity investments for
which the carrying value approximates the fair value, with the
exception of certain cost investments for which the fair value is
estimated based on the Company’s proportionate share of the
underlying net assets. Investments are classified as Level 3 as their
fair value is based on significant unobservable inputs.
94
2014 Annual Report
U.S. GAAP
Canadian National Railway Company
Notes to Consolidated Financial Statements
Debt
discounted cash flows using current interest rates for debt with similar
The fair value of the Company’s debt is estimated based on the quot-
terms, company rating, and remaining maturity. The Company’s debt
ed market prices for the same or similar debt instruments, as well as
is classified as Level 2.
The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as at December 31, 2014
and December 31, 2013 for which the carrying values on the Consolidated Balance Sheet are different from their fair values:
In millions
Financial assets
Investments (Note 8)
Financial liabilities
Total debt (Note 10)
December 31, 2014
December 31, 2013
Carrying
amount
Fair
value
Carrying
amount
Fair
value
$
58
$
183
$
57
$
164
$ 8,409
$ 9,767
$ 7,840
$ 8,683
18 Segmented information
The regions also demonstrate common characteristics in each
of the following areas:
The Company manages its operations as one business segment
(a) each region’s sole business activity is the transportation of
over a single network that spans vast geographic distances and
freight over the Company’s extensive rail network;
territories, with operations in Canada and the U.S. Financial infor-
(b) the regions service national accounts that extend over the
mation reported at this level, such as revenues, operating income,
Company’s various commodity groups and across its rail network;
and cash flow from operations, is used by corporate management,
(c) the services offered by the Company stem predominantly
including the Company’s chief operating decision-maker, in evalu-
from the transportation of freight by rail with the goal of
ating financial and operational performance and allocating resour-
optimizing the rail network as a whole; and
ces across CN’s network.
(d) the Company and its subsidiaries, not its regions, are subject
The Company’s strategic initiatives, which drive its operation-
to single regulatory regimes in both Canada and the U.S.
al direction, are developed and managed centrally by corporate
management and are communicated to its regional activity cen-
For the years ended December 31, 2014, 2013, and 2012, no
ters (the Western Region, Eastern Region and Southern Region).
major customer accounted for more than 10% of total revenues
Corporate management is responsible for, among others, CN’s
and the largest rail freight customer represented approximately
marketing strategy, the management of large customer accounts,
2% of total rail freight revenues.
overall planning and control of infrastructure and rolling stock,
For the reasons mentioned herein, the Company reports as one
the allocation of resources, and other functions such as financial
operating segment.
planning, accounting and treasury.
The following tables provide information by geographic area:
The role of each region is to manage the day-to-day service re-
quirements within their respective territories and control direct costs
In millions
Year ended December 31,
2014
2013
2012
incurred locally. Such cost control is required to ensure that pre-
Revenues
established efficiency standards set at the corporate level are met.
The regions execute the overall corporate strategy and operating
Canada
U.S.
plan established by corporate management, as their management of
Total revenues
throughput and control of direct costs does not serve as the platform
for the Company’s decision-making process. Approximately 95% 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.
Net income
Canada
U.S.
$ 8,108 $ 7,149 $ 6,770
4,026
3,426
3,150
$ 12,134 $ 10,575 $ 9,920
$ 2,249 $ 1,762 $ 1,972
918
850
708
Total net income
$ 3,167 $ 2,612 $ 2,680
In millions
Properties
Canada
U.S.
Total properties
December 31,
2014
2013
$ 15,798 $ 15,056
12,716
11,171
$ 28,514 $ 26,227
Canadian National Railway Company
U.S. GAAP
2014 Annual Report 95
Corporate Governance – Delivering Responsibly
CN is committed to being a responsible corporate citizen. At CN,
Because it is important to CN to uphold the highest standards
sound corporate citizenship touches nearly every aspect of what
in corporate governance and that any potential or real wrong-
we do, from governance to business ethics, from safety to en-
doings be reported, CN has also adopted methods allowing em-
vironmental protection. Central to this comprehensive approach
ployees and third parties to report accounting, auditing and other
is our strong belief that good corporate citizenship is simply good
concerns, as more fully described on our website.
business.
We are proud of our corporate governance practices. For more
CN has always recognized the importance of good governance.
information on these practices, please refer to our website, as well
As it evolved from a Canadian institution to a North American
as to our proxy circular – mailed to our shareholders and also avail-
publicly traded company, CN voluntarily followed certain corpor-
able on our website. CN understands that our long-term success is
ate governance requirements that, as a company based in Canada,
connected to our contribution to a sustainable future. That is why
it was not technically compelled to follow. We continue to do so
we are committed to the safety of our employees, the public and
today. Since many of our peers – and shareholders – are based
the environment; delivering reliable, efficient service so our cus-
in the United States, we want to provide the same assurances of
tomers succeed in global markets; building stronger communities;
sound practices as our U.S. competitors.
and providing a great place to work. Our sustainability activities
Hence, we adopt and adhere to corporate governance
are outlined in our Delivering Responsibly report, which can be
practices that either meet or exceed applicable Canadian and
found on our website: www.cn.ca
U.S. corporate governance standards. As a Canadian reporting
For the third straight year, CN’s practices have earned it a place
issuer with securities listed on the Toronto Stock Exchange (TSX)
on the Dow Jones Sustainability World Index (DJSI), which includes
and the New York Stock Exchange (NYSE), CN complies with applic-
an assessment of CN’s governance practices, in addition to being
able rules adopted by the Canadian Securities Administrators and
named to the DJSI North America index for the sixth consecutive
the rules of the U.S. Securities and Exchange Commission giving
year. CN was also recognized for climate change transparency for
effect to the provisions of the U.S. Sarbanes-Oxley Act of 2002.
the sixth year in a row by earning a position in CDP’s Canada 200
As a Canadian company, we are not required to comply with
Climate Disclosure Leadership Index.
many of the NYSE corporate governance rules, and instead may
CN received the Best Corporate Governance Award from
comply with Canadian governance practices. However, except
IR Magazine in 2009, 2010, 2014 and 2015. As well, in 2011
as summarized on our website (www.cn.ca in the Delivering
we received the Canadian Coalition for Good Governance (CCGG)
Responsibly – Governance section), our governance prac tices
Award for Best Disclosure of Board Governance Practices and
comply with the NYSE corporate governance rules in all significant
Director Qualifications; and in 2012 the CCGG Award for Best
respects.
Disclosure of Approach to Executive Compensation.
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.
96
2014 Annual Report
Canadian National Railway Company
Contents
1 A message from the Chairman
2 A message from Claude Mongeau
4 Building for the future:
With network capacity
With the next generation
Through innovation
With safety as a priority
8 Expanding our network
10 Board of Directors
11 Financial Section (U.S. GAAP)
96 Corporate Governance – Delivering Responsibly
97 Shareholder and Investor Information
Except where otherwise
indicated, all financial
information reflected 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, inflation, currency and interest rate fluctuations, changes in fuel prices,
legislative and/or regulatory developments, compliance with environmental laws and regulations, actions by regulators,
various events which could disrupt operations, including natural events such as severe weather, droughts, floods and
earthquakes, labor negotiations and disruptions, environmental claims, uncertainties of investigations, proceedings or
other types of claims and litigation, risks and liabilities arising from derailments, and other risks detailed from time to time
in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to “Manage-
ment’s Discussion and Analysis” in CN’s annual and interim reports, Annual Information Form and Form 40-F filed with
Canadian and U.S. securities regulators, available on CN’s website (www.cn.ca), for a summary of major risks.
CN assumes no obligation to update or revise forward-looking statements to reflect 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.
Shareholder and Investor Information
Annual meeting
The annual meeting of shareholders
will be held at 8:30 a.m. CDT on
April 21, 2015 at:
The Peabody Memphis
Venetian Room
149 Union Avenue
Memphis, Tennessee, US
Annual information form
The annual information form may be
obtained by writing to:
The Corporate Secretary
Canadian National Railway Company
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
It is also available on CN’s website.
Transfer agent and registrar
Computershare Trust Company of Canada
Offices in:
Montreal, Quebec;
Toronto, Ontario;
Calgary, Alberta;
Vancouver, British Columbia
Telephone: 1-800-564-6253
www.investorcentre.com
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 43078,
Providence, RI 02940-3078
Telephone: 1-800-962-4284
Shareholder services
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, 8th Floor
Toronto, Ontario M5J 2Y1
Telephone: 1-800-564-6253
www.investorcentre.com
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
Janet Drysdale
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
Canadian National Railway Company
2014 Annual Report 97
This report has been printed on
100% post-consumer paper.
BUILDING FOR THE
FUTURE
FUTURE
2 0 1 4 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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