EX-99.2 3 a2018q4fsnotes.htm CN Q4 2018 UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO Exhibit

Consolidated Statements of Income – unaudited


 
Three months ended December 31
 
Year ended
December 31
In millions, except per share data
2018

 
2017

 
2018

 
2017

Revenues
$
3,808

 
$
3,285

 
$
14,321

 
$
13,041

Operating expenses
 
 
 
 
 
 
 
Labor and fringe benefits (1)
791

 
665

 
2,860

 
2,536

Purchased services and material
527

 
473

 
1,971

 
1,769

Fuel
466

 
379

 
1,732

 
1,362

Depreciation and amortization
346

 
316

 
1,329

 
1,281

Equipment rents
115

 
107

 
467

 
418

Casualty and other
111

 
120

 
469

 
432

Total operating expenses (1)
2,356

 
2,060

 
8,828

 
7,798

Operating income (1)
1,452

 
1,225

 
5,493

 
5,243

Interest expense
(122
)
 
(117
)
 
(489
)
 
(481
)
Other components of net periodic benefit income (1)
73

 
76

 
302

 
315

Other income
93

 
4

 
376

 
12

Income before income taxes
1,496

 
1,188

 
5,682

 
5,089

Income tax recovery (expense) (Note 3)
(353
)
 
1,423

 
(1,354
)
 
395

Net income
$
1,143

 
$
2,611

 
$
4,328

 
$
5,484

Earnings per share
 

 
 

 
 
 
 
Basic
$
1.57

 
$
3.50

 
$
5.89

 
$
7.28

Diluted
$
1.56

 
$
3.48

 
$
5.87

 
$
7.24

Weighted-average number of shares
 

 
 

 
 
 
 
Basic
728.4

 
746.2

 
734.5

 
753.6

Diluted
731.3

 
750.0

 
737.7

 
757.3

Dividends declared per share
$
0.4550

 
$
0.4125

 
$
1.8200

 
$
1.6500

(1)
The Company adopted Accounting Standards Update (ASU) 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost in the first quarter of 2018 on a retrospective basis. Comparative figures have been adjusted to conform to the current presentation. See Note 2 - Recent accounting pronouncements for additional information.
See accompanying notes to unaudited consolidated financial statements.


Consolidated Statements of Comprehensive Income – unaudited

 
Three months ended December 31
 
Year ended
December 31
In millions
2018

 
2017

 
2018

 
2017

Net income
$
1,143

 
$
2,611

 
$
4,328

 
$
5,484

Other comprehensive income (loss)
 

 
 

 
 
 
 
Net gain (loss) on foreign currency translation
293

 
(6
)
 
403

 
(197
)
Net change in pension and other postretirement benefit plans
(910
)
 
(361
)
 
(759
)
 
(224
)
Other comprehensive loss before income taxes
(617
)
 
(367
)
 
(356
)
 
(421
)
Income tax recovery (expense)
302

 
105

 
291

 
(5
)
Other comprehensive loss
(315
)
 
(262
)
 
(65
)
 
(426
)
Comprehensive income
$
828

 
$
2,349

 
$
4,263

 
$
5,058

See accompanying notes to unaudited consolidated financial statements.



CN | 2018 – Fourth Quarter 11


Consolidated Balance Sheets – unaudited

 
December 31

 
December 31

In millions
2018

 
2017

Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
266

 
$
70

Restricted cash and cash equivalents
493

 
483

Accounts receivable
1,169

 
984

Material and supplies
557

 
424

Other current assets
243

 
229

Total current assets
2,728

 
2,190

 
 
 
 
Properties
37,773

 
34,189

Pension asset
446

 
994

Intangible and other assets
267

 
256

Total assets
$
41,214

 
$
37,629

Liabilities and shareholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable and other
$
2,316

 
$
1,903

Current portion of long-term debt
1,184

 
2,080

Total current liabilities
3,500

 
3,983

 
 
 
 
Deferred income taxes
7,480

 
6,953

Other liabilities and deferred credits
501

 
590

Pension and other postretirement benefits
707

 
699

Long-term debt
11,385

 
8,748

Shareholders' equity
 
 
 
Common shares (Note 4)
3,634

 
3,613

Common shares in Share Trusts
(175
)
 
(168
)
Additional paid-in capital (Note 4)
408

 
434

Accumulated other comprehensive loss
(2,849
)
 
(2,784
)
Retained earnings (Note 4)
16,623

 
15,561

Total shareholders' equity
17,641

 
16,656

Total liabilities and shareholders' equity
$
41,214

 
$
37,629

See accompanying notes to unaudited consolidated financial statements.























12 CN | 2018 – Fourth Quarter



Consolidated Statements of Changes in Shareholders' Equity – unaudited

 
Number of
common shares
Common
shares
 
Common
shares
in Share
Trusts
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
loss
 
Retained
earnings
 
Total
shareholders'
equity
 
In millions
Outstanding

Share
Trusts

Balance at December 31, 2016
762.0

1.8

 
$
3,647

 
$
(137
)
 
$
450

 
$
(2,358
)
 
$
13,239

 
$
14,841

Net income




 


 


 


 


 
5,484

 
5,484

Stock options exercised
1.2



 
68

 


 
(10
)
 


 


 
58

Settlement of equity settled awards
(Note 4)
0.3

(0.3
)
 
 
 
24

 
(84
)
 


 
(22
)
 
(82
)
Stock-based compensation expense and other




 


 


 
78

 


 
(3
)
 
75

Repurchase of common shares
(20.4
)


 
(102
)
 


 


 


 
(1,898
)
 
(2,000
)
Share purchases by Share Trusts
(0.5
)
0.5

 


 
(55
)
 


 


 


 
(55
)
Other comprehensive loss




 


 


 


 
(426
)
 


 
(426
)
Dividends ($1.65 per share)




 


 


 


 


 
(1,239
)
 
(1,239
)
Balance at December 31, 2017
742.6

2.0

 
3,613

 
(168
)
 
434

 
(2,784
)
 
15,561

 
16,656

Net income




 


 


 


 


 
4,328

 
4,328

Stock options exercised
1.7



 
120

 


 
(17
)
 


 


 
103

Settlement of equity settled awards
(Note 4)
0.4

(0.4
)
 
 
 
31

 
(68
)
 


 
(30
)
 
(67
)
Stock-based compensation expense and other




 


 


 
59

 


 
(2
)
 
57

Repurchase of common shares
(19.0
)


 
(99
)
 


 


 


 
(1,901
)
 
(2,000
)
Share purchases by Share Trusts
(0.4
)
0.4

 


 
(38
)
 


 


 


 
(38
)
Other comprehensive loss




 


 


 


 
(65
)
 


 
(65
)
Dividends ($1.82 per share)




 


 


 


 


 
(1,333
)
 
(1,333
)
Balance at December 31, 2018
725.3

2.0

 
$
3,634

 
$
(175
)
 
$
408

 
$
(2,849
)
 
$
16,623

 
$
17,641

See accompanying notes to unaudited consolidated financial statements.




















CN | 2018 – Fourth Quarter 13


Consolidated Statements of Cash Flows – unaudited

 
 
Three months ended December 31
 
Year ended December 31
In millions
 
2018

 
2017

 
2018

 
2017

Operating activities
 
 

 
 

 
 
 
 
Net income
 
$
1,143

 
$
2,611


$
4,328

 
$
5,484

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 


 


 


Depreciation and amortization
 
346

 
316

 
1,329

 
1,281

Deferred income taxes
 
126

 
(1,603
)
 
527

 
(1,195
)
Gain on disposal of property
 
(79
)
 
—

 
(338
)
 
—

Changes in operating assets and liabilities:
 
 
 


 


 


Accounts receivable
 
26

 
3

 
(91
)
 
(125
)
Material and supplies
 
13

 
(2
)
 
(120
)
 
(70
)
Accounts payable and other
 
394

 
118

 
379

 
418

Other current assets
 
(37
)
 
(61
)
 
14

 
(80
)
Pensions and other, net
 
(15
)
 
(33
)
 
(110
)
 
(197
)
Net cash provided by operating activities
 
1,917

 
1,349

 
5,918

 
5,516

Investing activities
 
 
 


 


 


Property additions
 
(1,264
)
 
(878
)
 
(3,531
)
 
(2,673
)
Disposal of property
 
—

 
—

 
194

 
—

Other, net
 
(20
)
 
(14
)
 
(67
)
 
(65
)
Net cash used in investing activities
 
(1,284
)
 
(892
)
 
(3,404
)
 
(2,738
)
Financing activities
 
 
 


 


 


Issuance of debt 
 
845

 
423

 
3,268

 
916

Repayment of debt
 
(371
)
 
(777
)
 
(2,393
)
 
(841
)
Change in commercial paper, net 
 
(348
)
 
662

 
99

 
379

Settlement of foreign exchange forward contracts on debt
 
15

 
15

 
53

 
(15
)
Issuance of common shares for stock options exercised
 
27

 
20

 
103

 
58

Withholding taxes remitted on the net settlement of equity settled awards
 
(2
)
 
(2
)
 
(51
)
 
(57
)
Repurchase of common shares 
 
(479
)
 
(473
)
 
(2,000
)
 
(2,016
)
Purchase of common shares for settlement of equity settled awards
 
(1
)
 
(3
)
 
(16
)
 
(25
)
Purchase of common shares by Share Trusts
 
(38
)
 
(55
)
 
(38
)
 
(55
)
Dividends paid
 
(331
)
 
(307
)
 
(1,333
)
 
(1,239
)
Net cash used in financing activities
 
(683
)
 
(497
)
 
(2,308
)
 
(2,895
)
 
 
 
 
 
 
 
 
 
Effect of foreign exchange fluctuations on cash, cash equivalents, restricted cash and restricted cash equivalents
 
—
 
2
 
—
 
(2)
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents
 
(50)
 
(38)
 
206
 
(119)
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period
 
809
 
591
 
553
 
672
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
 
$759
 
$553
 
$759
 
$553
Cash and cash equivalents, end of period
 
$266
 
$70
 
$266
 
$70
Restricted cash and cash equivalents, end of period
 
493
 
483
 
493
 
483
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
 
$759
 
$553
 
$759
 
$553
Supplemental cash flow information
 
 
 

 

 

Interest paid
 
$(89)
 
$(104)
 
$(488)
 
$(477)
Income taxes paid
 
$(107)
 
$(214)
 
$(776)
 
$(712)
See accompanying notes to unaudited consolidated financial statements.


14 CN | 2018 – Fourth Quarter



Notes to Unaudited Consolidated Financial Statements

1 – Basis of presentation

In these notes, the "Company" or "CN" refers to, Canadian National Railway Company and, as the context requires, its wholly-owned subsidiaries.
The accompanying unaudited Interim Consolidated Financial Statements, expressed in Canadian dollars, have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial statements. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Interim operating results are not necessarily indicative of the results that may be expected for the full year.
These unaudited Interim Consolidated Financial Statements have been prepared using accounting policies consistent with those used in preparing CN's 2017 Annual Consolidated Financial Statements, except as disclosed in Note 2 – Recent accounting pronouncements, and should be read in conjunction with such statements and Notes thereto.


2 – Recent accounting pronouncements

The following recent Accounting Standards Updates (ASUs) issued by FASB were adopted by the Company during the current year:

ASU 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
The ASU requires employers that sponsor defined benefit pension plans and/or other postretirement benefit plans to report the service cost component in the same line item or items as other compensation costs. The other components of net periodic benefit cost are required to be presented in the statement of income separately from the service cost component and outside a subtotal of income from operations. The new guidance allows only the service cost component to be eligible for capitalization. The guidance must be applied retrospectively for the presentation of the service cost component and other components of net periodic benefit cost in the statement of income and prospectively for the capitalization of the service cost component of net periodic benefit cost.
The Company adopted this ASU in the first quarter of 2018 with an effective date of January 1, 2018. As a result, the classification of the components of pension and postretirement benefit costs other than current service cost are now shown outside of Operating income in a separate caption entitled Other components of net periodic benefit income in the Company’s Consolidated Statements of Income.
As a result of applying this ASU, for the three months and year ended December 31, 2018, operating income was reduced by $73 million and $302 million, respectively ($76 million and $315 million for the three months and year ended December 31, 2017, respectively) with a corresponding increase presented in the new caption below Operating income with no impact on Net income. The guidance allowing only the service cost component to be eligible for capitalization did not have a significant impact on the Company’s Consolidated Financial Statements.

ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
The ASU provides guidance for the recognition, measurement, presentation and disclosure of financial instruments. The guidance requires equity investments, except for those accounted for under the equity method or that result in consolidation, to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The guidance must be applied prospectively by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
The Company adopted this ASU in the first quarter of 2018 on a prospective basis with an effective date of January 1, 2018. As a result of applying this ASU, the Company elected to measure all existing equity investments without readily determinable fair values, other than those accounted for using the equity method or that result in consolidation, at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The adoption of the ASU did not have a significant impact on the Company’s Consolidated Financial Statements.

ASU 2014-09 Revenue from Contracts with Customers and related amendments (Topic 606)
The ASU requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Additional disclosures


CN | 2018 – Fourth Quarter 15


Notes to Unaudited Consolidated Financial Statements

are required to assist users of financial statements to understand the nature, amount, timing and uncertainty of revenues and cash flows arising from an entity's contracts. The guidance can be applied using either the retrospective or modified retrospective transition method.
The Company adopted this standard in the first quarter of 2018 with an effective date of January 1, 2018 using the modified retrospective transition method applied to contracts that were not completed as of January 1, 2018. The adoption of this standard did not have an impact on the Company’s Consolidated Financial Statements, other than for the new disclosure requirements.

ASU 2018-02 Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
The ASU provides entities the option to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act (“U.S. Tax Reform”) from accumulated other comprehensive income to retained earnings. The guidance also requires certain disclosures about stranded tax effects and a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income. The guidance can either be applied prospectively from the beginning of the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. Tax Reform is recognized.
The Company adopted the amendments of this ASU during the fourth quarter of 2018 with an effective date of October 1, 2018. The Company did not elect to reclassify the income tax effects resulting from the U.S. Tax Reform from Accumulated other comprehensive loss to Retained earnings. The adoption of this standard did not have an impact on the Company’s Consolidated Financial Statements, other than for the new disclosure requirements.

The following recent ASU issued by FASB has an effective date after December 31, 2018 and has not been adopted by the Company:

ASU 2016-02 Leases and related amendments (Topic 842)
The ASU requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet for all leases greater than twelve months and requires additional qualitative and quantitative disclosures. The lessor accounting model under the new standard is substantially unchanged. The guidance must be applied using a modified retrospective approach. Entities may elect to apply the guidance to each prior period presented with a cumulative-effect adjustment to retained earnings recognized at the beginning of the earliest period presented or to apply the guidance with a cumulative-effect adjustment to retained earnings recognized at the beginning of the period of adoption. The ASU is effective for annual and interim reporting periods beginning after December 15, 2018.
The standard will have a significant impact on the Company's Consolidated Balance Sheets due to the recognition of right-of-use assets and lease liabilities for leases currently classified as operating leases with a term over twelve months. The Company has identified all contracts that contain a lease and has assembled the data necessary to calculate the estimated impact on transition. The Company has implemented a new lease management system and has made changes to processes and internal controls necessary to meet the reporting and disclosure requirements of this standard.
The new standard provides a number of practical expedients and accounting policy elections upon transition. The Company will not elect the package of three practical expedients that permits the Company not to reassess prior conclusions about lease identification, lease classification and initial direct costs. The Company will elect:
•
the use-of-hindsight practical expedient to reassess lease term and the likelihood that a purchase option will be exercised;
•
the land easement practical expedient to not evaluate land easements that were not previously accounted for as leases under Topic 840;
•
the short-term lease exemption for all asset classes that permits entities not to recognize right-of-use assets and lease liabilities onto the balance sheet; and
•
the practical expedient to not separate lease and non-lease components for the freight car asset category.
The Company will adopt the requirements of the ASU effective January 1, 2019, using a modified retrospective approach with a cumulative-effect adjustment to Retained earnings recognized on January 1, 2019, with no restatement of the comparative periods' financial information. As at January 1, 2019, the cumulative-effect adjustment required to adopt the new standard will increase the balance of Retained earnings by approximately $30 million. The initial adoption transition adjustment to record right-of-use assets and lease liabilities for leases over twelve months on the Company's Consolidated Balance Sheet will be approximately $750 million.

Other recently issued ASUs required to be applied for periods beginning on or after January 1, 2019 have been evaluated by the Company and will not have a significant impact on the Company's Consolidated Financial Statements.




16 CN | 2018 – Fourth Quarter



Notes to Unaudited Consolidated Financial Statements

3 - Income taxes

U.S. Tax Cuts and Job Act
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act ("U.S. Tax Reform"). The U.S. Tax Reform reduces the U.S. federal corporate income tax rate from 35% to 21%, effective as of January 1, 2018. The U.S. Tax Reform also allows for immediate capital expensing of new investments in certain qualified depreciable assets made after September 27, 2017, which will be phased down starting in year 2023. As a result of the U.S. Tax Reform, the Company's net deferred income tax liability decreased by $1,764 million for the year ended December 31, 2017.
The U.S. Tax Reform introduced other important changes to U.S. corporate income tax laws that may significantly affect CN in future years including the creation of a new Base Erosion Anti-abuse Tax (BEAT) that subjects certain payments from U.S. corporations to foreign related parties to additional taxes, and limitations to the deduction for net interest expense incurred by U.S. corporations. Since the enactment of the U.S. Tax Reform, U.S. authorities have issued various proposed regulations and preliminary guidance interpreting its provisions. These interpretations have been taken into account and did not affect the calculation of the Company's current year income tax provision and tax payments. However, the U.S. Tax Reform and these proposed regulations are expected to impact the Company’s income tax provisions and tax payments in future years.


4 - Share capital

Additional paid-in capital
In the fourth quarter of 2018, the Company changed its presentation for the settlement of equity-settled awards when purchasing shares on the open market, on a retrospective basis. Whereas previously upon settlement, the stock-based compensation expense was reclassified from Additional paid-in capital to Common shares and the settlement cost was recorded in Additional paid-in capital, now upon settlement, the Company records in Retained earnings the excess, if any, of the settlement cost of the awards over the related stock-based compensation expense, with no adjustment to Common shares. The Company reclassified prior year balances for Common shares, Additional paid-in capital, and Retained earnings in the Consolidated Balance Sheets to conform with the new presentation. For the years ended December 31, 2017 and 2016, the impact of this reclassification increased Additional paid-in capital by $192 million and $86 million, respectively, decreased Common shares by $167 million and $83 million, respectively, and decreased Retained earnings by $25 million and $3 million, respectively.




CN | 2018 – Fourth Quarter 17