-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D48tmUhJc4pJmlbZ7sh9ylErIr8elQcut7HLCeVlx4pHNakqwrWeID556Zq7Yr+1 9+CVMjSnc6S1ybiUoTQrag== 0000950103-02-000481.txt : 20020515 0000950103-02-000481.hdr.sgml : 20020515 20020515155512 ACCESSION NUMBER: 0000950103-02-000481 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020514 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANADIAN NATIONAL RAILWAY CO CENTRAL INDEX KEY: 0000016868 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 980018609 STATE OF INCORPORATION: A8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02413 FILM NUMBER: 02652142 BUSINESS ADDRESS: STREET 1: 935 DE LA GAUCHETIERE ST W STREET 2: MONTREAL QUEBEC CITY: CANADA STATE: A8 ZIP: H3B 2M9 BUSINESS PHONE: 5143996569 MAIL ADDRESS: STREET 1: 935 DE LA GAUCHETIERE ST WEST STREET 2: MONTREAL QUEBEC CITY: CANADA H3B 2M9 STATE: A8 ZIP: 00000 6-K 1 may1402_6k.txt ================================================================================ FORM 6-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 or 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR MAY 14, 2002 Canadian National Railway Company (Exact name of Registrant as specified in its charter) ----------------- Canadian National Railway Company (Translation of Registrant's name into English) ----------------- 935 de la Gauchetiere Street West Montreal, Quebec Canada H3B 2M9 (514) 399-7091 (Address of principal executive offices) ----------------- [Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F:] FORM 20-F FORM 40-F X --- --- [Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.] YES NO X --- --- [If "Yes " is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):] Not applicable ================================================================================ [CN LOGO] CANADIAN NATIONAL RAILWAY COMPANY HOW FAR CAN WE GO? Quarterly Review first quarter 2002 CANADIAN NATIONAL RAILWAY COMPANY PRESS RELEASE - -------------------------------------------------------------------------------- [CN LOGO] FOR IMMEDIATE RELEASE --------------------- Stock symbols: TSE : CNR / NYSE: CNI www.cn.ca --------- CN REPORTS FIRST-QUARTER 2002 NET INCOME OF $230 MILLION, OR $1.15 PER DILUTED SHARE, AS WC ACQUISITION DRIVES FINANCIAL RESULTS MONTREAL, APRIL 22, 2002 -- Canadian National today reported first-quarter 2002 net income of $230 million, compared with adjusted net income(1) of $202 million for the same quarter of 2001. Diluted earnings per share for the first quarter of 2002 were $1.15, up from adjusted diluted earnings per share(1) of $1.03 for the year-earlier period. Reported net income for the first quarter of 2001 was $275 million, or $1.39 per diluted share, including a gain from the sale of CN's interest in the Detroit River Tunnel Company. CN's operating income for first-quarter 2002 rose five per cent to $406 million, while its operating ratio increased by 0.6 of a point to 73.1 per cent. Revenues for the first three months of 2002 increased by eight per cent to $1,509 million; operating expenses rose by nine per cent to $1,103 million. CN President and Chief Executive Officer Paul M. Tellier said: "CN turned in a solid first-quarter 2002 performance, delivering double-digit gains in earnings and earnings per share on an adjusted basis.(1) Free cash flow was also strong, rising to $192 million from $39 million for the same period of 2001. The acquisition of Wisconsin Central - part of CN's growth strategy - again demonstrated shareholder value as it drove the improvement in CN's financial results. 1 CANADIAN NATIONAL RAILWAY COMPANY PRESS RELEASE - -------------------------------------------------------------------------------- "But our first-quarter performance reflects more than the inclusion of WC revenues - CN's automotive, forest products and petroleum and chemicals units all registered solid revenue gains. "Our automotive unit benefited from strong North American vehicle sales, while CN's forest products group transported greater volumes of lumber and panels in response to increased demand for new housing in the United States and Canada. CN's petroleum and chemicals unit also registered market share gains in the petroleum and petrochemical sectors and moved higher volumes of sulphur to the U.S. "CN's performance in the quarter was good considering very tough conditions for our bulk commodities businesses. Grain and fertilizers revenues declined largely because of the significant deterioration in the 2001/2002 Canadian grain crop. Coal revenues suffered from a decline in thermal coal shipments owing to milder weather conditions, and lower offshore metallurgical coal shipments. CN's intermodal unit, meanwhile, experienced a slight decrease in revenues as a result of the loss of a move in the overseas segment, partly offset by continued increases in the Canadian domestic segment. "CN expects its core merchandise businesses - forest products, petroleum and chemicals, and metals and minerals - will continue to grow as the North American economy improves. We will leverage our network, our diverse customer base and our industry-leading scheduled railway services to continue to drive top-line growth in the future." Four of CN's seven business units experienced revenue gains in the first quarter: forest products (33 per cent); metals and minerals (26 per cent); automotive (19 per cent); and petroleum and chemicals (18 per cent). Revenues declined for grain and fertilizers (16 per cent); coal (nine per cent); and intermodal (one per cent). Carloadings rose five per cent to 999 thousand, while freight revenue per carload increased by three per cent. The increase in expenses during the quarter was mainly attributable to the consolidation of WC operating expenses, and higher expenses for labour and fringe benefits and casualty and other. This was partially offset by lower costs for fuel, purchased services, and material. (1) Adjusted net income and diluted earnings per share for the first quarter of 2001 exclude a gain from the sale of CN's 50 per cent interest in the Detroit River Tunnel Company, which was equal to $73 million after-tax, or 36 cents per diluted share. Note 7 to the accompanying financial statements provides a reconciliation of adjusted net income to the Company's net income reported in accordance with United States generally accepted accounting principles (U.S. GAAP). 2 CANADIAN NATIONAL RAILWAY COMPANY PRESS RELEASE - -------------------------------------------------------------------------------- The financial results in this press release are reported in Canadian dollars and, except where noted, were determined on the basis of U.S. GAAP. This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risk and uncertainties and that its results could differ materially from those expressed or implied in such statements. Reference should be made to CN's most recent Form 40-F filed with the United States Securities and Exchange Commission, and the Annual Information Form filed with Canadian securities regulators, for a summary of major risk factors. Canadian National Railway Company spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the key cities of Toronto, Buffalo, Chicago, Detroit, Duluth, Minn./Superior, Wis., Green Bay, Wis., Minneapolis/St. Paul, Memphis, St. Louis, Jackson, Miss., with connections to all points in North America. - 30 - CONTACTS: MEDIA INVESTMENT COMMUNITY - ----- -------------------- Mark Hallman Robert Noorigian System Director, Media Relations Vice-President, Investor Relations (416) 217-6390 (514) 399-0052 3 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED STATEMENT OF INCOME (U.S. GAAP) - -------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31 ---------------------- 2002 2001 - ---------------------------------------------------------------------------------------- (UNAUDITED) Revenues $ 1,509 $ 1,398 Operating expenses 1,103 1,013 - ---------------------------------------------------------------------------------------- Operating income 406 385 Interest expense (96) (80) Other income (Note 3) 38 112 - ---------------------------------------------------------------------------------------- Income before income taxes 348 417 Income tax expense (118) (142) - ---------------------------------------------------------------------------------------- NET INCOME (NOTE 7) $ 230 $ 275 ======================================================================================== EARNINGS PER SHARE (NOTE 7) Basic $ 1.19 $ 1.44 Diluted $ 1.15 $ 1.39 WEIGHTED-AVERAGE NUMBER OF SHARES Basic 193.2 191.3 Diluted 203.0 199.9 ========================================================================================
See accompanying notes to consolidated financial statements. 4 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED STATEMENT OF OPERATING INCOME (U.S. GAAP) - -------------------------------------------------------------------------------- (IN MILLIONS)
THREE MONTHS ENDED MARCH 31 ----------------------------------- Variance 2002 2001 Fav (Unfav) - ---------------------------------------------------------------------------------------- (UNAUDITED) REVENUES Petroleum and chemicals $ 273 $ 231 18% Metals and minerals 122 97 26% Forest products 325 245 33% Coal 77 85 (9%) Grain and fertilizers 269 321 (16%) Intermodal 235 237 (1%) Automotive 151 127 19% Other items 57 55 4% - ------------------------------------------------------------------------- 1,509 1,398 8% OPERATING EXPENSES Labor and fringe benefits 461 378 (22%) Purchased services 137 133 (3%) Depreciation and amortization 141 132 (7%) Fuel 112 143 22% Equipment rents 87 76 (14%) Material 61 63 3% Operating taxes 41 44 7% Casualty and other 63 44 (43%) - ------------------------------------------------------------------------- 1,103 1,013 (9%) - ------------------------------------------------------------------------- OPERATING INCOME $ 406 $ 385 5% ===================================================================================== OPERATING RATIO 73.1% 72.5% (0.6) =====================================================================================
See accompanying notes to consolidated financial statements. 5 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED BALANCE SHEET (U.S. GAAP) - -------------------------------------------------------------------------------- (IN MILLIONS)
MARCH 31 December 31 March 31 2002 2001 2001 - ------------------------------------------------------------------------------------------------------------ (UNAUDITED) (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 51 $ 53 $ 40 Accounts receivable (Note 4) 699 645 736 Material and supplies 156 133 137 Deferred income taxes 153 153 116 Other 179 180 152 - ------------------------------------------------------------------------------------------------------------ 1,238 1,164 1,181 Properties 19,179 19,145 16,070 Other assets and deferred charges (Note 2) 856 914 430 - ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 21,273 $ 21,223 $ 17,681 ============================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued charges $ 1,367 $ 1,374 $ 1,257 Current portion of long-term debt (Note 4) 558 163 458 Other 94 132 86 - ------------------------------------------------------------------------------------------------------------ 2,019 1,669 1,801 Deferred income taxes 4,699 4,591 3,537 Other liabilities and deferred credits 1,279 1,345 1,129 Long-term debt (Note 4) 5,168 5,764 4,034 Convertible preferred securities 367 366 363 SHAREHOLDERS' EQUITY: Common shares 4,473 4,442 4,385 Accumulated other comprehensive income 92 58 97 Retained earnings 3,176 2,988 2,335 - ------------------------------------------------------------------------------------------------------------ 7,741 7,488 6,817 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,273 $ 21,223 $ 17,681 ============================================================================================================
See accompanying notes to consolidated financial statements. 6 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. GAAP) - -------------------------------------------------------------------------------- (IN MILLIONS)
THREE MONTHS ENDED MARCH 31 ---------------------- 2002 2001 - ------------------------------------------------------------------------------------------------- (UNAUDITED) COMMON SHARES(1) Balance, beginning of period $ 4,442 $ 4,349 Stock options exercised 31 36 - ------------------------------------------------------------------------------------------------- Balance, end of period $ 4,473 $ 4,385 ================================================================================================= ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period $ 58 $ 151 Other comprehensive income (loss): Unrealized foreign exchange loss on translation of U.S. dollar denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries (11) (152) Unrealized foreign exchange gain on translation of the net investment in foreign operations 12 247 Unrealized holding loss on investment in 360networks Inc. - (151) Unrealized holding gain (loss) on fuel derivative instruments (Note 5) 51 (7) - ------------------------------------------------------------------------------------------------- Other comprehensive income (loss) before income taxes 52 (63) Income tax (expense) recovery on other comprehensive income (loss) items (18) 9 - ------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 34 (54) - ------------------------------------------------------------------------------------------------- Balance, end of period $ 92 $ 97 ================================================================================================= RETAINED EARNINGS Balance, beginning of period $ 2,988 $ 2,098 Net income 230 275 Dividends (42) (38) - ------------------------------------------------------------------------------------------------- Balance, end of period $ 3,176 $ 2,335 =================================================================================================
See accompanying notes to consolidated financial statements. (1) DURING THE FIRST QUARTER OF 2002, THE COMPANY ISSUED 0.8 MILLION SHARES AS A RESULT OF STOCK OPTIONS EXERCISED. AT MARCH 31, 2002, THE COMPANY HAD 193.5 MILLION COMMON SHARES OUTSTANDING. 7 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (U.S. GAAP) - -------------------------------------------------------------------------------- (IN MILLIONS)
THREE MONTHS ENDED MARCH 31 -------------------------- 2002 2001 - -------------------------------------------------------------------------------------- (UNAUDITED) OPERATING ACTIVITIES Net income $ 230 $ 275 Non-cash items in income: Depreciation and amortization 142 134 Deferred income taxes 71 87 Gain on sale of investment (Note 3) - (101) Changes in: Accounts receivable (Note 4) (56) - Material and supplies (23) (25) Accounts payable and accrued charges (11) (163) Other net current assets and liabilities - 3 Payments for workforce reductions (47) (49) Other (24) (56) - -------------------------------------------------------------------------------------- Cash provided from operating activities 282 105 - -------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net additions to properties (120) (129) Other, net 72 101 - -------------------------------------------------------------------------------------- Cash used by investing activities (48) (28) - -------------------------------------------------------------------------------------- Dividends paid (42) (38) FINANCING ACTIVITIES Issuance of long-term debt 855 268 Reduction of long-term debt (1,078) (312) Issuance of common shares 29 30 - -------------------------------------------------------------------------------------- Cash used by financing activities (194) (14) - -------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2) 25 Cash and cash equivalents, beginning of period 53 15 - -------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51 $ 40 ======================================================================================
See accompanying notes to consolidated financial statements. 8 CANADIAN NATIONAL RAILWAY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP) - ------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION In management's opinion, the accompanying unaudited interim consolidated financial statements, prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP), contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Canadian National Railway Company's (the Company) financial position as at March 31, 2002, December 31 and March 31, 2001, its results of operations, changes in shareholders' equity and cash flows for the three months ended March 31, 2002 and 2001. These consolidated financial statements and notes have been prepared using accounting policies consistent with those used in preparing the Company's 2001 Annual Consolidated Financial Statements. While management believes that the disclosures presented are adequate to make the information not misleading, these consolidated financial statements and notes should be read in conjunction with the Company's Annual Consolidated Financial Statements. NOTE 2 - ACQUISITION OF WISCONSIN CENTRAL TRANSPORTATION CORPORATION Wisconsin Central Transportation Corporation (WC) was consolidated effective October 9, 2001, the date the Company acquired control of WC. Accordingly, the Company's results of operations for the quarter ended March 31, 2001 exclude the results of operations of WC. For comparative purposes only, if the Company had acquired WC on January 1, 2001, based on the historical amounts reported by WC, net of the amortization of the difference between the Company's cost to acquire WC and the net assets of WC (based on the fair values of WC's properties and equipment, and estimates of their remaining useful lives, as well as estimates of the fair values of other WC assets and liabilities), revenues, net income, basic and diluted earnings per share would have been $1,536 million, $282 million, $1.47 per basic share and $1.43 per diluted share, respectively, for the three months ended March 31, 2001. The pro forma figures do not reflect synergies, and accordingly, do not account for any potential increases in operating income, any estimated cost savings or facilities consolidation. In the first quarter of 2002, the Company sold its investment in Tranz Rail Holdings Limited (Tranz Rail), for net proceeds of $68 million. The Company had acquired Tranz Rail, a company which operates a 2,400-route mile freight and passenger rail business in New Zealand, through its acquisition of WC, and had accounted for it as "available for sale" in accordance with the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) 87-11, "Allocation of Purchase Price to Assets to be Sold." The difference between the carrying amount of the investment and the proceeds from sale was not significant. NOTE 3 - OTHER INCOME In the first quarter of 2001, the Company completed the sale of its 50 percent interest in the Detroit River Tunnel Company (DRT) and recorded a gain of $101 million, $73 million after tax. The DRT is a 1.6-mile rail-only tunnel crossing the Canada-U.S. border between Detroit and Windsor, Ontario. NOTE 4 - FINANCING ACTIVITIES REVOLVING CREDIT FACILITIES The Company has U.S.$1,000 million revolving credit facilities that expire in March 2003. The credit facility agreements contain customary financial covenants with which the Company has been in full compliance since the inception of the agreements. At March 31, 2002, the Company had entirely repaid its borrowings of U.S.$172 million (Cdn$273 million) outstanding at December 31, 2001. COMMERCIAL PAPER The Company has a commercial paper program which is backed by a portion of its revolving credit facilities, that enables it to issue commercial paper up to a maximum aggregate principal amount of $600 million, or the U.S. dollar equivalent. The revolving credit facilities will mature within the next twelve months and while the Company's intent is to renew the existing revolving credit facilities, the refinancing has not been renegotiated and, as such, the outstanding balance of U.S.$256 million (Cdn$408 million) of commercial paper has been included in the current portion of long-term debt at March 31, 2002. ACCOUNTS RECEIVABLE SECURITIZATION The Company has a revolving agreement to sell eligible freight trade receivables up to a maximum of $350 million of receivables outstanding at any point in time, expiring in June 2003. At March 31, 2002, pursuant to the agreement, $168 million and U.S.$113 million (Cdn$179 million) had been sold on a limited recourse basis reflecting no change in the level of accounts receivable sold since December 31, 2001. 9 CANADIAN NATIONAL RAILWAY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP) - ------------------------------------------------------------------------------- NOTE 5 - DERIVATIVE INSTRUMENTS At March 31, 2002, a portion of the Company's fuel requirement is being hedged using derivative instruments that are carried at market value on the balance sheet. These fuel hedges are accounted for as cash flow hedges whereby the effective portion of the cumulative change in the market value of the derivative instruments has been recorded in Other comprehensive income. At March 31, 2002, Accumulated other comprehensive income included an unrealized holding gain of $13 million, $9 million after tax, ($38 million unrealized holding loss, $25 million after tax at December 31, 2001) of which $8 million relates to derivative instruments that will mature within the next twelve months. For the comparative quarter, Accumulated other comprehensive income included an unrealized holding loss of $7 million, $4 million after tax. NOTE 6 - COMMITMENTS At March 31, 2002, the Company had commitments to acquire railroad ties, rail, freight cars and locomotives at an aggregate cost of $242 million ($52 million at December 31, 2001). 10 CANADIAN NATIONAL RAILWAY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP) - ------------------------------------------------------------------------------- NOTE 7 - NET INCOME AND EARNINGS PER SHARE In addition to the consolidation of the WC results of operations for the quarter ended March 31, 2002 as explained in Note 2, the comparability of the results of operations for the quarters ended March 31, 2002 and 2001 is also impacted by an item included in net income for the quarter ended March 31, 2001 as outlined below:
THREE MONTHS ENDED MARCH 31 ---------------------- 2002 2001 - --------------------------------------------------------------------------------------------- (IN MILLIONS) (UNAUDITED) Income before income taxes, excluding undernoted item $ 348 $ 316 Income tax expense (118) (114) - --------------------------------------------------------------------------------------------- Adjusted net income 230 202 Undernoted item, net of tax: Gain on sale of Detroit River Tunnel Company - 73 - --------------------------------------------------------------------------------------------- Net income $ 230 $ 275 =============================================================================================
The following table provides a reconciliation between basic and diluted earnings per share:
THREE MONTHS ENDED MARCH 31 ---------------------- 2002 2001 - --------------------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED) Net income $ 230 $ 275 Income impact on assumed conversion of preferred securities 3 3 - --------------------------------------------------------------------------------------------- $ 233 $ 278 Weighted-average shares outstanding 193.2 191.3 Effect of dilutive securities and stock options 9.8 8.6 - --------------------------------------------------------------------------------------------- Weighted-average diluted shares outstanding 203.0 199.9 Basic earnings per share $ 1.19 $ 1.44 Diluted earnings per share $ 1.15 $ 1.39 =============================================================================================
11 CANADIAN NATIONAL RAILWAY COMPANY SELECTED RAILROAD STATISTICS (U.S. GAAP) - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 ---------------------- 2002 2001(1) - -------------------------------------------------------------------------------------------------- (UNAUDITED) RAIL OPERATIONS Freight revenues ($ millions) 1,452 1,343 Gross ton miles (millions) 75,155 74,378 Revenue ton miles (RTM) (millions) 39,289 39,254 Route miles (includes Canada and the U.S.) 17,896 15,510 Operating expenses per RTM (cents) 2.81 2.58 Freight revenue per RTM (cents) 3.70 3.42 Carloads (thousands) 999 952 Freight revenue per carload ($) 1,453 1,411 Diesel fuel consumed (Liters in millions) 363 354 Average fuel price ($/Liter) 0.30 0.38 Revenue ton miles per liter of fuel consumed 108 111 Gross ton miles per liter of fuel consumed 207 210 Diesel fuel consumed (U.S. gallons in millions) 96 93 Average fuel price ($/U.S. gallon) 1.14 1.42 Revenue ton miles per U.S. gallon of fuel consumed 409 422 Gross ton miles per U.S. gallon of fuel consumed 783 800 Locomotive bad order ratio (%)(2) 7.0 7.9 Freight car bad order ratio (%) 6.2 6.5 - -------------------------------------------------------------------------------------------------- PRODUCTIVITY Operating ratio (%) 73.1 72.5 Freight revenue per route mile ($ thousands) 81 87 Revenue ton miles per route mile (thousands) 2,195 2,531 Freight revenue per average number of employees ($ thousands) 65 63 Revenue ton miles per average number of employees (thousands) 1,746 1,850 - -------------------------------------------------------------------------------------------------- EMPLOYEES Number at end of period 22,587 21,009 Average number during period 22,501 21,222 Labor and fringe benefits expense per RTM (cents) 1.17 0.96 Injury frequency rate per 200,000 person hours 3.4 4.5 Accident rate per million train miles 2.1 1.7 - -------------------------------------------------------------------------------------------------- FINANCIAL Debt to total capitalization ratio (% at end of period) 44.0 41.6 Return on assets (% at end of period) 1.4 1.8 ==================================================================================================
(1) 2001 DATA EXCLUDE WC WHICH WAS ACQUIRED AND CONSOLIDATED EFFECTIVE OCTOBER 9, 2001. (2) IN 2002, THE COMPANY EXPANDED ITS MEASURE OF BAD ORDER LOCOMOTIVES TO INCLUDE ALL THOSE NOT AVAILABLE FOR SERVICE, INCLUDING ON-LINE FAILURES. THE 2001 FIGURE HAS BEEN RESTATED ACCORDINGLY. 12 CANADIAN NATIONAL RAILWAY COMPANY SUPPLEMENTARY INFORMATION (U.S. GAAP) - -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 --------------------------------- Variance 2002 2001(1) Fav (Unfav) - ------------------------------------------------------------------------------------------- (UNAUDITED) REVENUE TON MILES (MILLIONS) Petroleum and chemicals 7,327 6,373 15% Metals and minerals 3,280 2,358 39% Forest products 8,122 6,985 16% Coal 3,305 3,936 (16%) Grain and fertilizers 9,831 12,459 (21%) Intermodal 6,629 6,432 3% Automotive 795 711 12% - ------------------------------------------------------------------------------------------- 39,289 39,254 - FREIGHT REVENUE / RTM (CENTS) TOTAL FREIGHT REVENUE PER RTM 3.70 3.42 8% BUSINESS UNITS: Petroleum and chemicals 3.73 3.62 3% Metals and minerals 3.72 4.11 (9%) Forest products 4.00 3.51 14% Coal 2.33 2.16 8% Grain and fertilizers 2.74 2.58 6% Intermodal 3.55 3.68 (4%) Automotive 18.99 17.86 6% - ------------------------------------------------------------------------------------------- CARLOADS (THOUSANDS) Petroleum and chemicals 145 134 8% Metals and minerals 86 59 46% Forest products 150 119 26% Coal 120 138 (13%) Grain and fertilizers 142 154 (8%) Intermodal 273 273 - Automotive 83 75 11% - ------------------------------------------------------------------------------------------- 999 952 5% FREIGHT REVENUE / CARLOAD (DOLLARS) TOTAL FREIGHT REVENUE PER CARLOAD 1,453 1,411 3% BUSINESS UNITS: Petroleum and chemicals 1,883 1,724 9% Metals and minerals 1,419 1,644 (14%) Forest products 2,167 2,059 5% Coal 642 616 4% Grain and fertilizers 1,894 2,084 (9%) Intermodal 861 868 (1%) Automotive 1,819 1,693 7% - -------------------------------------------------------------------------------------------
(1) 2001 DATA EXCLUDE WC WHICH WAS ACQUIRED AND CONSOLIDATED EFFECTIVE OCTOBER 9, 2001. 13 CANADIAN NATIONAL RAILWAY COMPANY SUPPLEMENTARY INFORMATION PRO FORMA CONSOLIDATED STATEMENT OF INCOME (U.S. GAAP) - ------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31 ------------------------------------------ 2002 2001 Variance pro forma(1) Fav (Unfav) - ----------------------------------------------------------------------------------------------------- (UNAUDITED) REVENUES Petroleum and chemicals $ 273 $ 254 7% Metals and minerals 122 120 2% Forest products 325 306 6% Coal 77 92 (16%) Grain and fertilizers 269 336 (20%) Intermodal 235 244 (4%) Automotive 151 127 19% Other items 57 57 - - ------------------------------------------------------------------------------------- 1,509 1,536 (2%) OPERATING EXPENSES Labor and fringe benefits 461 425 (8%) Purchased services 137 146 6% Depreciation and amortization 141 142 1% Fuel 112 155 28% Equipment rents 87 83 (5%) Material 61 73 16% Operating taxes 41 46 11% Casualty and other 63 50 (26%) - ------------------------------------------------------------------------------------- 1,103 1,120 2% OPERATING INCOME 406 416 (2%) Interest expense (96) (107) Other income 38 118 - ------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 348 427 Income tax expense (118) (145) - ------------------------------------------------------------------------------------- NET INCOME $ 230 $ 282 ===================================================================================== OPERATING RATIO 73.1% 72.9% (0.2) ===================================================================================== DILUTED EARNINGS PER SHARE $ 1.15 $ 1.43 ADJUSTED DILUTED EARNINGS PER SHARE(2) $ 1.15 $ 1.07 DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES 203.0 199.9 =====================================================================================
(1) THE PRO FORMA FIGURES REFLECT THE COMPANY'S RESULTS OF OPERATIONS AS IF THE COMPANY HAD ACQUIRED WC ON JANUARY 1, 2001. (2) EXCLUDES THE COMPANY'S 2001 GAIN FROM THE SALE OF ITS 50 PERCENT INTEREST IN THE DRT. 14 CANADIAN NATIONAL RAILWAY COMPANY SUPPLEMENTARY PRO FORMA INFORMATION (U.S. GAAP) - -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 ------------------------------------- 2002 2001 Variance pro forma(1) Fav (Unfav) - ---------------------------------------------------------------------------------------------------- (UNAUDITED) REVENUE TON MILES (MILLIONS) Petroleum and chemicals 7,327 6,699 9% Metals and minerals 3,280 3,214 2% Forest products 8,122 7,895 3% Coal 3,305 4,263 (22%) Grain and fertilizers 9,831 12,708 (23%) Intermodal 6,629 6,482 2% Automotive 795 712 12% - ----------------------------------------------------------------------------------------------- 39,289 41,973 (6%) FREIGHT REVENUE / RTM (CENTS) TOTAL FREIGHT REVENUE PER RTM 3.70 3.52 5% BUSINESS UNITS: Petroleum and chemicals 3.73 3.79 (2%) Metals and minerals 3.72 3.73 - Forest products 4.00 3.88 3% Coal 2.33 2.16 8% Grain and fertilizers 2.74 2.64 4% Intermodal 3.55 3.76 (6%) Automotive 18.99 17.84 6% - ----------------------------------------------------------------------------------------------- CARLOADS (THOUSANDS) Petroleum and chemicals 145 144 1% Metals and minerals 86 95 (9%) Forest products 150 154 (3%) Coal 120 148 (19%) Grain and fertilizers 142 160 (11%) Intermodal 273 287 (5%) Automotive 83 75 11% - ----------------------------------------------------------------------------------------------- 999 1,063 (6%) FREIGHT REVENUE / CARLOAD (DOLLARS) TOTAL FREIGHT REVENUE PER CARLOAD 1,453 1,391 4% BUSINESS UNITS: Petroleum and chemicals 1,883 1,764 7% Metals and minerals 1,419 1,263 12% Forest products 2,167 1,987 9% Coal 642 622 3% Grain and fertilizers 1,894 2,100 (10%) Intermodal 861 850 1% Automotive 1,819 1,693 7% - -----------------------------------------------------------------------------------------------
(1) THE PRO FORMA DATA HAS BEEN PREPARED ASSUMING THE COMPANY HAD ACQUIRED WC ON JANUARY 1, 2001. 15 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS RELATES TO THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CANADIAN NATIONAL RAILWAY COMPANY (CN) TOGETHER WITH ITS WHOLLY OWNED SUBSIDIARIES, INCLUDING GRAND TRUNK CORPORATION, ILLINOIS CENTRAL CORPORATION (IC) AND WISCONSIN CENTRAL TRANSPORTATION CORPORATION (WC), THE LATTER FROM OCTOBER 9, 2001. AS USED HEREIN, THE WORD "COMPANY" MEANS, AS THE CONTEXT REQUIRES, CN AND ITS SUBSIDIARIES. CN'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 ALSO PREPARES CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH CANADIAN GAAP, WHICH ARE INCLUDED IN THIS DOCUMENT. THE CANADIAN GAAP FINANCIAL STATEMENTS ARE DIFFERENT IN SOME RESPECTS FROM THESE FINANCIAL STATEMENTS, PRINCIPALLY IN THE TREATMENT OF TRACK REPLACEMENT COSTS, EXPENDITURES RELATING TO IMPROVEMENTS OF BRIDGES AND OTHER STRUCTURES AND FREIGHT CARS, DERIVATIVE INSTRUMENTS, STOCK-BASED COMPENSATION AND CONVERTIBLE PREFERRED SECURITIES. FINANCIAL RESULTS FIRST QUARTER OF 2002 COMPARED TO FIRST QUARTER OF 2001 - ------------------------------------------------------- The Company recorded consolidated net income of $230 million ($1.19 per basic share or $1.15 per diluted share) for the quarter ended March 31, 2002 compared to consolidated net income of $275 million ($1.44 per basic share or $1.39 per diluted share) in the first quarter of 2001, a decrease of $45 million ($0.25 per basic share or $0.24 per diluted share). The Company's consolidated net income for the first quarter of 2001 included a gain of $101 million, $73 million after tax ($0.38 per basic share or $0.36 per diluted share) related to the sale of the Company's 50 percent interest in the Detroit River Tunnel Company (DRT). Excluding this gain, net income in the current quarter increased by $28 million ($0.13 per basic share or $0.12 per diluted share) from net income of $202 million ($1.06 per basic share or $1.03 per diluted share) for the same quarter last year. Operating income was $406 million for the three months ended March 31, 2002 compared to $385 million in the first quarter of 2001, an increase of $21 million, or 5%. The operating ratio increased to 73.1% in the current quarter from 72.5% in the first quarter of 2001, a 0.6-point increase. The Company consolidated WC effective October 9, 2001, the date it acquired control of WC. Accordingly, in the preceding discussion, the Company's results of operations for the quarter ended March 31, 2001 exclude the results of operations of WC. Hereafter, PRO FORMA refers to the consolidation of the results of operations of WC, assuming the acquisition and control of WC occurred on January 1, 2001. Net income for the current quarter decreased by $52 million from pro forma net income of $282 million ($1.47 per basic share or $1.43 per diluted share) for the comparative 2001 period. Excluding the 2001 DRT transaction, net income for the current quarter increased by $21 million ($0.10 per basic share or $0.08 per diluted share) over the comparative pro forma net income of $209 million ($1.09 per basic share or $1.07 per diluted share). Operating income for the current quarter of $406 million decreased by $10 million when compared to pro forma operating income for the same quarter last year. The operating ratio for the current quarter increased slightly from the pro forma operating ratio of 72.9% in the first quarter of 2001. REVENUES Revenues for the quarter ended March 31, 2002 totaled $1,509 million compared to $1,398 million during the same period in 2001. The increase of $111 million, or 8%, was mainly attributable to the consolidation of WC revenues and to gains in automotive, forest products and petroleum and chemicals. These gains were partially offset by lower grain and fertilizer and coal revenues. Revenue ton miles remained unchanged as the 16 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- inclusion of WC traffic was offset by significantly lower grain and fertilizer and coal volumes. Freight revenue per revenue ton mile increased by 8% as compared to the same period in 2001 mainly due to the inclusion of shorter haul WC traffic and the effect of the weaker Canadian dollar. Revenues for the current quarter decreased by $27 million, or 2%, when compared to pro forma revenues of $1,536 million in the same 2001 period. PETROLEUM AND CHEMICALS: Revenues for the quarter ended March 31, 2002 increased by $42 million, or 18%, over the first quarter of 2001, of which $24 million resulted from the inclusion of WC revenues. Excluding WC, growth in the quarter was driven by market share gains in the petroleum and petrochemical sectors, strong sulfur shipments to the United States and the effect of the weaker Canadian dollar. Partly offsetting these increases were lower salt volumes in line with milder winter conditions, lower offshore sulfur exports and the impact of weak paper markets on pulp and paper chemicals. The revenue per revenue ton mile increase of 3% for the quarter was mainly attributable to the inclusion of shorter haul WC traffic and the weaker Canadian dollar. METALS AND MINERALS: Revenues for the quarter ended March 31, 2002 increased by $25 million, or 26%, over the first quarter of 2001, of which $26 million resulted from the inclusion of WC revenues. Excluding WC, market share gains in the non-ferrous segment, particularly aluminum, and increased construction materials traffic to the United States were offset by continued weakness in steel markets. Revenue per revenue ton mile declined by 9% mainly due to the inclusion of certain lower-rated WC traffic and an increase to longer haul traffic. FOREST PRODUCTS: Revenues for the quarter ended March 31, 2002 increased by $80 million, or 33%, over the first quarter of 2001, of which $61 million resulted from the inclusion of WC revenues. Excluding WC, growth in the quarter was attributable to strong lumber and panels traffic which benefited from strong housing markets in both Canada and the United States, and the effect of the weaker Canadian dollar. These gains were partially offset by continued weakness in the pulp and paper markets. The increase in revenue per revenue ton mile of 14% was mainly due to the inclusion of shorter haul WC traffic and the effect of the weaker Canadian dollar. COAL: Revenues for the quarter ended March 31, 2002 decreased by $8 million, or 9%, over the first quarter of 2001. The decline was mainly due to lower thermal coal shipments, impacted by milder weather conditions, and lower metallurgical coal shipments as a result of weak Canadian coal exports to offshore markets. The revenue per revenue ton mile increase of 8% was mainly due to an increase in rates tied to commodity prices and the effect of the weaker Canadian dollar. GRAIN AND FERTILIZERS: Revenues for the quarter ended March 31, 2002 decreased by $52 million, or 16%, over the first quarter of 2001. The decline was mainly attributable to a significant deterioration in the 2001/2002 Canadian grain crop, which was only partly offset by increased U.S. exports of soybean oil and meal and stronger potash shipments from western Canada. The 6% increase in revenue per revenue ton mile was mainly due to an increase in the grain revenue cap in August 2001 and a decline in longer haul traffic. INTERMODAL: Revenues for the quarter ended March 31, 2002 decreased by $2 million, or 1%, over the first quarter of 2001. The decline was mainly attributable to the loss of a move in the overseas segment, partly offset by continued increases in expedited train service volumes in the Canadian domestic segment. The 4% decrease in revenue per revenue ton mile was mainly attributable to the elimination of the fuel surcharge at the end of 2001 and an increase in the average length of haul. AUTOMOTIVE: Revenues for the quarter ended March 31, 2002 increased by $24 million, or 19%, over the first quarter of 2001. The increase was attributable to strong vehicle sales in North America and the impact of the weaker Canadian dollar. The increase in revenue per revenue ton mile of 6% was mainly due to the weaker Canadian dollar partially offset by an increase in the average length of haul. 17 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- OPERATING EXPENSES In the first quarter of 2002, total operating expenses amounted to $1,103 million compared to $1,013 million in the same quarter of 2001. The increase of $90 million, or 9%, was mainly due to the consolidation of WC operating expenses, and higher expenses for labor and fringe benefits and casualty and other. This was partially offset by lower costs for fuel, purchased services and material. Total operating expenses in the current quarter decreased by $17 million, or 2%, from pro forma operating expenses of $1,120 million in the same quarter of 2001. LABOR AND FRINGE BENEFITS: Labor and fringe benefit expenses increased by $83 million, or 22%, for the first quarter of 2002 when compared to the same 2001 period. The increase was mainly attributable to the inclusion of WC labor expense of $45 million, wage increases, higher benefit expenses, and the impact of the weaker Canadian dollar on U.S. denominated expenses. This was partially offset by the effects of a reduced workforce in 2002. PURCHASED SERVICES: The costs of purchased services increased by $4 million, or 3%, for the current quarter when compared to the corresponding quarter of 2001. The increase was mainly due to the inclusion of WC purchased services expense, partially offset by lower contracted services, crew transportation and lodging expenses, and utility costs. DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense increased by $9 million, or 7%, for the quarter ended March 31, 2002 compared to the same quarter in 2001. The increase was mainly due to the inclusion of WC depreciation expense. FUEL: The decrease in the current quarter of $31 million, or 22%, when compared to the first quarter of 2001, was primarily due to a decrease in the average price of fuel and higher productivity, partially offset by the inclusion of WC fuel expense. EQUIPMENT RENTS: These expenses increased by $11 million, or 14%, in the current quarter when compared to the same period in 2001. The increase resulted from the inclusion of WC equipment rents, higher expenses for private car mileage payments and lower net car hire income. MATERIAL: For the quarter ended March 31, 2002, material costs decreased by $2 million, or 3%, from the comparable 2001 period. The decrease was mainly due to lower locomotive and car maintenance costs that were largely offset by the inclusion of WC material costs. OPERATING TAXES: Operating taxes decreased by $3 million, or 7%, during the first quarter of 2002 when compared to the corresponding period in 2001, mainly due to prior years' provincial sales and capital tax recoveries in 2002, partially offset by the inclusion of WC operating taxes. CASUALTY AND OTHER: These expenses increased by $19 million, or 43%, in the current quarter when compared to first quarter 2001. The increase was mainly due to higher costs for casualty and legal claims, including occupational related claims, higher expenses for damaged equipment and merchandise claims and the inclusion of WC casualty and other expense. Lower bad debt expenses in 2002 partially offset the increase. OTHER INTEREST EXPENSE: The increase in interest costs of $16 million for the current quarter versus the equivalent 2001 period was mainly due to the financing related to the acquisition of WC and the consolidation of WC interest expense. OTHER INCOME: Excluding the 2001 gain of $101 million related to the sale of the Company's 50 percent interest in DRT, other income for the first quarter of 2002 increased to $38 million from $11 million for the same period last year. The increase was mainly due to the inclusion of $15 million of WC other income, of which $11 million consisted of WC's equity in earnings of English Welsh and Scottish Railway (EWS). Also contributing to the 18 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- increase were higher gains on disposal of surplus properties. INCOME TAX EXPENSE: The Company recorded an income tax expense of $118 million for the current quarter and $142 million for the corresponding period in 2001. The effective tax rate for the quarter ended March 31, 2002 was 33.9%. For the comparative period, the effective tax rate of 34.1% included the income tax effect on the gain related to the DRT transaction. Excluding the DRT transaction, the effective tax rate for the comparative 2001 period was 36.1%. The decrease in the effective tax rate reflected the impact of lower Canadian corporate tax rates. 19 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of liquidity is cash generated from operations. The Company also has the ability to fund liquidity requirements through its revolving credit facilities, the issuance of debt and/or equity, and the sale of a portion of its accounts receivable through the Accounts receivable securitization program. In addition, from time to time, the Company's liquidity requirements can be supplemented by the disposal of surplus properties and the monetization of assets. OPERATING ACTIVITIES: Cash provided from operating activities was $282 million for the three months ended March 31, 2002 compared to $105 million for the same period in 2001. Net income, excluding non-cash items, generated cash of $443 million in the current quarter, compared to $395 million in the corresponding 2001 quarter. Cash generated in the current quarter was partially consumed by payments with respect to workforce reductions and income taxes of $47 million and $38 million, respectively, $49 million and $32 million, respectively, for the comparative period in 2001. Payments for casualty and legal claims, including amounts paid for workers' compensation amounted to $41 million for the current quarter and $43 million for the respective 2001 period. INVESTING ACTIVITIES: Cash used by investing activities in the quarter ended March 31, 2002 amounted to $48 million compared to $28 million in the same quarter of 2001. In the current quarter, the Company sold its investment in Tranz Rail Holdings Limited for net proceeds of $68 million. The first quarter of 2001 included proceeds of $107 million from the sale of DRT. Net capital expenditures amounted to $120 million for the three months ended March 31, 2002, a decrease of $9 million from the same quarter in 2001. Capital expenditures included expenditures for roadway renewal, rolling stock, and other capacity and productivity improvements. The Company anticipates that capital expenditures for 2002 will remain at approximately the same level as 2001. This will include funds required for ongoing renewal of the basic plant and other acquisitions and investments required to improve the Company's operating efficiency and customer service. DIVIDENDS: The Company paid a quarterly dividend of $0.215 per share amounting to $42 million for the current quarter compared to $0.195 per share for a total of $38 million for the same period in 2001. FREE CASH FLOW The Company generated $192 million of free cash flow (defined as cash flow from operating activities less capital expenditures, other investing activities and dividends paid) for the three months ended March 31, 2002 compared to $39 million for the same 2001 period. FINANCING ACTIVITIES: Cash used by financing activities totaled $194 million for the quarter ended March 31, 2002 compared to $14 million for the same period in 2001. The Company's issuances and repayments of long-term debt relate principally to the Company's commercial paper and revolving credit facilities. The Company has access to various financing arrangements: REVOLVING CREDIT FACILITIES The Company has U.S.$1,000 million revolving credit facilities that expire in March 2003. The credit facility agreements contain customary financial covenants with which the Company has been in full compliance since the inception of the agreements. At March 31, 2002, the Company had entirely repaid its borrowings of U.S.$172 million (Cdn$273 million) outstanding at December 31, 2001. At March 31, 2002, letters of credit under the revolving credit facilities amounted to $155 million. COMMERCIAL PAPER The Company has a commercial paper program which is backed by a portion of its revolving credit facilities, that enables it to issue commercial paper up to a maximum aggregate principal amount of $600 million, or the U.S. dollar equivalent. The revolving credit facilities will mature within the next twelve months and while the Company's intent is to renew the existing revolving credit facilities, the refinancing has not been renegotiated and, as such, 20 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- the outstanding balance of U.S.$256 million (Cdn$408 million) of commercial paper has been included in the current portion of long-term debt at March 31, 2002. SHELF REGISTRATION STATEMENT At March 31, 2002, the Company had U.S.$400 million remaining for issuance under its currently effective shelf registration statement. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM The sale of a portion of the Company's accounts receivable is conducted under a securitization program, which has a $350 million maximum limit and will expire in June 2003. The program is subject to customary credit rating and reporting requirements. In the event the program is terminated before its scheduled maturity, the Company expects to have sufficient liquidity remaining in its current and future revolving credit facilities to meet future obligations and anticipated capital expenditures. Upon expiration, the Company's intent is to renew the program. At March 31, 2002, pursuant to the agreement, $168 million and U.S.$113 million (Cdn$179 million) had been sold on a limited recourse basis reflecting no change in the level of accounts receivable sold since December 31, 2001. The Company's access to current and alternate sources of financing at competitive costs is dependent on its credit rating. The Company is currently not aware of any adverse trend, event or condition that would affect the Company's current credit standing. 21 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS In the normal course of business, the Company incurs contractual obligations and commercial commitments. The following tables set forth material obligations and commitments as of March 31, 2002: CONTRACTUAL OBLIGATIONS (IN MILLIONS)
CONTRACT TYPE TOTAL 2002 2003-2004 2005-2006 2007 & THEREAFTER - ------------------------------------------------------------------------------------------------------- Long-term debt $4,833 $ 32 $1,337 $587 $2,877 Capital leases 893 105 174 85 529 Operating leases (a) 1,307 168 400 298 441 - ------------------------------------------------------------------------------------------------------- TOTAL OBLIGATIONS $7,033 $305 $1,911 $970 $3,847 =======================================================================================================
COMMERCIAL COMMITMENTS (IN MILLIONS)
COMMITMENT TYPE TOTAL 2002 2003-2004 2005-2006 2007 & THEREAFTER - ------------------------------------------------------------------------------------------------------- Standby letters of credit (b) $380 $317 $ 62 $ 1 $ - Other commercial commitments (c) 242 37 205 - - - ------------------------------------------------------------------------------------------------------- TOTAL COMMITMENTS $622 $354 $267 $ 1 $ - =======================================================================================================
(a) The Company has guaranteed the residual values of $77 million of equipment with lease terms expiring in the years 2004 through 2012. As at March 31, 2002, the Company does not expect to make any payments pertaining to the guarantees of these leases. (b) Consists mainly of letters of credit issued in favor of the various provincial Workers' Compensation Boards. (c) Includes commitments for railroad ties, rail, freight cars and locomotives. For 2002 and the foreseeable future, the Company expects cash from operations and from its various sources of financing to be sufficient to meet its future obligations and fund anticipated capital expenditures. 22 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- ACQUISITION OF WISCONSIN CENTRAL TRANSPORTATION CORPORATION On October 9, 2001, the Company completed its acquisition of WC for an acquisition cost of $1,297 million (U.S.$831 million) and began a phased integration of the companies' operations. The merger involves the integration of two previously independent businesses to provide shippers enhanced rail services over a coordinated network. There can be no assurance that there will be realization of rail service and other efficiencies or synergies that are expected to be derived from the merger. The Company accounted for the merger using the purchase method of accounting as required by the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations." As such, the Company's consolidated financial statements include the assets, liabilities and results of operations of WC as of October 9, 2001, the date of acquisition. The impact of the results of the final valuation of WC's assets and liabilities are not expected to have a material impact on the results of operations. CRITICAL ACCOUNTING POLICIES, BUSINESS RISKS AND OTHER MATTERS Management's discussion and analysis of the Company's financial condition and results of operations is based on the same accounting policies as those used in preparing the Company's 2001 Annual Consolidated Financial Statements. As such, this document should be read in conjunction with Note 1 "Summary of significant accounting policies" of the Company's 2001 Annual Consolidated Financial Statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management reviews its estimates, including those related to litigation, environmental liabilities, casualty claims, depreciation lives, income tax liabilities, and pension and other post-retirement benefits, based upon currently available information. Actual results could differ from these estimates. LEGAL ACTIONS In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to personal injuries, occupational related claims, damage to property and environmental matters. The Company maintains, and regularly updates on a case-by-case basis, casualty provisions for such items when the expected loss is both probable and can be reasonably estimated. Although the Company considers such provisions to be adequate for these matters, the final outcome with respect to actions outstanding or pending at March 31, 2002, or future claims, cannot be predicted with certainty, and therefore there can be no assurance that their resolution will not have a material adverse effect on the Company's financial position or results of operations in a particular quarter or fiscal year. Work-related injuries to employees, including occupational related claims, are a significant expense for the railroad industry in the United States. Employees of the Company in the United States are compensated according to the provisions of the Federal Employers' Liability Act (FELA). Consistent with the case-by-case approach, the Company does not accrue a provision for unasserted occupational related claims as they are not reasonably estimable. In view of the Company's increasing expansion in the United States, and the increase in the number of occupational claims over the past several years, the Company will work with an independent actuarial firm over the next few months and consider the results of an actuarial based approach to evaluate the sufficiency of its provision for all occupational related claims in the United 23 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- States. Any change in the estimated liability would be accounted for as a change in accounting estimate and recorded in the results of operations. As at March 31, 2002, the Company had aggregate reserves for legal matters of $271 million ($277 million at December 31, 2001), of which approximately $151 million was for work-related injuries to employees, including occupational related claims. ENVIRONMENTAL MATTERS REGULATORY COMPLIANCE The Company's operations are subject to federal, provincial, state, municipal and local regulations under environmental laws and regulations concerning, among other things, emissions into the air; discharges into waters; the generation, handling, storage, transportation, treatment and disposal of waste, hazardous substances and other materials; decommissioning of underground and aboveground storage tanks; and soil and groundwater contamination. A risk of environmental liability is inherent in the railroad and related transportation operations; real estate ownership, operation or control; and other commercial activities of the Company with respect to both current and past operations. As a result, the Company incurs significant compliance and capital costs, on an ongoing basis, associated with environmental regulatory compliance and clean-up requirements. Environmental expenditures that relate to current operations are expensed unless they relate to an improvement to the property. Expenditures that relate to an existing condition caused by past operations and which are not expected to contribute to current or future operations are expensed. KNOWN EXISTING ENVIRONMENTAL CONCERNS The ultimate cost of known contaminated sites cannot be definitely established, and the estimated environmental liability for any given site may vary depending on the nature and extent of the contamination, the available clean-up technique, the Company's share of the costs and evolving regulatory standards governing environmental liability. As a result, liabilities are recorded when environmental assessments and/or remedial efforts are likely, and when 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. UNKNOWN EXISTING ENVIRONMENTAL CONCERNS While the Company believes that it has identified the costs likely to be incurred in the next several years, based on known information, for environmental matters, the Company's ongoing efforts to identify potential environmental concerns that may be associated with its properties may lead to future environmental investigations, which may result in the identification of additional environmental costs and liabilities. The magnitude of such additional liabilities and costs cannot be reasonably estimated and as such, costs related to future remediation will be accrued in the year they become known. FUTURE OCCURRENCES In the operation of a railroad, it is possible that derailments, explosions or other accidents 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, including costs relating to the performance of clean-ups, natural resource damages and compensatory or punitive damages relating to harm to individuals or property. As at March 31, 2002, the Company had aggregate accruals for environmental costs of $110 million ($112 million at December 31, 2001). The Company has not included any reduction in costs for anticipated recovery from insurance. There can be no assurance that material 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 financial 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 environmental liabilities or costs. 24 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- PROPERTIES The Company follows the group method of depreciation and, as such, depreciates the cost of properties, net of asset impairment write-downs, on a straight-line basis over the estimated useful life of each asset class. Assessing the reasonableness of the estimated useful lives of properties requires judgment and is based upon currently available information, including comprehensive depreciation studies that incorporate assumptions of remaining useful lives. A revision to the estimated useful lives of properties is considered a change in accounting estimate and, as a result, depreciation rates would be changed on a prospective basis. A significant change in depreciable lives could result in a material change to depreciation expense. PENSION AND OTHER POST-RETIREMENT BENEFITS The Company accounts for pension and other post-retirement benefits as required by SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions", respectively. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and performance of plan assets. Delayed recognition of differences between actual results and those assumed is a guiding principle of these standards. This approach allows for a smooth recognition of changes in benefit obligations and plan performance over the working lives of the employees who benefit from the plans. An actuarial valuation is conducted to account for pension and other post-retirement benefits which uses management assumptions for the discount rate, the expected return on plan assets, the rate of compensation increase, the health care cost trend and the period of amortization for gains/losses. A change in any one of these assumptions could have a significant impact on the pension and post-retirement benefit expense recorded under SFAS No. 87 and SFAS No. 106, respectively. FINANCIAL INSTRUMENTS Although the Company conducts its business and receives revenues primarily in Canadian dollars, a growing portion of its revenues, expenses, assets and debt are denominated in U.S. dollars. Thus, the Company's results are affected by fluctuations in the exchange rate between these currencies. Changes in the exchange rate between the Canadian dollar and other currencies (including the U.S. dollar) make the goods transported by the Company more or less competitive in the world marketplace and thereby affect the Company's revenues. The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. However, the credit standing of counterparties is regularly monitored. To mitigate the effects of fuel price changes on its operating margins and overall profitability, the Company has a systematic hedging program which calls for regularly entering into swap positions on crude and heating oil to cover a target percentage of future fuel consumption up to two years in advance. For the quarters ended March 31, 2002 and 2001, the Company realized a $9 million loss and a $2 million gain, respectively, from its fuel hedging activities. Hedging positions and credit standings of counterparties are monitored, and losses due to counterparty non-performance are not anticipated. At March 31, 2002, the Company hedged approximately 46% of the estimated 2002 fuel consumption, 34% of the estimated 2003 fuel consumption and 2% of the estimated 2004 fuel consumption. This represented approximately 306 million U.S. gallons at an average price of U.S.$0.607 per U.S. gallon. Other comprehensive income for the quarters ended March 31, 2002 and 2001, included an unrealized gain of $51 million, $34 million after tax, and an unrealized loss of $7 million, $4 million after tax, respectively, resulting from the Company's fuel hedging activities. At March 31, 2002, Accumulated other comprehensive income included an unrealized holding gain of $13 25 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- million, $9 million after tax, ($38 million unrealized holding loss, $25 million after tax at December 31, 2001) of which $8 million relates to derivative instruments that will mature within the next twelve months. In the comparative quarter, Accumulated other comprehensive income included an unrealized holding loss of $7 million, $4 million after tax. COMPETITION The Company faces significant competition from a variety of carriers, including Canadian Pacific Railway Company which operates the other major rail system in Canada, serving most of the same industrial and population centers as the Company, long distance trucking companies and, in certain markets, major U.S. railroads and other Canadian and U.S. railroads. Competition is generally based on the quality and reliability of services provided, price, and the condition and suitability of carriers' equipment. Competition is particularly intense in eastern Canada where an extensive highway network and population centers, located relatively close to one another, have encouraged significant competition from trucking companies. In addition, much of the freight carried by the Company consists of commodity goods that are available from other sources in competitive markets. Factors affecting the competitive position of suppliers of these commodities, including exchange rates, could materially adversely affect the demand for goods supplied by the sources served by the Company and, therefore, the Company's volumes, revenues and profit margins. To a greater degree than other rail carriers, the Company's subsidiary, Illinois Central Railroad Company (ICRR), is vulnerable to barge competition because its main routes are parallel to the Mississippi River system. The use of barges for some commodities, particularly coal and grain, often represents a lower cost mode of transportation. Barge competition and barge rates are affected by navigational interruptions from ice, floods and droughts, which can cause widely fluctuating barge rates. The ability of ICRR to maintain its market share of the available freight has traditionally been affected by the navigational conditions on the river. In recent years, there has been significant consolidation of rail systems in the United States. The resulting larger rail systems are able to offer seamless services in larger market areas and effectively compete with the Company in certain markets. There can be no assurance that the Company will be able to compete effectively against current and future competitors in the railroad industry and that further consolidation within the railroad industry will not adversely affect the Company's competitive position. No assurance can be given that competitive pressures will not lead to reduced revenues, profit margins or both. LABOR NEGOTIATIONS Labor agreements with all Canadian unions expired on December 31, 2000. By April 2002, the Company had achieved ratified settlements with bargaining units representing 98% of the Company's Canadian unionized workforce. These agreements are generally for a three-year period effective until December 31, 2003. The general approach to labor negotiations by U.S. Class 1 railroads is to bargain on a collective national basis. For several years now, Grand Trunk Western (GTW), Duluth Winnipeg and Pacific (DWP), ICRR and CCP Holdings, Inc. (CCP) have bargained on a local basis rather than holding national, industry wide negotiations. Local negotiations result in settlements that better address both the employees' concerns and preferences and the railways' actual operating environment. There are risks associated with negotiating locally. Presidents and Congress have demonstrated that they will step in to avoid national strikes, while a local dispute may not generate federal intervention, making an extended work stoppage more likely. The Company's management believes the potential mutual benefits of local bargaining outweigh the risks. As of April 2002, the Company had in place agreements with bargaining units representing approximately 60% of the unionized workforce at ICRR, 45% at GTW and DWP, 60% at CCP and 100% at WC. These agreements have various durations, ranging from the end of 2001 to the end of 26 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- 2005. Several of these agreements will reopen in 2002. Negotiations are ongoing with the bargaining units with which the Company has not yet achieved new settlements. Until new agreements are reached or until settlements are ratified, the terms and conditions of previous agreements continue to apply. Although the Company does not anticipate work action related to these negotiations while they are ongoing, there can be no assurance that their resolution will not have a material adverse effect on the Company's financial position or results of operations. REGULATION The Company's rail operations in Canada are subject to regulation as to (i) rate setting and network rationalization by the Canadian Transportation Agency (the Agency), under the Canada Transportation Act (Canada) (the CTA), and (ii) safety by the federal Minister of Transport under the Railway Safety Act (Canada) and certain other statutes. The Company's U.S. rail operations are subject to regulation by the Surface Transportation Board (STB) (the successor to the Interstate Commerce Commission) and the Federal Railroad Administration. In addition, the Company is subject to a variety of health, safety, labor, environmental and other regulations, all of which can affect its competitive position and profitability. The CTA Review Panel, which was appointed by the federal government to carry out a comprehensive review of the Canadian transportation legislation, issued its report to the Minister of Transport at the end of June 2001. It was released to the public on July 18, 2001 and contains numerous recommendations for legislative changes which, if adopted, would affect all modes of transportation, including rail. No assurance can be given that any decision by the federal government pursuant to the report's recommendations will not materially adversely affect the Company's financial position or results of operations. BUSINESS PROSPECTS AND OTHER RISKS In any given year, the Company, like other railroads, is susceptible to changes in the economic conditions of the industries and geographic areas that produce and consume the freight it transports or the supplies it requires to operate. In addition, many of the goods and commodities carried by the Company experience cyclicality in the demand for them. However, many of the bulk commodities the Company transports move offshore and are impacted more by global economic conditions than North American economic cycles. The Company's results of operations can be expected to reflect this cyclicality because of the significant fixed costs inherent in railroad operations. The Company's revenues are affected by prevailing economic conditions. In 2001, widespread recessionary conditions in the economy affected the Company's revenues across a number of markets. Following a significant reduction in interest rates and a major depletion in inventories, there are encouraging signs that economic prospects will improve in 2002, particularly in North America. The Company will continue to leverage its strong focus on customer needs and quality service to grow the business. However, given the uncertainty surrounding crop yields in the current year and the unsettled situation prevailing in international oil markets, the Company remains cautious about business prospects in 2002. Should an economic slowdown or recession occur in North America or other key markets, or should major industrial restructuring take place, the volume of rail shipments carried by the Company is likely to be affected. In addition to the inherent risks of the business cycle, the Company is occasionally susceptible to severe weather conditions. For example, in the first quarter of 1998, a severe ice storm hit eastern Canada, which disrupted operations and service for the railroad as well as for CN customers. 27 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (U.S. GAAP) - ------------------------------------------------------------------------------- INFLATION Generally accepted accounting principles require the use of historical cost as the basis of reporting 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 operating 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. FORWARD-LOOKING INFORMATION Certain information included in this report may be "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the outlook, the actual results or performance of the Company or the rail industry to be materially different from any future results or performance implied by such statements. Such factors include the factors set forth in this section as well as other risks detailed from time to time in reports filed by the Company with securities regulators in Canada and the United States. 28 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED STATEMENT OF INCOME (CANADIAN GAAP) - ------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31 --------------------- 2002 2001 - --------------------------------------------------------------------------------------- (UNAUDITED) Revenues 1,509 $ 1,398 Operating expenses 1,137 1,036 - --------------------------------------------------------------------------------------- Operating income 372 362 Interest expense (91) (75) Other income (Note 4) 38 110 - --------------------------------------------------------------------------------------- Income before income taxes 319 397 Income tax expense (108) (126) - --------------------------------------------------------------------------------------- NET INCOME (NOTE 8) $ 211 $ 271 ======================================================================================= EARNINGS PER SHARE (NOTE 8) Basic $ 1.08 $ 1.40 Diluted $ 1.04 $ 1.36 WEIGHTED-AVERAGE NUMBER OF SHARES Basic 193.2 191.3 Diluted 203.0 199.9 =======================================================================================
See accompanying notes to consolidated financial statements. 29 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED STATEMENT OF OPERATING INCOME (CANADIAN GAAP) - ------------------------------------------------------------------------------- (IN MILLIONS)
THREE MONTHS ENDED MARCH 31 ----------------------------------- Variance 2002 2001 Fav (Unfav) - ------------------------------------------------------------------------------------ (UNAUDITED) REVENUES Petroleum and chemicals $ 273 $ 231 18% Metals and minerals 122 97 26% Forest products 325 245 33% Coal 77 85 (9%) Grain and fertilizers 269 321 (16%) Intermodal 235 237 (1%) Automotive 151 127 19% Other items 57 55 4% - --------------------------------------------------------------------- 1,509 1,398 8% OPERATING EXPENSES Labor and fringe benefits 488 409 (19%) Purchased services 144 137 (5%) Depreciation and amortization 121 108 (12%) Fuel 112 143 22% Equipment rents 87 76 (14%) Material 70 75 7% Operating taxes 41 44 7% Casualty and other 74 44 (68%) - --------------------------------------------------------------------- 1,137 1,036 (10%) - --------------------------------------------------------------------- OPERATING INCOME $ 372 $ 362 3% ================================================================================= OPERATING RATIO 75.3% 74.1% (1.2) =================================================================================
See accompanying notes to consolidated financial statements. 30 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED BALANCE SHEET (CANADIAN GAAP) - ------------------------------------------------------------------------------- (IN MILLIONS)
MARCH 31 December 31 March 31 2002 2001 2001 - -------------------------------------------------------------------------------------------------------- (UNAUDITED) (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 51 $ 53 $ 40 Accounts receivable (Note 5) 699 645 736 Material and supplies 156 133 137 Deferred income taxes 153 153 116 Other 171 180 151 - -------------------------------------------------------------------------------------------------------- 1,230 1,164 1,180 Properties 16,720 16,723 13,964 Other assets and deferred charges (Note 3) 838 901 440 - -------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 18,788 $ 18,788 $ 15,584 ======================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued charges $ 1,362 $ 1,374 $ 1,257 Current portion of long-term debt (Note 5) 558 163 458 Other 99 101 88 - -------------------------------------------------------------------------------------------------------- 2,019 1,638 1,803 Deferred income taxes 3,796 3,729 2,677 Other liabilities and deferred credits 1,234 1,296 1,113 Long-term debt (Note 5) 5,168 5,764 4,034 SHAREHOLDERS' EQUITY: Common shares 3,240 3,209 3,154 Convertible preferred securities 327 327 327 Contributed surplus 178 178 178 Currency translation 146 133 119 Retained earnings 2,680 2,514 2,179 - -------------------------------------------------------------------------------------------------------- 6,571 6,361 5,957 - -------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,788 $ 18,788 $ 15,584 ========================================================================================================
See accompanying notes to consolidated financial statements. 31 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CANADIAN GAAP) - ------------------------------------------------------------------------------- (IN MILLIONS)
THREE MONTHS ENDED MARCH 31 ------------------------- 2002 2001 - --------------------------------------------------------------------------------------- (UNAUDITED) COMMON SHARES(1) Balance, beginning of period $ 3,209 $ 3,124 Stock options exercised 31 30 - --------------------------------------------------------------------------------------- Balance, end of period $ 3,240 $ 3,154 ======================================================================================= CONVERTIBLE PREFERRED SECURITIES(2) - --------------------------------------------------------------------------------------- Balance, beginning and end of period $ 327 $ 327 ======================================================================================= CONTRIBUTED SURPLUS - --------------------------------------------------------------------------------------- Balance, beginning and end of period $ 178 $ 178 ======================================================================================= CURRENCY TRANSLATION - --------------------------------------------------------------------------------------- Balance, end of period $ 146 $ 119 ======================================================================================= RETAINED EARNINGS Balance, beginning of period $ 2,514 $ 1,949 Net income 211 271 Dividends (45) (41) - --------------------------------------------------------------------------------------- Balance, end of period $ 2,680 $ 2,179 =======================================================================================
See accompanying notes to consolidated financial statements. (1) DURING THE FIRST QUARTER OF 2002, THE COMPANY ISSUED 0.8 MILLION SHARES AS A RESULT OF STOCK OPTIONS EXERCISED. AT MARCH 31, 2002, THE COMPANY HAD 193.5 MILLION COMMON SHARES OUTSTANDING. (2) AT MARCH 31, 2002, THE COMPANY HAD 4.6 MILLION CONVERTIBLE PREFERRED SECURITIES OUTSTANDING. 32 CANADIAN NATIONAL RAILWAY COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (CANADIAN GAAP) - ------------------------------------------------------------------------------- (IN MILLIONS)
THREE MONTHS ENDED MARCH 31 ------------------------- 2002 2001 - ---------------------------------------------------------------------------------------- (UNAUDITED) OPERATING ACTIVITIES Net income $ 211 $ 271 Non-cash items in income: Depreciation and amortization 122 110 Deferred income taxes 61 71 Gain on sale of investment (Note 4) - (101) Changes in: Accounts receivable (Note 5) (56) (2) Material and supplies (23) (25) Accounts payable and accrued charges (16) (150) Other net current assets and liabilities - 7 Payments for workforce reductions (47) (49) Other (27) (70) - ---------------------------------------------------------------------------------------- Cash provided from operating activities 225 62 - ---------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net additions to properties (71) (87) Other, net 80 108 - ---------------------------------------------------------------------------------------- Cash provided from investing activities 9 21 - ---------------------------------------------------------------------------------------- Dividends paid (42) (48) FINANCING ACTIVITIES Issuance of long-term debt 855 268 Reduction of long-term debt (1,078) (312) Issuance of common shares 29 30 - ---------------------------------------------------------------------------------------- Cash used by financing activities (194) (14) - ---------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2) 21 Cash and cash equivalents, beginning of period 53 19 - ---------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51 $ 40 ========================================================================================
See accompanying notes to consolidated financial statements. 33 CANADIAN NATIONAL RAILWAY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CANADIAN GAAP) - ------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION In management's opinion, the accompanying unaudited interim consolidated financial statements, prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Canadian National Railway Company's (the Company) financial position as at March 31, 2002, December 31 and March 31, 2001, its results of operations, changes in shareholders' equity and cash flows for the three months ended March 31, 2002 and 2001. These consolidated financial statements and notes have been prepared using accounting policies consistent with those used in preparing the Company's 2001 Annual Consolidated Financial Statements except for Stock-based compensation as explained in Note 2. While management believes that the disclosures presented are adequate to make the information not misleading, these consolidated financial statements and notes should be read in conjunction with the Company's Annual Consolidated Financial Statements. NOTE 2 - ACCOUNTING CHANGES The Company has made certain changes in accounting policies to conform to new accounting standards. STOCK-BASED COMPENSATION Effective January 1, 2002, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3870 "Stock-Based Compensation and Other Stock-Based Payments." The new recommendations require the use of a fair value based approach of accounting for all non-employee and certain employee stock-based awards, such as direct awards of stock, awards that call for settlement in cash or other assets, or stock appreciation rights that call for settlement through the issuance of equity instruments. For all other employee stock-based awards, such as stock option awards, the recommendations encourage but do not require that the fair value based approach be used, though require additional disclosure including pro forma net income and earnings per share, as if the fair value based accounting method had been used to account for these awards. The Company has elected to prospectively apply the intrinsic value based method of accounting to its awards of conventional and performance-based employee stock options granted on or after January 1, 2002. These options are granted at an exercise price equal to the market value of the common shares at the date of granting and, as such, compensation cost is not recognized for conventional-based options since both the number of shares to which an individual is entitled and the exercise price are known at the date of granting. Compensation cost attributable to performance-based employee stock option awards, granted on or after January 1, 2002, is measured at intrinsic value and recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. For the first quarter of 2002, no compensation expense was recognized as no performance-based employee stock option awards were granted. In prior periods, the Company did not record compensation cost related to employee stock options grants and, any consideration paid by employees on the exercise of stock options was recorded as share capital. In accordance with the new recommendations, the Company accounts for its direct awards of stock to employees, which are issued through the mid-term incentive share unit plan, using the fair value based approach to awards granted on or after January 1, 2002. The mid-term incentive share unit plan, entitles employees to receive payout of a combination of common stock of the Company (equity settled portion), as to 50 percent, and cash value (cash settled portion), as to the remaining 50 percent. The new recommendations will not be applied to the equity settled portion of this award granted prior to January 1, 2002 since the new recommendations require prospective application for such awards. Compensation cost for the cash settled portion of this award is measured at fair value, which in all respects is equivalent to intrinsic value since the compensation cost stemming from the award must be finally measured at intrinsic value, and is recognized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost. The new recommendations require retroactive application, without restatement, of the Company's grants outstanding at January 1, 2002 that call for settlement in cash. Had the new recommendations been retroactively applied to the cash settled portion, there would have been no impact on prior periods' financial statements, since no compensation expense was, or would have been recognized for prior periods, due to the nature of the vesting conditions. During the first quarter of 2002, the Company granted 3.2 million of conventional options and, 0.8 million of previously issued stock options were exercised. 34 CANADIAN NATIONAL RAILWAY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CANADIAN GAAP) - ------------------------------------------------------------------------------- Had compensation cost been determined as if the fair value based accounting approach had been used for all awards granted in the first quarter of 2002, the Company's pro forma net income and earnings per share would have been as follows:
Three months ended March 31, 2002 -------------------------------------------------------- -------------------------------------------------------- Net income (IN MILLIONS) $ 208 Basic earnings per share $ 1.06 Diluted earnings per share $ 1.02 ========================================================
As permitted by the new recommendations, these pro forma amounts exclude the effect of awards granted prior to January 1, 2002 and include the calculation of compensation expense using the Black-Scholes option-pricing model with the following assumptions:
Three months ended March 31, 2002 -------------------------------------------------------- -------------------------------------------------------- Expected option life (years) 7.0 Risk-free interest rate 5.79% Expected stock price volatility 30% Average dividend per share $ 0.86 ========================================================
Three months ended March 31, 2002 -------------------------------------------------------- Weighted average fair value of options granted $ 30.98 ========================================================
FOREIGN EXCHANGE In 2001, the Company early adopted the CICA amended recommendations of Section 1650 "Foreign Currency Translation." As required by the amended section, the Company has restated all financial data for 2001. NOTE 3 - ACQUISITION OF WISCONSIN CENTRAL TRANSPORTATION CORPORATION Wisconsin Central Transportation Corporation (WC) was consolidated effective October 9, 2001, the date the Company acquired control of WC. Accordingly, the Company's results of operations for the quarter ended March 31, 2001 exclude the results of operations of WC. For comparative purposes only, if the Company had acquired WC on January 1, 2001, based on the historical amounts reported by WC, net of the amortization of the difference between the Company's cost to acquire WC and the net assets of WC (based on the fair values of WC's properties and equipment, and estimates of their remaining useful lives, as well as estimates of the fair values of other WC assets and liabilities), revenues, net income, basic and diluted earnings per share would have been $1,536 million, $277 million, $1.43 per basic share and $1.39 per diluted share, respectively, for the three months ended March 31, 2001. The pro forma figures do not reflect synergies, and accordingly, do not account for any potential increases in operating income, any estimated cost savings or facilities consolidation. In the first quarter of 2002, the Company sold its investment in Tranz Rail Holdings Limited (Tranz Rail), for net proceeds of $68 million. The Company had acquired Tranz Rail, a company which operates a 2,400-route mile freight and passenger rail business in New Zealand, through its acquisition of WC, and had accounted for it as "available for sale." The difference between the carrying amount of the investment and the proceeds from sale was not significant. NOTE 4 - OTHER INCOME In the first quarter of 2001, the Company completed the sale of its 50 percent interest in the Detroit River Tunnel Company (DRT) and recorded a gain of $101 million, $82 million after tax. The DRT is a 1.6-mile rail-only tunnel crossing the Canada-U.S. border between Detroit and Windsor, Ontario. NOTE 5 - FINANCING ACTIVITIES REVOLVING CREDIT FACILITIES The Company has U.S.$1,000 million revolving credit facilities that expire in March 2003. The credit facility agreements contain customary financial covenants with which the Company has been in full compliance since the inception of the agreements. At March 31, 2002, the Company had entirely repaid its borrowings of U.S.$172 million (Cdn$273 million) outstanding at December 31, 2001. COMMERCIAL PAPER The Company has a commercial paper program which is backed by a portion of its revolving credit facilities, that enables it to issue commercial paper up to a maximum aggregate principal amount of $600 million, or the U.S. dollar equivalent. The revolving credit facilities will mature within the next twelve months and while the Company's intent is to renew the existing revolving credit facilities, the refinancing has not been renegotiated and, as such, the outstanding balance of U.S.$256 million (Cdn$408 million) of commercial paper has been included in the current portion of long-term debt at March 31, 2002. 35 CANADIAN NATIONAL RAILWAY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CANADIAN GAAP) - ------------------------------------------------------------------------------- ACCOUNTS RECEIVABLE SECURITIZATION The Company has a revolving agreement to sell eligible freight trade receivables up to a maximum of $350 million of receivables outstanding at any point in time, expiring in June 2003. At March 31, 2002, pursuant to the agreement, $168 million and U.S.$113 million (Cdn$179 million) had been sold on a limited recourse basis reflecting no change in the level of accounts receivable sold since December 31, 2001. NOTE 6 - DERIVATIVE INSTRUMENTS The Company uses derivative instruments to hedge a portion of its fuel requirement. As a result of its fuel hedging activities, the Company had an unrealized holding gain of $13 million at March 31, 2002 (unrealized holding losses of $38 million and $7 million at December 31 and March 31, 2001, respectively). NOTE 7 - COMMITMENTS At March 31, 2002, the Company had commitments to acquire railroad ties, rail, freight cars and locomotives at an aggregate cost of $242 million ($52 million at December 31, 2001). 36 CANADIAN NATIONAL RAILWAY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CANADIAN GAAP) - ------------------------------------------------------------------------------- NOTE 8 - NET INCOME AND EARNINGS PER SHARE In addition to the consolidation of the WC results of operations for the quarter ended March 31, 2002 as explained in Note 3, the comparability of the results of operations for the quarters ended March 31, 2002 and 2001 is also impacted by an item included in net income for the quarter ended March 31, 2001 as outlined below:
THREE MONTHS ENDED MARCH 31 --------------------- 2002 2001 - ------------------------------------------------------------------------------------- (IN MILLIONS) (UNAUDITED) Income before income taxes, excluding undernoted item $ 319 $ 296 Income tax expense (108) (107) - ------------------------------------------------------------------------------------- Adjusted net income 211 189 Undernoted item, net of tax: Gain on sale of Detroit River Tunnel Company - 82 - ------------------------------------------------------------------------------------- Net income $ 211 $ 271 =====================================================================================
The following table provides a reconciliation between basic and diluted earnings per share:
THREE MONTHS ENDED MARCH 31 --------------------- 2002 2001 - ------------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED) Net income $ 211 $ 271 Dividends on convertible preferred securities (3) (3) - ------------------------------------------------------------------------------------- Income used for basic earnings per share $ 208 $ 268 Weighted-average shares outstanding 193.2 191.3 Effect of dilutive securities and stock options 9.8 8.6 - ------------------------------------------------------------------------------------- Weighted-average diluted shares outstanding 203.0 199.9 Basic earnings per share $ 1.08 $ 1.40 Diluted earnings per share $ 1.04 $ 1.36 =====================================================================================
37 CANADIAN NATIONAL RAILWAY COMPANY SELECTED RAILROAD STATISTICS (CANADIAN GAAP) - -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 -------------------- 2002 2001(1) - ------------------------------------------------------------------------------------------ (UNAUDITED) RAIL OPERATIONS Freight revenues ($ millions) 1,452 1,343 Gross ton miles (millions) 75,155 74,378 Revenue ton miles (RTM) (millions) 39,289 39,254 Route miles (includes Canada and the U.S.) 17,896 15,510 Operating expenses per RTM (cents) 2.89 2.64 Freight revenue per RTM (cents) 3.70 3.42 Carloads (thousands) 999 952 Freight revenue per carload ($) 1,453 1,411 Diesel fuel consumed (Liters in millions) 363 354 Average fuel price ($/Liter) 0.30 0.38 Revenue ton miles per liter of fuel consumed 108 111 Gross ton miles per liter of fuel consumed 207 210 Diesel fuel consumed (U.S. gallons in millions) 96 93 Average fuel price ($/U.S. gallon) 1.14 1.42 Revenue ton miles per U.S. gallon of fuel consumed 409 422 Gross ton miles per U.S. gallon of fuel consumed 783 800 Locomotive bad order ratio (%)(2) 7.0 7.9 Freight car bad order ratio (%) 6.2 6.5 - ------------------------------------------------------------------------------------------ PRODUCTIVITY Operating ratio (%) 75.3 74.1 Freight revenue per route mile ($ thousands) 81 87 Revenue ton miles per route mile (thousands) 2,195 2,531 Freight revenue per average number of employees ($ thousands) 65 63 Revenue ton miles per average number of employees (thousands) 1,746 1,850 - ------------------------------------------------------------------------------------------ EMPLOYEES Number at end of period 22,587 21,009 Average number during period 22,501 21,222 Labor and fringe benefits expense per RTM (cents) 1.24 1.04 Injury frequency rate per 200,000 person hours 3.4 4.5 Accident rate per million train miles 2.1 1.7 - ------------------------------------------------------------------------------------------ FINANCIAL Debt to total capitalization ratio (% at end of period) 46.6 43.0 Return on assets (% at end of period) 1.4 2.0 ==========================================================================================
(1) 2001 DATA EXCLUDE WC WHICH WAS ACQUIRED AND CONSOLIDATED EFFECTIVE OCTOBER 9, 2001. (2) IN 2002, THE COMPANY EXPANDED ITS MEASURE OF BAD ORDER LOCOMOTIVES TO INCLUDE ALL THOSE NOT AVAILABLE FOR SERVICE, INCLUDING ON-LINE FAILURES. THE 2001 FIGURE HAS BEEN RESTATED ACCORDINGLY. 38 CANADIAN NATIONAL RAILWAY COMPANY SUPPLEMENTARY INFORMATION (CANADIAN GAAP) - -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 ---------------------------------- Variance 2002 2001(1) Fav (Unfav) - ------------------------------------------------------------------------------------------- (UNAUDITED) REVENUE TON MILES (MILLIONS) Petroleum and chemicals 7,327 6,373 15% Metals and minerals 3,280 2,358 39% Forest products 8,122 6,985 16% Coal 3,305 3,936 (16%) Grain and fertilizers 9,831 12,459 (21%) Intermodal 6,629 6,432 3% Automotive 795 711 12% - ------------------------------------------------------------------------------------------- 39,289 39,254 - FREIGHT REVENUE / RTM (CENTS) TOTAL FREIGHT REVENUE PER RTM 3.70 3.42 8% BUSINESS UNITS: Petroleum and chemicals 3.73 3.62 3% Metals and minerals 3.72 4.11 (9%) Forest products 4.00 3.51 14% Coal 2.33 2.16 8% Grain and fertilizers 2.74 2.58 6% Intermodal 3.55 3.68 (4%) Automotive 18.99 17.86 6% - ------------------------------------------------------------------------------------------- CARLOADS (THOUSANDS) Petroleum and chemicals 145 134 8% Metals and minerals 86 59 46% Forest products 150 119 26% Coal 120 138 (13%) Grain and fertilizers 142 154 (8%) Intermodal 273 273 - Automotive 83 75 11% - ------------------------------------------------------------------------------------------- 999 952 5% FREIGHT REVENUE / CARLOAD (DOLLARS) TOTAL FREIGHT REVENUE PER CARLOAD 1,453 1,411 3% BUSINESS UNITS: Petroleum and chemicals 1,883 1,724 9% Metals and minerals 1,419 1,644 (14%) Forest products 2,167 2,059 5% Coal 642 616 4% Grain and fertilizers 1,894 2,084 (9%) Intermodal 861 868 (1%) Automotive 1,819 1,693 7% - -------------------------------------------------------------------------------------------
(1) 2001 DATA EXCLUDE WC WHICH WAS ACQUIRED AND CONSOLIDATED EFFECTIVE OCTOBER 9, 2001. 39 CANADIAN NATIONAL RAILWAY COMPANY SUPPLEMENTARY INFORMATION PRO FORMA CONSOLIDATED STATEMENT OF INCOME (CANADIAN GAAP) - ------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31 -------------------------------------------- 2002 2001 Variance pro forma(1) Fav (Unfav) - ---------------------------------------------------------------------------------------------------- (UNAUDITED) REVENUES Petroleum and chemicals $ 273 $ 254 7% Metals and minerals 122 120 2% Forest products 325 306 6% Coal 77 92 (16%) Grain and fertilizers 269 336 (20%) Intermodal 235 244 (4%) Automotive 151 127 19% Other items 57 57 - - --------------------------------------------------------------------------------- 1,509 1,536 (2%) OPERATING EXPENSES Labor and fringe benefits 488 458 (7%) Purchased services 144 150 4% Depreciation and amortization 121 118 (3%) Fuel 112 155 28% Equipment rents 87 83 (5%) Material 70 85 18% Operating taxes 41 46 11% Casualty and other 74 50 (48%) - --------------------------------------------------------------------------------- 1,137 1,145 1% OPERATING INCOME 372 391 (5%) Interest expense (91) (102) Other income 38 116 - --------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 319 405 Income tax expense (108) (128) - --------------------------------------------------------------------------------- NET INCOME $ 211 $ 277 ================================================================================= OPERATING RATIO 75.3% 74.5% (0.8) ================================================================================= DILUTED EARNINGS PER SHARE $ 1.04 $ 1.39 ADJUSTED DILUTED EARNINGS PER SHARE (2) $ 1.04 $ 0.98 DILUTED WEIGHTED-AVERAGE NUMBER OF SHARES 203.0 199.9 =================================================================================
(1) THE PRO FORMA FIGURES REFLECT THE COMPANY'S RESULTS OF OPERATIONS AS IF THE COMPANY HAD ACQUIRED WC ON JANUARY 1, 2001. (2) EXCLUDES THE COMPANY'S 2001 GAIN FROM THE SALE OF ITS 50 PERCENT INTEREST IN THE DRT. 40 CANADIAN NATIONAL RAILWAY COMPANY SUPPLEMENTARY PRO FORMA INFORMATION (CANADIAN GAAP) - -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31 ------------------------------------------ 2002 2001 Variance pro forma(1) Fav (Unfav) - --------------------------------------------------------------------------------------------- (UNAUDITED) REVENUE TON MILES (MILLIONS) Petroleum and chemicals 7,327 6,699 9% Metals and minerals 3,280 3,214 2% Forest products 8,122 7,895 3% Coal 3,305 4,263 (22%) Grain and fertilizers 9,831 12,708 (23%) Intermodal 6,629 6,482 2% Automotive 795 712 12% - --------------------------------------------------------------------------------------------- 39,289 41,973 (6%) FREIGHT REVENUE / RTM (CENTS) TOTAL FREIGHT REVENUE PER RTM 3.70 3.52 5% BUSINESS UNITS: Petroleum and chemicals 3.73 3.79 (2%) Metals and minerals 3.72 3.73 - Forest products 4.00 3.88 3% Coal 2.33 2.16 8% Grain and fertilizers 2.74 2.64 4% Intermodal 3.55 3.76 (6%) Automotive 18.99 17.84 6% - --------------------------------------------------------------------------------------------- CARLOADS (THOUSANDS) Petroleum and chemicals 145 144 1% Metals and minerals 86 95 (9%) Forest products 150 154 (3%) Coal 120 148 (19%) Grain and fertilizers 142 160 (11%) Intermodal 273 287 (5%) Automotive 83 75 11% - --------------------------------------------------------------------------------------------- 999 1,063 (6%) FREIGHT REVENUE / CARLOAD (DOLLARS) TOTAL FREIGHT REVENUE PER CARLOAD 1,453 1,391 4% BUSINESS UNITS: Petroleum and chemicals 1,883 1,764 7% Metals and minerals 1,419 1,263 12% Forest products 2,167 1,987 9% Coal 642 622 3% Grain and fertilizers 1,894 2,100 (10%) Intermodal 861 850 1% Automotive 1,819 1,693 7% - ---------------------------------------------------------------------------------------------
(1) THE PRO FORMA DATA HAS BEEN PREPARED ASSUMING THE COMPANY HAD ACQUIRED WC ON JANUARY 1, 2001. 41 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS RELATES TO THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CANADIAN NATIONAL RAILWAY COMPANY (CN) TOGETHER WITH ITS WHOLLY OWNED SUBSIDIARIES, INCLUDING GRAND TRUNK CORPORATION, ILLINOIS CENTRAL CORPORATION (IC) AND WISCONSIN CENTRAL TRANSPORTATION CORPORATION (WC), THE LATTER FROM OCTOBER 9, 2001. AS USED HEREIN, THE WORD "COMPANY" MEANS, AS THE CONTEXT REQUIRES, CN AND ITS SUBSIDIARIES. CN'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 CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CANADIAN GAAP). THE COMPANY ALSO PREPARES CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GAAP, WHICH ARE INCLUDED IN THIS DOCUMENT. THE U.S. GAAP FINANCIAL STATEMENTS ARE DIFFERENT IN SOME RESPECTS FROM THESE FINANCIAL STATEMENTS, PRINCIPALLY IN THE TREATMENT OF TRACK REPLACEMENT COSTS, EXPENDITURES RELATING TO IMPROVEMENTS OF BRIDGES AND OTHER STRUCTURES AND FREIGHT CARS, DERIVATIVE INSTRUMENTS, STOCK-BASED COMPENSATION AND CONVERTIBLE PREFERRED SECURITIES. FINANCIAL RESULTS FIRST QUARTER OF 2002 COMPARED TO FIRST QUARTER OF 2001 - ------------------------------------------------------- The Company recorded consolidated net income of $211 million ($1.08 per basic share or $1.04 per diluted share) for the quarter ended March 31, 2002 compared to consolidated net income of $271 million ($1.40 per basic share or $1.36 per diluted share) in the first quarter of 2001, a decrease of $60 million ($0.32 per basic or diluted share). The Company's consolidated net income for the first quarter of 2001 included a gain of $101 million, $82 million after tax ($0.43 per basic share or $0.41 per diluted share) related to the sale of the Company's 50 percent interest in the Detroit River Tunnel Company (DRT). Excluding this gain, net income in the current quarter increased by $22 million ($0.11 per basic share or $0.09 per diluted share) from net income of $189 million ($0.97 per basic share or $0.95 per diluted share) for the same quarter last year. Operating income was $372 million for the three months ended March 31, 2002 compared to $362 million in the first quarter of 2001, an increase of $10 million, or 3%. The operating ratio increased to 75.3% in the current quarter from 74.1% in the first quarter of 2001, a 1.2-point increase. The Company consolidated WC effective October 9, 2001, the date it acquired control of WC. Accordingly, in the preceding discussion, the Company's results of operations for the quarter ended March 31, 2001 exclude the results of operations of WC. Hereafter, PRO FORMA refers to the consolidation of the results of operations of WC, assuming the acquisition and control of WC occurred on January 1, 2001. Net income for the current quarter decreased by $66 million from pro forma net income of $277 million ($1.43 per basic share or $1.39 per diluted share) for the comparative 2001 period. Excluding the 2001 DRT transaction, net income for the current quarter increased by $16 million ($0.08 per basic share or $0.06 per diluted share) over the comparative pro forma net income of $195 million ($1.00 per basic share or $0.98 per diluted share). Operating income for the current quarter of $372 million decreased by $19 million when compared to pro forma operating income for the same quarter last year. The operating ratio for the current quarter increased by 0.8-points from the pro forma operating ratio of 74.5% in the first quarter of 2001. REVENUES Revenues for the quarter ended March 31, 2002 totaled $1,509 million compared to $1,398 million during the same period in 2001. The increase of $111 million, or 8%, was mainly attributable to the consolidation of WC revenues and to gains in automotive, forest products and petroleum and chemicals. These gains were partially offset by lower grain and fertilizer and coal revenues. Revenue ton miles remained unchanged as the inclusion of WC traffic was offset by significantly lower grain and fertilizer and coal volumes. Freight 42 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- revenue per revenue ton mile increased by 8% as compared to the same period in 2001 mainly due to the inclusion of shorter haul WC traffic and the effect of the weaker Canadian dollar. Revenues for the current quarter decreased by $27 million, or 2%, when compared to pro forma revenues of $1,536 million in the same 2001 period. PETROLEUM AND CHEMICALS: Revenues for the quarter ended March 31, 2002 increased by $42 million, or 18%, over the first quarter of 2001, of which $24 million resulted from the inclusion of WC revenues. Excluding WC, growth in the quarter was driven by market share gains in the petroleum and petrochemical sectors, strong sulfur shipments to the United States and the effect of the weaker Canadian dollar. Partly offsetting these increases were lower salt volumes in line with milder winter conditions, lower offshore sulfur exports and the impact of weak paper markets on pulp and paper chemicals. The revenue per revenue ton mile increase of 3% for the quarter was mainly attributable to the inclusion of shorter haul WC traffic and the weaker Canadian dollar. METALS AND MINERALS: Revenues for the quarter ended March 31, 2002 increased by $25 million, or 26%, over the first quarter of 2001, of which $26 million resulted from the inclusion of WC revenues. Excluding WC, market share gains in the non-ferrous segment, particularly aluminum, and increased construction materials traffic to the United States were offset by continued weakness in steel markets. Revenue per revenue ton mile declined by 9% mainly due to the inclusion of certain lower-rated WC traffic and an increase to longer haul traffic. FOREST PRODUCTS: Revenues for the quarter ended March 31, 2002 increased by $80 million, or 33%, over the first quarter of 2001, of which $61 million resulted from the inclusion of WC revenues. Excluding WC, growth in the quarter was attributable to strong lumber and panels traffic which benefited from strong housing markets in both Canada and the United States, and the effect of the weaker Canadian dollar. These gains were partially offset by continued weakness in the pulp and paper markets. The increase in revenue per revenue ton mile of 14% was mainly due to the inclusion of shorter haul WC traffic and the effect of the weaker Canadian dollar. COAL: Revenues for the quarter ended March 31, 2002 decreased by $8 million, or 9%, over the first quarter of 2001. The decline was mainly due to lower thermal coal shipments, impacted by milder weather conditions, and lower metallurgical coal shipments as a result of weak Canadian coal exports to offshore markets. The revenue per revenue ton mile increase of 8% was mainly due to an increase in rates tied to commodity prices and the effect of the weaker Canadian dollar. GRAIN AND FERTILIZERS: Revenues for the quarter ended March 31, 2002 decreased by $52 million, or 16%, over the first quarter of 2001. The decline was mainly attributable to a significant deterioration in the 2001/2002 Canadian grain crop, which was only partly offset by increased U.S. exports of soybean oil and meal and stronger potash shipments from western Canada. The 6% increase in revenue per revenue ton mile was mainly due to an increase in the grain revenue cap in August 2001 and a decline in longer haul traffic. INTERMODAL: Revenues for the quarter ended March 31, 2002 decreased by $2 million, or 1%, over the first quarter of 2001. The decline was mainly attributable to the loss of a move in the overseas segment, partly offset by continued increases in expedited train service volumes in the Canadian domestic segment. The 4% decrease in revenue per revenue ton mile was mainly attributable to the elimination of the fuel surcharge at the end of 2001 and an increase in the average length of haul. AUTOMOTIVE: Revenues for the quarter ended March 31, 2002 increased by $24 million, or 19%, over the first quarter of 2001. The increase was attributable to strong vehicle sales in North America and the impact of the weaker Canadian dollar. The increase in revenue per revenue ton mile of 6% was mainly due to the weaker Canadian dollar partially offset by an increase in the average length of haul. 43 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- OPERATING EXPENSES In the first quarter of 2002, total operating expenses amounted to $1,137 million compared to $1,036 million in the same quarter of 2001. The increase of $101 million, or 10%, was mainly due to the consolidation of WC operating expenses, and higher expenses for labor and fringe benefits and casualty and other. This was partially offset by lower costs for fuel, purchased services and material. Total operating expenses in the current quarter decreased by $8 million, or 1%, from pro forma operating expenses of $1,145 million in the same quarter of 2001. LABOR AND FRINGE BENEFITS: Labor and fringe benefit expenses increased by $79 million, or 19%, for the first quarter of 2002 when compared to the same 2001 period. The increase was mainly attributable to the inclusion of WC labor expense of $52 million, wage increases, higher benefit expenses, and the impact of the weaker Canadian dollar on U.S. denominated expenses. This was partially offset by the effects of a reduced workforce in 2002. PURCHASED SERVICES: The costs of purchased services increased by $7 million, or 5%, for the current quarter when compared to the corresponding quarter of 2001. The increase was mainly due to the inclusion of WC purchased services expense, partially offset by lower contracted services, crew transportation and lodging expenses, and utility costs. DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense increased by $13 million, or 12%, for the quarter ended March 31, 2002 compared to the same quarter in 2001. The increase was mainly due to the inclusion of WC depreciation expense. FUEL: The decrease in the current quarter of $31 million, or 22%, when compared to the first quarter of 2001, was primarily due to a decrease in the average price of fuel and higher productivity, partially offset by the inclusion of WC fuel expense. EQUIPMENT RENTS: These expenses increased by $11 million, or 14%, in the current quarter when compared to the same period in 2001. The increase resulted from the inclusion of WC equipment rents, higher expenses for private car mileage payments and lower net car hire income. MATERIAL: For the quarter ended March 31, 2002, material costs decreased by $5 million, or 7%, from the comparable 2001 period. The decrease was mainly due to lower locomotive and car maintenance costs that were partly offset by the inclusion of WC material costs. OPERATING TAXES: Operating taxes decreased by $3 million, or 7%, during the first quarter of 2002 when compared to the corresponding period in 2001, mainly due to prior years' provincial sales and capital tax recoveries in 2002, partially offset by the inclusion of WC operating taxes. CASUALTY AND OTHER: These expenses increased by $30 million, or 68%, in the current quarter when compared to first quarter 2001. The increase was mainly due to higher costs for casualty and legal claims, including occupational related claims, higher expenses for damaged equipment and merchandise claims and the inclusion of WC casualty and other expense. Lower bad debt expenses in 2002 partially offset the increase. OTHER INTEREST EXPENSE: The increase in interest costs of $16 million for the current quarter versus the equivalent 2001 period was mainly due to the financing related to the acquisition of WC and the consolidation of WC interest expense. OTHER INCOME: Excluding the 2001 gain of $101 million related to the sale of the Company's 50 percent interest in DRT, other income for the first quarter of 2002 increased to $38 million from $9 million for the same period last year. The increase was mainly due to the inclusion of $15 million of WC other income, of which $11 million consisted of WC's equity in earnings of English Welsh and 44 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- Scottish Railway (EWS). Also contributing to the increase were higher gains on disposal of surplus properties. INCOME TAX EXPENSE: The Company recorded an income tax expense of $108 million for the current quarter and $126 million for the corresponding period in 2001. The effective tax rate for the quarter ended March 31, 2002 was 33.9%. For the comparative period, the effective tax rate of 31.7% included the income tax effect on the gain related to the DRT transaction. Excluding the DRT transaction, the effective tax rate for the comparative 2001 period was 36.1%. The decrease in the effective tax rate reflected the impact of lower Canadian corporate tax rates. 45 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of liquidity is cash generated from operations. The Company also has the ability to fund liquidity requirements through its revolving credit facilities, the issuance of debt and/or equity, and the sale of a portion of its accounts receivable through the Accounts receivable securitization program. In addition, from time to time, the Company's liquidity requirements can be supplemented by the disposal of surplus properties and the monetization of assets. OPERATING ACTIVITIES: Cash provided from operating activities was $225 million for the three months ended March 31, 2002 compared to $62 million for the same period in 2001. Net income, excluding non-cash items, generated cash of $394 million in the current quarter, compared to $351 million in the corresponding 2001 quarter. Cash generated in the current quarter was partially consumed by payments with respect to workforce reductions and income taxes of $47 million and $38 million, respectively, $49 million and $32 million, respectively, for the comparative period in 2001. Payments for casualty and legal claims, including amounts paid for workers' compensation amounted to $41 million for the current quarter and $43 million for the respective 2001 period. INVESTING ACTIVITIES: Cash provided from investing activities in the quarter ended March 31, 2002 amounted to $9 million compared to $21 million in the same quarter of 2001. In the current quarter, the Company sold its investment in Tranz Rail Holdings Limited for net proceeds of $68 million. The first quarter of 2001 included proceeds of $107 million from the sale of DRT. Net capital expenditures amounted to $71 million for the three months ended March 31, 2002, a decrease of $16 million from the same quarter in 2001. Capital expenditures included expenditures for roadway renewal, rolling stock, and other capacity and productivity improvements. The Company anticipates that capital expenditures for 2002 will remain at approximately the same level as 2001. This will include funds required for ongoing renewal of the basic plant and other acquisitions and investments required to improve the Company's operating efficiency and customer service. DIVIDENDS: The Company paid a quarterly dividend of $0.215 per common share amounting to $42 million for the current quarter compared to $0.195 per common share for a total of $38 million for the same period in 2001. In the first quarter of 2001, $10 million was paid on the convertible preferred securities at an annual rate of 5.25%. FREE CASH FLOW The Company generated $192 million of free cash flow (defined as cash flow from operating activities less capital expenditures, other investing activities and dividends paid) for the three months ended March 31, 2002 compared to $35 million for the same 2001 period. FINANCING ACTIVITIES: Cash used by financing activities totaled $194 million for the quarter ended March 31, 2002 compared to $14 million for the same period in 2001. The Company's issuances and repayments of long-term debt relate principally to the Company's commercial paper and revolving credit facilities. The Company has access to various financing arrangements: REVOLVING CREDIT FACILITIES The Company has U.S.$1,000 million revolving credit facilities that expire in March 2003. The credit facility agreements contain customary financial covenants with which the Company has been in full compliance since the inception of the agreements. At March 31, 2002, the Company had entirely repaid its borrowings of U.S.$172 million (Cdn$273 million) outstanding at December 31, 2001. At March 31, 2002, letters of credit under the revolving credit facilities amounted to $155 million. COMMERCIAL PAPER The Company has a commercial paper program which is backed by a portion of its revolving credit facilities, that enables it to issue commercial paper up to a maximum aggregate principal amount of 46 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- $600 million, or the U.S. dollar equivalent. The revolving credit facilities will mature within the next twelve months and while the Company's intent is to renew the existing revolving credit facilities, the refinancing has not been renegotiated and, as such, the outstanding balance of U.S.$256 million (Cdn $408million) of commercial paper has been included in the current portion of long-term debt at March 31, 2002. SHELF REGISTRATION STATEMENT At March 31, 2002, the Company had U.S.$400 million remaining for issuance under its currently effective shelf registration statement. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM The sale of a portion of the Company's accounts receivable is conducted under a securitization program, which has a $350 million maximum limit and will expire in June 2003. The program is subject to customary credit rating and reporting requirements. In the event the program is terminated before its scheduled maturity, the Company expects to have sufficient liquidity remaining in its current and future revolving credit facilities to meet future obligations and anticipated capital expenditures. Upon expiration, the Company's intent is to renew the program. At March 31, 2002, pursuant to the agreement, $168 million and U.S.$113 million (Cdn$179 million) had been sold on a limited recourse basis reflecting no change in the level of accounts receivable sold since December 31, 2001. The Company's access to current and alternate sources of financing at competitive costs is dependent on its credit rating. The Company is currently not aware of any adverse trend, event or condition that would affect the Company's current credit standing. 47 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS In the normal course of business, the Company incurs contractual obligations and commercial commitments. The following tables set forth material obligations and commitments as of March 31, 2002: CONTRACTUAL OBLIGATIONS (IN MILLIONS)
CONTRACT TYPE TOTAL 2002 2003-2004 2005-2006 2007 & THEREAFTER - ---------------------------------------------------------------------------------------------------------------------- Long-term debt $4,833 $ 32 $1,337 $587 $2,877 Capital leases 893 105 174 85 529 Operating leases (a) 1,307 168 400 298 441 - ---------------------------------------------------------------------------------------------------------------------- TOTAL OBLIGATIONS $7,033 $305 $1,911 $970 $3,847 ======================================================================================================================
COMMERCIAL COMMITMENTS (IN MILLIONS)
COMMITMENT TYPE TOTAL 2002 2003-2004 2005-2006 2007 & THEREAFTER - ---------------------------------------------------------------------------------------------------------------------- Standby letters of credit (b) $380 $317 $ 62 $ 1 $ - Other commercial commitments (c) 242 37 205 - - - ---------------------------------------------------------------------------------------------------------------------- TOTAL COMMITMENTS $622 $354 $267 $ 1 $ - ======================================================================================================================
(a) The Company has guaranteed the residual values of $77 million of equipment with lease terms expiring in the years 2004 through 2012. As at March 31, 2002, the Company does not expect to make any payments pertaining to the guarantees of these leases. (b) Consists mainly of letters of credit issued in favor of the various provincial Workers' Compensation Boards. (c) Includes commitments for railroad ties, rail, freight cars and locomotives. For 2002 and the foreseeable future, the Company expects cash from operations and from its various sources of financing to be sufficient to meet its future obligations and fund anticipated capital expenditures. 48 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- ACQUISITION OF WISCONSIN CENTRAL TRANSPORTATION CORPORATION On October 9, 2001, the Company completed its acquisition of WC for an acquisition cost of $1,297 million (U.S.$831 million) and began a phased integration of the companies' operations. The merger involves the integration of two previously independent businesses to provide shippers enhanced rail services over a coordinated network. There can be no assurance that there will be realization of rail service and other efficiencies or synergies that are expected to be derived from the merger. The Company accounted for the merger using the purchase method of accounting as required by the Canadian Institute of Chartered Accountants (CICA) Handbook Section 1581 "Business Combinations." As such, the Company's consolidated financial statements include the assets, liabilities and results of operations of WC as of October 9, 2001, the date of acquisition. The impact of the results of the final valuation of WC's assets and liabilities are not expected to have a material impact on the results of operations. CRITICAL ACCOUNTING POLICIES, BUSINESS RISKS AND OTHER MATTERS Management's discussion and analysis of the Company's financial condition and results of operations is based on the same accounting policies as those used in preparing the Company's 2001 Annual Consolidated Financial Statements. As such, this document should be read in conjunction with Note 1 "Summary of significant accounting policies" of the Company's 2001 Annual Consolidated Financial Statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management reviews its estimates, including those related to litigation, environmental liabilities, casualty claims, depreciation lives, income tax liabilities, and pension and other post-retirement benefits, based upon currently available information. Actual results could differ from these estimates. LEGAL ACTIONS In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to personal injuries, occupational related claims, damage to property and environmental matters. The Company maintains, and regularly updates on a case-by-case basis, casualty provisions for such items when the expected loss is both probable and can be reasonably estimated. Although the Company considers such provisions to be adequate for these matters, the final outcome with respect to actions outstanding or pending at March 31, 2002, or future claims, cannot be predicted with certainty, and therefore there can be no assurance that their resolution will not have a material adverse effect on the Company's financial position or results of operations in a particular quarter or fiscal year. Work-related injuries to employees, including occupational related claims, are a significant expense for the railroad industry in the United States. Employees of the Company in the United States are compensated according to the provisions of the Federal Employers' Liability Act (FELA). Consistent with the case-by-case approach, the Company does not accrue a provision for unasserted occupational related claims as they are not reasonably estimable. In view of the Company's increasing expansion in the United States, and the increase in the number of occupational claims over the past several years, the Company will work with an independent actuarial firm over the next few months and consider the results of an actuarial based approach to evaluate the sufficiency of its provision 49 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- for all occupational related claims in the United States. Any change in the estimated liability would be accounted for as a change in accounting estimate and recorded in the results of operations. As at March 31, 2002, the Company had aggregate reserves for legal matters of $271 million ($277 million at December 31, 2001), of which approximately $151 million was for work-related injuries to employees, including occupational related claims. ENVIRONMENTAL MATTERS REGULATORY COMPLIANCE The Company's operations are subject to federal, provincial, state, municipal and local regulations under environmental laws and regulations concerning, among other things, emissions into the air; discharges into waters; the generation, handling, storage, transportation, treatment and disposal of waste, hazardous substances and other materials; decommissioning of underground and aboveground storage tanks; and soil and groundwater contamination. A risk of environmental liability is inherent in the railroad and related transportation operations; real estate ownership, operation or control; and other commercial activities of the Company with respect to both current and past operations. As a result, the Company incurs significant compliance and capital costs, on an ongoing basis, associated with environmental regulatory compliance and clean-up requirements. Environmental expenditures that relate to current operations are expensed unless they relate to an improvement to the property. Expenditures that relate to an existing condition caused by past operations and which are not expected to contribute to current or future operations are expensed. KNOWN EXISTING ENVIRONMENTAL CONCERNS The ultimate cost of known contaminated sites cannot be definitely established, and the estimated environmental liability for any given site may vary depending on the nature and extent of the contamination, the available clean-up technique, the Company's share of the costs and evolving regulatory standards governing environmental liability. As a result, liabilities are recorded when environmental assessments and/or remedial efforts are likely, and when 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. UNKNOWN EXISTING ENVIRONMENTAL CONCERNS While the Company believes that it has identified the costs likely to be incurred in the next several years, based on known information, for environmental matters, the Company's ongoing efforts to identify potential environmental concerns that may be associated with its properties may lead to future environmental investigations, which may result in the identification of additional environmental costs and liabilities. The magnitude of such additional liabilities and costs cannot be reasonably estimated and as such, costs related to future remediation will be accrued in the year they become known. FUTURE OCCURRENCES In the operation of a railroad, it is possible that derailments, explosions or other accidents 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, including costs relating to the performance of clean-ups, natural resource damages and compensatory or punitive damages relating to harm to individuals or property. As at March 31, 2002, the Company had aggregate accruals for environmental costs of $110 million ($112 million at December 31, 2001). The Company has not included any reduction in costs for anticipated recovery from insurance. There can be no assurance that material 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 financial 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 environmental liabilities or costs. 50 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- PROPERTIES The Company follows the group method of depreciation and, as such, depreciates the cost of properties, net of asset impairment write-downs, on a straight-line basis over the estimated useful life of each asset class. Assessing the reasonableness of the estimated useful lives of properties requires judgment and is based upon currently available information, including comprehensive depreciation studies that incorporate assumptions of remaining useful lives. A revision to the estimated useful lives of properties is considered a change in accounting estimate and, as a result, depreciation rates would be changed on a prospective basis. A significant change in depreciable lives could result in a material change to depreciation expense. PENSION AND OTHER POST-RETIREMENT BENEFITS The Company accounts for pension and other post-retirement benefits as required by CICA Handbook Section 3461 "Employee future benefits". Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and performance of plan assets. Delayed recognition of differences between actual results and those assumed is a guiding principle of these standards. This approach allows for a smooth recognition of changes in benefit obligations and plan performance over the working lives of the employees who benefit from the plans. An actuarial valuation is conducted to account for pension and other post-retirement benefits which uses management assumptions for the discount rate, the expected return on plan assets, the rate of compensation increase, the health care cost trend and the period of amortization for gains/losses. A change in any one of these assumptions could have a significant impact on the pension and post-retirement benefit expense recorded under CICA Section 3461. FINANCIAL INSTRUMENTS Although the Company conducts its business and receives revenues primarily in Canadian dollars, a growing portion of its revenues, expenses, assets and debt are denominated in U.S. dollars. Thus, the Company's results are affected by fluctuations in the exchange rate between these currencies. Changes in the exchange rate between the Canadian dollar and other currencies (including the U.S. dollar) make the goods transported by the Company more or less competitive in the world marketplace and thereby affect the Company's revenues. The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. However, the credit standing of counterparties is regularly monitored. To mitigate the effects of fuel price changes on its operating margins and overall profitability, the Company has a systematic hedging program which calls for regularly entering into swap positions on crude and heating oil to cover a target percentage of future fuel consumption up to two years in advance. For the quarters ended March 31, 2002 and 2001, the Company realized a $9 million loss and a $2 million gain, respectively, from its fuel hedging activities. Hedging positions and credit standing of counterparties are monitored, and losses due to counterparty non-performance are not anticipated. At March 31, 2002, the Company hedged approximately 46% of the estimated 2002 fuel consumption, 34% of the estimated 2003 fuel consumption and 2% of the estimated 2004 fuel consumption. This represented approximately 306 million U.S. gallons at an average price of U.S.$0.607 per U.S. gallon. As a result of its fuel hedging activities, the Company had an unrealized holding gain of $13 million at March 31, 2002 (unrealized holding losses of $38 million and $7 million at December 31 and March 31, 2001, respectively). 51 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- COMPETITION The Company faces significant competition from a variety of carriers, including Canadian Pacific Railway Company which operates the other major rail system in Canada, serving most of the same industrial and population centers as the Company, long distance trucking companies and, in certain markets, major U.S. railroads and other Canadian and U.S. railroads. Competition is generally based on the quality and reliability of services provided, price, and the condition and suitability of carriers' equipment. Competition is particularly intense in eastern Canada where an extensive highway network and population centers, located relatively close to one another, have encouraged significant competition from trucking companies. In addition, much of the freight carried by the Company consists of commodity goods that are available from other sources in competitive markets. Factors affecting the competitive position of suppliers of these commodities, including exchange rates, could materially adversely affect the demand for goods supplied by the sources served by the Company and, therefore, the Company's volumes, revenues and profit margins. To a greater degree than other rail carriers, the Company's subsidiary, Illinois Central Railroad Company (ICRR), is vulnerable to barge competition because its main routes are parallel to the Mississippi River system. The use of barges for some commodities, particularly coal and grain, often represents a lower cost mode of transportation. Barge competition and barge rates are affected by navigational interruptions from ice, floods and droughts, which can cause widely fluctuating barge rates. The ability of ICRR to maintain its market share of the available freight has traditionally been affected by the navigational conditions on the river. In recent years, there has been significant consolidation of rail systems in the United States. The resulting larger rail systems are able to offer seamless services in larger market areas and effectively compete with the Company in certain markets. There can be no assurance that the Company will be able to compete effectively against current and future competitors in the railroad industry and that further consolidation within the railroad industry will not adversely affect the Company's competitive position. No assurance can be given that competitive pressures will not lead to reduced revenues, profit margins or both. LABOR NEGOTIATIONS Labor agreements with all Canadian unions expired on December 31, 2000. By April 2002, the Company had achieved ratified settlements with bargaining units representing 98% of the Company's Canadian unionized workforce. These agreements are generally for a three-year period effective until December 31, 2003. The general approach to labor negotiations by U.S. Class 1 railroads is to bargain on a collective national basis. For several years now, Grand Trunk Western (GTW), Duluth Winnipeg and Pacific (DWP), ICRR and CCP Holdings, Inc. (CCP) have bargained on a local basis rather than holding national, industry wide negotiations. Local negotiations result in settlements that better address both the employees' concerns and preferences and the railways' actual operating environment. There are risks associated with negotiating locally. Presidents and Congress have demonstrated that they will step in to avoid national strikes, while a local dispute may not generate federal intervention, making an extended work stoppage more likely. The Company's management believes the potential mutual benefits of local bargaining outweigh the risks. As of April 2002, the Company had in place agreements with bargaining units representing approximately 60% of the unionized workforce at ICRR, 45% at GTW and DWP, 60% at CCP and 100% at WC. These agreements have various durations, ranging from the end of 2001 to the end of 2005. Several of these agreements will reopen in 2002. Negotiations are ongoing with the bargaining units with which the Company has not yet achieved new settlements. Until new agreements are reached or 52 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- until settlements are ratified, the terms and conditions of previous agreements continue to apply. Although the Company does not anticipate work action related to these negotiations while they are ongoing, there can be no assurance that their resolution will not have a material adverse effect on the Company's financial position or results of operations. REGULATION The Company's rail operations in Canada are subject to regulation as to (i) rate setting and network rationalization by the Canadian Transportation Agency (the Agency), under the Canada Transportation Act (Canada) (the CTA), and (ii) safety by the federal Minister of Transport under the Railway Safety Act (Canada) and certain other statutes. The Company's U.S. rail operations are subject to regulation by the Surface Transportation Board (STB) (the successor to the Interstate Commerce Commission) and the Federal Railroad Administration. In addition, the Company is subject to a variety of health, safety, labor, environmental and other regulations, all of which can affect its competitive position and profitability. The CTA Review Panel, which was appointed by the federal government to carry out a comprehensive review of the Canadian transportation legislation, issued its report to the Minister of Transport at the end of June 2001. It was released to the public on July 18, 2001 and contains numerous recommendations for legislative changes which, if adopted, would affect all modes of transportation, including rail. No assurance can be given that any decision by the federal government pursuant to the report's recommendations will not materially adversely affect the Company's financial position or results of operations. BUSINESS PROSPECTS AND OTHER RISKS In any given year, the Company, like other railroads, is susceptible to changes in the economic conditions of the industries and geographic areas that produce and consume the freight it transports or the supplies it requires to operate. In addition, many of the goods and commodities carried by the Company experience cyclicality in the demand for them. However, many of the bulk commodities the Company transports move offshore and are impacted more by global economic conditions than North American economic cycles. The Company's results of operations can be expected to reflect this cyclicality because of the significant fixed costs inherent in railroad operations. The Company's revenues are affected by prevailing economic conditions. In 2001, widespread recessionary conditions in the economy affected the Company's revenues across a number of markets. Following a significant reduction in interest rates and a major depletion in inventories, there are encouraging signs that economic prospects will improve in 2002, particularly in North America. The Company will continue to leverage its strong focus on customer needs and quality service to grow the business. However, given the uncertainty surrounding crop yields in the current year and the unsettled situation prevailing in international oil markets, the Company remains cautious about business prospects in 2002. Should an economic slowdown or recession occur in North America or other key markets, or should major industrial restructuring take place, the volume of rail shipments carried by the Company is likely to be affected. In addition to the inherent risks of the business cycle, the Company is occasionally susceptible to severe weather conditions. For example, in the first quarter of 1998, a severe ice storm hit eastern Canada, which disrupted operations and service for the railroad as well as for CN customers. INFLATION Generally accepted accounting principles require the use of historical cost as the basis of reporting in financial statements. As a result, the cumulative effect of inflation, which has significantly increased asset replacement costs for capital-intensive 53 CANADIAN NATIONAL RAILWAY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS (CANADIAN GAAP) - ------------------------------------------------------------------------------- companies such as CN, is not reflected in operating 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. FORWARD-LOOKING INFORMATION Certain information included in this report may be "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the outlook, the actual results or performance of the Company or the rail industry to be materially different from any future results or performance implied by such statements. Such factors include the factors set forth in this section as well as other risks detailed from time to time in reports filed by the Company with securities regulators in Canada and the United States. 54 CANADIAN NATIONAL LA VERSION FRANCAISE DU PRESENT 935 de La Gauchetiere Street West RAPPORT FINANCIER EST DISPONIBLE A Montreal, Quebec L'ADRESSE SUIVANTE : H3B 2M9 CANADIEN NATIONAL Stock Symbols: Affaires publiques TSE: CNR 935, rue de La Gauchetiere Ouest NYSE: CNI Montreal (Quebec) H3B 2M9 Internet Address: www.cn.ca Telephone : (514) 399-7212 Telecopieur : (514) 399-5344 1 888 888-5909 -----END PRIVACY-ENHANCED MESSAGE-----