CN reports record third-quarter earnings and nine-month free cash flow of more than $1 billion

Financial Statements (PDF 488.788KB )

MONTREAL, Oct. 18, 2005 — CN today reported its financial and operating results for the third quarter and nine-month period ended Sept. 30, 2005.

Third-quarter financial highlights

• Diluted earnings per share of $1.47, up 24 per cent;
• Record net income of $411 million, an increase of 19 per cent;
• Operating income of $665 million, an increase of 13 per cent;
• Operating ratio of 63.3 per cent, a 2.1-percentage point improvement;
• Record nine-month free cash flow of $1,058 million, up from $754 million for the same period of 2004;⁽¹⁾
• Favourable income tax adjustments and other income helped to offset expenses related to the derailment at Wabamun Lake, Alta.

E. Hunter Harrison, president and chief executive officer of CN, said: “CN posted record third-quarter earnings and nine-month free cash flow despite the headwinds of higher fuel costs, the effects of two hurricanes on our network in the Gulf Coast region of the United States, and unfortunate accidents.“

Revenues for third-quarter 2005 increased six per cent to $1,810 million, with CN's grain and fertilizers, coal, and intermodal segments registering double-digit revenue growth. Forest products, metals and minerals, and automotive revenues also improved.

CN's revenue performance was driven largely by increased freight rates. An important contributor to these rate increases was a higher fuel surcharge owing to increased crude oil prices. Partly offsetting revenue gains during the quarter was the unfavourable $80-million translation impact of the stronger Canadian dollar on U.S.-dollar denominated revenues.

Grain and fertilizer revenues benefited from higher export shipments of Canadian peas, barley and canola, while improved coal revenues reflected metallurgical coal shipments originating at new mines in western Canada. Strong container imports over the Port of Vancouver helped to increase intermodal revenues. CN also enjoyed strong demand for construction materials, which benefited its forest products and metals and minerals revenues. Automotive revenues increased in part as a result of higher imports of vehicles over the ports of Vancouver and Halifax and increased finished vehicle traffic in the southern U.S. Petroleum and chemicals revenues were adversely affected by soft market conditions and reduced petrochemical production in the hurricane-stricken Gulf Coast region.

Operating expenses for the third quarter of 2005 increased by two per cent to $1,145 million, largely as a result of higher fuel costs and higher casualty and other expenses. These increases were partly offset by the favourable $50-million translation impact of the stronger Canadian dollar on U.S.-dollar denominated expenses.

The continued appreciation of the Canadian dollar reduced the company's third-quarter 2005 net income by approximately $15 million.

Financial results for the first nine months of 2005
Net income for the nine-month period ended Sept. 30 was $1,126 million, or $3.98 per diluted share, compared with net income of $882 million, or $3.05 per diluted share, for the comparable period of 2004.

Operating income for the latest nine-month period increased 22 per cent to $1,904 million.

CN's operating ratio for the nine-month period was 64.4 per cent, an improvement of 3.2 percentage points.

Revenues for the latest nine-month period increased 11 per cent to $5,354 million, due mainly to freight rate increases, the inclusion of nine months of revenues from the rail and related holdings of Great Lakes Transportation LLC (GLT) and BC Rail, and a return to normal intermodal volumes following the first-quarter 2004 strike by the Canadian Auto Workers union. Partly offsetting these gains was the unfavourable $220-million translation impact of the stronger Canadian dollar on U.S.-dollar denominated revenues.

CN acquired and consolidated GLT and BC Rail on May 10, 2004, and July 14, 2004, respectively.

Operating expenses increased six per cent to $3,450 million, primarily due to increased fuel costs, the inclusion of nine months of GLT and BC Rail expenses, and higher labour and fringe benefits. Partly offsetting these factors was the favourable $135-million translation impact of the stronger Canadian dollar on U.S.-dollar denominated expenses, and lower equipment rents.

The continued appreciation of the Canadian dollar reduced the company's nine-month 2005 net income by approximately $45 million.

The financial results in this press release are reported in Canadian dollars and were determined on the basis of U.S. generally accepted accounting principles (U.S. GAAP).

(1) Please see discussion and reconciliation of this non-GAAP adjusted performance measure in the attached supplementary schedule, Non-GAAP Measures.

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, its Annual Information Form filed with the Canadian securities regulators, and its 2004 Annual and 2005 Quarterly Financial Statements and Management Discussion and Analysis, for a summary of major risks.