CN Cuts Expenses Sharply in Response to Lower Freight Volumes, Records Third-Quarter Net Income of $140 Million, Excluding Special Charge -- Part 1 of 4 - Financial Tables Will Follow --.

MONTREAL--(BUSINESS WIRE)--Oct. 20, 1998--CN(ME:CNR.) (TSE:CNR.) (NYSE:CNI) CN renews productivity drive with $590-million special charge for workforce reductions.

Canadian National today reported third-quarter 1998 net income of $140 million, excluding a special charge for workforce reductions, compared with net income of $133 million for the comparable period of 1997. Excluding the special charge, the Company reduced operating expenses by 11 per cent in response to a nine per cent reduction in carload volumes and nine per cent decline in revenue during the quarter.

CN recorded a pre-tax $590-million ($345 million, after tax) special charge to operations in the third quarter ended Sept. 30, 1998, to recognize second-half 1998 and full-year 1999 workforce reductions aimed at cutting operating costs and increasing productivity. The job reductions in the second half of 1998 are approximately 1,600, with an additional 1,400 reductions to take place next year. The bulk of the second-half 1998 reductions will occur in the final quarter of the year. The special charge includes severance and other payments for affected employees.

With the special charge, CN reported a net loss of $205 million for the third quarter of 1998.

Excluding the special charge, diluted earnings per share for third- quarter 1998 were $1.45, compared with $1.54 ($1.57 for continuing operations) for the comparable period of 1997. Including the special charge, the diluted loss per share for third-quarter 1998 was $2.14.

Operating income for the third quarter of 1998, excluding the special charge, declined two per cent to $258 million from $264 million for the comparable period of 1997. The operating loss for the latest quarter, including the special charge, was $332 million.

CN's operating ratio for the most recent quarter, excluding the special charge, was 73.3 per cent, an improvement of 1.8 points over the third-quarter 1997 performance of 75.1 per cent.

CN President and Chief Executive Officer Paul M. Tellier said: "The third quarter was a tough one for the Company, which turned in a satisfactory performance given the decline in revenue. CN effectively managed its day-to-day operations during the quarter, reducing operating expenses by 11 per cent in response to lower freight volumes. We took decisive steps to protect the Company's earning power in this downturn. I have said repeatedly that it is vital for CN to generate acceptable results, wherever we are in the business cycle."

Tellier said: "The special charge for job reductions was driven by the need for CN to improve productivity across the board. The system-wide job cuts are permanent. The decision to reduce the labor force was painful but essential. We have said repeatedly that we intend to become the most efficient, most productive and most customer-focused railroad in North America. We have said for more than a year that CN must intensify asset utilization and increase productivity levels. These objectives have led us to devise more efficient, more disciplined ways of operating the railroad and managing our assets. These efficiencies will generate service and cost benefits that, in the end, require a smaller workforce."

For the third quarter of 1998, CN's equity in the earnings of Illinois Central Corporation (IC), less after-tax interest costs associated with the acquisition of IC, decreased CN's net loss by approximately $10 million. CN and IC on July 15, 1998, filed a formal application with the U.S. Surface Transportation Board (STB) seeking regulatory approval of CN's acquisition of IC and the integration of the companies' rail operations. All IC shares acquired by CN earlier this year are held in a voting trust pending a final STB ruling on the CN/IC merger.

CN's operating expenses for the third quarter of 1998, excluding the special charge, declined by 11 per cent to $709 million from $798 million a year earlier, owing largely to lower expenses for labor and fringe benefits attributable to lower volumes, and to lower costs for material, fuel and purchased services.

Revenue for the most recent quarter declined nine per cent to $967 million from $1,062 million for the third quarter of 1997. Industrial products revenue rose by six per cent, while forest products revenue increased by one per cent. Four business units posted revenue declines: grain and grain products (36 per cent), automotive (31 per cent), intermodal (four per cent) and coal, sulphur, and fertilizers (two per cent).

Carloads for the most recent quarter declined nine per cent to 578 thousand from 634 thousand for the year-earlier period.

Tellier said a number of factors have caused reduced freight volumes this year. "The Company was affected by a labor dispute at General Motors Corp. - our largest single customer - and by relatively weak grain shipments, including Canadian barley exports. Also, our coal export traffic in 1998 has been negatively affected by a weak international coal market, due to reductions in Asian steel production. Concern about our labor negotiations during the third quarter may have affected intermodal shipments. However, we have now negotiated new agreements with all our major unions."

Net income for the nine-month period ended Sept. 30, 1998, was $387 million, excluding the third-quarter special charge and $42-million cumulative effect of change in accounting policy for pensions. Including the special charge and accounting change, net income for the nine-month 1998 period was $84 million.

For the first nine months of 1997, CN recorded net income of $344 million, excluding $589-million cumulative effect of change in accounting policy for track replacement costs and pre-tax gain of $21 million ($12 million, after tax) related to the sale of the Company's interest in a joint venture. Including non-recurring items, the Company reported net income of $945 million for the first nine months of 1997.

Diluted earnings per share for the first nine months of 1998, excluding the special charge and accounting change, were $4.26. Including these non-recurring items, diluted earnings per share were 92 cents for the first nine months of 1998.

Excluding non-recurring items, diluted earnings per share for the first nine months of 1997 were $3.99 ($4.02 for continuing operations). Including these items, diluted earnings per share were $10.96.

CN's equity in the earnings of IC, net of after-tax interest costs associated with the IC acquisition, increased nine-month 1998 net income by $22 million.

Excluding the special charge, operating income for the first nine months of 1998 was $715 million, an increase of five per cent over operating income of $681 million for the comparable period of 1997. Including the special charge, operating income for the nine-month 1998 period was $125 million.

CN's operating ratio for the nine-month 1998 period, excluding the special charge, was 76.6 per cent, an improvement of 2.1 points over the year-earlier performance of 78.7 per cent.

Excluding the special charge, operating expenses for the first nine months of 1998 fell seven per cent to $2,341 million from $2,523 million for the comparable period of 1997.

Revenue for the nine-month period of 1998 declined five per cent to $3,056 million from $3,204 million a year earlier. Revenue for industrial products increased by three per cent, while forest products revenue rose an equal percentage. Four business units reported revenue declines: grain and grain products (19 per cent), automotive (16 per cent), coal, sulphur, and fertilizers (three per cent) and intermodal (one per cent).

Carloads for the first nine months of 1998 were 1,827 thousand, down three per cent from 1,883 thousand for the same period of 1997.

Canadian National Railway Company serves all of Canada and the U.S. Midwest, including the ports of Vancouver, Montreal and Halifax, and the key cities of Toronto, Chicago, Detroit and Buffalo, with connections to all points in North America.