CN reports Q2-2008 net income of C$459 million, or C$0.95 per diluted share, including deferred income tax recovery of C$0.05

2008-07-21 15:02:00

CN reports Q2-2008 net income of C$459 million, or C$0.95 per diluted share, including deferred income tax recovery of C$0.05

MONTREAL, QUEBEC–(EMWNews – July 21, 2008) – CN (TSX:CNR) (NYSE:CNI) today reported its financial and operating results for the second quarter and first half ended June 30, 2008.

Second-quarter 2008 results

– Diluted earnings per share declined six per cent to C$0.95.

– Net income declined 11 per cent to C$459 million.

– Revenues increased four per cent to C$2,098 million.

– Operating income declined 13 per cent to C$707 million, with the Company’s operating ratio rising by 6.3 points to 66.3 per cent.

– The stronger Canadian dollar relative to the U.S. dollar, which affects the conversion of CN’s U.S. dollar-denominated revenues and expenses, reduced second-quarter 2008 net income by approximately C$25 million, or C$0.05 per diluted share.

CN’s second-quarter 2008 and 2007 results included deferred income tax recoveries of C$23 million (C$0.05 per diluted share) and C$30 million (C$0.06 per diluted share), respectively, as a result of continued reductions in corporate income tax rates in Canada.

E. Hunter Harrison, president and chief executive officer, said: “I am pleased with our second-quarter results given the challenges we faced during the period. Operations performed very well, and we saw revenue gains across most of our commodity groups, although the gains only partly helped to offset spiralling fuel costs that rose 60 per cent year over year to almost C$400 million.

“Despite the headwinds, we saw double-digit growth in intermodal revenues as a result of new container traffic over the Port of Prince Rupert and continued import strength at the Port of Vancouver, as well as higher volumes of commodities to support oil sands development in Alberta.

“CN continues to face economic uncertainties in the current environment, but we are still targeting diluted earnings per share growth in the mid-single-digit range for full-year 2008.” (1)

The four per cent increase in second-quarter 2008 revenues was largely attributable to freight rate increases, of which approximately two-thirds were due to a higher fuel surcharge, and increased volumes in specific commodity groups, including intermodal and metals and minerals. Partly offsetting these gains were the negative translation impact of the stronger Canadian dollar on U.S. dollar-denominated revenues and weakness in specific markets, particularly forest products and automotive.

Five of CN’s seven commodity groups registered revenues gains in the quarter, led by intermodal (14 per cent), coal (eight per cent), petroleum and chemicals (seven per cent), metals and minerals (six per cent), and grain and fertilizers (four per cent). Forest products revenues declined 14 per cent, and automotive revenues declined 13 per cent.

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by the Company, declined by two per cent during the second quarter versus the comparable period of 2007.

Second-quarter 2008 total rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, increased four per cent, mainly due to freight rate increases that were partially offset by the translation impact of the stronger Canadian dollar.

Operating expenses for the quarter increased by 14 per cent to C$1,391 million, largely as a result of increases in fuel costs, purchased services and material, and casualty and other expenses, which were partly offset by the favorable translation impact of the stronger Canadian dollar on U.S. dollar-denominated expenses, and lower labor and fringe benefits expense.

First-half 2008 results

Net income for the first half of 2008 was C$770 million, or C$1.59 per diluted share, compared with net income of C$840 million, or C$1.63 per diluted share for the comparable period of 2007.

First-half 2008 net income included a deferred income tax recovery of C$23 million (C$0.05 per diluted share) owing to a reduction in provincial corporate income tax rates in Canada, as well as a deferred income tax recovery of C$11 million (C$0.02 per diluted share) resulting from net capital losses arising from the reorganization of a subsidiary.

First-half 2007 net income included a C$30 million (C$0.06 per diluted share) deferred income tax recovery owing to a reduction in the federal corporate income tax rate in Canada.

Operating income for the first half of 2008 declined 10 per cent to C$1,230 million, while the Company’s first-half 2008 operating ratio increased by 4.3 points to 69.4 per cent.

Revenues for the period increased two per cent to C$4,025 million, mainly due to freight rate increases, of which approximately two-thirds were due to a higher fuel surcharge, and increased volumes in specific commodity groups, including intermodal and metals and minerals. The increased volumes reflected the negative impact of a conductors’ strike in Canada on first-quarter 2007 volumes that was partly offset by the impact of difficult weather conditions experienced in Canada and the U.S. Midwest during the first quarter of 2008.

Partly offsetting these factors were the negative translation impact of the stronger Canadian dollar on U.S. dollar-denominated revenues and weakness in specific markets, particularly forest products and automotive.

Revenue ton-miles for the first half of 2008 were relatively flat compared with the year-earlier period, while total rail freight revenue per revenue ton-mile increased one per cent.

First-half 2008 operating expenses increased nine per cent to C$2,795 million, largely owing to increases in fuel costs, purchased services and material, and casualty and other expenses. These factors were partly offset by the favorable translation impact of the stronger Canadian dollar on U.S. dollar-denominated expenses and lower labor and fringe benefits expense.

CN estimates the conductors’ strike had a negative impact on first-quarter 2007 operating income and net income of approximately C$50 million and C$35 million (C$0.07 per diluted share), respectively.

The strengthening of the Canadian dollar relative to the U.S. dollar reduced first-half 2008 net income by approximately C$55 million, or C$0.11 per diluted share.

The financial results in this news release were determined on the basis of U.S. Generally Accepted Accounting Principles (U.S. GAAP).

(1) CN’s financial outlook for 2008 – diluted earnings per share (EPS) growth in the mid-single-digit range over 2007 adjusted diluted EPS of C$3.40 – is based on certain assumptions for the balance of 2008: a Canadian-U.S. dollar exchange rate at or around parity, a crude oil (West Texas Intermediate) price of around US$135 per barrel, and North American economic growth of approximately one per cent.

Forward-Looking Statements

This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risk, uncertainties and assumptions. In addition to the other assumptions contained in this release, the Company believes the U.S. economy is currently experiencing recessionary conditions, but assumes that it will recover within the next six to nine months, and that the global economy will grow at a moderate pace throughout this period. The Company cautions that these, as well as its other assumptions stated above, may not materialize. The Company’s results could differ materially from those expressed or implied in such forward-looking statements. Important factors that could cause such differences include, but are not limited to, industry competition, legislative and/or regulatory developments, compliance with environmental laws and regulations, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, the effects of adverse general economic and business conditions, inflation, currency fluctuations, changes in fuel prices, labor disruptions, environmental claims, investigations or proceedings, other types of claims and litigation, and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to “Management’s Discussion and Analysis” in CN’s annual and interim reports and Annual Information Form and Form 40-F filed with Canadian and U.S. securities regulators, available on CN’s website, for a summary of major risks.

CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement.

CN – Canadian National Railway Company and its operating railway subsidiaries – 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 metropolitan areas of Toronto, Buffalo, Chicago, Detroit, Duluth, Minn./Superior, Wis., Green Bay, Wis., Minneapolis/St. Paul, Memphis, and Jackson, Miss., with connections to all points in North America. For more information on CN, visit the company’s website at www.cn.ca.



CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF INCOME (U.S. GAAP)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(In millions, except per share data)

Three months ended Six months ended
June 30 June 30
------------------ -----------------
2008 2007 2008 2007
----------------------------------------------------------------------------
(Unaudited)

Revenues $ 2,098 $ 2,027 $ 4,025 $ 3,933
----------------------------------------------------------------------------

Operating expenses
Labor and fringe benefits 392 430 853 915
Purchased services and material 283 263 568 539
Fuel 399 249 709 468
Depreciation and amortization 176 168 351 339
Equipment rents 60 62 124 128
Casualty and other 81 44 190 172
----------------------------------------------------------------------------
Total operating expenses 1,391 1,216 2,795 2,561
----------------------------------------------------------------------------

Operating income 707 811 1,230 1,372

Interest expense (87) (85) (173) (173)

Other income 9 1 3 5
----------------------------------------------------------------------------

Income before income taxes 629 727 1,060 1,204

Income tax expense (Note 7) (170) (211) (290) (364)
----------------------------------------------------------------------------

Net income $ 459 $ 516 $ 770 $ 840
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings per share (Note 8)
Basic $ 0.96 $ 1.02 $ 1.61 $ 1.65

Diluted $ 0.95 $ 1.01 $ 1.59 $ 1.63

Weighted-average number
of shares
Basic 476.4 505.2 479.6 507.7

Diluted 482.0 512.3 485.3 515.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED BALANCE SHEET (U.S. GAAP)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(In millions)

June 30 December 31 June 30
2008 2007 2007
----------------------------------------------------------------------------
(Unaudited) (Unaudited)

Assets

Current assets:
Cash and cash equivalents $ 161 $ 310 $ 241
Accounts receivable (Note 3) 843 370 425
Material and supplies 217 162 204
Deferred income taxes 67 68 73
Other 88 138 159
----------------------------------------------------------------------------
1,376 1,048 1,102

Properties 20,864 20,413 20,401
Intangible and other assets 2,113 1,999 1,664
----------------------------------------------------------------------------

Total assets $ 24,353 $ 23,460 $ 23,167
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities and shareholders' equity

Current liabilities:
Accounts payable and accrued charges $ 1,198 $ 1,282 $ 1,427
Current portion of long-term debt 85 254 366
Other 91 54 62
----------------------------------------------------------------------------
1,374 1,590 1,855

Deferred income taxes (Note 7) 5,100 4,908 4,885
Other liabilities and deferred credits 1,381 1,422 1,443
Long-term debt (Note 3) 6,389 5,363 5,193

Shareholders' equity:
Common shares 4,208 4,283 4,417
Accumulated other comprehensive loss (1) (31) (180)
Retained earnings 5,902 5,925 5,554
----------------------------------------------------------------------------
10,109 10,177 9,791
----------------------------------------------------------------------------

Total liabilities and shareholders' equity $ 24,353 $ 23,460 $ 23,167
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. GAAP)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(In millions)

Three months ended Six months ended
June 30 June 30
------------------ -----------------
2008 2007 2008 2007
----------------------------------------------------------------------------
(Unaudited)

Common shares (1)

Balance, beginning of period $ 4,241 $ 4,426 $ 4,283 $ 4,459
Stock options exercised and
other 19 44 42 67
Share repurchase programs
(Note 3) (52) (53) (117) (109)
----------------------------------------------------------------------------
Balance, end of period $ 4,208 $ 4,417 $ 4,208 $ 4,417
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated other comprehensive loss

Balance, beginning of period $ 9 $ (50) $ (31) $ (44)

Other comprehensive income (loss):

Unrealized foreign exchange
gain (loss) on:
Translation of the net
investment in foreign
operations (47) (477) 140 (533)
Translation of U.S.
dollar-denominated
long-term debt designated
as a hedge of the net
investment in U.S.
subsidiaries 41 391 (141) 438

Pension and other postretirement
benefit plans (Note 5):
Amortization of net actuarial
loss (gain) included in net
periodic benefit cost (1) 13 (2) 25
Amortization of prior service
cost included in net
periodic benefit cost 6 6 12 11
----------------------------------------------------------------------------
Other comprehensive income
(loss) before income taxes (1) (67) 9 (59)
Income tax recovery (expense) (9) (63) 21 (77)
----------------------------------------------------------------------------
Other comprehensive income
(loss) (10) (130) 30 (136)
----------------------------------------------------------------------------
Balance, end of period $ (1) $ (180) $ (1) $ (180)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Retained earnings

Balance, beginning of period $ 5,823 $ 5,434 $ 5,925 $ 5,409
Adoption of new accounting
pronouncements (2) - - - 95
----------------------------------------------------------------------------

Restated balance, beginning of
period 5,823 5,434 5,925 5,504

Net income 459 516 770 840
Share repurchase programs
(Note 3) (271) (291) (573) (578)
Dividends (109) (105) (220) (212)
----------------------------------------------------------------------------
Balance, end of period $ 5,902 $ 5,554 $ 5,902 $ 5,554
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.

(1) During the three and six months ended June 30, 2008, the Company issued
0.7 million and 1.5 million common shares, respectively, as a result of
stock options exercised, and repurchased 6.0 million and 13.3 million
common shares, respectively, under its 33.0 million share repurchase
program. At June 30, 2008, the Company had 473.4 million common shares
outstanding.

(2) On January 1, 2007, the Company adopted Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 48, "Accounting for Uncertainty in
Income Taxes," and early adopted the measurement date provisions of
Statement of Financial Accounting Standards (SFAS) No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans,
an amendment of FASB Statements No. 87, 88, 106, and 132(R )." The
application of FIN No. 48 on January 1, 2007 had the effect of
decreasing the net deferred income tax liability and increasing
Retained earnings by $98 million. The application of SFAS No. 158 on
January 1, 2007 had the effect of decreasing Retained earnings by
$3 million.


CANADIAN NATIONAL RAILWAY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (U.S. GAAP)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(In millions)

Three months ended Six months ended
June 30 June 30
------------------ -----------------
2008 2007 2008 2007
----------------------------------------------------------------------------
(Unaudited)

Operating activities

Net income $ 459 $ 516 $ 770 $ 840
Adjustments to reconcile net
income to net cash provided
from operating activities:
Depreciation and amortization 176 169 351 341
Deferred income taxes 89 43 114 50
Other changes in:
Accounts receivable (233) 38 (468) 214
Material and supplies (6) (1) (54) (20)
Accounts payable and
accrued charges (58) (4) (126) (406)
Other net current assets
and liabilities 41 27 79 9
Other (59) (22) (92) 1
----------------------------------------------------------------------------
Cash provided from operating
activities 409 766 574 1,029
----------------------------------------------------------------------------

Investing activities

Property additions (352) (344) (529) (547)
Other, net 9 2 20 12
----------------------------------------------------------------------------
Cash used by investing
activities (343) (342) (509) (535)
----------------------------------------------------------------------------

Financing activities

Issuance of long-term debt 1,597 1,050 2,652 1,484
Reduction of long-term debt (1,418) (904) (1,998) (1,049)
Issuance of common shares due
to exercise of stock
options and related excess
tax benefits realized 16 41 34 59
Repurchase of common shares (323) (344) (690) (687)
Dividends paid (109) (105) (220) (212)
----------------------------------------------------------------------------
Cash used by financing
activities (237) (262) (222) (405)
----------------------------------------------------------------------------

Effect of foreign exchange
fluctuations on U.S. dollar-
denominated cash and cash
equivalents (2) (27) 8 (27)
----------------------------------------------------------------------------

Net increase (decrease) in
cash and cash equivalents (173) 135 (149) 62

Cash and cash equivalents,
beginning of period 334 106 310 179
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 161 $ 241 $ 161 $ 241
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental cash flow information
Net cash receipts from
customers and other $ 1,886 $ 2,086 $ 3,634 $ 4,160
Net cash payments for:
Employee services,
suppliers and other
expenses (1,215) (1,017) (2,554) (2,254)
Interest (90) (73) (190) (187)
Workforce reductions (6) (7) (12) (16)
Personal injury and
other claims (18) (26) (44) (46)
Pensions (31) (22) (53) (23)
Income taxes (117) (175) (207) (605)
----------------------------------------------------------------------------
Cash provided from operating
activities $ 409 $ 766 $ 574 $ 1,029
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


CANADIAN NATIONAL RAILWAY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Note 1 - Basis of presentation

In management's opinion, the accompanying unaudited Interim Consolidated
Financial Statements and Notes thereto, expressed in Canadian dollars, and
prepared in accordance with U.S. generally accepted accounting principles
(U.S. GAAP) for interim financial statements, contain all adjustments
(consisting of normal recurring accruals) necessary to present fairly
Canadian National Railway Company's (the Company) financial position as at
June 30, 2008, December 31, 2007, and June 30, 2007, and its results of
operations, changes in shareholders' equity and cash flows for the three and
six months ended June 30, 2008 and 2007.

These unaudited Interim Consolidated Financial Statements and Notes thereto
have been prepared using accounting policies consistent with those used in
preparing the Company's 2007 Annual Consolidated Financial Statements. While
management believes that the disclosures presented are adequate to make the
information not misleading, these unaudited Interim Consolidated Financial
Statements and Notes thereto should be read in conjunction with the
Company's Interim Management's Discussion and Analysis (MD&A) and Annual
Consolidated Financial Statements and Notes thereto.


Note 2 - Agreement to acquire Elgin, Joliet and Eastern Railway Company
(EJ&E)

In September 2007, the Company entered into an agreement with the U.S. Steel
Corporation (U.S. Steel) for the acquisition of the key operations of EJ&E
for a purchase price of approximately U.S.$300 million. Under the terms of
the agreement, the Company will acquire substantially all of the railroad
assets and equipment of EJ&E, except those that support the Gary Works site
in northwest Indiana and the steelmaking operations of U.S. Steel. The
acquisition will be financed by debt and cash on hand.

In accordance with the terms of the agreement, the Company's obligation to
consummate the acquisition is subject to the Company having obtained from
the Surface Transportation Board (STB) a final, unappealable decision that
approves the acquisition and does not impose on the parties conditions that
would significantly and adversely affect the anticipated economic benefits
of the acquisition to the Company.

On November 26, 2007, the STB accepted the Company's application to consider
the acquisition as a minor transaction. The STB, however, is also requiring
an Environmental Impact Statement (EIS) for the transaction, and it has
indicated that its decision on the transaction will not be issued until the
EIS process is completed. The Company has requested that the STB establish
time limits for it to conclude its environmental review and issue a decision
that would enable the transaction to close by late 2008. If the transaction
is approved by the STB, the Company will account for the acquisition using
the purchase method of accounting.


Note 3 - Financing activities

Shelf prospectus and registration statement
In May 2008, the Company issued U.S.$325 million (Cdn$331 million) of 4.95%
Notes due 2014 and U.S.$325 million (Cdn$331 million) of 5.55% Notes due
2018. The debt offering was made under the Company's current shelf
prospectus and registration statement. Accordingly, the amount available
under the shelf prospectus and registration statement has been reduced to
U.S.$1.85 billion. The Company used the net proceeds of U.S.$643 million to
repay a portion of its commercial paper outstanding, and to reduce its
account receivable securitization program.

Revolving credit facility
As at June 30, 2008, the Company had letters of credit drawn on its U.S.
$1 billion revolving credit facility, expiring in October 2011, of
$179 million ($57 million as at December 31, 2007). The Company also had
total borrowings under its commercial paper program of $345 million, of
which $230 million was denominated in Canadian dollars and $115 million was
denominated in U.S. dollars (U.S.$113 million). The weighted-average
interest rate on these borrowings was 2.96%. As at December 31, 2007, total
borrowings under the Company's commercial paper program were $122 million,
of which $114 million was denominated in Canadian dollars and $8 million was
denominated in U.S. dollars (U.S.$8 million). The weighted-average interest
rate on these borrowings was 5.01%.

Accounts receivable securitization
The Company has a five-year agreement, expiring in May 2011, to sell an
undivided co-ownership interest for maximum cash proceeds of $600 million in
a revolving pool of freight receivables to an unrelated trust. Pursuant to
the agreement, the Company sells an interest in its receivables and receives
proceeds net of the retained interest as stipulated in the agreement.

As at June 30, 2008, the Company had sold receivables that resulted in
proceeds of $231 million under this program ($588 million at December 31,
2007), and recorded retained interest of approximately 10% of this amount in
Other current assets (retained interest of approximately 10% recorded as at
December 31, 2007). As at June 30, 2008, the servicing asset and liability
were not significant.

Share repurchase programs
In the second quarter of 2008, under its 33.0 million share repurchase
program, the Company repurchased 6.0 million common shares for $323 million,
at a weighted-average price of $53.91 per share. As at June 30, 2008, the
Company has ended this program, repurchasing a total of 31.0 million common
shares since July 26, 2007, the inception of this program, for $1,588
million, at a weighted-average price of $51.22 per share.

On July 21, 2008, the Board of Directors of the Company approved a new
share repurchase program which allows for the repurchase of up to 25.0
million common shares between July 28, 2008 and July 20, 2009 pursuant
to a normal course issuer bid, at prevailing market prices or such other
prices as may be permitted by the Toronto Stock Exchange.


Note 4 - Stock plans

The Company has various stock-based incentive plans for eligible employees.
A description of the plans is provided in Note 12 - Stock plans, to the
Company's 2007 Annual Consolidated Financial Statements. For the three and
six months ended June 30, 2008, the Company recorded total compensation
expense for awards under all plans of $6 million and $34 million,
respectively, and $44 million and $73 million, respectively, for the same
periods in 2007. The total tax benefit recognized in income in relation to
stock-based compensation expense for the three and six months ended June 30,
2008 was $3 million and $10 million, respectively, and $13 million and
$21 million, respectively, for the same periods in 2007.

Cash settled awards
Following approval by the Board of Directors in January 2008, the Company
granted 0.7 million restricted share units (RSUs) to designated management
employees entitling them to receive payout in cash based on the Company's
share price. The RSUs granted by the Company are generally scheduled for
payout in cash after three years ("plan period") and vest upon the
attainment of targets relating to return on invested capital over the plan
period and the Company's share price during the last three months of the
plan period. As at June 30, 2008, 0.1 million RSUs remained authorized for
future issuance under this plan.

The following table provides the activity for all cash settled awards in
2008:

----------------------------------------------------------------------------
Vision 2008
Share Unit Voluntary Incentive
RSUs Plan (Vision) Deferral Plan (VIDP)
---------------- ---------------- --------------------
In millions Nonvested Vested Nonvested Vested Nonvested Vested
----------------------------------------------------------------------------
Outstanding at
December 31, 2007 1.6 0.9 0.8 - 0.2 1.9
Granted 0.7 - - - - -
Forfeited (0.1) - - - - -
Vested during period - - - - (0.1) 0.1
Payout - (0.9) - - - (0.2)
Conversion into VIDP - - - - - -
----------------------------------------------------------------------------
Outstanding at June
30, 2008 2.2 - 0.8 - 0.1 1.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The following table provides valuation and expense information for all cash
settled awards:

----------------------------------------------------------------------------
In millions, unless
otherwise indicated RSUs(1) Vision(1) VIDP(2) Total
----------------------------------------------------------------------------
2003
Year of grant 2008 2007 2006 2005 2004 2005 onwards
------ ------ ------ ----- ------ ----- ------
Stock-based
compensation
expense
recognized
over requisite
service period
Six months
ended June
30, 2008 $ 9 $ - $ 7 N/A $ 2 $ 2 $ 6 $ 26
Six months
ended June
30, 2007 N/A $ 13 $ 12 $ 12 $ 3 $ 7 $ 19 $ 66
----------------------------------------------------------------------------

Liability
outstanding
June 30, 2008 $ 9 $ 11 $ 36 N/A $ 2 $ 10 $ 94 $ 162
December 31,
2007 N/A $ 11 $ 29 $ 48 $ 4 $ 8 $ 95 $ 195
----------------------------------------------------------------------------

Fair value
per unit
June 30, 2008 $29.63 $31.25 $41.63 N/A $48.98 $15.90 $48.98 N/A
----------------------------------------------------------------------------

Fair value of
awards vested
during period
Six months
ended June
30, 2008 $ - $ - $ - N/A $ - $ - $ 2 $ 2
Six months
ended June
30, 2007 N/A $ - $ - $ - $ 5 $ - $ 3 $ 8
----------------------------------------------------------------------------

Nonvested
awards
at June 30,
2008
Unrecognized
compensation
cost $ 10 $ 4 $ 4 N/A $ 2 $ 2 $ 4 $ 26
Remaining
recognition
period (years) 2.50 1.50 0.50 N/A 0.50 0.50 3.50 N/A
----------------------------------------------------------------------------

Assumptions(3)
Stock price($) $48.98 $48.98 $48.98 N/A $48.98 $48.98 $48.98 N/A
Expected stock
price
volatility(4) 22% 23% 26% N/A N/A 28% N/A N/A
Expected term
(years)(5) 2.50 1.50 0.50 N/A N/A 0.50 N/A N/A
Risk-free
interest
rate(6) 3.31% 3.20% 2.96% N/A N/A 2.59% N/A N/A
Dividend rate
($)(7) $ 0.92 $ 0.92 $ 0.92 N/A N/A $ 0.92 N/A N/A
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Compensation cost is based on the fair value of the awards at period-end
using the lattice-based valuation model that uses the assumptions as
presented herein, except for time-vested RSUs.

(2) Compensation cost is based on intrinsic value.

(3) Assumptions used to determine fair value are at June 30, 2008.

(4) Based on the historical volatility of the Company's stock over a period
commensurate with the expected term of the award.

(5) Represents the remaining period of time that awards are expected to be
outstanding.

(6) Based on the implied yield available on zero-coupon government issues
with an equivalent term commensurate with the expected term of the
awards.

(7) Based on the annualized dividend rate.

Stock option awards
Following approval by the Board of Directors in January 2008, the Company
granted 0.9 million conventional stock options to designated senior
management employees. The stock option plan allows eligible employees to
acquire common shares of the Company upon vesting at a price equal to the
market value of the common shares at the date of grant. The options are
exercisable during a period not exceeding 10 years. The right to exercise
options generally accrues over a period of four years of continuous
employment. Options are not generally exercisable during the first 12 months
after the date of grant. At June 30, 2008, 13.5 million common shares
remained authorized for future issuances under this plan. The total number
of options outstanding at June 30, 2008, including conventional, performance
and performance-accelerated options, was 10.5 million, 0.3 million and
3.3 million, respectively.

The following table provides the activity of stock option awards in 2008.
The table also provides the aggregate intrinsic value for in-the-money stock
options, which represents the amount that would have been received by option
holders had they exercised their options on June 30, 2008 at the Company's
closing stock price of $48.98.

----------------------------------------------------------------------------
Options outstanding
----------------------------------------------------------------------------
Weighted- Weighted-
Number average average Aggregate
of exercise years to intrinsic
options price expiration value
----------------------------------------------------------------------------
In In
millions millions
----------------------------------------------------------------------------
Outstanding at December 31, 2007 (1) 14.7 $ 24.55
Granted 0.9 $ 48.51
Forfeited - $ -
Exercised (1.5) $ 17.44
----------------------------------------------------------------------------
Outstanding at June 30, 2008 (1) 14.1 $ 27.01 4.7 $311
----------------------------------------------------------------------------
Exercisable at June 30, 2008 (1) 11.7 $ 23.09 3.9 $303
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Stock options with a U.S. dollar exercise price have been translated to
Canadian dollars using the foreign exchange rate in effect at the
balance sheet date.

The following table provides valuation and expense information for all stock
option awards:

----------------------------------------------------------------------------
In millions, unless otherwise indicated
----------------------------------------------------------------------------
Year of grant 2008 2007 2006 2005 Total
------ ------ ------ ------ -----
Stock-based compensation expense
recognized over requisite service
period (1)
Six months ended June 30, 2008 $ 5 $ 1 $ 1 $ 1 $ 8
Six months ended June 30, 2007 N/A $ 5 $ 1 $ 1 $ 7
----------------------------------------------------------------------------

Fair value per unit
At grant date ($) $12.44 $13.36 $13.80 $ 9.19 N/A
----------------------------------------------------------------------------

Fair value of awards vested during
period
Six months ended June 30, 2008 $ - $ 3 $ 3 $ 3 $ 9
Six months ended June 30, 2007 N/A $ - $ 4 $ 3 $ 7
----------------------------------------------------------------------------

Nonvested awards at June 30, 2008
Unrecognized compensation cost $ 6 $ 3 $ 2 $ 2 $ 13
Remaining recognition period (years) 3.6 2.6 1.6 0.6 N/A
----------------------------------------------------------------------------

Assumptions (1)
Grant price ($) $48.51 $52.79 $51.51 $36.33 N/A
Expected stock price volatility (2) 27% 24% 25% 25% N/A
Expected term (years) (3) 5.3 5.2 5.2 5.2 N/A
Risk-free interest rate (4) 3.58% 4.12% 4.04% 3.50% N/A
Dividend rate ($) (5) $ 0.92 $ 0.84 $ 0.65 $ 0.50 N/A
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Compensation cost is based on the grant date fair value using the
Black-Scholes option-pricing model that uses the assumptions at the
grant date.

(2) Based on the historical volatility of the Company's stock over a period
commensurate with the expected term of the award.

(3) Represents the period of time that awards are expected to be
outstanding. The Company uses historical data to estimate option
exercise and employee termination, and groups of employees that have
similar historical exercise behavior are considered separately.

(4) Based on the implied yield available on zero-coupon government issues
with an equivalent term commensurate with the expected term of the
awards.

(5) Based on the annualized dividend rate.


Note 5 - Pensions and other postretirement benefits

For the three and six months ended June 30, 2008 and 2007, the components of
net periodic benefit cost (income) for pensions and other postretirement
benefits were as follows:

(a) Components of net periodic benefit cost (income) for pensions

----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
------------------ -----------------
In millions 2008 2007 2008 2007
----------------------------------------------------------------------------
Service cost $ 35 $ 38 $ 70 $ 76
Interest cost 200 185 400 371
Expected return on plan assets (251) (235) (502) (469)
Amortization of prior service
cost 5 5 10 10
Recognized net actuarial loss - 14 - 27
----------------------------------------------------------------------------
Net periodic benefit cost
(income) $ (11) $ 7 $ (22) $ 15
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(b) Components of net periodic benefit cost for other postretirement
benefits

----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
------------------ -----------------
In millions 2008 2007 2008 2007
----------------------------------------------------------------------------
Service cost $ 1 $ 1 $ 2 $ 2
Interest cost 4 3 8 7
Curtailment gain (1) - (3) (3)
Amortization of prior service
cost 1 1 2 1
Recognized net actuarial gain (1) (1) (2) (2)
----------------------------------------------------------------------------
Net periodic benefit cost $ 4 $ 4 $ 7 $ 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------

In 2008, the Company expects to make total contributions of approximately
$120 million for all its defined benefit plans, of which $53 million was
disbursed as at June 30, 2008 and includes $22 million relating to the 2007
funding year.


Note 6 - Major commitments and contingencies

A. Commitments
As at June 30, 2008, the Company had commitments to acquire railroad ties,
rail, freight cars, locomotives, and other equipment and services, as well
as outstanding information technology service contracts and licenses, at an
aggregate cost of $863 million ($952 million at December 31, 2007). The
Company also has agreements with fuel suppliers to purchase approximately
88% of the estimated remaining 2008 volume, 66% of its anticipated 2009
volume, and 31% of its anticipated 2010 volume, at market prices prevailing
on the date of the purchase.

B. Contingencies
In the normal course of its operations, the Company becomes involved in
various legal actions, including actions brought on behalf of various
classes of claimants, and claims relating to personal injuries, occupational
disease and damage to property.

Canada
Employee injuries are governed by the workers' compensation legislation in
each province whereby employees may be awarded either a lump sum or future
stream of payments depending on the nature and severity of the injury.
Accordingly, the Company accounts for costs related to employee work-related
injuries based on actuarially developed estimates of the ultimate cost
associated with such injuries, including compensation, health care and
third-party administration costs. For all other legal actions, the Company
maintains, and regularly updates on a case-by-case basis, provisions for
such items when the expected loss is both probable and can be reasonably
estimated based on currently available information.

United States
Employee work-related injuries, including occupational disease claims, are
compensated according to the provisions of the Federal Employers' Liability
Act (FELA), which requires either the finding of fault through the U.S. jury
system or individual settlements, and represent a major liability for the
railroad industry. The Company follows an actuarial-based approach and
accrues the expected cost for personal injury and property damage claims and
asserted and unasserted occupational disease claims, based on actuarial
estimates of their ultimate cost. A comprehensive actuarial study is
conducted on an annual basis, in the fourth quarter, by an independent
actuarial firm for occupational disease claims, while an actuarial study is
conducted on a semi-annual basis for non-occupational disease claims. On an
ongoing basis, management reviews and compares the assumptions inherent in
the latest actuarial study with the current claim experience and, if
required, adjustments to the liability are recorded.

As at June 30, 2008, the Company had aggregate reserves for personal injury
and other claims of $450 million, of which $104 million was recorded as a
current liability ($446 million, of which $102 million was recorded as a
current liability at December 31, 2007). Although the Company considers such
provisions to be adequate for all its outstanding and pending claims, the
final outcome with respect to actions outstanding or pending at June 30,
2008, or with respect to 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.

C. Environmental matters
The Company's operations are subject to numerous federal, provincial, state,
municipal and local environmental laws and regulations in Canada and the
United States 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
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 in its
railroad operations and relating to its past and present ownership,
operation or control of real property.

The Company is subject to environmental clean-up and enforcement actions. In
particular, the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (CERCLA), also known as the Superfund law, as well
as similar state laws generally impose joint and several liability for
clean-up and enforcement costs on current and former owners and operators of
a site without regard to fault or the legality of the original conduct. The
Company has been notified that it is a potentially responsible party for
study and clean-up costs at approximately 23 sites governed by the Superfund
law (and other similar federal and state laws) for which investigation and
remediation payments are or will be made or are yet to be determined and, in
many instances, is one of several potentially responsible parties.

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 the costs of complying with
environmental laws and containing or remediating contamination cannot be
reasonably estimated due to:

(i) the lack of specific technical information available with respect to
many sites;
(ii) the absence of any government authority, third-party orders, or claims
with respect to particular sites;
(iii) the potential for new or changed laws and regulations and for
development of new remediation technologies and uncertainty regarding
the timing of the work with respect to particular sites;
(iv) the ability to recover costs from any third parties with respect to
particular sites; and

therefore, the likelihood of any such costs being incurred or whether such
costs would be material to the Company cannot be determined at this time.
There can thus be no assurance that 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. Although the effect on operating results and liquidity cannot be
reasonably estimated, management believes, based on current information,
that environmental matters will not have a material adverse effect on the
Company's financial condition or competitive position. Costs related to any
future remediation will be accrued in the year in which they become known.

As at June 30, 2008, the Company had aggregate accruals for environmental
costs of $108 million, of which $28 million was recorded as a current
liability ($111 million, of which $28 million was recorded as a current
liability as at December 31, 2007).

D. Guarantees and indemnifications
In the normal course of business, the Company, including certain of its
subsidiaries, enters into agreements that may involve providing certain
guarantees or indemnifications to third parties and others, which may extend
beyond the term of the agreement. These include, but are not limited to,
residual value guarantees on operating leases, standby letters of credit and
surety and other bonds, and indemnifications that are customary for the type
of transaction or for the railway business.

The Company is required to recognize a liability for the fair value of the
obligation undertaken in issuing certain guarantees on the date the
guarantee is issued or modified. In addition, where the Company expects to
make a payment in respect of a guarantee, a liability will be recognized to
the extent that one has not yet been recognized.

(i) Guarantee of residual values of operating leases
The Company has guaranteed a portion of the residual values of certain of
its assets under operating leases with expiry dates between 2008 and 2019,
for the benefit of the lessor. If the fair value of the assets, at the end
of their respective lease term, is less than the fair value, as estimated at
the inception of the lease, then the Company must, under certain conditions,
compensate the lessor for the shortfall. At June 30, 2008, the maximum
exposure in respect of these guarantees was $139 million. There are no
recourse provisions to recover any amounts from third parties.

(ii) Other guarantees
The Company, including certain of its subsidiaries, has granted irrevocable
standby letters of credit and surety and other bonds, issued by highly rated
financial institutions, to third parties to indemnify them in the event the
Company does not perform its contractual obligations. As at June 30, 2008,
the maximum potential liability under these guarantees was $485 million, of
which $406 million was for workers' compensation and other employee benefits
and $79 million was for equipment under leases and other. During 2008, the
Company has granted guarantees for which no liability has been recorded, as
they relate to the Company's future performance.

As at June 30, 2008, the Company had not recorded any additional liability
with respect to these guarantees, as the Company does not expect to make any
additional payments associated with these guarantees. The majority of the
guarantee instruments mature at various dates between 2008 and 2010.

(iii) General indemnifications
In the normal course of business, the Company has provided indemnifications,
customary for the type of transaction or for the railway business, in
various agreements with third parties, including indemnification provisions
where the Company would be required to indemnify third parties and others.
Indemnifications are found in various types of contracts with third parties
which include, but are not limited to:

(a) contracts granting the Company the right to use or enter upon property
owned by third parties such as leases, easements, trackage rights and
sidetrack agreements;
(b) contracts granting rights to others to use the Company's property,
such as leases, licenses and easements;
(c) contracts for the sale of assets and securitization of accounts
receivable;
(d) contracts for the acquisition of services;
(e) financing agreements;
(f) trust indentures, fiscal agency agreements, underwriting agreements or
similar agreements relating to debt or equity securities of the
Company and engagement agreements with financial advisors;
(g) transfer agent and registrar agreements in respect of the Company's
securities;
(h) trust and other agreements relating to pension plans and other plans,
including those establishing trust funds to secure payment to certain
officers and senior employees of special retirement compensation
arrangements;
(i) pension transfer agreements;
(j) master agreements with financial institutions governing derivative
transactions; and
(k) settlement agreements with insurance companies or other third parties
whereby such insurer or third party has been indemnified for any
present or future claims relating to insurance policies, incidents or
events covered by the settlement agreements.

To the extent of any actual claims under these agreements, the Company
maintains provisions for such items, which it considers to be adequate. Due
to the nature of the indemnification clauses, the maximum exposure for
future payments may be material. However, such exposure cannot be determined
with certainty.

The Company has entered into various indemnification contracts with third
parties for which the maximum exposure for future payments cannot be
determined with certainty. As a result, the Company was unable to determine
the fair value of these guarantees and accordingly, no liability was
recorded. There are no recourse provisions to recover any amounts from third
parties.


Note 7 - Income taxes

In 2008, the Company recorded a deferred income tax recovery of $34 million
in the Consolidated Statement of Income, of which $23 million, recorded in
the second quarter, was due to the enactment of lower provincial corporate
income tax rates and $11 million, recorded in the first quarter, resulted
from net capital losses arising from the reorganization of a subsidiary. In
the second quarter of 2007, the Company recorded a deferred income tax
recovery of $30 million in the Consolidated Statement of Income, due to the
enactment of a lower federal corporate income tax rate in Canada.


Note 8 - Earnings per share

The following table provides a reconciliation between basic and diluted
earnings per share:

----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
------------------ -----------------
In millions, except per
share data 2008 2007 2008 2007
----------------------------------------------------------------------------

Net income $ 459 $ 516 $ 770 $ 840

Weighted-average shares
outstanding 476.4 505.2 479.6 507.7
Effect of stock options 5.6 7.1 5.7 7.4
----------------------------------------------------------------------------
Weighted-average diluted shares
outstanding 482.0 512.3 485.3 515.1

Basic earnings per share $ 0.96 $ 1.02 $ 1.61 $ 1.65
Diluted earnings per share $ 0.95 $ 1.01 $ 1.59 $ 1.63
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The weighted-average number of stock options that were not included in the
calculation of diluted earnings per share, as their inclusion would have had
an anti-dilutive impact, was 0.1 million for both the three and six months
ended June 30, 2008, and nil and 0.1 million, respectively, for the
corresponding periods in 2007.


CANADIAN NATIONAL RAILWAY COMPANY
SELECTED RAILROAD STATISTICS (1) (U.S. GAAP)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three months ended Six months ended
June 30 June 30
------------------ -----------------
2008 2007 2008 2007
----------------------------------------------------------------------------
(Unaudited)
Statistical operating data

Rail freight revenues
($ millions) 1,876 1,848 3,636 3,602
Gross ton

For more information, please contact

CN
Mark Hallman (Media)
Director
Communications, Media
(905) 669-3384

or

CN
Robert Noorigian (Investment Community)
Vice-President
Investor Relations
(514) 399-0052

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