CN
TSX : CNR
NYSE : CNI

CN

October 19, 2006 16:01 ET

CN posts 27 per cent increase in Q3 2006 diluted EPS, revises upwards 2006 full-year earnings guidance, expects solid 2007 financial performance

MONTREAL, QUEBEC--(CCNMatthews - Oct. 19, 2006) - CN today reported its financial and operating results for the three-month and nine-month periods ended Sept. 30, 2006.

Third-quarter 2006 financial highlights

- Net income of C$497 million, a 21 per cent increase over third-quarter 2005;

- Diluted earnings per share (EPS) of C$0.94, an increase of 27 per cent;

- Operating income of C$844 million, up 27 per cent;

- Solid revenues of C$1,981 million, an increase of nine per cent;

- Record quarterly operating ratio of 57.4 per cent, an improvement of 5.9 percentage points, and

- Nine-months free cash flow of C$1,131 million (1)

E. Hunter Harrison, president and chief executive officer, said: "CN produced exceptional third-quarter results, reflecting substantial revenue growth, asset utilization and cost control accomplishments. Revenues increased nine per cent, freight volume was up six per cent, and carloadings improved by two per cent.

"The top line benefited from the underlying strength of the diverse and balanced portfolio of commodities that CN transports, as well as freight rate increases. Cost control was again outstanding -- operating expenses declined one per cent during the quarter despite an increase in workload and much higher fuel expenses. Our revenue, cost performance and asset utilization focus all came together in producing a record quarterly operating ratio of 57.4 per cent.

"CN's business model - the pursuit of long-term, sustainable growth, and its consistent ability to grow the business at low incremental cost - continues to hit the mark, driving superior bottom line growth and delivering shareholder value."

Positive revision to CN's 2006 earnings guidance, solid financial outlook for 2007

Harrison said: "I'm pleased to announce today that CN is revising upwards its full-year 2006 earnings guidance because of the strong year-to-date financial performance of the company. CN now expects 2006 adjusted diluted earnings per share to be approximately C$3.40." (2)

Building on the strength of CN's 2006 financial track record, the company expects 2007 diluted earnings per share to grow in the 10 per cent-plus range, consistent with the company's long-term vision.

In addition, CN expects 2006 free cash flow of approximately C$1.3 billion, and 2007 free cash flow of approximately C$800 million, with the reduction in 2007 reflecting higher cash payments for Canadian income taxes.

CN's 2007 financial outlook assumes, among various conditions, the latest consensus forecast of North American economic growth of 2.6 per cent; crude oil prices (West Texas Intermediate) of US$65 per barrel; and a Canadian-U.S. dollar exchange rate of US$0.89 per Canadian dollar.

Third-quarter revenues and expenses

Third-quarter revenues increased nine per cent due to rate increases, higher fuel surcharges, and volume growth, particularly in the grain, intermodal, and metals and minerals commodity groups. Partly offsetting these gains was the unfavourable C$65-million translation impact of the stronger Canadian dollar on U.S. dollar-denominated revenues.

Six of CN's seven commodity groups experienced revenue increases during the quarter, while revenue ton-miles - a measure of the rail freight volume carried by the company - rose by six per cent.

CN's operating expenses for the third quarter declined one per cent to C$1,137 million, owing largely to lower casualty and other expense, lower labour and fringe benefits expense, and the favourable C$40-million translation impact of the stronger Canadian dollar on U.S. dollar-denominated expenses. Partly offsetting these factors were increased fuel costs, and purchased services and material expense.

The continued appreciation in the Canadian dollar relative to the U.S. dollar reduced third-quarter net income by approximately C$15 million, or approximately three cents per diluted share.

Nine-month results

Net income for the first nine months of 2006 increased by 41 per cent to C$1,588 million, with diluted earnings per share increasing 48 per cent to C$2.95. Included in net income was a second-quarter deferred income tax recovery of C$250 million (C$0.46 per diluted share) resulting primarily from the enactment of lower federal and provincial corporate tax rates in Canada.

Revenues for the nine-month period increased by eight per cent to C$5,774 million due to rate increases, higher fuel surcharges, and volume growth, particularly in the grain, intermodal, and metals and minerals commodity groups. Partly offsetting these gains was the unfavourable C$220-million translation impact of the stronger Canadian dollar on U.S. dollar-denominated revenues.

Operating expenses for the first nine months of 2006 increased one per cent to C$3,500 million. The increase was largely due to increased fuel costs, purchased services and material expense, and depreciation. Partly offsetting these factors was the favourable C$130-million translation impact of the stronger Canadian dollar on U.S. dollar-denominated expenses, lower casualty and other expense, and lower labour and fringe benefits expense.

Operating income increased 19 per cent to C$2,274 million, while the company's operating ratio improved by 3.8 percentage points to 60.6 per cent.

The continued appreciation of the Canadian dollar relative to the U.S. dollar reduced nine-month 2006 net income by approximately C$50 million, or approximately nine cents per diluted share.

The financial results in this press release 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.

(2) CN's positive revision to its full-year 2006 earnings outlook - the company now forecasts 2006 adjusted diluted earnings per share to be approximately C$3.40 -- excludes the effect of the company's second-quarter 2006 deferred income tax recovery of C$250 million (C$0.46 per diluted share). For comparison purposes, CN reported 2005 diluted earnings per share of C$2.77.

This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risk and uncertainties, including the assumptions described above in this news release, and that its results could differ materially from those expressed or implied in such 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, labour 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 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, its 2005 Annual Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis (MD&A), as well as its 2006 quarterly consolidated financial statements and MD&A, for a summary of major risks.

CN - 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, and Jackson, Miss., with connections to all points in North America.



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

Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
(Unaudited)

Revenues $ 1,981 $ 1,810 $ 5,774 $ 5,354
---------------------------------------------------------------------------

Operating expenses 1,137 1,145 3,500 3,450
---------------------------------------------------------------------------

Operating income 844 665 2,274 1,904

Interest expense (82) (72) (232) (225)

Other income (loss) (10) 11 (16) 2
---------------------------------------------------------------------------

Income before income taxes 752 604 2,026 1,681

Income tax expense (Note 4) (255) (193) (438) (555)
---------------------------------------------------------------------------

Net income $ 497 $ 411 $ 1,588 $ 1,126
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Earnings per share (Notes 8, 9)

Basic $ 0.95 $ 0.75 $ 3.00 $ 2.03

Diluted $ 0.94 $ 0.74 $ 2.95 $ 1.99

Weighted-average number of shares

Basic 522.5 547.3 529.5 555.8

Diluted 530.2 557.4 538.0 566.2
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


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

Three months ended Nine months ended
September 30 September 30
---------------------- -----------------------
Variance Variance
Fav Fav
2006 2005 (Unfav) 2006 2005 (Unfav)
---------------------------------------------------------------------------
(Unaudited)

Revenues

Petroleum and chemicals $ 298 $ 267 12% $ 872 $ 813 7%
Metals and minerals 239 209 14% 681 622 9%
Forest products 449 448 - 1,331 1,302 2%
Coal 96 80 20% 282 256 10%
Grain and fertilizers 308 273 13% 907 809 12%
Intermodal 376 331 14% 1,062 931 14%
Automotive 120 114 5% 383 375 2%
Other items 95 88 8% 256 246 4%
--------------------------------------- -------------
1,981 1,810 9% 5,774 5,354 8%

Operating expenses

Labor and fringe
benefits 416 453 8% 1,334 1,388 4%
Purchased services
and material 205 188 (9%) 623 590 (6%)
Depreciation and
amortization 157 156 (1%) 483 470 (3%)
Fuel 235 181 (30%) 663 526 (26%)
Equipment rents 50 46 (9%) 135 146 8%
Casualty and other 74 121 39% 262 330 21%
--------------------------------------- -------------
1,137 1,145 1% 3,500 3,450 (1%)
--------------------------------------- -------------

Operating income $ 844 $ 665 27% $2,274 $1,904 19%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Operating ratio 57.4% 63.3% 5.9 60.6% 64.4% 3.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


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

September 30 December 31 September 30
2006 2005 2005
---------------------------------------------------------------------------
(Unaudited) (Unaudited)
Assets

Current assets:
Cash and cash equivalents $ 56 $ 62 $ 119
Accounts receivable (Note 2) 1,035 623 643
Material and supplies 205 151 175
Deferred income taxes 80 65 47
Other 107 248 252
---------------------------------------------------------------------------
1,483 1,149 1,236


Properties 20,216 20,078 19,761
Intangible and other assets 976 961 930
---------------------------------------------------------------------------

Total assets $ 22,675 $ 22,188 $ 21,927
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities and shareholders' equity

Current liabilities:
Accounts payable and accrued charges $ 1,671 $ 1,478 $ 1,429
Current portion of long-term debt
(Note 2) 151 408 370
Other 69 72 115
---------------------------------------------------------------------------
1,891 1,958 1,914


Deferred income taxes (Note 4) 4,884 4,817 4,743
Other liabilities and deferred credits 1,474 1,487 1,463
Long-term debt (Note 2) 5,164 4,677 4,608


Shareholders' equity:
Common shares 4,476 4,580 4,605
Accumulated other comprehensive loss (520) (222) (169)
Retained earnings 5,306 4,891 4,763
---------------------------------------------------------------------------
9,262 9,249 9,199
---------------------------------------------------------------------------

Total liabilities and shareholders'
equity $ 22,675 $ 22,188 $ 21,927
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


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

Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
(Unaudited)

Common shares (1)

Balance, beginning of period $ 4,543 $ 4,640 $ 4,580 $ 4,706

Stock options exercised
and other 8 45 90 146

Share repurchase programs
(Note 2) (75) (80) (194) (247)

---------------------------------------------------------------------------
Balance, end of period $ 4,476 $ 4,605 $ 4,476 $ 4,605
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Accumulated other comprehensive loss

Balance, beginning of period $ (521) $ (106) $ (222) $ (148)

Other comprehensive income (loss):

Unrealized foreign exchange
gain (loss) on translation of
U.S. dollar-denominated long-
term debt designated as a hedge
of the net investment in U.S.
subsidiaries (44) 200 163 123

Unrealized foreign exchange gain
(loss) on translation of the net
investment in foreign operations 50 (283) (214) (190)

Increase (decrease) in unrealized
holding gains on fuel derivative
instruments (Note 5) (10) (12) (57) 35
---------------------------------------------------------------------------
Other comprehensive loss before
income taxes (4) (95) (108) (32)

Income tax recovery (expense)
(Note 4) 5 32 (190) 11
---------------------------------------------------------------------------
Other comprehensive income (loss) 1 (63) (298) (21)
---------------------------------------------------------------------------
Balance, end of period $ (520) $ (169) $ (520) $ (169)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Retained earnings

Balance, beginning of period $ 5,212 $ 4,720 $ 4,891 $ 4,726

Net income 497 411 1,588 1,126

Share repurchase programs
(Note 2) (318) (300) (916) (881)

Dividends (85) (68) (257) (208)

---------------------------------------------------------------------------
Balance, end of period $ 5,306 $ 4,763 $ 5,306 $ 4,763
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

(1) During the three and nine months ended September 30, 2006, the Company
issued 0.2 million and 3.4 million common shares, respectively, as a
result of stock options exercised. At September 30, 2006, the Company
had 517.7 million common shares outstanding (Note 9).


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

Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
(Unaudited)

Operating activities

Net income $ 497 $ 411 $ 1,588 $ 1,126
Adjustments to reconcile net
income to net cash provided
from operating activities:
Depreciation and amortization 159 157 486 473
Deferred income taxes (Note 4) 74 146 (20) 444
Other changes in:
Accounts receivable (Note 2) (71) (10) (420) 124
Material and supplies 30 9 (54) (50)
Accounts payable and accrued
charges 134 (103) 149 (184)
Other net current assets and
liabilities 9 40 92 83
Other 22 (7) 57 (5)
---------------------------------------------------------------------------
Cash provided from operating
activities 854 643 1,878 2,011
---------------------------------------------------------------------------

Investing activities

Property additions (384) (321) (826) (792)
Other, net 6 17 (39) 90
---------------------------------------------------------------------------
Cash used by investing activities (378) (304) (865) (702)
---------------------------------------------------------------------------

Financing activities

Issuance of long-term debt - 648 3,125 1,741
Reduction of long-term debt (153) (599) (2,855) (1,846)
Issuance of common shares due to
exercise of stock options and
related excess tax benefits
realized (Note 3) 4 24 78 104
Repurchase of common shares (393) (380) (1,110) (1,128)
Dividends paid (85) (68) (257) (208)
---------------------------------------------------------------------------
Cash used by financing activities (627) (375) (1,019) (1,337)
---------------------------------------------------------------------------

Net decrease in cash and cash
equivalents (151) (36) (6) (28)

Cash and cash equivalents,
beginning of period 207 155 62 147
---------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 56 $ 119 $ 56 $ 119
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow information

Net cash receipts from
customers and other $ 1,898 $ 1,825 $ 5,366 $ 5,545
Net cash payments for:
Employee services, suppliers
and other expenses (873) (946) (2,942) (2,951)
Interest (86) (93) (227) (236)
Workforce reductions (10) (20) (37) (72)
Personal injury and other claims (18) (23) (60) (71)
Pensions (21) (19) (46) (73)
Income taxes (36) (81) (176) (131)
---------------------------------------------------------------------------
Cash provided from operating
activities $ 854 $ 643 $ 1,878 $ 2,011
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

Certain of the 2005 comparative figures have been reclassified in order to
be consistent with the 2006 presentation.


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 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
September 30, 2006 and December 31 and September 30, 2005, its results of
operations, changes in shareholders' equity and cash flows for the three
and nine months ended September 30, 2006 and 2005.

These unaudited Interim Consolidated Financial Statements and Notes thereto
have been prepared using accounting policies consistent with those used in
preparing the Company's 2005 Annual Consolidated Financial Statements,
except for stock-based compensation as explained in Note 3 - Stock plans.
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 and Annual
Consolidated Financial Statements and Notes thereto.


Note 2 - Financing activities

Shelf prospectus and registration statement
On May 9, 2006, the Company filed a shelf prospectus and registration
statement providing for the issuance, from time to time, of up to
U.S.$1,500 million of debt securities in one or more offerings. Pursuant
to the filing, on May 31, 2006, the Company issued U.S.$250 million
(Cdn$275 million) of 5.80% Notes due 2016 and U.S.$450 million (Cdn$495
million) of 6.20% Debentures due 2036. The Company used the net proceeds
of U.S.$692 million to reduce its accounts receivable securitization
program and to repay a portion of its outstanding commercial paper.

On July 15, 2006, the interest rate on the Company's U.S.$250 million
Puttable Reset Securities PURSSM (PURS) was reset at a new rate of 6.71%
for the remaining 30-year term ending July 15, 2036. The PURS were
originally issued in July 1998 with an option to call the securities on
July 15, 2006 (the reset date). The call option holder exercised the call
option, which resulted in the remarketing of the original PURS. The new
interest rate was determined according to a pre-set mechanism based on
prevailing market conditions. The Company did not receive any cash
proceeds from the remarketing.

The remarketing did not trigger an extinguishment of debt, as the
provisions for the reset of the interest rate were set forth in the
original PURS. As such, the original PURS remain outstanding but accrue
interest at the new rate until July 2036. Under securities laws, the
remarketing required utilization of the Company's shelf prospectus and
registration statement.

Following the issuance and remarketing of debt as explained herein, the
amount available under the shelf prospectus and registration statement has
been reduced to U.S.$550 million.

Revolving credit facility
In January 2006, the Company repaid its borrowings of U.S.$15 million
(Cdn$17 million) outstanding at December 31, 2005 under its U.S.$1,000
million revolving credit facility. As at September 30, 2006, the Company
had letters of credit drawn on its revolving credit facility of $306
million ($316 million as at December 31, 2005) and had no outstanding
borrowings under its commercial paper program (U.S.$367 million (Cdn$427
million) at an average interest rate of 4.40% as at December 31, 2005).

In early October 2006, the Company amended its U.S.$1,000 million
revolving credit facility, improving the pricing parameters and extending
the maturity from March 2010 to October 2011. Other terms of the facility
remain substantially the same.

Accounts receivable securitization
On May 31, 2006, the Company entered into an agreement, expiring in
May 2011, to sell an undivided co-ownership interest of up to a maximum of
$600 million in a revolving pool of freight receivables to an unrelated
trust. As part of the interest sold, the Company has recorded, in Other
current assets, an amount equal to the required reserves stipulated in the
agreement. The Company has retained the responsibility for servicing,
administering and collecting the receivables sold. At September 30, 2006,
the servicing asset and liability were not significant. Costs related to
the agreement, which fluctuate with changes in prevailing interest rates,
are recorded in Other loss. Subject to customary indemnifications, the
trust's recourse to the Company is generally limited to income earned on
the receivables.

This new program replaced the Company's previous accounts receivable
securitization program that was set to expire in June 2006. Upon
termination of the previous program, the receivables sold were repurchased
with the funds from the Company's debt issuance in May 2006. Pursuant to
the repurchase, receivables in the amount of $535 million were
added to the balance sheet and the retained interest that was recorded in
Other current assets in the amount of $51 million, was removed.

The Company accounts for the securitization program as a sale, as control
over the transferred accounts receivable is relinquished. Due to the
relatively short collection period and the high quality of the receivables
sold, the fair value of the undivided interest transferred to the trust,
net of the retained interest (the required reserves), approximated the
book value and there was no gain or loss resulting from the transaction.

At September 30, 2006, the Company had sold receivables that resulted in
proceeds of $100 million under the new accounts receivable securitization
program ($489 million at December 31, 2005 under the previous program),
and recorded the retained interest of approximately 10% of this amount in
Other current assets.

Share repurchase programs
On July 20, 2006, the Board of Directors of the Company approved a new
share repurchase program which allows for the repurchase of up to 28.0
million common shares between July 25, 2006 and July 24, 2007 pursuant to
a normal course issuer bid, at prevailing market prices.

In the third quarter of 2006, under this current share repurchase program,
the Company repurchased 8.5 million common shares for $393 million, at an
average price of $46.23 per share.

In the second quarter of 2006, the Company ended its 32.0 million share
repurchase program, which began July 25, 2005, repurchasing a total of 30.0
million common shares for $1,388 million, at an average price of $46.26 per
share. Of this amount, 14.0 million common shares were repurchased in 2006
for $717 million, at an average price of $51.24 per share.


Note 3 - Stock plans

On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123(R ), "Share-Based Payment," which requires the
expensing of all options issued, modified or settled based on the grant
date fair value over the period during which an employee is required to
provide service (vesting period). The standard also requires that cash
settled awards be measured at fair value at each reporting date until
ultimate settlement.

The Company adopted SFAS No. 123(R ) using the modified prospective
approach, which requires application of the standard to all awards granted,
modified, repurchased or cancelled on or after January 1, 2006, and to all
awards for which the requisite service has not been rendered as at such
date. Since January 1, 2003, the Company has been following the fair value
based approach prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," for stock option awards granted,
modified or settled on or after such date, while cash settled awards were
measured at their intrinsic value at each reporting period until
December 31, 2005. As such, the application of SFAS No. 123(R ) on
January 1, 2006 to all awards granted prior to its adoption did not have a
significant impact on the financial statements. In accordance with the
modified prospective approach, prior period financial statements have not
been restated to reflect the impact of SFAS No. 123(R ).

For the three and nine months ended September 30, 2006, the application of
SFAS No. 123(R ) had the effect of decreasing stock-based compensation
expense by $2 million and increasing stock-based compensation expense by $1
million, respectively, and increasing net income by $1 million and
decreasing net income by $1 million, respectively. There was no effect on
the basic and diluted earnings per share for the three and nine months
ended September 30, 2006.

The Company has various stock-based incentive plans for eligible employees.
A description of the plans is provided herein. For the three and nine
months ended September 30, 2006, the Company recorded total compensation
cost for awards under all plans of $7 million and $48 million,
respectively, and $38 million and $79 million, respectively, for the same
periods in 2005. The total tax benefit recognized in income in relation to
stock-based compensation expense for the three and nine months ended
September 30, 2006, was $1 million and $12 million, respectively, and $12
million and $22 million, respectively, for the same periods in 2005.


Cash settled awards
A. Restricted share units
The Company has granted restricted share units (RSUs), 0.8 million in 2006
and 0.9 million in 2005, to designated management employees entitling them
to receive payout in cash based on the Company's share price. The RSUs
granted are generally scheduled for payout after three years and vest upon
the attainment of targets relating to return on invested capital over the
three-year period and to the Company's share price during the three-month
period ending December 31, 2008 for the 2006 grant and December 31, 2007
for the 2005 grant. The Company had granted 2.3 million RSUs in 2004,
having the same general terms as the currently outstanding RSUs described,
except that the RSUs were subject to accelerated payout if specified
targets related to the Company's 20-day average share price were attained
during the period ending December 31, 2005. Given that these targets were
met, vesting of these units was accelerated and increased to its maximum
allowable amount under the plan, resulting in a payout of $105 million. Of
this amount, $41 million was converted into deferred share units at
December 31, 2005, and the remaining payout of $64 million was paid in
cash in January 2006. As at September 30, 2006, a minimal amount of RSUs
remained authorized for future issuance under this plan.


B. Vision 2008 Share Unit Plan
The Company has a special share unit plan (Vision), which was approved by
the Board of Directors in January 2005, whereby 0.8 million share units
were granted to designated senior management employees entitling them to
receive a payout in cash, based on the Company's share price, in January
2009. The share units vest conditionally upon the attainment of targets
relating to the Company's share price during the six-month period ending
December 31, 2008. Payout is conditional upon the attainment of targets
relating to return on invested capital over the four-year period and to
the Company's share price during the 20-day period ending on December 31,
2008. The award payout will be equal to the number of share units vested
on December 31, 2008 multiplied by the Company's 20-day average share
price ending on such date. As at September 30, 2006, 0.2 million share
units remained authorized for future issuance under this plan.


C. Voluntary Incentive Deferral Plan
The Company has a Voluntary Incentive Deferral Plan (VIDP), providing
eligible senior management employees the opportunity to elect to receive
their annual incentive bonus payment and other eligible incentive payments
in deferred share units (DSUs). A DSU is equivalent to a common share of
the Company and also earns dividends when cash dividends are paid on
common shares. The number of DSUs received by each participant is
established using the average closing price for the 20 trading days prior
to and including the date of the incentive payment. For each participant,
the Company will grant a further 25% (Company match) of the amount elected
in DSUs, which will vest over a period of 4 years. The election to receive
eligible incentive payments in DSUs is no longer available to a participant
when the value of the participant's vested DSUs is sufficient to meet the
Company's stock ownership guidelines. The value of each participant's DSUs
is payable in cash at the time of cessation of employment. The Company's
liability for DSUs is marked-to-market at each period-end based on the
Company's closing stock price.

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

---------------------------------------------------------------------------
RSUs Vision VIDP
----------------- ----------------- -----------------
In millions Nonvested Vested Nonvested Vested Nonvested Vested
---------------------------------------------------------------------------

Outstanding at
December 31, 2005 1.2 - 0.8 - 0.4 1.7
Granted 0.8 - - - - -
Forfeited - - - - - -
Vested during period - - - - - -
Conversion into VIDP - - - - - 0.1
---------------------------------------------------------------------------
Outstanding at
September 30, 2006 2.0 - 0.8 - 0.4 1.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Additional disclosures required under SFAS No. 123(R ) for cash settled
awards are provided in tabular format herein.

Stock option awards
The Company has stock option plans for 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 granting. 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 September 30, 2006, 15.2 million common
shares remained authorized for future issuances under these plans.

Options issued by the Company include conventional options, which vest
over a period of time, performance options, which vested upon the
attainment of Company targets relating to the operating ratio and
unlevered return on investment, and performance-accelerated options,
which vest on the sixth anniversary of the grant or prior if certain
Company targets, relating to return on investment and revenues, are
attained.

For the nine months ended September 30, 2006 and 2005, the Company granted
approximately 1.1 million and 1.3 million, respectively, of conventional
stock options to designated senior management employees that vest over a
period of four years of continuous employment. As at September 30, 2006,
the Company's performance-based stock options were fully vested and the
performance-accelerated options vested in January 2006 given that the
specified targets were met.

The total number of options outstanding at September 30, 2006, for
conventional, performance, and performance-accelerated options was 13.1
million, 0.8 million and 4.7 million, respectively.

The following table provides the activity of stock option awards during
the quarter, and for options outstanding and exercisable at the end of the
quarter, the weighted average exercise price, the weighted average years
to expiration and the aggregate intrinsic value. The aggregate intrinsic
value represents the total pre-tax intrinsic value, based on the Company's
closing stock price at September 30, 2006 of $46.75, which would have been
received by option holders had they exercised their options on such date.

---------------------------------------------------------------------------
Options outstanding Nonvested options
----------------------------------------- --------------------
Weighted- Weighted- Weighted-
Number average average Aggregate Number average
of exercise years to intrinsic of grant date
options price expiration value options fair value
---------------------------------------------------- --------------------
In In In
millions millions millions
---------------------------------------------------- --------------------
Outstanding
at
December
31, 2005 (1) 21.0 $ 20.95 5.4 $ 8.47
Granted 1.1 $ 51.51 1.1 $ 13.80
Forfeited (0.1) $ 34.73 - $ -
Exercised (3.4) $ 18.31 N/A N/A
Vested N/A N/A (4.4) $ 8.30
---------------------------------------------------------------------------
Outstanding
at
September
30, 2006 (1) 18.6 $ 23.04 5.4 $ 441 2.1 $ 11.59
---------------------------------------------------------------------------
Exercisable
at
September
30, 2006 (1) 16.5 $ 20.60 5.0 $ 432 N/A N/A
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(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 information related to options exercised
during the three and nine months ended September 30, 2006 and 2005:

---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
In millions 2006 2005 2006 2005
---------------------------------------------------------------------------
Total intrinsic value $ 5 $ 26 $ 112 $ 121
Cash received upon exercise
of options $ 4 $ 24 $ 63 $ 104
Related tax benefit realized $ - $ 2 $ 15 $ 17
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Prior to January 1, 2006, the Company followed the fair value based
approach for stock option awards and had prospectively applied this method
of accounting to all awards granted, modified or settled on or after
January 1, 2003, and measured cash settled awards at their intrinsic value
at period end. For the three and nine months ended September 30, 2005, if
compensation cost had been determined based upon fair values at the date
of grant for awards under all plans, the Company's pro forma net income
and earnings per share would have been as follows:

---------------------------------------------------------------------------
In millions, except per Three months ended Nine months ended
share data September 30, 2005 September 30, 2005
-------------------------------------------------- -------------------
Net income, as reported $ 411 $ 1,126

Add (deduct) compensation cost, net of
applicable taxes, determined under:

Fair value method for all awards granted
after Jan 1, 2003 26 57

Fair value method for all awards (33) (76)
---------------------------------------------------------------------------
Pro forma net income $ 404 $ 1,107
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic earnings per share, as reported $ 0.75 $ 2.03
Basic earnings per share, pro forma $ 0.74 $ 1.99

Diluted earnings per share, as reported $ 0.74 $ 1.99
Diluted earnings per share, pro forma $ 0.72 $ 1.96
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2006 data is not provided since net income and pro forma net income would
be the same given the application of SFAS No. 123(R ).

Additional disclosures required under SFAS No. 123(R ) for option awards are
provided in tabular format herein.


Additional disclosures required under SFAS No. 123(R ) pertaining to all
awards

---------------------------------------------------------------------------
Cash settled awards Stock option awards
---------------------------------- (3)
In millions,
unless otherwise RSUs Vision VIDP
indicated (1) (1) (2)
---------------------------------------------------------------------------
Prior
2003 2006 to
Year of grant 2006 2005 2004 2005 onwards (4) 2005 2005
------------------- ------ ------- -------------------

Stock-based compensation expense
recognized over vesting period

Nine months ended
September 30, 2006 $ 8 $ 12 $ 5 $ 6 $ 5 $ 7 $ 2 $ 3
Nine months ended
September 30, 2005 $ - $ 8 $ 50 $ - $ 6 $ - $ 2 $ 13
---------------------------------------------------------------------------

Liability outstanding

September 30, 2006 $ 8 $ 27 $ 7 $ 6 $ 91 N/A N/A N/A
December 31, 2005 $ - $ 15 $ 66 $ - $ 83 N/A N/A N/A
---------------------------------------------------------------------------

Fair value per unit

At period-end ($) $31.88 $45.69 $46.75 $17.09 $46.75 N/A N/A N/A
At grant date ($) N/A N/A N/A N/A N/A $13.80 $9.24 $8.61
---------------------------------------------------------------------------

Fair value of awards vested during period

Nine months ended
September 30, 2006 $ - $ - $ - $ - $ 2 $ - $ 3 $ 34
Nine months ended
September 30, 2005 $ - $ - $ - $ - $ 1 $ - $ - $ 34
---------------------------------------------------------------------------

Nonvested awards at September 30, 2006

Unrecognized
compensation
cost $ 24 $ 19 $ 9 $ 7 $ 13 $ 7 $ 7 $ -
Remaining
recognition
period (years) 2.25 1.25 2.25 2.25 3.25 3.35 2.35 -
---------------------------------------------------------------------------

Assumptions (5)

Stock price ($) $46.75 $46.75 $46.75 $46.75 $46.75 $51.51 $36.22 $23.59
Expected
stock price
volatility (6) 19% 18% N/A 20% N/A 25% 25% 30%
Expected term
(years) (7) 2.25 1.25 N/A 2.25 N/A 5.17 5.20 6.22
Risk-free
interest rate (8) 3.91% 4.11% N/A 4.39% N/A 4.04% 3.55% 5.13%
Dividend rate
($) (9) $ 0.65 $0.65 N/A $ 0.65 N/A $ 0.65 $ 0.50 $ 0.30
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Beginning in 2006, compensation cost was 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. In
2005, compensation cost was measured using intrinsic value for all
awards.

(2) Compensation cost for all periods presented was based on intrinsic
value.

(3) Compensation cost for all periods presented was based on the grant date
fair value using the Black-Scholes option-pricing model that uses the
assumptions presented herein.

(4) Includes the accelerated recognition of awards granted to
retirement-eligible employees. For these individuals, compensation cost
is recognized over the period from the grant date to the date the
requisite service period has been achieved.

(5) Assumptions used to determine fair value are at period-end for cash
settled awards and at grant date for stock option awards.

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

(7) Represents the remaining period of time that awards are expected to be
outstanding.
For option awards only, 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.

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

(9) Based on the annualized dividend rate.


Note 4 - Income taxes

In the second quarter of 2006, the Company adjusted its deferred income tax
liability mainly due to the enactment of lower federal and provincial
corporate tax rates in Canada. As a result, the Company recorded a deferred
income tax recovery of $250 million in the Consolidated statement of
income.

Also in the second quarter of 2006, for certain items reported in
Accumulated other comprehensive loss (a separate component of Shareholders'
equity), the Company adjusted its deferred income tax liability for changes
in income tax rates applied to certain temporary differences and also for
the income tax effect on the currency translation amount resulting from the
difference between the accounting and tax basis of its net investment in
foreign subsidiaries. As a result, the Company recorded a net charge for
deferred income taxes in Other comprehensive loss of $180 million.


Note 5 - Derivative instruments

Fuel
To mitigate the effects of fuel price changes on its operating margins and
overall profitability, the Company had a hedging program which called for
entering into swap positions on crude and heating oil to cover a target
percentage of future fuel consumption up to two years in advance. However,
with an increased application of fuel surcharge on revenues, no additional
swap positions were entered into since September 2004 and the Company has
now terminated this program.

These fuel hedges were accounted for as cash flow hedges, whereby the
effective portion of the cumulative change in the market value of the
derivative instruments had been recorded in Accumulated other comprehensive
loss.

During the three months ended September 30, 2006, the Company's remaining
swap positions matured and were settled. As a result, the related
unrealized gain previously recorded in Accumulated other comprehensive loss
was reclassified into income (unrealized gain of $57 million, $39 million
after tax at December 31, 2005). At September 30, 2006, the Company is no
longer hedged through financial markets.

Interest rate
At September 30, 2006, Accumulated other comprehensive loss included an
unamortized gain of $12 million, $8 million after tax.


Note 6 - Pensions and other post-retirement benefits

For the three and nine months ended September 30, 2006 and 2005, the
components of net periodic benefit cost for pensions and other post-
retirement benefits were as follows:

(a) Components of net periodic benefit cost for pensions

---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
In millions 2006 2005 2006 2005
---------------------------------------------------------------------------
Service cost $ 29 $ 35 $ 109 $ 106
Interest cost 180 185 538 556
Amortization of prior service cost 5 4 14 14
Expected return on plan assets (227) (220) (680) (662)
Amortization of net actuarial loss 22 - 68 1
---------------------------------------------------------------------------
Net periodic benefit cost $ 9 $ 4 $ 49 $ 15
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(b) Components of net periodic benefit cost for post-retirement benefits

---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
In millions 2006 2005 2006 2005
---------------------------------------------------------------------------
Service cost $ 1 $ 2 $ 3 $ 6
Interest cost 3 4 11 14
Amortization of prior service cost - 1 - 2
Recognized net actuarial gain - (1) (4) (3)
---------------------------------------------------------------------------
Net periodic benefit cost $ 4 $ 6 $ 10 $ 19
---------------------------------------------------------------------------
---------------------------------------------------------------------------

For the 2006 funding year, the Company expects to make total contributions
of approximately $100 million for all its defined benefit plans of which
$46 million was disbursed as at September 30, 2006.


Note 7 - Major commitments and contingencies

A. Commitments
As at September 30, 2006, the Company had commitments to acquire railroad
ties, rail, freight cars, locomotives and other equipment or services at an
aggregate cost of $653 million ($578 million at December 31, 2005). The
Company also had outstanding information technology service contracts of
$20 million and agreements with fuel suppliers to purchase approximately
82% of the estimated remaining 2006 volume, and 35% of its anticipated 2007
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 claims relating to personal injuries,
occupational disease and damage to property.

In 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 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.

In the 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 by an
independent actuarial firm. 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 September 30, 2006, the Company had aggregate reserves for personal
injury and other claims of $647 million ($657 million at
December 31, 2005). 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 September 30, 2006, 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.

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 September 30, 2006, the Company had aggregate accruals for
environmental costs of $131 million ($124 million as at December 31, 2005).

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.

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 2006 and 2017,
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. As at September 30,
2006, the maximum exposure in respect of these guarantees was $145 million,
of which $2 million has been recorded and represents the Company's
obligation to stand ready and honor the guarantees that were entered into
in accordance with Financial Accounting Standard Board Interpretation
No. 45 requirements. There are no recourse provisions to recover any
amounts from third parties.

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
September 30, 2006, the maximum potential liability under these guarantees
was $450 million of which $379 million was for workers' compensation and
other employee benefits and $71 million was for equipment under leases and
other. The Company has granted guarantees for which no liability has been
recorded, as they relate to the Company's future performance.

As at September 30, 2006, 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 2006
and 2010.

CN Pension Plan, CN 1935 Pension Plan and BC Rail Ltd Pension Plan
The Company has indemnified and held harmless the current trustee and the
former trustee of the Canadian National Railways Pension Trust Funds, the
trustee of the BC Rail Ltd Pension Trust Fund, and the respective officers,
directors, employees and agents of such trustees, from any and all taxes,
claims, liabilities, damages, costs and expenses arising out of the
performance of their obligations under the relevant trust agreements and
trust deeds, including in respect of their reliance on authorized
instructions of the Company or for failing to act in the absence of
authorized instructions. These indemnifications survive the termination of
such agreements or trust deeds. As at September 30, 2006, the Company had
not recorded a liability associated with these indemnifications, as the
Company does not expect to make any payments pertaining to these
indemnifications.

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. As at September 30, 2006, the carrying value for guarantees for
which the Company was able to determine the fair value, was $1 million.
There are no recourse provisions to recover any amounts from third parties.


Note 8 - Earnings per share

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

---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
In millions, ------------------ ------------------
except per share data 2006 2005 2006 2005
---------------------------------------------------------------------------
(Unaudited)

Net income $ 497 $ 411 $ 1,588 $ 1,126

Weighted-average shares
outstanding 522.5 547.3 529.5 555.8
Effect of stock options 7.7 10.1 8.5 10.4
---------------------------------------------------------------------------
Weighted-average diluted shares
outstanding 530.2 557.4 538.0 566.2

Basic earnings per share $ 0.95 $ 0.75 $ 3.00 $ 2.03
Diluted earnings per share $ 0.94 $ 0.74 $ 2.95 $ 1.99
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Note 9 - Common stock split

On January 24, 2006, the Board of Directors of the Company approved a two-
for-one common stock split which was effected in the form of a stock
dividend of one additional common share of CN payable for each share held.
The stock dividend was paid on February 28, 2006, to shareholders of record
on February 22, 2006. All equity-based benefit plans and the previous share
repurchase program were adjusted to reflect the issuance of additional
shares or options due to the stock split. All share and per share data has
been adjusted to reflect the stock split.


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

Three months ended Nine months ended
September 30 September 30
------------------- ------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
(Unaudited)

Statistical operating data

Freight revenues ($ millions) 1,886 1,722 5,518 5,108
Gross ton miles (GTM)
(millions) 88,880 84,384 264,565 255,066
Revenue ton miles (RTM)
(millions) 47,066 44,425 139,644 134,103
Carloads (thousands) 1,241 1,216 3,678 3,633
Route miles (includes Canada
and the U.S.) 19,919 19,221 19,919 19,221
Employees (end of period) 21,681 22,141 21,681 22,141
Employees (average during
period) 21,670 22,233 21,663 22,373
---------------------------------------------------------------------------

Productivity

Operating ratio (%) 57.4 63.3 60.6 64.4
Freight revenue per RTM (cents) 4.01 3.88 3.95 3.81
Freight revenue per carload ($) 1,520 1,416 1,500 1,406
Operating expenses per GTM
(cents) 1.28 1.36 1.32 1.35
Labor and fringe benefits
expense per GTM (cents) 0.47 0.54 0.50 0.54
GTMs per average number of
employees (thousands) 4,102 3,795 12,213 11,401
Diesel fuel consumed (U.S.
gallons in millions) 96 96 300 302
Average fuel price ($/U.S.
gallon) (1) 2.33 1.79 2.12 1.66
GTMs per U.S. gallon of fuel
consumed 926 879 882 845
---------------------------------------------------------------------------

Safety indicators

Injury frequency rate per
200,000 person hours (2) 2.3 2.8 2.1 2.5
Accident rate per million train
miles (2) 2.8 2.0 2.3 1.6
---------------------------------------------------------------------------

Financial ratios

Debt to total capitalization
ratio (% at end of period) 36.5 35.1 36.5 35.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Includes the impact of the Company's fuel hedging program.

(2) As reported to the Federal Railroad Administration.

Certain statistical data and related productivity measures are based on
estimated data available at such time and are subject to change as more
complete information becomes available. As such, certain comparative data
have been restated to reflect changes to estimated data previously reported.


CANADIAN NATIONAL RAILWAY COMPANY
SUPPLEMENTARY INFORMATION (U.S. GAAP)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Three months ended Nine months ended
September 30 September 30
---------------------- ----------------------
Variance Variance
Fav Fav
2006 2005 (Unfav) 2006 2005 (Unfav)
---------------------------------------------------------------------------
(Unaudited)

Revenue ton miles (millions)

Petroleum and chemicals 8,049 7,611 6% 23,938 23,286 3%
Metals and minerals 4,611 4,217 9% 13,441 12,603 7%
Forest products 10,874 10,676 2% 32,439 31,749 2%
Coal 3,500 3,360 4% 10,518 10,573 (1%)
Grain and fertilizers 10,839 9,747 11% 32,305 29,475 10%
Intermodal 8,487 8,128 4% 24,685 24,090 2%
Automotive 706 686 3% 2,318 2,327 -
--------------------------------------- ---------------
47,066 44,425 6% 139,644 134,103 4%

Freight revenue / RTM (cents)

Total freight revenue
per RTM 4.01 3.88 3% 3.95 3.81 4%

Commodity groups:
Petroleum and chemicals 3.70 3.51 5% 3.64 3.49 4%
Metals and minerals 5.18 4.96 4% 5.07 4.94 3%
Forest products 4.13 4.20 (2%) 4.10 4.10 -
Coal 2.74 2.38 15% 2.68 2.42 11%
Grain and fertilizers 2.84 2.80 1% 2.81 2.74 3%
Intermodal 4.43 4.07 9% 4.30 3.86 11%
Automotive 17.00 16.62 2% 16.52 16.12 2%
--------------------------------------- ---------------

Carloads (thousands)

Petroleum and chemicals 152 146 4% 445 448 (1%)
Metals and minerals 270 259 4% 778 748 4%
Forest products 165 177 (7%) 513 540 (5%)
Coal 99 115 (14%) 317 347 (9%)
Grain and fertilizers 150 137 9% 437 415 5%
Intermodal 348 320 9% 994 926 7%
Automotive 57 62 (8%) 194 209 (7%)
--------------------------------------- ---------------
1,241 1,216 2% 3,678 3,633 1%

Freight revenue / carload (dollars)

Total freight revenue
per carload 1,520 1,416 7% 1,500 1,406 7%

Commodity groups:
Petroleum and chemicals 1,961 1,829 7% 1,960 1,815 8%
Metals and minerals 885 807 10% 875 832 5%
Forest products 2,721 2,531 8% 2,595 2,411 8%
Coal 970 696 39% 890 738 21%
Grain and fertilizers 2,053 1,993 3% 2,076 1,949 6%
Intermodal 1,080 1,034 4% 1,068 1,005 6%
Automotive 2,105 1,839 14% 1,974 1,794 10%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Such statistical data and related productivity measures are based on
estimated data available at such time and are subject to change as more
complete information becomes available.


CANADIAN NATIONAL RAILWAY COMPANY
NON-GAAP MEASURES - unaudited
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Adjusted performance measures
During the nine months ended September 30, 2006, the Company reported
adjusted net income of $1,338 million, or $2.49 per diluted share,
excluding the impact of a second-quarter deferred income tax recovery of
$250 million ($0.46 per diluted share) that resulted primarily from the
enactment of lower federal and provincial corporate tax rates in Canada.
Management believes that adjusted net income and adjusted earnings per
share are useful measures of performance that can facilitate period-to-
period comparisons, as they exclude an item, such as the deferred income
tax recovery, that does not necessarily arise as part of the normal day-to-
day operations of the Company and could distort the analysis of trends in
business performance. The exclusion of such item in adjusted net income and
adjusted earnings per share does not, however, imply that such item is
necessarily non-recurring. These adjusted measures do not have any
standardized meaning prescribed by GAAP and may, therefore, not be
comparable to similar measures presented by other companies. The reader
is advised to read all information provided in the Company's Interim
Consolidated Financial Statements and Notes thereto. The following table
provides a reconciliation of net income and earnings per share, as reported
for the nine months ended September 30, 2006, to the adjusted performance
measures presented herein.

---------------------------------------------------------------------------
Nine months ended September 30, 2006
----------------------------------------
Rate
In millions, except per share data Reported enactments Adjusted
---------------------------------------------------------------------------
Revenues $ 5,774 $ - $ 5,774
Operating expenses 3,500 - 3,500
---------------------------------------------------------------------------
Operating income 2,274 - 2,274
---------------------------------------------------------------------------
Interest expense (232) - (232)
Other loss (16) - (16)
---------------------------------------------------------------------------
Income before income taxes 2,026 - 2,026
Income tax expense (438) (250) (688)
---------------------------------------------------------------------------
Net income $ 1,588 $ (250) $ 1,338
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Basic earnings per share $ 3.00 $ (0.48) $ 2.52
Diluted earnings per share $ 2.95 $ (0.46) $ 2.49
---------------------------------------------------------------------------

Free cash flow
The Company believes that free cash flow is a useful measure of performance
as it demonstrates the Company's ability to generate cash after the payment
of capital expenditures and dividends. Free cash flow does not have any
standardized meaning prescribed by GAAP and may, therefore, not be
comparable to similar measures presented by other companies. The Company
defines free cash flow as cash provided from operating activities,
excluding changes in the level of accounts receivable sold under the
securitization program, less investing activities, and after the payment of
dividends, calculated as follows:

---------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
In millions 2006 2005 2006 2005
---------------------------------------------------------------------------

Cash provided from operating
activities $ 854 $ 643 $ 1,878 $ 2,011

Less:
Investing activities (378) (304) (865) (702)
---------------------------------------------------------------------------
Cash provided before
financing activities 476 339 1,013 1,309
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Adjustments:
Change in level of accounts
receivable sold (1) - - 375 (43)
Dividends paid (85) (68) (257) (208)
---------------------------------------------------------------------------
Free cash flow $ 391 $ 271 $ 1,131 $ 1,058
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Changes in the level of accounts receivable sold under the Company's
accounts receivable securitization program are considered a financing
activity.


www.cn.ca

Contact Information

  • CN
    Mark Hallman (Media)
    System Director, Media Relations
    (905) 669-3384
    or
    CN
    Robert Noorigian (Investment Community)
    Vice-President, Investor Relations
    (514) 399-0052