CN
TSX : CNR
NYSE : CNI

CN

July 20, 2005 12:38 ET

CN raises full-year 2005 earnings outlook as second-quarter diluted earnings per share rise 30 per cent to $1.47

MONTREAL, QUEBEC--(CCNMatthews - July 20, 2005) - CN today reported its financial and operating results for the second quarter and six-month period ended June 30, 2005.

Financial highlights, and increased full-year 2005 earnings forecast

- Diluted earnings per share of $1.47 for the second quarter of 2005, up 30 per cent from $1.13 reported for second-quarter 2004;

- Second-quarter 2005 net income of $416 million, an increase of 28 per cent from second-quarter 2004 net income of $326 million;

- Second-quarter 2005 operating income of $713 million, an increase of 24 per cent;

- Record second-quarter operating ratio of 61.2 per cent, a 4.3-percentage point improvement over second-quarter 2004 performance;

- Free cash flow of $787 million for the first half of 2005, compared with $587 million for the comparable period of 2004; (1)

- Strong results and solid outlook prompt management to increase full-year 2005 earnings guidance - diluted earnings per share for the year now expected to rise in the range of 20 to 25 per cent, compared with previous guidance of 10-15 per cent increase over 2004 EPS of $4.34.

E. Hunter Harrison, president and chief executive officer of CN, said: "CN had a terrific quarter and first half of the year, demonstrating once again the power of the company's business model - precision railroading and the pursuit of profitable, sustainable growth - along with the strength of our freight franchise. A key measure of our success was a record second-quarter operating ratio of 61.2 per cent.

"On the revenue side, CN's core merchandise businesses - including forest products, metals and minerals, and petroleum and chemicals - continued to register solid gains during the quarter. CN's intermodal business also performed well, benefiting from strong container imports via the Port of Vancouver, as did our coal business, which saw shipments from new metallurgical-coal mines in Western Canada. Grain and fertilizers revenues were affected by decreased availability of high-quality grain in Canada, while our automotive business experienced lower production at some of the southern Ontario production facilities we serve.

"Our free cash flow performance was outstanding and will permit us to reward shareholders with a new share buy-back program effective July 25, 2005. (See accompanying press release.) Under this program, CN plans to purchase for cancellation up to 16 million, or about six per cent, of the issued and outstanding shares of the company."

Second-quarter revenues increased by 10 per cent to $1,838 million, largely owing to freight rate increases, which included a higher fuel surcharge as a result of increases in crude oil prices, and the inclusion of revenues from the rail and related holdings of Great Lakes Transportation LLC (GLT) and BC Rail. Partly offsetting these gains was the unfavourable $80-million translation impact of the stronger Canadian dollar on U.S.-dollar denominated revenues.

CN consolidated the operations of GLT and BC Rail on May 10, 2004, and July 14, 2004, respectively.

Operating expenses for the second quarter of 2005 increased by three per cent to $1,125 million, largely as a result of increased fuel costs and the inclusion of GLT and BC Rail expenses. These expense increases were partly offset by the favourable $50-million translation impact of the stronger Canadian dollar on U.S.-dollar denominated expenses, and lower labour and fringe benefits expenses.

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

First-half 2005 financial results

Net income for the first six months of 2005 was $715 million, or $2.51 per diluted share, compared with $536 million, or $1.85 per diluted share, for the comparable period of 2004.

Operating income for the first half of 2005 rose 28 per cent to $1,239 million.

CN's operating ratio for the first six months of 2005 was 65.0 per cent, an improvement of 3.7 percentage points.

Revenues for the first half of 2005 rose 14 per cent to $3,544 million, mainly due to freight rate increases, the inclusion of GLT and BC Rail revenues, and a return to normal intermodal volumes following the first quarter 2004 Canadian Auto Workers (CAW) strike. Partly offsetting these gains was the unfavourable $140-million translation impact of the stronger Canadian dollar on U.S.-dollar denominated revenues.

Operating expenses increased eight per cent to $2,305 million, primarily due to increased fuel costs and the inclusion of GLT and BC Rail expenses, partly offset by the favourable $85-million translation impact of the stronger Canadian dollar on U.S.-dollar denominated expenses.

The continued appreciation of the Canadian dollar reduced the company's first-half 2005 net income by approximately $30 million.

In the first quarter of 2004, the CAW strike reduced CN's operating income and net income by $35 million and $24 million, respectively.

Increased full-year 2005 earnings guidance

Harrison said: "CN's strong first-half financial and operating performance, along with continued improvements in pricing, gives management confidence that the company will exceed previous earnings guidance for full-year 2005.

"CN now expects 2005 diluted earnings per share will rise in the range of 20 to 25 per cent over 2004 earnings of $4.34 per diluted share. This new earnings outlook compares with the Company's previous earnings growth forecast of 10 to 15 per cent for 2005. Our employees are performing strongly and we expect to continue to deliver solid benefits to shareholders."

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

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

This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risks and uncertainties and that its results could differ materially from those expressed or implied in such statements. Reference should be made to CN's most recent Form 40-F filed with the United States Securities and Exchange Commission, its Annual Information Form filed with the Canadian securities regulators, its 2004 Annual and 2005 Quarterly Consolidated Financial Statements and notes thereto, and Management's Discussion and Analysis, for a summary of major risks.

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)
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(In millions, except per share data)


Three months ended Six months ended
June 30 June 30
------------------ -----------------
2005 2004(1) 2005 2004(1)
---------------------------------------------------------------------
(Unaudited)

Revenues $ 1,838 $ 1,665 $ 3,544 $ 3,103
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Operating expenses 1,125 1,090 2,305 2,133
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Operating income 713 575 1,239 970

Interest expense (78) (68) (153) (140)

Other loss (5) (23) (9) (36)
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Income before income
taxes 630 484 1,077 794

Income tax expense (214) (158) (362) (258)
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Net income $ 416 $ 326 $ 715 $ 536
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Earnings per share

Basic $ 1.50 $ 1.14 $ 2.55 $ 1.88

Diluted $ 1.47 $ 1.13 $ 2.51 $ 1.85

Weighted-average
number of shares

Basic 278.1 284.9 280.0 284.7

Diluted 283.0 289.2 285.2 289.0
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See accompanying notes to consolidated financial statements.

(1) Includes GLT as of May 10, 2004. (See Note 2 - Acquisitions)


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


Three months ended Six months ended
June 30 June 30
------------------- -------------------
Variance Variance
2005 2004(1) Fav 2005 2004(1) Fav
(Unfav) (Unfav)
---------------------------------------------------------------------
(Unaudited)

Revenues

Petroleum and chemicals $ 271 $ 259 5% $ 546 $ 509 7%
Metals and minerals 214 184 16% 413 318 30%
Forest products 450 369 22% 854 689 24%
Coal 97 74 31% 176 141 25%
Grain and fertilizers 260 274 (5%) 536 530 1%
Intermodal 313 287 9% 600 515 17%
Automotive 139 143 (3%) 261 273 (4%)
Other items 94 75 25% 158 128 23%
-------------------------------------- ------------
1,838 1,665 10% 3,544 3,103 14%

Operating expenses

Labor and fringe benefits 436 466 6% 935 885 (6%)
Purchased services and
material 196 181 (8%) 402 371 (8%)
Depreciation and
amortization 158 150 (5%) 314 292 (8%)
Fuel 179 123 (46%) 345 245 (41%)
Equipment rents 53 68 22% 100 131 24%
Casualty and other 103 102 (1%) 209 209 -
-------------------------------------- -------------
1,125 1,090 (3%) 2,305 2,133 (8%)
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Operating income $ 713 $ 575 24% $1,239 $ 970 28%
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Operating ratio 61.2% 65.5% 4.3 65.0% 68.7% 3.7
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See accompanying notes to consolidated financial statements.

(1) Includes GLT as of May 10, 2004. (See Note 2 - Acquisitions)

Certain of the 2004 comparative figures have been reclassified in
order to be consistent with the 2005 presentation.


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


June 30 December 31 June 30
2005 2004 2004
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(Unaudited) (Unaudited)

Assets

Current assets:
Cash and cash equivalents $ 155 $ 147 $ 135
Accounts receivable (Note 4) 662 793 617
Material and supplies 187 127 169
Deferred income taxes 181 364 102
Other 279 279 260
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1,464 1,710 1,283

Properties 20,057 19,715 19,789
Intangible and other assets 918 940 898
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Total assets $ 22,439 $ 22,365 $ 21,970
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Liabilities and shareholders' equity

Current liabilities:
Accounts payable and accrued
charges $ 1,577 $ 1,605 $ 1,485
Current portion of long-term
debt (Note 4) 83 578 256
Other 82 76 70
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1,742 2,259 1,811

Deferred income taxes 4,910 4,723 5,129
Other liabilities and deferred
credits 1,499 1,513 1,471
Long-term debt (Note 4) 5,034 4,586 4,568

Shareholders' equity:
Common shares 4,640 4,706 4,704
Accumulated other comprehensive
loss (106) (148) (35)
Retained earnings 4,720 4,726 4,322
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9,254 9,284 8,991
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Total liabilities and
shareholders' equity $ 22,439 $ 22,365 $ 21,970
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See accompanying notes to consolidated financial statements.

Certain of the 2004 comparative figures have been reclassified in
order to be consistent with the 2005 presentation.


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


Three months ended Six months ended
June 30 June 30
------------------ -----------------
2005 2004(1) 2005 2004(1)
---------------------------------------------------------------------
(Unaudited)


Common shares (2)

Balance, beginning
of period $ 4,715 $ 4,682 $ 4,706 $ 4,664
Stock options
exercised and other 15 22 101 40
Share repurchase
program (Note 4) (90) - (167) -
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Balance, end of period $ 4,640 $ 4,704 $ 4,640 $ 4,704
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Accumulated other comprehensive loss

Balance, beginning of
period $ (91) $ (111) $ (148) $ (129)

Other comprehensive
income (loss):

Unrealized foreign
exchange loss on
translation of U.S.
dollar denominated
long-term debt designated
as a hedge of the net
investment in U.S.
subsidiaries (40) (97) (77) (129)

Unrealized foreign
exchange gain on
translation of the net
investment in foreign
operations 49 153 93 207

Increase (decrease) in
unrealized holding
gains on fuel derivative
instruments (Note 6) (31) 23 47 43

Unrealized holding gain
on interest rate
derivatives - 33 - 18
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Other comprehensive
income (loss) before
income taxes (22) 112 63 139

Income tax recovery
(expense) 7 (36) (21) (45)
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Other comprehensive
income (loss) (15) 76 42 94
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Balance, end of period $ (106) $ (35) $ (106) $ (35)
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Retained earnings

Balance, beginning
of period $ 4,684 $ 4,052 $ 4,726 $ 3,897

Net income 416 326 715 536

Share repurchase
program (Note 4) (311) - (581) -

Dividends (69) (56) (140) (111)
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Balance, end of
period $ 4,720 $ 4,322 $ 4,720 $ 4,322
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See accompanying notes to consolidated financial statements.

(1) Includes GLT as of May 10, 2004. (See Note 2 - Acquisitions)

(2) During the three and six months ended June 30, 2005, the Company
issued 0.3 million and 2.3 million common shares, respectively,
as a result of stock options exercised. At June 30, 2005, the
Company had 275.4 million common shares outstanding.


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


Three months ended Six months ended
June 30 June 30
------------------ -----------------
2005 2004(1) 2005 2004(1)
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(Unaudited)


Operating activities

Net income $ 416 $ 326 $ 715 $ 536
Adjustments to
reconcile net income
to net cash provided
from operating
activities:
Depreciation and
amortization 159 152 316 295
Deferred income taxes 162 87 298 142
Equity in earnings
of English Welsh
and Scottish Railway (1) 3 (6) 8
Other changes in:
Accounts receivable 70 (68) 134 (60)
Material and supplies (8) (3) (59) (38)
Accounts payable and
accrued charges (60) 37 (81) (29)
Other net current
assets and liabilities 53 48 43 19
Other (6) 8 8 22
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Cash provided from
operating activities 785 590 1,368 895
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Investing activities

Net additions to
properties (318) (259) (471) (384)
Acquisition of Great
Lakes Transportation
LLC's railroads and
related holdings
(Note 2) - (553) - (553)
Other, net 69 31 73 172
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Cash used by investing
activities (249) (781) (398) (765)
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Dividends paid (69) (56) (140) (111)

Financing activities

Issuance of long-term
debt 473 3,530 1,093 4,021
Reduction of long-term
debt (596) (3,340) (1,247) (4,066)
Issuance of common
shares 10 17 80 31
Repurchase of common
shares (401) - (748) -
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Cash provided from
(used by) financing
activities (514) 207 (822) (14)
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Net increase (decrease) in
cash and cash equivalents (47) (40) 8 5

Cash and cash equivalents,
beginning of period 202 175 147 130
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Cash and cash equivalents,
end of period $ 155 $ 135 $ 155 $ 135
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Supplemental cash flow information

Net cash receipts
from customers and
other $ 1,834 $ 1,619 $ 3,720 $ 3,023
Net cash payments
for:
Employee services,
suppliers and
other expenses (892) (841) (2,005) (1,772)
Interest (52) (54) (143) (128)
Workforce reductions (21) (24) (52) (56)
Personal injury and
other claims (21) (19) (48) (55)
Pensions (52) (60) (54) (66)
Income taxes (11) (31) (50) (51)
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Cash provided from
operating activities $ 785 $ 590 $ 1,368 $ 895
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See accompanying notes to consolidated financial statements.

(1) Includes GLT as of May 10, 2004. (See Note 2 - Acquisitions)


CANADIAN NATIONAL RAILWAY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)
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Note 1 - Basis of presentation

In management's opinion, the accompanying unaudited interim
consolidated financial statements, expressed in Canadian dollars, and
prepared in accordance with U.S. generally accepted accounting
principles (U.S. GAAP), contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly Canadian National
Railway Company's (the Company) financial position as at June 30,
2005 and December 31 and June 30, 2004, its results of operations,
changes in shareholders' equity and cash flows for the three and six
months ended June 30, 2005 and 2004.

These interim consolidated financial statements and notes have been
prepared using accounting policies consistent with those used in
preparing the Company's 2004 Annual Consolidated Financial
Statements. While management believes that the disclosures presented
are adequate to make the information not misleading, these interim
consolidated financial statements and notes 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 - Acquisitions

Great Lakes Transportation LLC's railroads and related holdings (GLT)
and BC Rail Partnership and the former BC Rail Ltd. (collectively BC
Rail) were acquired and consolidated effective May 10, 2004 and July
14, 2004, respectively. Accordingly, the Company's results of
operations for the quarter and six months ended June 30, 2004
included the results of operations of GLT as of May 10, 2004 and
excluded those of BC Rail.

The Company's final cost to acquire GLT of U.S.$395 million (Cdn$547
million) and BC Rail of $991 million, included purchase price
adjustments and transaction costs. By the second quarter of 2004, the
Company had paid U.S.$399 million (Cdn$553 million) for the
acquisition of GLT. The Company subsequently received Cdn$6 million
for purchase price adjustments finalized in the third quarter.

The Company had estimated, on a preliminary basis, the fair value of
GLT's and BC Rail's assets acquired, owned and leased, and
liabilities assumed at acquisition based on then current available
information. The Company has since finalized the allocations of the
GLT and BC Rail purchase price and has not made any significant
adjustments to the preliminary purchase price allocations as
presented in Note 3 - Acquisitions, of the Company's 2004 Annual
Consolidated Financial Statements.

For comparative purposes only, if the Company had acquired both GLT
and BC Rail on January 1, 2004, based on their respective historical
amounts, net of the amortization of the difference between the
Company's cost to acquire GLT and BC Rail and their respective net
assets (based on preliminary estimates of the fair value of GLT's and
BC Rail's assets and liabilities), revenues, net income, and basic
and diluted earnings per share would have been $1,761 million, $338
million, $1.19 per basic share and $1.17 per diluted share,
respectively, for the three months ended June 30, 2004 and $3,318
million, $550 million, $1.93 per basic share and $1.90 per diluted
share, respectively, for the six months ended June 30, 2004.

The pro forma figures for both GLT and BC Rail do not reflect
synergies, and accordingly, do not account for any potential
increases in operating income, any estimated cost savings or
facilities consolidation.

Note 3 - Note receivable from English Welsh and Scottish Railway
(EWS)

On April 28, 2005, EWS fully redeemed the Company's 8% note
receivable due 2009. The Company received Pounds Sterling 26 million
(Cdn$61 million), which included principal and accrued but unpaid
interest at the date of redemption.

Note 4 - Financing activities

In January 2005, the Company repaid its borrowings of U.S.$90 million
(Cdn$108 million) outstanding at December 31, 2004 under its
U.S.$1,000 million revolving credit facility. On March 29, 2005, the
Company refinanced, by way of amendment, its revolving credit
facility, which was scheduled to mature in December 2005, for a five-
year period to March 2010. The credit facility is available for
general corporate purposes, including back-stopping the Company's
commercial paper program. The credit facility provides for borrowings
at various interest rates, including the Canadian prime rate,
bankers' acceptance rates, the U.S. federal funds effective rate and
the London Interbank Offer Rate, plus applicable margins. The amended
credit facility agreement retains customary limitations on debt as a
percentage of total capitalization, but eliminates the requirement
for maintaining tangible net worth above pre-defined levels. The
Company has been in compliance with these covenants throughout the
period. As at June 30, 2005, the Company had letters of credit of
$301 million under its revolving credit facility and outstanding
borrowings of U.S.$323 million (Cdn$397 million) under its commercial
paper program.

In May 2005, the Company repaid U.S.$100 million (Cdn$125 million) of
7.75% 10-year Notes with cash on hand.

The Company has an accounts receivable securitization program,
expiring in June 2006, under which it may sell, on a revolving basis,
a maximum of $500 million ($450 million prior to February 2005) of
eligible freight trade and other receivables outstanding at any point
in time, to an unrelated trust. The Company has a contingent residual
interest of approximately 10% of receivables sold, which is recorded
in Other current assets. At June 30, 2005, pursuant to the agreement,
$492 million had been sold, compared to $445 million at December 31,
2004.

On July 20, 2005, the Board of Directors of the Company approved a
new share repurchase program which allows for the repurchase of up to
16.0 million common shares between July 25, 2005 and July 24, 2006
pursuant to a normal course issuer bid, at prevailing market prices.

In the second quarter of 2005, the Company completed its 14.0 million
share repurchase program, which began November 1, 2004, repurchasing
the remaining 5.4 million common shares for $401 million, at an
average price of $74.30 per share. The total cost of the program was
$1,021 million (average price per share of $72.94), with 10.0 million
shares repurchased in 2005 for $748 million (average price per share
of $74.78).

Note 5 - Stock-based compensation

For the three and six months ended June 30, 2005 and 2004, the
Company recorded total compensation cost for awards under all plans
of $13 million and $41 million, respectively, and $21 million and $25
million, respectively, for the same periods in 2004.

(a) Restricted share units
In the first half of 2005, the Company granted approximately 0.4
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 are 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, 2007. At June 30, 2005, the Company had approximately 1.6 million
RSUs outstanding under the Plan. For the three and six months ended
June 30, 2005, the Company recorded compensation cost of $12 million
and $31 million, respectively, compared to $4 million and $7 million,
for the same 2004 periods.

(b) Stock options
In the first half of 2005, the Company granted approximately 0.7
million conventional stock options to designated senior management
employees, that vest over a period of four years of continuous
employment. The total number of options outstanding at June 30, 2005,
including conventional, performance, and performance-accelerated
options was 11.5 million. For the three and six months ended June 30,
2005, the Company recorded compensation cost of $4 million and $11
million, respectively, compared to $3 million and $5 million,
respectively, for the same 2004 periods. At June 30, 2005, 8.1
million options remained authorized for future issuances.

(c) Vision 2008 Share Unit Plan
In the first quarter of 2005, the Board of Directors of the Company
approved a special share unit plan with a four-year term to December
2008, entitling designated senior management employees to receive
payout in cash in January 2009. The Company granted 0.4 million share
units which 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 also 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. 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. Due to the
nature of the vesting conditions, no compensation cost was recorded
for the three and six months ended June 30, 2005.

The Company follows 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. The
Company follows the intrinsic value method for cash settled awards.
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:

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Three months ended Six months ended
June 30 June 30
In millions, except ------------------ -----------------
per share data 2005 2004 2005 2004
---------------------------------------------------------------------
Net income, as reported $ 416 $ 326 $ 715 $ 536

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

Fair value method for
all awards granted
after Jan 1, 2003
(SFAS No. 123) 10 6 31 10

Intrinsic value method
for performance-based
awards granted prior
to 2003 (APB 25) - 9 - 9

Fair value method for all
awards (SFAS No. 123) (16) (22) (43) (34)
---------------------------------------------
Pro forma net income $ 410 $ 319 $ 703 $ 521
---------------------------------------------
---------------------------------------------

Basic earnings per
share, as reported $ 1.50 $ 1.14 $ 2.55 $ 1.88
Basic earnings per
share, pro forma $ 1.47 $ 1.12 $ 2.51 $ 1.83

Diluted earnings per
share, as reported $ 1.47 $ 1.13 $ 2.51 $ 1.85
Diluted earnings per
share, pro forma $ 1.45 $ 1.10 $ 2.46 $ 1.80
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Compensation cost related to stock option awards granted in the
current period under the fair value based approach was calculated
using the Black-Scholes option-pricing model with the following
assumptions:

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Three months ended Six months ended
June 30 June 30
------------------ -----------------
2005 2004(1) 2005 2004(1)
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Expected option life
(years) 5.2 - 5.2 -
Risk-free interest rate 3.19% - 3.55% -
Expected stock price
volatility 25% - 25% -
Average dividend
per share $ 1.00 - $ 1.00 -
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Weighted average fair
value of options
granted $ 18.71 $ - $ 18.48 $ -
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(1) In the first half of 2004, the Company did not grant any stock
option awards.

Note 6 - Derivative instruments

Fuel
At June 30, 2005, the Company had hedged approximately 48% of the
estimated remaining 2005 fuel consumption, representing approximately
98 million U.S. gallons at an average price of U.S.$0.79 per U.S.
gallon, and approximately 17% of the estimated 2006 fuel consumption,
representing approximately 69 million U.S. gallons at an average
price of U.S.$0.89 per U.S. gallon. These derivative instruments are
carried at market value on the balance sheet and are accounted for as
cash flow hedges whereby the effective portion of the cumulative
change in the market value of the derivative instruments has been
recorded in Other comprehensive income (loss). At June 30, 2005,
Accumulated other comprehensive loss included unrealized gains of
$139 million, $94 million after tax ($92 million, $62 million after
tax at December 31, 2004), of which $133 million relates to
derivative instruments that will mature within the next twelve months
and are presented in Other current assets.

Note 7 - Pensions and other post-retirement benefits

For the three and six months ended June 30, 2005 and 2004, 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
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Three months ended Six months ended
June 30 June 30
------------------ -----------------
In millions 2005 2004 2005 2004
---------------------------------------------------------------------
Service cost $ 35 $ 29 $ 71 $ 58
Interest cost 186 181 371 361
Amortization of prior
service cost 5 5 10 10
Expected return on plan
assets (221) (208) (442) (416)
Recognized net actuarial
loss 1 1 1 1
-------------------------------------------
Net periodic benefit cost $ 6 $ 8 $ 11 $ 14
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(b) Components of net periodic benefit cost for post-retirement
benefits
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Three months ended Six months ended
June 30 June 30
------------------ -----------------
In millions 2005 2004 2005 2004
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Service cost $ 2 $ 2 $ 4 $ 4
Interest cost 5 5 10 9
Amortization of prior
service cost 1 1 1 2
Recognized net actuarial
loss (gain) (1) 1 (2) 1
-------------------------------------------
Net periodic benefit cost $ 7 $ 9 $ 13 $ 16
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For the 2005 funding year, the Company expects to make total
contributions of $120 million for all its defined benefit plans of
which $54 million had been made at June 30, 2005.

Note 8 - Major commitments and contingencies

A. Commitments
As at June 30, 2005, the Company had commitments to acquire railroad
ties, rail, freight cars, locomotives and other equipment at an
aggregate cost of $554 million ($194 million at December 31, 2004).
The Company also had outstanding information technology service
contracts of $14 million and agreements with fuel suppliers to
purchase approximately 78% of the estimated remaining 2005 volume,
50% of its anticipated 2006 volume, and 12% 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 expense 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 occupational disease claims, based on actuarial
estimates of their ultimate cost. A liability for the minimum amount
of unasserted occupational disease claims is also accrued to the
extent they can be reasonably estimated. The amount recorded reflects
a 25-year horizon, as the Company expects that a large majority of
these cases will be received over such period. An 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 June 30, 2005, the Company had aggregate reserves for personal
injury and other claims of $679 million ($642 million at December 31,
2004). 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, 2005, 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 federal, provincial, state,
municipal and local regulations under 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 for environmental matters in the next several years,
based on known information, 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, 2005, the Company had aggregate accruals for
environmental costs of $117 million ($113 million as at December 31,
2004).

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 extend over the term of the agreement. These include, but are
not limited to, residual value guarantees on operating leases,
standby letters of credit and surety bonds, and indemnifications that
are customary for the type of transaction or for the railway
business.

Effective January 1, 2003, 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 2012, 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, 2005, the maximum exposure in
respect of these guarantees was $96 million of which $8 million has
been recorded. Of that amount, $6 million represents the expected
cash outlay for such guarantees, while the remaining $2 million
represents the Company's obligation to stand ready and honor the
guarantees that were entered into subsequent to January 1, 2003.
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 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, 2005, the maximum potential liability
under these guarantees was $449 million of which $358 million was for
workers' compensation and other employee benefits and $91 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 June 30, 2005, 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 guarantee instruments mature at various dates between
2005 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 June 30, 2005, 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 agreements relating to pension plans and other
plans, including those establishing trust funds to secure the 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 the guarantees and accordingly,
no liability was recorded. As at June 30, 2005, 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.


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


Three months ended Six months ended
June 30 June 30
------------------ -----------------
2005 2004(1) 2005 2004(1)
---------------------------------------------------------------------
(Unaudited)

Statistical operating data

Freight revenues
($ millions) 1,744 1,590 3,386 2,975
Gross ton miles (GTM)
(millions) 86,206 83,179 170,682 161,132
Revenue ton miles (RTM)
(millions) 44,750 43,187 89,657 84,481
Carloads (thousands) 1,204 1,145 2,391 2,122
Route miles (includes
Canada and the U.S.) 19,221 17,898 19,221 17,898
Employees
(end of period) 22,462 22,514 22,462 22,514
Employees (average
during period) 22,519 22,192 22,444 21,759
---------------------------------------------------------------------

Productivity

Operating ratio (%) 61.2 65.5 65.0 68.7
Freight revenue per RTM
(cents) 3.90 3.68 3.78 3.52
Freight revenue per
carload ($) 1,449 1,389 1,416 1,402
Operating expenses per
GTM (cents) 1.31 1.31 1.35 1.32
Labor and fringe benefits
expense per GTM (cents) 0.51 0.56 0.55 0.55
GTMs per average number
of employees (thousands) 3,828 3,748 7,605 7,405
Diesel fuel consumed
(U.S. gallons in
millions) 102 98 206 193
Average fuel price
($/U.S. gallon) 1.66 1.27 1.60 1.24
GTMs per U.S. gallon of
fuel consumed 845 849 829 835
---------------------------------------------------------------------

Safety indicators

Injury frequency rate per
200,000 person hours 2.1 2.5 2.3 2.5
Accident rate per
million train miles 1.4 1.2 1.3 1.3
---------------------------------------------------------------------

Financial ratios

Debt to total
capitalization ratio
(% at end of period) 35.6 34.9 35.6 34.9
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Includes GLT as of May 10, 2004.

Certain of the comparative statistical data and related productivity
measures have been restated to reflect changes to estimated
statistical data previously reported.


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


Three months ended Six months ended
June 30 June 30
------------------- -------------------
Variance Variance
2005 2004(1) Fav 2005 2004(1) Fav
(Unfav) (Unfav)
---------------------------------------------------------------------
(Unaudited)

Revenue ton miles (millions)

Petroleum and chemicals 7,617 7,620 - 15,675 15,314 2%
Metals and minerals 4,101 4,179 (2%) 8,394 7,987 5%
Forest products 10,833 9,651 12% 21,073 18,450 14%
Coal 3,799 3,110 22% 7,184 6,297 14%
Grain and fertilizers 9,360 9,985 (6%) 19,728 19,967 (1%)
Intermodal 8,199 7,737 6% 15,962 14,727 8%
Automotive 841 905 (7%) 1,641 1,739 (6%)
-------------------------------------- -------------
44,750 43,187 4% 89,657 84,481 6%

Freight revenue / RTM (cents)

Total freight revenue
per RTM 3.90 3.68 6% 3.78 3.52 7%
Commodity groups:
Petroleum and chemicals 3.56 3.40 5% 3.48 3.32 5%
Metals and minerals 5.22 4.40 19% 4.92 3.98 24%
Forest products 4.15 3.82 9% 4.05 3.73 9%
Coal 2.55 2.38 7% 2.45 2.24 9%
Grain and fertilizers 2.78 2.74 1% 2.72 2.65 3%
Intermodal 3.82 3.71 3% 3.76 3.50 7%
Automotive 16.53 15.80 5% 15.90 15.70 1%
-------------------------------------- -------------

Carloads (thousands)

Petroleum and chemicals 148 147 1% 302 294 3%
Metals and minerals 237 200 19% 475 296 60%
Forest products 182 161 13% 363 313 16%
Coal 117 100 17% 221 203 9%
Grain and fertilizers 134 144 (7%) 278 286 (3%)
Intermodal 312 313 - 606 574 6%
Automotive 74 80 (8%) 146 156 (6%)
-------------------------------------- -------------
1,204 1,145 5% 2,391 2,122 13%

Freight revenue / carload (dollars)

Total freight revenue
per carload 1,449 1,389 4% 1,416 1,402 1%
Commodity groups:
Petroleum and chemicals 1,831 1,762 4% 1,808 1,731 4%
Metals and minerals 903 920 (2%) 869 1,074 (19%)
Forest products 2,473 2,292 8% 2,353 2,201 7%
Coal 829 740 12% 796 695 15%
Grain and fertilizers 1,940 1,903 2% 1,928 1,853 4%
Intermodal 1,003 917 9% 990 897 10%
Automotive 1,878 1,788 5% 1,788 1,750 2%
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Includes GLT as of May 10, 2004.

Certain of the comparative statistical data and related productivity
measures have been restated to reflect changes to estimated
statistical data previously reported and reclassified in order to be
consistent with the 2005 presentation.

CANADIAN NATIONAL RAILWAY COMPANY
NON-GAAP MEASURES (U.S. GAAP)
---------------------------------------------------------------------
---------------------------------------------------------------------


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 dividends paid, and adjusted for significant
acquisitions as they are not indicative of normal day-to-day
investments in the Company's asset base, calculated as follows:

---------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
------------------- -----------------
In millions 2005 2004 2005 2004
---------------------------------------------------------------------

Cash provided from
operating activities $ 785 $ 590 $ 1,368 $ 895

Less:
Investing activities (249) (781) (398) (765)
Dividends paid (69) (56) (140) (111)
-------------------------------------------
Cash provided (used)
before financing
activities 467 (247) 830 19
-------------------------------------------
-------------------------------------------

Adjustments:
Change in accounts
receivable sold 10 9 (43) 15
Acquisition of GLT - 553 - 553
-------------------------------------------
Free cash flow $ 477 $ 315 $ 787 $ 587
---------------------------------------------------------------------
---------------------------------------------------------------------


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


Three months ended Six months ended
June 30 June 30
--------------------- ---------------------
2005 2004 Variance 2005 2004 Variance
pro Fav pro Fav
forma(1) (Unfav) forma(1) (Unfav)
---------------------------------------------------------------------
(Unaudited)

Revenues
Petroleum and
chemicals $ 271 $ 270 - $ 546 $ 534 2%
Metals and minerals 214 205 4% 413 377 10%
Forest products 450 414 9% 854 783 9%
Coal 97 77 26% 176 148 19%
Grain and fertilizers 260 275 (5%) 536 534 -
Intermodal 313 288 9% 600 516 16%
Automotive 139 143 (3%) 261 273 (4%)
Other items 94 89 6% 158 153 3%
------------------------------------ -------------
1,838 1,761 4% 3,544 3,318 7%

Operating expenses
Labor and fringe
benefits 436 494 12% 935 957 2%
Purchased services
and materials 196 196 - 402 412 2%
Depreciation and
amortization 158 158 - 314 312 (1%)
Fuel 179 132 (36%) 345 266 (30%)
Equipment rents 53 62 15% 100 122 18%
Casualty and other 103 108 5% 209 224 7%
------------------------------------ -------------
1,125 1,150 2% 2,305 2,293 (1%)

Operating income 713 611 17% 1,239 1,025 21%

Interest expense (78) (87) (153) (180)

Other loss (5) (23) (9) (35)
------------------------------------ --------------
Income before income
taxes 630 501 1,077 810
Income tax expense (214) (163) (362) (261)
----------------------------------- -------------

Net income $ 416 $ 338 $ 715 $ 549
--------------------------------------------------------------------
--------------------------------------------------------------------
Operating ratio 61.2% 65.3% 4.1 65.0% 69.1% 4.1
--------------------------------------------------------------------
--------------------------------------------------------------------

Basic earnings
per share $ 1.50 $ 1.19 $ 2.55 $ 1.93
Diluted earnings
per share $ 1.47 $ 1.17 $ 2.51 $ 1.90
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) The pro forma figures reflect the Company's results of operations
as if the Company had acquired GLT and BC Rail on January 1,
2004.

Certain of the 2004 comparative figures have been reclassified in
order to be consistent with the 2005 presentation.


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

Three months ended Six months ended
June 30 June 30
--------------------- ---------------------
2005 2004 Variance 2005 2004 Variance
pro Fav pro Fav
forma(1) (Unfav) forma(1) (Unfav)
---------------------------------------------------------------------
(Unaudited)


Revenue ton miles (millions)

Petroleum and
chemicals 7,617 7,792 (2%) 15,675 15,726 -
Metals and minerals 4,101 4,492 (9%) 8,394 8,895 (6%)
Forest products 10,833 10,429 4% 21,073 20,085 5%
Coal 3,799 3,139 21% 7,184 6,359 13%
Grain and
fertilizers 9,360 10,040 (7%) 19,728 20,115 (2%)
Intermodal 8,199 7,737 6% 15,962 14,727 8%
Automotive 841 905 (7%) 1,641 1,739 (6%)
------------------------------------- ---------------
44,750 44,534 - 89,657 87,646 2%

Freight revenue / RTM (cents)

Total freight revenue
per RTM 3.90 3.75 4% 3.78 3.61 5%
Commodity groups:
Petroleum and
chemicals 3.56 3.47 3% 3.48 3.40 2%
Metals and minerals 5.22 4.56 14% 4.92 4.24 16%
Forest products 4.15 3.97 5% 4.05 3.90 4%
Coal 2.55 2.45 4% 2.45 2.33 5%
Grain and fertilizers 2.78 2.74 1% 2.72 2.65 3%
Intermodal 3.82 3.72 3% 3.76 3.50 7%
Automotive 16.53 15.80 5% 15.90 15.70 1%
------------------------------------ --------------

Carloads (thousands)

Petroleum and
chemicals 148 149 (1%) 302 300 1%
Metals and minerals 237 263 (10%) 475 488 (3%)
Forest products 182 183 (1%) 363 361 1%
Coal 117 104 13% 221 213 4%
Grain and fertilizers 134 144 (7%) 278 288 (3%)
Intermodal 312 313 - 606 573 6%
Automotive 74 80 (8%) 146 156 (6%)
------------------------------------ --------------
1,204 1,236 (3%) 2,391 2,379 1%

Freight revenue / carload (dollars)

Total freight
revenue per carload 1,449 1,353 7% 1,416 1,330 6%

Commodity groups:
Petroleum and
chemicals 1,831 1,812 1% 1,808 1,780 2%
Metals and minerals 903 779 16% 869 773 12%
Forest products 2,473 2,262 9% 2,353 2,169 8%
Coal 829 740 12% 796 695 15%
Grain and
fertilizers 1,940 1,910 2% 1,928 1,854 4%
Intermodal 1,003 920 9% 990 901 10%
Automotive 1,878 1,788 5% 1,788 1,750 2%
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) The pro forma figures reflect the Company's results of operations
as if the Company had acquired GLT and BC Rail on January 1,
2004.

Certain of the comparative statistical data and related productivity
measures have been restated to reflect changes to estimated
statistical data previously reported and reclassified in order to be
consistent with the 2005 presentation.


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Contact Information

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