CN
TSX : CNR
NYSE : CNI

CN

April 23, 2007 16:02 ET

CN reports diluted Q1-2007 EPS of C$0.63, net income of C$324 million, reflecting adverse effects of severe winter weather and conductors' strike

MONTREAL, QUEBEC--(CCNMatthews - April 23, 2007) - CN today reported its financial and operating results for the first quarter ended March 31, 2007.

First-quarter 2007 financial highlights

- Diluted earnings per share of C$0.63, down five per cent from year-earlier EPS of C$0.66.

- Net income of C$324 million, a decline of 10 per cent from first-quarter 2006 net income of C$362 million.

- Revenues of C$1,906 million, an increase of C$9 million over first-quarter 2006 revenues of C$1,897 million.

- Operating ratio of 70.6 per cent, a 3.5-point increase from the same quarter of 2006.

E. Hunter Harrison, president and chief executive officer of CN, said: "The first three months of 2007 were very challenging for CN, as we announced in our media release of March 29. Our results for the quarter were affected by unusually difficult winter weather in Western Canada during January and February, a work stoppage by conductors and yard-service employees across Canada in February, and then avalanches and landslides in Western Canada that blocked our main line to and from Vancouver in March."

First-quarter operating income declined 10 per cent to C$561 million, while CN's operating ratio increased by 3.5-points to 70.6 per cent. CN estimates the United Transportation Union (UTU) strike reduced first-quarter operating income by approximately C$50 million, and net income by C$35 million, or seven cents per diluted share.

Revenues for the first three months of 2007 were basically flat at C$1,906 million, reflecting freight rate increases, an overall improvement in traffic mix driven principally by extended routings for certain forest products traffic, and the translation impact of the weaker Canadian dollar on U.S. dollar-denominated revenues. This increase was partly offset by the effect of the UTU strike, unfavourable weather conditions, weakness in specific markets, and lower fuel surcharge revenues resulting from a decrease in crude oil prices.

Revenue ton-miles, a measurement of the relative weight and distance of rail freight transported by the company, declined three per cent during first-quarter 2007. Rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned from the movement of a ton of freight over one mile, increased by four per cent over the same period of 2006.

Operating expenses for the first three months of 2007 increased by six per cent to C$1,345 million, primarily due to increased casualty and other expenses, equipment rents, and purchased services and material expenses, which were partly offset by lower labour and fringe benefit expenses.

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

This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risk and uncertainties, including the assumption that, while CN expects a moderate slowdown in the North American economy in the near term, positive economic conditions in North America and globally will continue, 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, and its 2006 Annual Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis (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)
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(In millions, except per share data)

Three months ended
March 31
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2007 2006
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(Unaudited)

Revenues $1,906 $1,897
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Operating expenses
Labor and fringe benefits 485 493
Purchased services and material 276 258
Depreciation and amortization 171 164
Fuel 219 204
Equipment rents 66 47
Casualty and other 128 106
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Total operating expenses 1,345 1,272
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Operating income 561 625

Interest expense (88) (75)

Other income (loss) 4 (1)
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Income before income taxes 477 549

Income tax expense (153) (187)
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Net income $ 324 $ 362
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Earnings per share (Note 8)

Basic $ 0.64 $ 0.68

Diluted $ 0.63 $ 0.66

Weighted-average number of shares

Basic 510.2 536.1

Diluted 517.8 545.1
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See accompanying notes to unaudited consolidated financial statements.


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

March 31 December 31 March 31
2007 2006 2006
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(Unaudited) (Unaudited)
Assets

Current assets:
Cash and cash equivalents $ 106 $ 179 $ 173
Accounts receivable 508 692 551
Material and supplies 208 189 224
Deferred income taxes 83 84 66
Other 184 192 184
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1,089 1,336 1,198

Properties 20,988 21,053 20,175
Intangible and other assets 1,646 1,615 947
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Total assets $23,723 $24,004 $22,320
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Liabilities and shareholders' equity

Current liabilities:
Accounts payable and accrued charges $ 1,460 $ 1,823 $ 1,439
Current portion of long-term debt (Note 3) 244 218 402
Other 50 73 65
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1,754 2,114 1,906

Deferred income taxes (Note 2) 5,025 5,215 4,846
Other liabilities and deferred credits 1,532 1,465 1,506
Long-term debt (Note 3) 5,602 5,386 4,860

Shareholders' equity:
Common shares 4,426 4,459 4,591
Accumulated other comprehensive loss (50) (44) (245)
Retained earnings 5,434 5,409 4,856
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9,810 9,824 9,202
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Total liabilities and shareholders' equity $23,723 $24,004 $22,320
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See accompanying notes to unaudited consolidated financial statements.


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

Three months ended
March 31
-------------------
2007 2006
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(Unaudited)

Common shares (1)

Balance, beginning of period $4,459 $4,580

Stock options exercised and other 23 71

Share repurchase programs (Note 3) (56) (60)
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Balance, end of period $4,426 $4,591
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Accumulated other comprehensive loss

Balance, beginning of period $ (44) $ (222)

Other comprehensive income (loss):

Unrealized foreign exchange gain (loss) on:
Translation of the net investment in foreign operations (56) (14)
Translation of U.S. dollar-denominated long-term debt
designated as a hedge of the net investment in U.S.
subsidiaries 47 6

Pension and other postretirement benefit plans:
Amortization of:
Prior service cost (Note 6) 5 -
Net actuarial loss (Note 6) 12 -

Derivative instruments:
Decrease in unrealized holding gains on fuel derivative
instruments (Note 5) - (27)
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Other comprehensive income (loss) before income taxes 8 (35)

Income tax recovery (expense) (14) 12
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Other comprehensive loss (6) (23)
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Balance, end of period $ (50) $ (245)
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Retained earnings

Balance, beginning of period $5,409 $4,891

Adoption of new accounting pronouncements (Note 2) 95 -
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Restated balance, beginning of period 5,504 4,891

Net income 324 362

Share repurchase programs (Note 3) (287) (310)

Dividends (107) (87)
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Balance, end of period $5,434 $4,856
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See accompanying notes to unaudited consolidated financial statements.

(1) During the first quarter of 2007, the Company issued 0.7 million common
shares as a result of stock options exercised.
At March 31, 2007, the Company had 506.6 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
March 31
-------------------
2007 2006
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(Unaudited)
Operating activities

Net income $ 324 $ 362
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 172 164
Deferred income taxes 7 47
Other changes in:
Accounts receivable 176 70
Material and supplies (19) (72)
Accounts payable and accrued charges (402) (20)
Other net current assets and liabilities (18) 33
Other 23 35
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Cash provided from operating activities 263 619
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Investing activities

Property additions (203) (155)
Other, net 10 (54)
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Cash used by investing activities (193) (209)
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Financing activities

Issuance of long-term debt 434 802
Reduction of long-term debt (145) (710)
Issuance of common shares due to exercise of stock
options and related excess tax benefits realized 18 66
Repurchase of common shares (343) (370)
Dividends paid (107) (87)
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Cash used by financing activities (143) (299)
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Net increase (decrease) in cash and cash equivalents (73) 111

Cash and cash equivalents, beginning of period 179 62
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Cash and cash equivalents, end of period $ 106 $ 173
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Supplemental cash flow information
Net cash receipts from customers and other $2,015 $1,921
Net cash payments for:
Employee services, suppliers and other expenses (1,178) (1,127)
Interest (114) (88)
Workforce reductions (9) (16)
Personal injury and other claims (20) (26)
Pensions (1) (1)
Income taxes (430) (44)
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Cash provided from operating activities $ 263 $ 619
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See accompanying notes to unaudited consolidated financial statements.


CANADIAN NATIONAL RAILWAY COMPANY
NOTES TO UNAUDITED 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 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
March 31, 2007, December 31, 2006, and March 31, 2006, and its results of
operations, changes in shareholders' equity and cash flows for the three
months ended March 31, 2007 and 2006.

These unaudited Interim Consolidated Financial Statements and Notes thereto
have been prepared using accounting policies consistent with those used in
preparing the Company's 2006 Annual Consolidated Financial Statements,
except for accounting for income taxes and pensions and other postretirement
benefits as explained in Note 2 - Adoption of new accounting pronouncements.
While management believes that the disclosures presented are adequate to
make the information not misleading, these unaudited Interim Consolidated
Financial Statements and Notes thereto should be read in conjunction with
the Company's Interim Management's Discussion and Analysis (MD&A) and Annual
Consolidated Financial Statements and Notes thereto.

Certain of the comparative figures have been reclassified in order to be
consistent with the 2007 presentation as discussed herein. As a result of
the Company's expansion of its existing non-rail transportation services, in
combination with its rail service, the Company has become primarily
responsible for the fulfillment of the transportation of goods involving
non-rail activities. In order to be consistent with other non-rail
transportation services, the Company reclassified certain operating expenses
incurred for non-rail transportation services, which were previously netted
with their related revenues, to reflect the gross reporting of revenues
where appropriate. This change had no impact on the Company's operating
income and net income, as both revenues and operating expenses were
increased by $59 million in the first quarter of 2007 and $50 million in the
first quarter of 2006.


Note 2 - Adoption of new accounting pronouncements

Income taxes
On January 1, 2007, the Company adopted Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income
Taxes," which prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also
provides guidance on derecognition, classification, interest and penalties,
disclosure, and transition. The application of FIN No. 48 on January 1, 2007
had the effect of decreasing the net deferred income tax liability and
increasing Retained earnings by $98 million.

The Company recognizes interest accrued and penalties related to
unrecognized tax benefits in Income tax expense in the Company's
Consolidated Statement of Income. The amount of interest and penalties
expense for the three months ended March 31, 2007 was not significant.

At January 1, 2007, the total amount of unrecognized tax benefits was $80
million, of which $36 million related to accrued interest and penalties. If
recognized, all of the unrecognized tax benefits would affect the effective
tax rate.

In Canada, the federal income tax returns filed for the years 2002 to 2006
and the provincial income tax returns filed for the years 1998 to 2006
remain subject to examination by the taxation authorities. In the U.S., the
income tax returns filed for the years 2003 to 2006 remain subject to
examination by the taxation authorities.

Pensions and other postretirement benefits
On January 1, 2007, pursuant to Statement of Financial Accounting Standards
(SFAS) No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R )," the Company early adopted the requirement to measure the defined
benefit plan assets and the projected benefit obligation as of the date of
the fiscal year-end statement of financial position for its U.S. plans. The
Company elected to use the 15-month transition method, which allows for the
extrapolation of net periodic benefit cost based on the September 30, 2006
measurement date to the fiscal year-end date of December 31, 2007. As a
result, the Company recorded a reduction of $3 million to Retained earnings
at January 1, 2007, which represents the net periodic benefit cost
attributable to the period between the early measurement date of September
30, 2006 and January 1, 2007 (the date of adoption).


Note 3 - Financing activities

Revolving credit facility
As at March 31, 2007, the Company had letters of credit drawn on its U.S. $1
billion revolving credit facility of $306 million ($308 million as at
December 31, 2006) and had U.S.$265 million (Cdn$306 million) of borrowings
under its commercial paper program (nil as at December 31, 2006) at an
average interest rate of 5.29%.

Accounts receivable securitization
The Company has a five-year 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.

At March 31, 2007, the Company had sold receivables that resulted in
proceeds of $529 million under this program ($393 million at December 31,
2006). The retained interest in the receivables was approximately 10% of
this amount and is recorded in Other current assets. At March 31, 2007, the
servicing asset and liability were not significant.

Share repurchase program
In the first quarter of 2007, under its current 28.0 million share
repurchase program, the Company repurchased 6.5 million common shares for
$343 million, at an average price of $52.71 per share. The Company has
repurchased a total of 22.0 million common shares since July 25, 2006, the
inception of this program, for $1,109 million, at an average price of $50.40
per share.


Note 4 - Stock plans

The Company has various stock-based incentive plans for eligible employees.
A description of the plans is provided in Note 12 - Stock plans, to the
Company's 2006 Annual Consolidated Financial Statements. For the three
months ended March 31, 2007 and 2006, the Company recorded total
compensation expense for awards under all plans of $29 million and $34
million, respectively. The total tax benefit recognized in income in
relation to stock-based compensation expense was $8 million and $10 million
for the quarters ended March 31, 2007 and 2006, respectively.

Cash settled award
Following approval by the Board of Directors, the Company granted 0.7
million restricted share units (RSUs) to designated management employees
entitling them to receive payout in cash based on the Company's share price.
The RSUs granted by the Company are generally scheduled for payout in cash
after three years ("plan period") and vest upon the attainment of targets
relating to return on invested capital over the plan period and the
Company's share price during the last three months of the plan period. As at
March 31, 2007, 0.1 million RSUs remained authorized for future issuance
under this plan.

The following table provides the activity for all cash settled awards in
2007:

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Vision 2008
Share Unit Voluntary Incentive
RSUs Plan (Vision) Deferral Plan (VIDP)
----------------- ----------------- --------------------
In millions Nonvested Vested Nonvested Vested Nonvested Vested
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Outstanding at
December 31, 2006 2.0 - 0.8 - 0.3 1.9
Granted 0.7 - - - - -
Forfeited - - - - - -
Vested during period (0.2) 0.2 - - - -
Payout - (0.1) - - - (0.1)
Conversion into VIDP - (0.1) - - - 0.1
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Outstanding at
March 31, 2007 2.5 - 0.8 - 0.3 1.9
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The following table provides valuation and expense information for all cash
settled awards:

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In millions, unless
otherwise indicated RSUs(1) Vision(1) VIDP(2) Total
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2003
Year of grant 2007 2006 2005 2004 2005 onwards
----------------------------- ------ -------
Stock-based
compensation expense
recognized over
requisite service
period
Quarter ended
March 31, 2007 $ 8 $ 3 $ 4 $ 2 $ 1 $ 5 $ 23
Quarter ended
March 31, 2006 N/A $ 2 $ 6 $ 2 $ 6 $ 13 $ 29
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Liability
outstanding
March 31, 2007 $ 8 $ 24 $ 38 $ 1 $ 9 $ 110 $ 190
December 31, 2006 N/A $ 21 $ 34 $ 8 $ 8 $ 99 $ 170
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Fair value per unit
March 31, 2007 $30.11 $38.02 $50.23 $50.92 $20.27 $50.92 N/A
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Fair value of awards
vested during
period
Quarter ended
March 31, 2007 $ - $ - $ - $ 5 $ - $ 1 $ 6
Quarter ended
March 31, 2006 N/A $ - $ - $ - $ - $ 2 $ 2
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Nonvested awards at
March 31, 2007
Unrecognized
compensation cost $ 12 $ 14 $ 13 $ 7 $ 7 $ 11 $ 64
Remaining
recognition
period (years) 2.75 1.75 0.75 1.75 1.75 3.75 N/A
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Assumptions (3)
Stock price ($) $50.92 $50.92 $50.92 $50.92 $50.92 $50.92 N/A
Expected stock price
volatility (4) 20% 20% 21% N/A 20% N/A N/A
Expected term
(years) (5) 2.75 1.75 0.75 N/A 1.75 N/A N/A
Risk-free interest
rate (6) 3.99% 3.98% 4.00% N/A 4.32% N/A N/A
Dividend rate ($)(7)$ 0.84 $ 0.84 $ 0.84 N/A $ 0.84 N/A N/A
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(1) Compensation cost is based on the fair value of the awards at period-end
using the lattice-based valuation model that uses the assumptions as
presented herein, except for time-vested RSUs.

(2) Compensation cost is based on intrinsic value.

(3) Assumptions used to determine fair value are at period-end.

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

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

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

(7) Based on the annualized dividend rate.


Stock option award
Following approval by the Board of Directors, the Company granted
approximately 0.8 million conventional stock options to designated senior
management employees. The stock option plan allows eligible employees to
acquire common shares of the Company upon vesting at a price equal to the
market value of the common shares at the date of grant. The options are
exercisable during a period not exceeding 10 years. The right to exercise
options generally accrues over a period of four years of continuous
employment. Options are not generally exercisable during the first 12 months
after the date of grant. At March 31, 2007, 14.4 million common shares
remained authorized for future issuances under this plan. The total number
of options outstanding at March 31, 2007, including conventional,
performance, and performance-accelerated options, was 12.3 million, 0.7
million and 4.0 million, respectively.


The following table provides the activity of stock option awards in 2007:

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Options outstanding
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Weighted- Weighted-
Number average average Aggregate
of exercise years to intrinsic
options price expiration value
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In In
millions millions
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Outstanding at December 31, 2006 (1) 16.9 $23.29
Granted 0.8 $52.70
Forfeited - $ -
Exercised (0.7) $17.08
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Outstanding at March 31, 2007 (1) 17.0 $24.93 5.2 $441
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Exercisable at March 31, 2007 (1) 14.7 $21.47 4.7 $432
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(1) Stock options with a U.S. dollar exercise price have been translated to
Canadian dollars using the foreign exchange rate in effect at the
balance sheet date.


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

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In millions, unless otherwise indicated
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Prior to
Year of grant 2007 2006 2005 2005 Total
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Stock-based compensation expense
recognized over requisite service
period (1)
Quarter ended March 31, 2007 $ 4 $ 1 $ 1 $ - $ 6
Quarter ended March 31, 2006 N/A $ 1 $ 1 $ 3 $ 5
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Fair value per unit
At grant date ($) $13.32 $13.80 $ 9.19 $ 8.61 N/A
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Fair value of awards vested during
period
Quarter ended March 31, 2007 $ - $ 4 $ 3 $ - $ 7
Quarter ended March 31, 2006 N/A $ - $ 3 $ 33 $ 36
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Nonvested awards at March 31, 2007
Unrecognized compensation cost $ 6 $ 5 $ 5 $ - $ 16
Remaining recognition period (years) 3.83 2.85 1.84 - N/A
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Assumptions (1)
Stock price ($) $52.70 $51.51 $36.33 $23.59 N/A
Expected stock price volatility (2) 24% 25% 25% 30% N/A
Expected term (years) (3) 5.22 5.17 5.20 6.22 N/A
Risk-free interest rate (4) 4.11% 4.04% 3.50% 5.13% N/A
Dividend rate ($) (5) $ 0.84 $ 0.65 $ 0.50 $ 0.30 N/A
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(1) Compensation cost is based on the grant date fair value using the
Black-Scholes option-pricing model that uses the assumptions at the
grant date.

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

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

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

(5) Based on the annualized dividend rate.


Note 5 - Derivative instruments

The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. At March 31, 2007, the Company
did not have any derivative financial instruments outstanding. At March 31,
2007, Accumulated other comprehensive loss included an unamortized gain of
$11 million, $8 million after tax ($12 million, $8 million after tax at
December 31, 2006) related to interest rate derivatives settled in 2004. At
March 31, 2006, Accumulated other comprehensive loss included unrealized
gains of $30 million, $21 million after tax, related to fuel derivative
instruments that were settled in September 2006.


Note 6 - Pensions and other postretirement benefits

For the quarters ended March 31, 2007 and 2006, the components of net
periodic benefit cost for pensions and other postretirement benefits were as
follows:

(a) Components of net periodic benefit cost for pensions

In millions Three months ended March 31, 2007 2006
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Service cost $ 38 $ 40
Interest cost 186 179
Expected return on plan assets (234) (227)
Amortization of prior service cost 5 4
Amortization of net actuarial loss 13 23
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Net periodic benefit cost $ 8 $ 19
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(b) Components of net periodic benefit cost for postretirement benefits

In millions Three months ended March 31, 2007 2006
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Service cost $ 1 $ 1
Interest cost 4 4
Curtailment (3) -
Recognized net actuarial gain (1) (1)
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Net periodic benefit cost $ 1 $ 4
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For the 2007 funding year, the Company expects to make total contributions
of approximately $100 million for all its defined benefit plans, of which $1
million was disbursed at March 31, 2007.


Note 7 - Major commitments and contingencies

A. Commitments
As at March 31, 2007, the Company had commitments to acquire railroad ties,
rail, freight cars, locomotives, and other equipment and services, as well
as outstanding information technology service contracts and licenses, at an
aggregate cost of $781 million ($773 million at December 31, 2006). The
Company also has agreements with fuel suppliers to purchase approximately
46% of the estimated remaining 2007 volume, 32% of its anticipated 2008
volume, 25% of its anticipated 2009 volume, and 8% of its anticipated 2010
volume at market prices prevailing on the date of the purchase.

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

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

United States
Employee work-related injuries, including occupational disease claims, are
compensated according to the provisions of the Federal Employers' Liability
Act (FELA), which requires either the finding of fault through the U.S. jury
system or individual settlements, and represent a major liability for the
railroad industry. The Company follows an actuarial-based approach and
accrues the expected cost for personal injury and property damage claims and
asserted and unasserted occupational disease claims, based on actuarial
estimates of their ultimate cost. A comprehensive actuarial study is
conducted on an annual basis 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 March 31, 2007, the Company had aggregate reserves for personal injury
and other claims of $613 million, of which $114 million was recorded as a
current liability ($602 million, of which $115 million was recorded as a
current liability at December 31, 2006). 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 March 31,
2007, or with respect to future claims, cannot be predicted with certainty,
and therefore there can be no assurance that their resolution will not have
a material adverse effect on the Company's financial position or results of
operations in a particular quarter or fiscal year.

C. Environmental matters
The Company's operations are subject to numerous federal, provincial, state,
municipal and local environmental laws and regulations in Canada and the
United States concerning, among other things, emissions into the air;
discharges into waters; the generation, handling, storage, transportation,
treatment and disposal of waste, hazardous substances, and other materials;
decommissioning of underground and aboveground storage tanks; and soil and
groundwater contamination. A risk of environmental liability is inherent in
railroad and related transportation operations; real estate ownership,
operation or control; and other commercial activities of the Company with
respect to both current and past operations. As a result, the Company incurs
significant compliance and capital costs, on an ongoing basis, associated
with environmental regulatory compliance and clean-up requirements in its
railroad operations and relating to its past and present ownership,
operation or control of real property.

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

While the Company believes that it has identified the costs likely to be
incurred in the next several years, based on known information, for
environmental matters, the Company's ongoing efforts to identify potential
environmental concerns that may be associated with its properties may lead
to future environmental investigations, which may result in the
identification of additional environmental costs and liabilities. The
magnitude of such additional liabilities and the costs of complying with
environmental laws and containing or remediating contamination cannot be
reasonably estimated due to:

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

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

As at March 31, 2007, the Company had aggregate accruals for environmental
costs of $121 million, of which $19 million was recorded as a current
liability ($131 million, of which $25 million was recorded as a current
liability as at December 31, 2006).

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

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

(i) Guarantee of residual values of operating leases
The Company has guaranteed a portion of the residual values of certain of
its assets under operating leases with expiry dates between 2007 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. At March 31, 2007, 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
FIN No. 45 requirements. There are no recourse provisions to recover any
amounts from third parties.

(ii) Other guarantees
The Company, including certain of its subsidiaries, has granted irrevocable
standby letters of credit and surety and other bonds, issued by highly rated
financial institutions, to third parties to indemnify them in the event the
Company does not perform its contractual obligations. As at March 31, 2007,
the maximum potential liability under these guarantees was $440 million, of
which $366 million was for workers' compensation and other employee benefits
and $74 million was for equipment under leases and other. During 2007, the
Company has granted guarantees for which no liability has been recorded, as
they relate to the Company's future performance.

As at March 31, 2007 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 2007 and 2010.

(iii) General indemnifications
In the normal course of business, the Company has provided indemnifications,
customary for the type of transaction or for the railway business, in
various agreements with third parties, including indemnification provisions
where the Company would be required to indemnify third parties and others.
Indemnifications are found in various types of contracts with third parties
which include, but are not limited to, (a) contracts granting the Company
the right to use or enter upon property owned by third parties such as
leases, easements, trackage rights and sidetrack agreements; (b) contracts
granting rights to others to use the Company's property, such as leases,
licenses and easements; (c) contracts for the sale of assets and
securitization of accounts receivable; (d) contracts for the acquisition of
services; (e) financing agreements; (f) trust indentures, fiscal agency
agreements, underwriting agreements or similar agreements relating to debt
or equity securities of the Company and engagement agreements with financial
advisors; (g) transfer agent and registrar agreements in respect of the
Company's securities; (h) trust and other agreements relating to pension
plans and other plans, including those establishing trust funds to secure
payment to certain officers and senior employees of special retirement
compensation arrangements; (i) pension transfer agreements; (j) master
agreements with financial institutions governing derivative transactions;
and (k) settlement agreements with insurance companies or other third
parties whereby such insurer or third party has been indemnified for any
present or future claims relating to insurance policies, incidents or events
covered by the settlement agreements. To the extent of any actual claims
under these agreements, the Company maintains provisions for such items,
which it considers to be adequate. Due to the nature of the indemnification
clauses, the maximum exposure for future payments may be material. However,
such exposure cannot be determined with certainty.

The Company has entered into various indemnification contracts with third
parties for which the maximum exposure for future payments cannot be
determined with certainty. As a result, the Company was unable to determine
the fair value of these guarantees and accordingly, no liability was
recorded. As at March 31, 2007, 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:

In millions, except per
share data Three months ended March 31, 2007 2006
----------------------------------------------------------------------------
(Unaudited)

Net income $ 324 $ 362

Weighted-average shares outstanding 510.2 536.1
Effect of stock options 7.6 9.0
----------------------------------------------------------------------------
Weighted-average diluted shares outstanding 517.8 545.1

Basic earnings per share $ 0.64 $ 0.68
Diluted earnings per share $ 0.63 $ 0.66
----------------------------------------------------------------------------
----------------------------------------------------------------------------

For the quarters ended March 31, 2007 and 2006, the weighted-average
number of stock options that were not included in the calculation of
diluted earnings per share, as their inclusion would have had an anti-
dilutive impact, were 0.2 million and 0.3 million, respectively.


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

Three months ended
March 31
-------------------
2007 2006
----------------------------------------------------------------------------
(Unaudited)
Statistical operating data

Rail freight revenues ($ millions) 1,754 1,753
Gross ton miles (GTM) (millions) 81,741 86,231
Revenue ton miles (RTM) (millions) 44,093 45,661
Carloads (thousands) 1,131 1,191
Route miles (includes Canada and the U.S.) 20,263 19,962
Employees (end of period) 21,685 21,656
Employees (average for the period) 21,027 21,521
----------------------------------------------------------------------------

Productivity

Operating ratio (%) 70.6 67.1
Rail freight revenue per RTM (cents) 3.98 3.84
Rail freight revenue per carload ($) 1,551 1,472
Operating expenses per GTM (cents) 1.65 1.48
Labor and fringe benefits expense per GTM (cents) 0.59 0.57
GTMs per average number of employees (thousands) 3,887 4,007
Diesel fuel consumed (U.S. gallons in millions) 96 104
Average fuel price ($/U.S. gallon) (1) 2.18 1.88
GTMs per U.S. gallon of fuel consumed 851 829
----------------------------------------------------------------------------

Safety indicators

Injury frequency rate per 200,000 person hours (2) 1.6 2.3
Accident rate per million train miles (2) 2.7 1.5
----------------------------------------------------------------------------

Financial ratio

Debt to total capitalization ratio (% at end of period) 37.3 36.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) 2006 includes the impact of the Company's fuel hedging program.

(2) Based on Federal Railroad Administration (FRA) reporting criteria.


Certain of the 2006 comparative figures have been reclassified in order to
be consistent with the 2007 presentation (see Note 1 of the Company's
unaudited Interim Consolidated Financial Statements). 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.


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

Three months ended March 31
----------------------------
Variance
Fav
2007 2006 (Unfav)
----------------------------------------------------------------------------
(Unaudited)
Revenues (in millions of dollars)
Petroleum and chemicals 303 292 4%
Metals and minerals 198 200 (1%)
Forest products 410 438 (6%)
Coal 89 85 5%
Grain and fertilizers 309 298 4%
Intermodal 313 315 (1%)
Automotive 132 125 6%
Other 152 144 6%
-------------------------------------------------------------------
1,906 1,897 -
Revenue ton miles (millions)
Petroleum and chemicals 7,870 8,127 (3%)
Metals and minerals 3,850 4,297 (10%)
Forest products 10,105 10,706 (6%)
Coal 3,100 3,256 (5%)
Grain and fertilizers 10,788 10,713 1%
Intermodal 7,591 7,758 (2%)
Automotive 789 804 (2%)
-------------------------------------------------------------------
44,093 45,661 (3%)

Rail freight revenue / RTM (cents)
Total rail freight revenue per RTM 3.98 3.84 4%
Commodity groups:
Petroleum and chemicals 3.85 3.59 7%
Metals and minerals 5.14 4.65 11%
Forest products 4.06 4.09 (1%)
Coal 2.87 2.61 10%
Grain and fertilizers 2.86 2.78 3%
Intermodal 4.12 4.06 1%
Automotive 16.73 15.55 8%
-------------------------------------------------------------------

Carloads (thousands)
Petroleum and chemicals 146 150 (3%)
Metals and minerals 231 235 (2%)
Forest products 152 177 (14%)
Coal 90 110 (18%)
Grain and fertilizers 141 141 -
Intermodal 305 308 (1%)
Automotive 66 70 (6%)
-------------------------------------------------------------------
1,131 1,191 (5%)

Rail freight revenue / carload (dollars)
Total rail freight revenue per carload 1,551 1,472 5%
Commodity groups:
Petroleum and chemicals 2,075 1,947 7%
Metals and minerals 857 851 1%
Forest products 2,697 2,475 9%
Coal 989 773 28%
Grain and fertilizers 2,191 2,113 4%
Intermodal 1,026 1,023 -
Automotive 2,000 1,786 12%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Certain of the 2006 comparative figures have been reclassified in order to
be consistent with the 2007 presentation (see Note 1 of the Company's
unaudited Interim Consolidated Financial Statements). 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 MEASURE - unaudited
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Free cash flow
The Company utilized $176 million of free cash flow for the quarter ended
March 31, 2007 and generated $318 million of free cash flow for the same
period in 2006. The decrease is largely explained by the final payment of
$367 million for Canadian income taxes in the first quarter of 2007, in
respect of the 2006 fiscal year. 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
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. 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 cash used by
investing activities, and after the payment of dividends, calculated as
follows:


In millions Three months ended March 31, 2007 2006
----------------------------------------------------------------------------
Cash provided from operating activities $ 263 $ 619
Cash used by investing activities (193) (209)
----------------------------------------------------------------------------
Cash provided before financing activities 70 410
----------------------------------------------------------------------------

Adjustments:
Change in accounts receivable securitization (1) (139) (5)
Dividends paid (107) (87)
----------------------------------------------------------------------------
Free cash flow $ (176) $ 318
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

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Contact Information

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    Mark Hallman (Media)
    System Director, Media Relations
    (905) 669-3384
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    Robert Noorigian (Investment Community)
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    (514) 399-0052