CN
TSX : CNR
NYSE : CNI

CN

April 21, 2008 16:01 ET

CN reports Q1-2008 net income of C$311 million, or C$0.64 per diluted share; now expects full-year diluted EPS growth in mid-single digit range

Rail operations making steady gains after severe first-quarter weather

MONTREAL, QUEBEC--(Marketwire - April 21, 2008) - CN (TSX:CNR) (NYSE:CNI) today reported its financial and operating results for the first quarter ended March 31, 2008.

First-quarter 2008 results

- Diluted earnings per share increased two per cent to C$0.64.

- Net income declined four per cent to C$311 million.

- Revenues increased one per cent to C$1,927 million.

- Operating income declined seven per cent to C$523 million, with the Company's operating ratio rising by 2.3 points to 72.9 per cent.

- The stronger Canadian dollar relative to the U.S. dollar, which affects the conversion of CN's U.S. dollar-denominated revenues and expenses, reduced first-quarter 2008 net income by approximately C$30 million, or C$0.06 per diluted share.

The comparability of CN's first-quarter 2008 and 2007 financial results is affected by a first-quarter 2008 deferred income tax recovery of C$11 million (C$0.02 per diluted share) resulting from net capital losses arising from the reorganization of a subsidiary, and the impact of a first-quarter 2007 strike by conductors in Canada. CN estimates the strike reduced first-quarter 2007 net income by approximately C$35 million, or C$0.07 per diluted share.

E. Hunter Harrison, president and chief executive officer, said: "CN experienced some of the worst winter weather in decades during the first quarter of this year. Extreme cold and snow affected us system-wide - particularly in Western Canada - delaying trains and putting crews, cars and locomotives out of cycle. In January we took the unprecedented step of suspending most operations in the West for almost two days to ensure the safety of our employees. All these factors depressed traffic volumes and increased costs. In addition, our financial performance was affected by the strength of the Canadian dollar and significant weakness in certain markets, mainly forest products, which saw reduced volumes as a result of the decline in U.S. housing activity.

"It was a tough way to start the year, but we're making steady progress in improving network fluidity and workload."

Harrison said CN remains cautious about the North American economy. "While we believe the U.S. economy may currently be in a recession, we expect a gradual recovery during the second half of the year, and that the global economy will grow at a moderate pace throughout the year. CN sees growth opportunities in the container trade over the Port of Prince Rupert, increased resource demand, and increased shipments of commodities associated with oil and gas development in Western Canada, including pipes, machinery and equipment, and condensate."

The improvement in CN's first-quarter 2008 revenues was mainly attributable to freight rate increases, which included higher fuel surcharge revenues as a result of applicable fuel prices; overall improvements in traffic mix; and increased volumes, particularly in grain and fertilizers and intermodal due in part to the negative impact of the conductors' strike on first-quarter 2007 volumes. Partly offsetting these gains were the negative translation impact of the stronger Canadian dollar on U.S. dollar-denominated revenues; the harsh weather conditions in Canada and the U.S. Midwest, which affected the Company's operations; and lower volumes resulting from significant weakness in certain markets, mainly forest products.

Five CN commodity groups posted improvements in revenues during first-quarter 2008, led by intermodal (12 per cent), coal (11 per cent), grain and fertilizers (10 per cent), petroleum and chemicals (five per cent), and metals and minerals (four per cent). Forest products revenues declined 20 per cent, while automotive revenues fell 12 per cent.

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by the Company, increased by two per cent during first-quarter 2008 versus the comparable period of 2007. The absence of a labor disruption this year explains part of the volume increase.

First-quarter 2008 total rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, declined two per cent, mainly due to the translation impact of the stronger Canadian dollar and an increase in the average length of haul, which were partly offset by freight rate increases.

Operating expenses for the latest quarter increased by four per cent to C$1,404 million, largely as a result of increased fuel costs and higher purchased services and material expenses, which were partly offset by the positive translation impact of the stronger Canadian dollar on U.S. dollar-denominated expenses, and lower casualty and other expenses.

Revised 2008 financial outlook

Based on difficult first-quarter 2008 operating conditions and significant weakness in certain markets, CN now expects 2008 diluted earnings per share (EPS) growth to be in the mid-single digit range over 2007 adjusted diluted EPS of C$3.40. Full-year 2008 free cash flow is now expected to be in the order of C$650 million. (1) CN is maintaining its forecast for revenue growth in the range of six to eight per cent.

CN's prior financial outlook called for 2008 diluted EPS growth to be in the mid-to-high single digit range, and free cash flow in the order of C$750 million. (1)

CN's revised financial outlook is based on certain assumptions for the balance of 2008 - a Canadian-U.S. dollar exchange rate at or around parity, a crude oil (West Texas Intermediate) price of around US$105 per barrel, and North American economic growth of approximately one per cent.

Please see "Forward-Looking Statements" below for additional information.

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

(1) Please see discussion and reconciliation of this non-GAAP measure in the attached supplementary schedule, Non-GAAP Measure. To the extent CN has included non-GAAP financial measures as part of its financial outlook, the Company may not be able to provide a reconciliation to the non-GAAP measures, due to unknown variables and uncertainty related to future results.

Forward-Looking Statements

This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risk, uncertainties and assumptions. In addition to the other assumptions contained in this release, the Company believes the U.S. economy may currently be in a mild recession but that it will gradually recover in the second half of 2008 and that the global economy will grow at a moderate pace throughout the year. The Company cautions that these, as well as its other assumptions stated above, may not materialize. The Company's results could differ materially from those expressed or implied in such forward-looking statements. Important factors that could cause such differences include, but are not limited to, industry competition, legislative and/or regulatory developments, compliance with environmental laws and regulations, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, the effects of adverse general economic and business conditions, inflation, currency fluctuations, changes in fuel prices, labor disruptions, environmental claims, investigations or proceedings, other types of claims and litigation, and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to 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 2007 Annual Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis (MD&A), for a summary of major risks.

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

CN - Canadian National Railway Company and its operating railway subsidiaries - spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the key metropolitan areas of Toronto, Buffalo, Chicago, Detroit, Duluth, Minn./Superior, Wis., Green Bay, Wis., Minneapolis/St. Paul, Memphis, St. Louis, and Jackson, Miss., with connections to all points in North America. For more information on CN, visit the company's website at www.cn.ca.




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

Three months ended
March 31
------------------
2008 2007
----------------------------------------------------------------------------
(Unaudited)

Revenues $1,927 $1,906
----------------------------------------------------------------------------

Operating expenses
Labor and fringe benefits 461 485
Purchased services and material 285 276
Fuel 310 219
Depreciation and amortization 175 171
Equipment rents 64 66
Casualty and other 109 128
----------------------------------------------------------------------------
Total operating expenses 1,404 1,345
----------------------------------------------------------------------------

Operating income 523 561

Interest expense (86) (88)

Other income (loss) (6) 4
----------------------------------------------------------------------------

Income before income taxes 431 477

Income tax expense (120) (153)
----------------------------------------------------------------------------

Net income $ 311 $324
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings per share (Note 7)

Basic $ 0.64 $0.64

Diluted $ 0.64 $0.63

Weighted-average number of shares

Basic 482.8 510.2

Diluted 488.6 517.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


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

March 31 December 31 March 31
2008 2007 2007
----------------------------------------------------------------------------
(Unaudited) (Unaudited)

Assets

Current assets:
Cash and cash equivalents $ 334 $ 310 $ 106
Accounts receivable (Note 3) 621 370 508
Material and supplies 212 162 208
Deferred income taxes 67 68 83
Other 111 138 184
----------------------------------------------------------------------------
1,345 1,048 1,089

Properties 20,754 20,413 20,988
Intangible and other assets 2,065 1,999 1,646
----------------------------------------------------------------------------

Total assets $24,164 $23,460 $23,723
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities and shareholders' equity

Current liabilities:
Accounts payable and accrued charges $ 1,262 $ 1,282 $ 1,460
Current portion of long-term debt (Note 3) 269 254 244
Other 71 54 50
----------------------------------------------------------------------------
1,602 1,590 1,754

Deferred income taxes 5,021 4,908 5,025
Other liabilities and deferred credits 1,404 1,422 1,532
Long-term debt (Note 3) 6,064 5,363 5,602

Shareholders' equity:
Common shares 4,241 4,283 4,426
Accumulated other comprehensive income (loss) 9 (31) (50)
Retained earnings 5,823 5,925 5,434
----------------------------------------------------------------------------
10,073 10,177 9,810
----------------------------------------------------------------------------

Total liabilities and shareholders' equity $24,164 $23,460 $23,723
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


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

Three months ended
March 31
------------------
2008 2007
----------------------------------------------------------------------------
(Unaudited)

Common shares (1)

Balance, beginning of period $4,283 $4,459
Stock options exercised and other 23 23
Share repurchase programs (Note 3) (65) (56)
----------------------------------------------------------------------------
Balance, end of period $4,241 $4,426
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated other comprehensive income (loss)

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

Other comprehensive income (loss):

Unrealized foreign exchange gain (loss) on:
Translation of the net investment in foreign operations 187 (56)
Translation of U.S. dollar-denominated long-term debt
designated as a hedge of the net investment in U.S.
subsidiaries (182) 47

Pension and other postretirement benefit plans (Note 5) :
Amortization of net actuarial loss included in net
periodic benefit cost (1) 12
Amortization of prior service cost included in net
periodic benefit cost 6 5
----------------------------------------------------------------------------
Other comprehensive income before income taxes 10 8

Income tax recovery (expense) 30 (14)
----------------------------------------------------------------------------
Other comprehensive income (loss) 40 (6)
----------------------------------------------------------------------------
Balance, end of period $ 9 $ (50)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Retained earnings

Balance, beginning of period $5,925 $5,409
Adoption of new accounting pronouncements (2) - 95
----------------------------------------------------------------------------
Restated balance, beginning of period 5,925 5,504

Net income 311 324
Share repurchase programs (Note 3) (302) (287)
Dividends (111) (107)
----------------------------------------------------------------------------
Balance, end of period $5,823 $5,434
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.


(1) During the first quarter of 2008, the Company issued 0.8 million common
shares as a result of stock options exercised and repurchased 7.3
million common shares under its current share repurchase program. At
March 31, 2008, the Company had 478.7 million common shares outstanding.

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


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

Three months ended
March 31
-------------------
2008 2007
----------------------------------------------------------------------------
(Unaudited)

Operating activities

Net income $ 311 $ 324
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization 175 172
Deferred income taxes 25 7
Other changes in:
Accounts receivable (235) 176
Material and supplies (48) (19)
Accounts payable and accrued charges (68) (402)
Other net current assets and liabilities 38 (18)
Other (33) 23
----------------------------------------------------------------------------
Cash provided from operating activities 165 263
----------------------------------------------------------------------------

Investing activities

Property additions (177) (203)
Other, net 11 10
----------------------------------------------------------------------------
Cash used by investing activities (166) (193)
----------------------------------------------------------------------------

Financing activities

Issuance of long-term debt 1,055 434
Reduction of long-term debt (580) (145)
Issuance of common shares due to exercise of stock options
and related excess tax benefits realized 18 18
Repurchase of common shares (367) (343)
Dividends paid (111) (107)
----------------------------------------------------------------------------
Cash provided from (used by) financing activities 15 (143)
----------------------------------------------------------------------------

Effect of foreign exchange fluctuations on U.S.
dollar-denominated cash and cash equivalents 10 -
----------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents 24 (73)

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

Supplemental cash flow information
Net cash receipts from customers and other $1,748 $2,074
Net cash payments for:
Employee services, suppliers and other expenses (1,339) (1,237)
Interest (100) (114)
Workforce reductions (6) (9)
Personal injury and other claims (26) (20)
Pensions (22) (1)
Income taxes (90) (430)
----------------------------------------------------------------------------
Cash provided from operating activities $ 165 $ 263
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.



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


Note 1 - Basis of presentation

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

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


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

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

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

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


Note 3 - Financing activities

Revolving credit facility
As at March 31, 2008, the Company had letters of credit drawn on its U.S.$1
billion revolving credit facility, expiring in October 2011, of $59 million
($57 million as at December 31, 2007). The Company also had total borrowings
under its commercial paper program of $631 million, of which $67 million was
denominated in Canadian dollars and $564 million was denominated in U.S.
dollars (U.S.$549 million). The weighted-average interest rate on these
borrowings was 3.08%. As at December 31, 2007, total borrowings under the
Company's commercial paper program were $122 million, of which $114 million
was denominated in Canadian dollars and $8 million was denominated in U.S.
dollars (U.S.$8 million). The weighted-average interest rate on these
borrowings was 5.01%.

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

As at March 31, 2008, the Company had sold receivables that resulted in
proceeds of $440 million under this program ($588 million as at December 31,
2007), and recorded retained interest of approximately 10% of this amount in
Other current assets (retained interest of approximately 10% recorded as at
December 31, 2007). As at March 31, 2008, the servicing asset and liability
were not significant.

Share repurchase program
In the first quarter of 2008, under the current 33.0 million share
repurchase program, the Company repurchased 7.3 million common shares for
$367 million, at a weighted-average price of $50.26 per share. The Company
has repurchased a total of 25.0 million common shares since July 26, 2007,
the inception of this program, for $1,264 million, at a weighted-average
price of $50.57 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 2007 Annual Consolidated Financial Statements. For the three
months ended March 31, 2008 and 2007 the Company recorded total compensation
expense for awards under all plans of $28 million and $29 million,
respectively. The total tax benefit recognized in income in relation to
stock-based compensation expense for the three months ended March 31, 2008
and 2007 was $7 million and $8 million, respectively.

Cash settled awards
Following approval by the Board of Directors in January 2008, the Company
granted 0.7 million restricted share units (RSUs) to designated management
employees entitling them to receive payout in cash based on the Company's
share price. The RSUs granted by the Company are generally scheduled for
payout in cash after three years ("plan period") and vest upon the
attainment of targets relating to return on invested capital over the plan
period and the Company's share price during the last three months of the
plan period. As at March 31, 2008, 0.1 million RSUs remained authorized for
future issuance under this plan.

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

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


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

----------------------------------------------------------------------------
In millions, unless
otherwise indicated RSUs(1) Vision(1) VIDP(2) Total
----------------------------------------------------------------------------
2003
Year of grant 2008 2007 2006 2005 2004 2005 onwards
------------------------------------ ----- -------
Stock-based
compensation
expense
recognized
over requisite
service
period
Three months
ended March
31, 2008 $ 7 $ 2 $ 4 $ - $ 1 $ 3 $ 6 $ 23
Three months
ended March
31, 2007 N/A $ 8 $ 3 $ 4 $ 2 $ 1 $ 5 $ 23
---------------------------------------------------------------------------

Liability
outstanding
March 31, 2008 $ 7 $ 13 $ 33 $ - $ 1 $ 11 $ 93 $158
December 31,
2007 N/A $ 11 $ 29 $ 48 $ 4 $ 8 $ 95 $195
---------------------------------------------------------------------------

Fair value
per unit
March 31, 2008 $29.38 $31.36 $40.79 $ - $49.77 $20.27 $49.77 N/A
---------------------------------------------------------------------------

Fair value of
awards vested
during period
Three months
ended March
31, 2008 $ - $ - $ - $ - $ - $ - $ 1 $ 1
Three months
ended March
31, 2007 N/A $ - $ - $ - $ 5 $ - $ 1 $ 6
---------------------------------------------------------------------------

Nonvested awards
at March 31, 2008
Unrecognized
compensation
cost $ 11 $ 7 $ 6 $ - $ 3 $ 3 $ 6 $ 36
Remaining
recognition
period (years) 2.75 1.75 0.75 - 0.75 0.75 3.75 N/A
---------------------------------------------------------------------------

Assumptions(3)
Stock price($) $49.77 $49.77 $49.77 N/A $49.77 $49.77 $49.77 N/A
Expected stock
price
volatility(4) 22% 23% 26% N/A N/A 28% N/A N/A
Expected term
(years)(5) 2.75 1.75 0.75 N/A N/A 0.75 N/A N/A
Risk-free
interest
rate(6) 2.66% 2.62% 2.52% N/A N/A 1.88% N/A N/A
Dividend rate
($)(7) $ 0.92 $ 0.92 $ 0.92 N/A N/A $ 0.92 N/A N/A
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Compensation cost is based on the fair value of the awards at period-end
using the lattice-based valuation model that uses the assumptions as
presented herein, except for time-vested RSUs.

(2) Compensation cost is based on intrinsic value.

(3) Assumptions used to determine fair value are at March 31, 2008.

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

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

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

(7) Based on the annualized dividend rate.


Stock option awards
Following approval by the Board of Directors in January 2008, the Company
granted 0.9 million conventional stock options to designated senior
management employees. The stock option plan allows eligible employees to
acquire common shares of the Company upon vesting at a price equal to the
market value of the common shares at the date of grant. The options are
exercisable during a period not exceeding 10 years. The right to exercise
options generally accrues over a period of four years of continuous
employment. Options are not generally exercisable during the first 12 months
after the date of grant. At March 31, 2008, 13.5 million common shares
remained authorized for future issuances under this plan. The total number
of options outstanding at March 31, 2008, including conventional,
performance and performance-accelerated options, was 10.9 million,
0.5 million and 3.4 million, respectively.

The following table provides the activity of stock option awards in 2008.
The table also provides the aggregate intrinsic value for in-the-money stock
options, which represents the amount that would have been received by option
holders had they exercised their options on March 31, 2008 at the Company's
closing stock price of $49.77.

---------------------------------------------------------------------------
Options outstanding
----------------------------------------
Weighted- Weighted-
Number average average Aggregate
of exercise years to intrinsic
options price expiration value
---------------------------------------------------------------------------
In In
millions millions
---------------------------------------------------------------------------
Outstanding at December 31, 2007 (1) 14.7 $24.55
Granted 0.9 $48.46
Forfeited - $ -
Exercised (0.8) $15.06
--------------------------------------------------------------------------
Outstanding at March 31, 2008 (1) 14.8 $26.71 4.8 $342
---------------------------------------------------------------------------
Exercisable at March 31, 2008 (1) 12.4 $22.90 4.1 $333
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Stock options with a U.S. dollar exercise price have been translated to
Canadian dollars using the foreign exchange rate in effect at the
balance sheet date.


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

---------------------------------------------------------------------------
In millions, unless otherwise indicated
---------------------------------------------------------------------------
Year of grant 2008 2007 2006 2005 Total
-------------------------------------
Stock-based compensation expense
recognized over requisite service
period (1)
Three months ended March 31, 2008 $ 3 $ 1 $ - $ 1 $ 5
Three months ended March 31, 2007 N/A $ 4 $ 1 $ 1 $ 6
---------------------------------------------------------------------------

Fair value per unit
At grant date ($) $12.43 $13.36 $13.80 $ 9.19 N/A
---------------------------------------------------------------------------

Fair value of awards vested during
period
Three months ended March 31, 2008 $ - $ 3 $ 3 $ 3 $ 9
Three months ended March 31, 2007 N/A $ - $ 4 $ 3 $ 7
---------------------------------------------------------------------------

Nonvested awards at March 31, 2008
Unrecognized compensation cost $ 7 $ 4 $ 3 $ 2 $ 16
Remaining recognition period (years) 3.8 2.8 1.8 0.8 N/A
---------------------------------------------------------------------------

Assumptions (1)
Grant price ($) $48.46 $52.79 $51.51 $36.33 N/A
Expected stock price volatility (2) 27% 24% 25% 25% N/A
Expected term (years) (3) 5.3 5.2 5.2 5.2 N/A
Risk-free interest rate (4) 3.58% 4.12% 4.04% 3.50% N/A
Dividend rate ($) (5) $ 0.92 $ 0.84 $ 0.65 $ 0.50 N/A
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Compensation cost is based on the grant date fair value using the
Black-Scholes option-pricing model that uses the assumptions at the
grant date.

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

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

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

(5) Based on the annualized dividend rate.


Note 5 - Pensions and other postretirement benefits

For the three months ended March 31, 2008 and 2007, the components of net
periodic benefit cost (income) for pensions and other postretirement
benefits were as follows:

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

In millions Three months ended March 31, 2008 2007
----------------------------------------------------------------------------
Service cost $ 35 $ 38
Interest cost 200 186
Expected return on plan assets (251) (234)
Amortization of prior service cost 5 5
Recognized net actuarial loss - 13
----------------------------------------------------------------------------
Net periodic benefit cost (income) $ (11) $ 8
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

In millions Three months ended March 31, 2008 2007
----------------------------------------------------------------------------
Service cost $ 1 $ 1
Interest cost 4 4
Curtailment gain (2) (3)
Amortization of prior service cost 1 -
Recognized net actuarial gain (1) (1)
----------------------------------------------------------------------------
Net periodic benefit cost $ 3 $ 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------

In 2008, the Company expects to make total contributions of approximately
$120 million for all its defined benefit plans, of which $22 million,
relating to the 2007 funding year, was disbursed in the first quarter of
2008.


Note 6 - Major commitments and contingencies

A. Commitments
As at March 31, 2008, the Company had commitments to acquire railroad ties,
rail, freight cars, locomotives, and other equipment and services, as well
as outstanding information technology service contracts and licenses, at an
aggregate cost of $870 million ($952 million at December 31, 2007). The
Company also has agreements with fuel suppliers to purchase approximately
85% of the estimated remaining 2008 volume, 61% of its anticipated 2009
volume, and 28% of its anticipated 2010 volume, at market prices prevailing
on the date of the purchase.

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

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

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

As at March 31, 2008, the Company had aggregate reserves for personal injury
and other claims of $458 million, of which $105 million was recorded as a
current liability ($446 million, of which $102 million was recorded as a
current liability as at December 31, 2007). Although the Company considers
such provisions to be adequate for all its outstanding and pending claims,
the final outcome with respect to actions outstanding or pending at March
31, 2008, or with respect to future claims, cannot be predicted with
certainty, and therefore there can be no assurance that their resolution
will not have a material adverse effect on the Company's financial position
or results of operations in a particular quarter or fiscal year.

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

The Company is subject to environmental clean-up and enforcement actions. In
particular, the Federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (CERCLA), also known as the Superfund law, as well
as similar state laws generally impose joint and several liability for
clean-up and enforcement costs on current and former owners and operators of
a site without regard to fault or the legality of the original conduct. The
Company has been notified that it is a potentially responsible party for
study and clean-up costs at approximately 22 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, 2008, the Company had aggregate accruals for environmental
costs of $109 million, of which $26 million was recorded as a current
liability ($111 million, of which $28 million was recorded as a current
liability as at December 31, 2007).

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

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

(i) Guarantee of residual values of operating leases
The Company has guaranteed a portion of the residual values of certain of
its assets under operating leases with expiry dates between 2008 and 2019,
for the benefit of the lessor. If the fair value of the assets, at the end
of their respective lease term, is less than the fair value, as estimated at
the inception of the lease, then the Company must, under certain conditions,
compensate the lessor for the shortfall. At March 31, 2008, the maximum
exposure in respect of these guarantees was $146 million. There are no
recourse provisions to recover any amounts from third parties.

(ii) Other guarantees
The Company, including certain of its subsidiaries, has granted irrevocable
standby letters of credit and surety and other bonds, issued by highly rated
financial institutions, to third parties to indemnify them in the event the
Company does not perform its contractual obligations. As at March 31, 2008,
the maximum potential liability under these guarantees was $470 million, of
which $391 million was for workers' compensation and other employee benefits
and $79 million was for equipment under leases and other. During 2008, the
Company has granted guarantees for which no liability has been recorded, as
they relate to the Company's future performance.

As at March 31, 2008, the Company had not recorded any additional liability
with respect to these guarantees, as the Company does not expect to make any
additional payments associated with these guarantees. The majority of the
guarantee instruments mature at various dates between 2008 and 2010.

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

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

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

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


Note 7 - 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, 2008 2007
----------------------------------------------------------------------------

Net income $ 311 $ 324

Weighted-average shares outstanding 482.8 510.2
Effect of stock options 5.8 7.6
----------------------------------------------------------------------------
Weighted-average diluted shares outstanding 488.6 517.8

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

For the quarters ended March 31, 2008 and 2007, the weighted-average number
of stock options that were not included in the calculation of diluted
earnings per share, as their inclusion would have had an anti-dilutive
impact, was 0.2 million in both periods.


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

Three months ended
March 31
------------------
2008 2007
----------------------------------------------------------------------------
(Unaudited)
Statistical operating data

Rail freight revenues ($ millions) 1,760 1,754
Gross ton miles (GTM) (millions) 84,327 81,741
Revenue ton miles (RTM) (millions) 44,959 44,093
Carloads (thousands) 1,132 1,131
Route miles (includes Canada and the U.S.) 20,421 20,263
Employees (end of period) 22,703 22,139
Employees (average for the period) 22,636 21,478
----------------------------------------------------------------------------

Productivity

Operating ratio (%) 72.9 70.6
Rail freight revenue per RTM (cents) 3.91 3.98
Rail freight revenue per carload ($) 1,555 1,551
Operating expenses per GTM (cents) 1.66 1.65
Labor and fringe benefits expense per GTM (cents) 0.55 0.59
GTMs per average number of employees (thousands) 3,725 3,806
Diesel fuel consumed (U.S. gallons in millions) 99 96
Average fuel price ($/U.S. gallon) 3.02 2.18
GTMs per U.S. gallon of fuel consumed 852 851
----------------------------------------------------------------------------

Financial ratio

Debt to total capitalization ratio (% at end of period) 38.6 37.3
----------------------------------------------------------------------------

Safety indicators

Injury frequency rate per 200,000 person hours (2) 2.1 1.6
Accident rate per million train miles (2) 2.7 2.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes data relating to companies acquired as of the date of
acquisition.

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


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
2008 2007 (Unfav)
----------------------------------------------------------------------------
(Unaudited)
Revenues (millions of dollars)
Petroleum and chemicals 319 303 5%
Metals and minerals 205 198 4%
Forest products 330 410 (20%)
Coal 99 89 11%
Grain and fertilizers 340 309 10%
Intermodal 351 313 12%
Automotive 116 132 (12%)
Other revenues 167 152 10%
------------------------------------------------------------------
1,927 1,906 1%
Revenue ton miles (millions)
Petroleum and chemicals 8,426 7,870 7%
Metals and minerals 4,091 3,850 6%
Forest products 8,458 10,105 (16%)
Coal 3,392 3,100 9%
Grain and fertilizers 11,829 10,788 10%
Intermodal 8,089 7,591 7%
Automotive 674 789 (15%)
------------------------------------------------------------------
44,959 44,093 2%
Rail freight revenue / RTM (cents)
Total rail freight revenue per RTM 3.91 3.98 (2%)
Commodity groups:
Petroleum and chemicals 3.79 3.85 (2%)
Metals and minerals 5.01 5.14 (3%)
Forest products 3.90 4.06 (4%)
Coal 2.92 2.87 2%
Grain and fertilizers 2.87 2.86 -
Intermodal 4.34 4.12 5%
Automotive 17.21 16.73 3%
------------------------------------------------------------------

Carloads (thousands)
Petroleum and chemicals 145 146 (1%)
Metals and minerals 238 231 3%
Forest products 127 152 (16%)
Coal 87 90 (3%)
Grain and fertilizers 151 141 7%
Intermodal 327 305 7%
Automotive 57 66 (14%)
------------------------------------------------------------------
1,132 1,131 -
Rail freight revenue / carload (dollars)
Total rail freight revenue per carload 1,555 1,551 -
Commodity groups:
Petroleum and chemicals 2,200 2,075 6%
Metals and minerals 861 857 -
Forest products 2,598 2,697 (4%)
Coal 1,138 989 15%
Grain and fertilizers 2,252 2,191 3%
Intermodal 1,073 1,026 5%
Automotive 2,035 2,000 2%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

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 generated $61 million of free cash flow for the quarter ended
March 31, 2008, and utilized $176 million of free cash flow for the same
period in 2007. Free cash flow does not have any standardized meaning
prescribed by GAAP and therefore, may 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 accounts receivable securitization program and
changes in cash and cash equivalents resulting from foreign exchange
fluctuations, less cash used by investing activities and the payment of
dividends, calculated as follows:

In millions Three months ended March 31, 2008 2007
----------------------------------------------------------------------------

Cash provided from operating activities $ 165 $ 263
Cash used by investing activities (166) (193)
----------------------------------------------------------------------------
Cash provided (used) before financing activities (1) 70
----------------------------------------------------------------------------

Adjustments:
Change in accounts receivable securitization 163 (139)
Dividends paid (111) (107)
Effect of foreign exchange fluctuations on U.S.
dollar-denominated cash and cash equivalents 10 -
----------------------------------------------------------------------------
Free cash flow $ 61 $(176)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

www.cn.ca

Contact Information

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