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CN reports Q2-2009 net income of C$387 million, or C$0.82 per diluted share, compared with year-earlier net income of C$459 million, or C$0.95 per diluted share

MONTREAL, July 20 /PRNewswire-FirstCall/ - CN (TSX: CNR)(NYSE: CNI) today reported its financial and operating results for the second quarter ended June 30, 2009.

    Second-quarter 2009 highlights

    - Net income declined to C$387 million, or C$0.82 per diluted share, from
      year-earlier net income of C$459 million, or C$0.95 per diluted share,
      as a result of depressed North American and global economies driving
      lower volumes.
    - Revenues declined 15 per cent to C$1,781 million, carloads declined
      22 per cent to 928,000, and revenue ton-miles declined 14 per cent,
      with weakness in almost all market segments.
    - Operating expenses declined 14 per cent to C$1,198 million, reflecting
      a significant reduction in year-over-year fuel prices and extensive
      cost-containment measures in response to lower traffic.
    - Operating income declined 18 per cent to C$583 million, while the
      operating ratio increased by one percentage point to 67.3 per cent.
    - Six-month 2009 free cash flow increased to C$463 million from
      C$225 million generated during the first-half of 2008.(1)

    CN's second-quarter 2009 net income included:

    - A deferred income tax recovery of C$28 million ($0.06 per diluted
      share), of which C$12 million (C$0.03 per diluted share) resulted from
      the enactment of a lower provincial corporate income tax rate and
      C$16 million (C$0.03 per diluted share) resulted from the
      re-capitalization of a foreign investment.
    - Costs of C$2 million after-tax (nil per diluted share) related to the
      acquisition of the principal rail lines of the Elgin, Joliet and
      Eastern Railway Company (EJ&E).

Excluding these items, CN reported adjusted second-quarter 2009 net income of C$361 million, or C$0.76 per diluted share.(1)

The strengthening of the U.S. dollar affected the conversion of the Company's U.S.-dollar-denominated revenues and expenses, increasing second-quarter 2009 net income by C$15 million, or C$0.03 per diluted share.

CN's second-quarter 2008 net income also included a deferred income tax recovery of C$23 million (C$0.05 per diluted share) resulting from the enactment of lower provincial corporate income tax rates. Excluding that item, adjusted second-quarter 2008 net income was C$436 million, or C$0.90 per diluted share.(1)

E. Hunter Harrison, president and chief executive officer, said: "The second quarter of 2009 saw a continuation of significant weakness in most of our commodity groups as a result of the current recession in North America and difficult global economic conditions, with all groups but coal registering double-digit declines in carloadings. The biggest declines were in metals and minerals shipments, principally on account of a sharp reduction in short-haul iron ore movements in northern Minnesota, and in automotive and forest products traffic. Intermodal, grain and fertilizers, and petroleum and chemicals saw lesser declines. Coal was a bright spot, however, as a result of higher U.S. shipments resulting from our acquisition of the EJ E.

"While the current economic environment continues to affect our business significantly and we remain focused on adjusting expenses accordingly, we see some signs that several markets are stabilizing and we hope the economy will begin to recover in the second half of this year. CN's solid cost structure and operational expertise will position us well to meet the challenges and opportunities that lie ahead."

Second-quarter 2009 revenues, traffic volumes and expenses

The 15 per cent decline in second-quarter 2009 revenues resulted from significantly lower volumes in almost all markets as a result of prevailing economic conditions in the North American and global economies, and a lower fuel surcharge due to year-over-year decreases in applicable fuel prices as well as lower volumes. Partly offsetting these factors were the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues, freight rate increases, and a positive change in traffic mix.

Second-quarter 2009 carloadings declined 22 per cent to 928,000 from 1,188 thousand in the year-earlier period. Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, declined by 14 per cent from second-quarter 2008.

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, was flat in the second quarter of 2009 when compared to the same period of 2008. The positive translation impact of the weaker Canadian dollar and freight rate increases were entirely offset during the quarter by the impact of a lower fuel surcharge and an increase in the average length of haul.

The 14 per cent decline in second-quarter 2009 operating expenses was primarily due to lower fuel costs and reduced expenses for purchased services and material and labor, partly reflecting the impact of reduced freight volumes and management's cost-reduction initiatives. These factors were partially offset by the negative translation impact of the weaker Canadian dollar on U.S.-dollar-denominated expenses.

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

Forward-Looking Statements

This news release contains forward-looking statements. CN cautions that, by their nature, forward-looking statements involve risk, uncertainties and assumptions. Implicit in these statements, particularly in respect of long-term growth opportunities, is the Company's assumption that such growth opportunities are less affected by the current situation in the North American and global economies. The Company cautions that its assumptions may not materialize and that the current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. The Company cautions that its 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, the effects of adverse general economic and business conditions, including the current deep recession in the North American economy and the global economic contraction in 2009, industry competition, inflation, currency and interest rate fluctuations, changes in fuel prices, legislative and/or regulatory developments, compliance with environmental laws and regulations, actions by regulators, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, labor negotiations and disruptions, environmental claims, uncertainties of investigations, proceedings or other types of claims and litigation, risks and liabilities arising from derailments, and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to "Management's Discussion and Analysis" in CN's annual and interim reports, Annual Information Form and Form 40-F filed with Canadian and U.S. securities regulators, available on CN's website, for a summary of major risks.

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

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

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


                                 Three months ended       Six months ended
                                       June 30                 June 30
    	                          ----------------------  ---------------------
                                  2009        2008        2009        2008
    -------------------------------------------------------------------------
                                                 (Unaudited)

    Revenues                  $  1,781    $  2,098    $  3,640    $  4,025
    -------------------------------------------------------------------------

    Operating expenses
      Labor and fringe benefits    413         392         867         853
      Purchased services and
       material                    253         283         544         568
      Fuel                         174         399         356         709
      Depreciation and
       amortization                199         176         402         351
      Equipment rents               70          60         152         124
      Casualty and other            89          81         255         190
    -------------------------------------------------------------------------
    Total operating expenses     1,198       1,391       2,576       2,795
    -------------------------------------------------------------------------

    Operating income               583         707       1,064       1,230

    Interest expense              (108)        (87)       (220)       (173)

    Other income (Note 3)            9           9         170           3
    -------------------------------------------------------------------------

    Income before income taxes     484         629       1,014       1,060

    Income tax expense (Note 7)    (97)       (170)       (203)       (290)
    -------------------------------------------------------------------------

    Net income                $    387    $    459    $    811    $    770
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Earnings per share
     (Note 10)

      Basic                   $   0.83    $   0.96    $   1.73    $   1.61

      Diluted                 $   0.82    $   0.95    $   1.72    $   1.59

    Weighted-average number
     of shares

      Basic                      468.7       476.4       468.5       479.6

      Diluted                    473.0       482.0       472.7       485.3
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to unaudited consolidated financial statements.


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

                                         June 30  December 31      June 30
                                            2009         2008         2008
    -------------------------------------------------------------------------
                                      (Unaudited)               (Unaudited)
    Assets

    Current assets:
      Cash and cash equivalents         $    431     $    413     $    161
      Accounts receivable (Note 4)           865          913          843
      Material and supplies                  258          200          217
      Deferred income taxes                  113           98           67
      Other                                   96          132           88
    -------------------------------------------------------------------------
                                           1,763        1,756        1,376

    Properties                            23,160       23,203       20,864
    Intangible and other assets            1,814        1,761        2,113
    -------------------------------------------------------------------------

    Total assets                        $ 26,737     $ 26,720     $ 24,353
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and shareholders' equity

    Current liabilities:
      Accounts payable and other        $  1,270     $  1,386     $  1,289
      Current portion of long-term debt      506          506           85
    -------------------------------------------------------------------------
                                           1,776        1,892        1,374

    Deferred income taxes                  5,443        5,511        5,100
    Other liabilities and deferred
     credits                               1,319        1,353        1,381
    Long-term debt (Note 4)                7,093        7,405        6,389

    Shareholders' equity:
      Common shares                        4,203        4,179        4,208
      Accumulated other comprehensive
       loss                                 (207)        (155)          (1)
      Retained earnings                    7,110        6,535        5,902
    -------------------------------------------------------------------------
                                          11,106       10,559       10,109
    -------------------------------------------------------------------------

    Total liabilities and shareholders'
     equity                             $ 26,737     $ 26,720     $ 24,353
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to unaudited consolidated financial statements.


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

                                 Three months ended       Six months ended
                                       June 30                 June 30
                                ----------------------  ---------------------
                                  2009        2008        2009        2008
    -------------------------------------------------------------------------
                                                 (Unaudited)

    Common shares (1)

    Balance, beginning of
     period                   $  4,188    $  4,241    $  4,179    $  4,283
      Stock options
       exercised and other          15          19          24          42
      Share repurchase
       programs (Note 4)             -         (52)          -        (117)
    -------------------------------------------------------------------------
    Balance, end of period    $  4,203    $  4,208    $  4,203    $  4,208
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive loss
    Balance, beginning of
     period                   $   (126)   $      9    $   (155)   $    (31)
    Other comprehensive
     income (loss):
    Unrealized foreign
     exchange gain (loss) on:
      Translation of the net
       investment in foreign
       operations                 (583)        (47)       (332)        140
      Translation of U.S.
       dollar-denominated
       long-term debt
       designated as a hedge
       of the net investment
       in U.S. subsidiaries        580          41         322        (141)
    Pension and other
     postretirement benefit
     plans (Note 6):
      Amortization of net
       actuarial loss (gain)
       included in net periodic
       benefit cost (income)         1          (1)          1          (2)
      Amortization of prior
       service cost included
       in net periodic benefit
       cost (income)                 -           6           1          12
    -------------------------------------------------------------------------
    Other comprehensive income
     (loss) before income taxes     (2)         (1)         (8)          9
    Income tax recovery
     (expense)                     (79)         (9)        (44)         21
    -------------------------------------------------------------------------
    Other comprehensive income
     (loss)                        (81)        (10)        (52)         30
    -------------------------------------------------------------------------
    Balance, end of period    $   (207)   $     (1)   $   (207)   $     (1)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Retained earnings

    Balance, beginning of
     period                   $  6,841    $  5,823    $  6,535    $  5,925
      Net income                   387         459         811         770
      Share repurchase
       programs (Note 4)             -        (271)          -        (573)
      Dividends                   (118)       (109)       (236)       (220)
    -------------------------------------------------------------------------
    Balance, end of period    $  7,110    $  5,902    $  7,110    $  5,902
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to unaudited consolidated financial statements.

    (1) During the three and six months ended June 30, 2009, the Company
        issued 0.6 million and 0.8 million common shares, respectively, as a
        result of stock options exercised. At June 30, 2009, the Company had
        469.0 million common shares outstanding.


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

                                 Three months ended       Six months ended
                                       June 30                 June 30
                                ----------------------  ---------------------
                                  2009        2008        2009        2008
    -------------------------------------------------------------------------
                                                 (Unaudited)

    Operating activities

    Net income                $    387    $    459    $    811    $    770
    Adjustments to reconcile
     net income to net cash
     provided from operating
     activities:
      Depreciation and
       amortization                199         176         402         351
      Deferred income taxes         40          89          50         114
      Gain on disposal of
       property (Note 3)             -           -        (157)          -
      Other changes in:
        Accounts receivable         28        (233)         29        (468)
        Material and supplies        4          (6)        (49)        (54)
        Accounts payable and
         other                      (9)        (39)       (141)        (98)
        Other current assets         5          22          41          51
      Other                        (22)        (59)        (36)        (92)
    -------------------------------------------------------------------------
    Cash provided from
     operating activities          632         409         950         574
    -------------------------------------------------------------------------

    Investing activities

    Property additions            (309)       (352)       (496)       (529)
    Acquisitions, net of cash
     acquired (Note 3)               -           -        (373)          -
    Disposal of property
     (Note 3)                       40           -         150           -
    Other, net                      33           9          37          20
    -------------------------------------------------------------------------
    Cash used by investing
     activities                   (236)       (343)       (682)       (509)
    -------------------------------------------------------------------------

    Financing activities

    Issuance of long-term debt       -       1,597       1,440       2,652

    Reduction of long-term debt   (187)     (1,418)     (1,459)     (1,998)
    Issuance of common shares
     due to exercise of stock
     options and related excess
     tax benefits realized          13          16          15          34
    Repurchase of common shares      -        (323)          -        (690)
    Dividends paid                (118)       (109)       (236)       (220)
    -------------------------------------------------------------------------
    Cash used by financing
     activities                   (292)       (237)       (240)       (222)
    -------------------------------------------------------------------------
    Effect of foreign exchange
     fluctuations on U.S.
     dollar-denominated cash
     and cash equivalents          (22)         (2)        (10)          8
    -------------------------------------------------------------------------
    Net increase (decrease) in
     cash and cash equivalents      82        (173)         18        (149)
    Cash and cash equivalents,
     beginning of period           349         334         413         310
    -------------------------------------------------------------------------
    Cash and cash equivalents,
     end of period            $    431    $    161    $    431    $    161
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental cash flow
     information
      Net cash receipts from
       customers and other    $  1,834    $  1,886    $  3,738    $  3,634
      Net cash payments for:

        Employee services,
         suppliers and other
         expenses                 (970)     (1,215)     (2,332)     (2,554)
        Interest                   (93)        (90)       (199)       (190)
        Workforce reductions        (4)         (6)         (8)        (12)
        Personal injury and
         other claims              (35)        (18)        (65)        (44)
        Pensions                   (28)        (31)        (28)        (53)
        Income taxes               (72)       (117)       (156)       (207)
    -------------------------------------------------------------------------
    Cash provided from
     operating activities     $    632    $    409    $    950    $    574
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to unaudited consolidated financial statements.


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

Note 1 - Basis of presentation

In management's opinion, the accompanying unaudited Interim Consolidated Financial Statements and Notes thereto, expressed in Canadian dollars, and prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial statements, contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Canadian National Railway Company's (the Company) financial position as at June 30, 2009, December 31, 2008, and June 30, 2008, and its results of operations, changes in shareholders' equity and cash flows for the three and six months ended June 30, 2009 and 2008.

These unaudited Interim Consolidated Financial Statements and Notes thereto have been prepared using accounting policies consistent with those used in preparing the Company's 2008 Annual Consolidated Financial Statements, except as disclosed in Note 2 - Accounting change. 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 the 2008 Annual Consolidated Financial Statements and Notes thereto.

These unaudited Interim Consolidated Financial Statements and Notes thereto were approved by the Company's Board of Directors and issued on July 20, 2009. As at such date, there were no material subsequent events affecting any conditions that existed at the date of the balance sheet, including any estimates inherent in the process of preparing the financial statements.

Note 2 - Accounting change

On January 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) # 141 (R), "Business Combinations," which became effective for acquisitions with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Until December 31, 2008, the Company was subject to the requirements of SFAS # 141, "Business Combinations," which required that acquisition-related costs be included as part of the purchase cost of an acquired business. As such, the Company had reported acquisition-related costs in Other current assets pending the closing of its acquisition of the Elgin, Joliet and Eastern Railway Company (EJ E), which had been subject to an extensive U.S. Surface Transportation Board (STB) approval process. On January 31, 2009, the Company completed its acquisition of the EJ E and accounted for the acquisition under SFAS # 141 (R). The Company incurred acquisition-related costs, including costs to obtain regulatory approval, of approximately $49 million, of which $3 million was incurred in the second quarter of 2009. These costs were expensed and reported in Casualty and other in the Consolidated Statement of Income for the six months ended June 30, 2009 pursuant to SFAS # 141 (R) requirements. At the time of adoption, this change in accounting policy had the effect of decreasing net income by $28 million ($0.06 per basic or diluted earnings per share) and Other current assets by $46 million. This change had no effect on the Consolidated Statement of Cash Flows. Disclosures prescribed by SFAS # 141 (R) are presented in Note 3 - Acquisition and disposal of property.

Note 3 - Acquisition and disposal of property

Acquisition of Elgin, Joliet and Eastern Railway Company

On January 31, 2009, the Company acquired the principal rail lines of the EJ E for a total cash consideration of U.S.$300 million (Cdn$373 million), paid with cash on hand. The EJ E is a short-line railway previously owned by U.S. Steel Corporation (U.S. Steel) that operates over 198 miles of track and serves steel mills, petrochemical customers, utility plants and distribution centers in Illinois and Indiana, as well as connects with all the major railroads entering Chicago. Under the terms of the acquisition agreement, the Company acquired substantially all of the railroad operations of EJ E, except those that support the Gary Works site in northwest Indiana and the steelmaking operations of U.S. Steel. The acquisition is expected to drive new efficiencies and operating improvements on CN's network as a result of streamlined rail operations and reduced congestion in the Chicago area.

The Company and EJ E had entered into the acquisition agreement on September 25, 2007, and the Company had filed an application for authorization of the transaction with the STB on October 30, 2007. Following an extensive regulatory approval process, which included an Environmental Impact Statement (EIS) that resulted in conditions imposed to mitigate municipalities' concerns regarding increased rail activity, expected along the EJ E line, the STB approved the transaction on December 24, 2008. The STB also imposed a five-year monitoring and oversight condition, during which the Company is required to file with the STB monthly operational reports as well as quarterly reports on the implementation status of the STB-imposed mitigation conditions. This permits the STB to take further action if there is a material change in the facts and circumstances upon which it relied in imposing the specific mitigation conditions. Over the next few years, the Company has committed to spend approximately U.S.$100 million for railroad infrastructure improvements and over U.S.$60 million under a series of agreements with individual communities, a comprehensive voluntary mitigation program that addresses municipalities' concerns, and additional STB-imposed conditions that the Company has accepted with one exception. The Company has filed an appeal challenging the STB's condition requiring the installation of grade separations at two locations along the EJ E at Company funding levels significantly beyond prior STB practice. Although the STB granted the Company's application to acquire control of the EJ E, challenges have since been made by certain communities as to the sufficiency of the EIS which, if successful, could result in further consideration of the environmental impact of the transaction and mitigation conditions imposed. The Company strongly disputes the merit of these challenges, and has intervened in support of the STB's defense against them. The final outcome of such challenges, as well as the resolution of matters that could arise during the STB's five-year oversight of the transaction, 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.

The Company has accounted for the acquisition using the purchase method of accounting pursuant to SFAS # 141 (R), "Business Combinations," which the Company adopted on January 1, 2009. As such, the consolidated financial statements of the Company include the assets, liabilities and results of operations of EJ E as of January 31, 2009, the date of acquisition. The costs incurred to-date to acquire the EJ E of approximately $49 million were expensed and reported in Casualty and other in the Consolidated Statement of Income for the six months ended June 30, 2009 (see Note 2 - Accounting change).

The following table summarizes the consideration paid for EJ E and the estimated fair value of the assets acquired and liabilities assumed that were recognized at the acquisition date. The Company has not finalized its valuation of such assets and liabilities. As such, the fair value is subject to change, although no material change is anticipated.

                                                       At January 31, 2009
    -------------------------------------------------------------------------
    (In U.S. millions)

    Consideration
    Cash                                                          $    300
    -------------------------------------------------------------------------
    Fair value of total consideration transferred                 $    300
    -------------------------------------------------------------------------

    Recognized amounts of identifiable assets acquired
     and liabilities assumed
    Current assets                                                $      6
    Other long-term assets                                               4
    Property, plant and equipment                                      304
    Current liabilities                                                 (4)
    Other long-term liabilities                                        (10)
    -------------------------------------------------------------------------
    Total identifiable net assets                                 $    300
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

The amount of revenues and net income of EJ E included in the Company's Consolidated Statement of Income from the acquisition date to June 30, 2009, were $34 million and $7 million, respectively. The Company has not provided supplemental pro forma information relating to the pre-acquisition period as it was not considered material to the results of operations of the Company.

Disposal of Weston subdivision

In March 2009, the Company entered into an agreement with GO Transit to sell the property known as the Weston subdivision in Toronto, Ontario, together with the rail fixtures and certain passenger agreements (collectively the "Rail Property"), for cash proceeds of $110 million before transaction costs, with a balance on sale of about $50 million placed in escrow on the Company's behalf and to be released in accordance with the terms of the agreement but no later than December 31, 2009. At June 30, 2009, $40 million had been released from escrow and was received by the Company. Under the agreement, the Company obtained the perpetual right to operate freight trains over the Rail Property at its then current level of operating activity, with the possibility of increasing its operating activity for additional consideration. The transaction resulted in a gain on disposition of $157 million ($135 million after-tax), including amounts related to the real estate as well as the retention of trackage and other rights. The Company accounted for the transaction in Other income under the full accrual method of accounting for real estate transactions.

Note 4 - Financing activities

Shelf prospectus and registration statement

In February 2009, the Company issued U.S.$550 million (Cdn$684 million) of 5.55% Notes due 2019. The debt offering was made under the Company's currently effective shelf prospectus and registration statement, filed by the Company in December 2007. Accordingly, the amount registered for offering under the shelf prospectus and registration statement has been reduced to U.S.$1.3 billion. The Company used the net proceeds of U.S.$540 million (Cdn$672 million) from the offering to repay a portion of its then outstanding commercial paper and to reduce a portion of its accounts receivable securitization program.

Revolving credit facility

As at June 30, 2009, the Company had letters of credit drawn on its U.S.$1 billion revolving credit facility, expiring in October 2011, of $236 million ($181 million as at December 31, 2008). The Company also had total borrowings under its commercial paper program of $5 million denominated in Canadian dollars. The weighted-average interest rate on these borrowings was 1.01%.

As at December 31, 2008, total borrowings under the Company's commercial paper program were $626 million, of which $256 million was denominated in Canadian dollars and $370 million was denominated in U.S. dollars (U.S.$303 million). The weighted-average interest rate on these borrowings was 2.42%.

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. In the second quarter of 2009, the Company reduced the program limit from $600 million to $400 million until the end of 2009 to reflect the anticipated reduction in the use of the program.

Pursuant to the agreement, the Company sells an interest in its receivables and receives proceeds net of the required reserve as stipulated in the agreement. The required reserve represents an amount set aside to allow for possible credit losses and is recognized by the Company as retained interest and recorded in Other current assets in its Consolidated Balance Sheet. The eligible freight receivables as defined in the agreement may not include delinquent or defaulted receivables, or receivables that do not meet certain obligor-specific criteria, including concentrations in excess of prescribed limits with any one customer.

During the first half of 2009, proceeds from collections reinvested in the securitization program were approximately $138 million and purchases of previously transferred accounts receivable were approximately $4 million. At June 30, 2009, the servicing asset and liability were not significant. Subject to customary indemnifications, the trust's recourse is generally limited to the receivables.

As at June 30, 2009, the Company had sold receivables that resulted in proceeds of $2 million under this program ($71 million at December 31, 2008), and recorded retained interest of approximately 10% of this amount in Other current assets (retained interest of approximately 10% recorded as at December 31, 2008). The fair value of the retained interest approximated carrying value as a result of the short collection cycle and negligible credit losses.

Share repurchase program

During the first half of 2009, the Company did not repurchase any common shares under its 25.0 million share repurchase program, which expired on July 20, 2009. The Company repurchased a total of 6.1 million common shares since July 28, 2008, the inception of the program, for $331 million, at a weighted-average price of $54.42 per share.

Note 5 - Stock plans

The Company has various stock-based incentive plans for eligible employees. A description of the plans is provided in Note 11 - Stock plans, to the Company's 2008 Annual Consolidated Financial Statements. For the three and six months ended June 30, 2009, the Company recorded total compensation expense for awards under all plans of $25 million and $40 million, respectively, and $6 million and $34 million, respectively, for the same periods in 2008. The total tax benefit recognized in income in relation to stock-based compensation expense for the three and six months ended June 30, 2009 was $7 million and $11 million, respectively, and $3 million and $10 million, respectively, for the same periods in 2008.

Cash settled awards

Following approval by the Board of Directors in January 2009, the Company granted 0.9 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 conditionally upon the attainment of a target relating to return on invested capital over the plan period. Payout is conditional upon the attainment of a minimum share price calculated using the average of the last three months of the plan period. As at June 30, 2009, 0.1 million RSUs remained authorized for future issuance under this plan.

The following table provides the 2009 activity for all cash settled awards:

    -------------------------------------------------------------------------
                                                       Voluntary Incentive
                                      RSUs             Deferral Plan (VIDP)
                             ----------------------- ------------------------
    In millions              Nonvested      Vested   Nonvested      Vested
    -------------------------------------------------------------------------
    Outstanding at
     December 31, 2008             1.3         0.9(1)      0.1         1.8

    Granted                        0.9           -           -         0.1(2)
    Transferred into plan            -           -           -         0.1
    Payout                           -        (0.9)          -        (0.1)
    -------------------------------------------------------------------------
    Outstanding at
     June 30, 2009                 2.2           -         0.1         1.9
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Includes 0.1 million of 2004 time-vested RSUs.
    (2) Includes the Company's match and dividends earned on original
        deferred share units.

    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
    -------------------------------------------------------------------------
    Year of                                                   2003
     grant    2009    2008    2007    2006    2004    2005 onwards
            ------  ------  ------  ------  ------  ------ -------
    Stock-
     based
     compensa-
     tion
     expense
     (recovery)
     recognized
     over
     requisite
     service
     period
    Six
     months
     ended
     June
     30,
     2009   $   14  $    2  $    3  $   (2)    N/A     N/A  $   14  $   31
    Six
     months
     ended
     June
     30,
     2008      N/A  $    9  $    -  $    7  $    2  $    2  $    6  $   26
    -------------------------------------------------------------------------

    Liability
     outstan-
     ding
    June
     30,
     2009   $   14  $   10  $   12  $    -  $    -     N/A  $   98  $  134
    December
     31,
     2008      N/A  $    8  $    9  $   53  $    3  $    -  $   88  $  161
    -------------------------------------------------------------------------

    Fair
     value
     per
     unit
    June
     30,
     2009
     ($)    $35.19  $28.36  $22.93     N/A     N/A     N/A  $49.97     N/A
    -------------------------------------------------------------------------

    Fair
     value
     of
     awards
     vested
     during
     period
    Six
     months
     ended
     June
     30,
     2009   $    -  $    -  $    -     N/A     N/A     N/A  $    1  $    1
    Six
     months
     ended
     June
     30,
     2008      N/A  $    -  $    -  $    -  $    -  $    -  $    2  $    2
    -------------------------------------------------------------------------

    Nonvested
     awards
     at June
     30,
     2009
    Unreco-
     gnized
     compen-
     sation
     cost   $   13  $    3  $    1     N/A     N/A     N/A  $    2  $   19
    Remaining
     recogni-
     tion
     period
     (years)  2.50    1.50    0.50     N/A     N/A     N/A    3.50     N/A
    -------------------------------------------------------------------------

    Assump-
     tions(3)
    Stock
     price
     ($)    $49.97  $49.97  $49.97     N/A     N/A     N/A  $49.97     N/A
    Expected
     stock
     price
     volati-
     lity(4)    29%     32%     37%    N/A     N/A     N/A     N/A     N/A
    Expected
     term
     (years)
     (5)      2.50    1.50    0.50     N/A     N/A     N/A     N/A     N/A
    Risk-free
     interest
     rate(6)  1.52%   0.86%   0.31%    N/A     N/A     N/A     N/A     N/A
    Dividend
     rate
     ($)(7) $ 1.01  $ 1.01  $ 1.01     N/A     N/A     N/A     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.

    (2) Compensation cost is based on intrinsic value.

    (3) Assumptions used to determine fair value are at June 30, 2009.

    (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 2009, the Company granted 1.2 million conventional stock options to designated senior management employees. The stock option plan allows eligible employees to acquire common shares of the Company upon vesting at a price equal to the market value of the common shares at the date of grant. The options are exercisable during a period not exceeding 10 years. The right to exercise options generally accrues over a period of four years of continuous employment. Options are not generally exercisable during the first 12 months after the date of grant. At June 30, 2009, 12.3 million common shares remained authorized for future issuances under this plan. The total number of options outstanding at June 30, 2009, including conventional and performance-accelerated options, was 10.5 million and 3.1 million, respectively.

The following table provides the activity of stock option awards in 2009. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the amount that would have been received by option holders had they exercised their options on June 30, 2009 at the Company's closing stock price of $49.97.

    -------------------------------------------------------------------------
                                             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,
     2008(1)                        13.2  $  29.05
    Granted                          1.2  $  42.13
    Exercised                       (0.8) $  15.33
    -------------------------------------------------------------------------
    Outstanding at June 30,
     2009(1)                        13.6  $  30.47         4.5    $    273
    -------------------------------------------------------------------------
    Exercisable at June 30,
     2009(1)                        11.0  $  26.59         3.5    $    261
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (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        2009     2008     2007     2006     2005    Total
                      -------------------------------------------------------
    Stock-based
     compensation
     expense
     recognized
     over requisite
     service
     period(1)
    Six months
     ended
     June 30,
     2009              $    6   $    1   $    1   $    1   $    -   $    9
    Six months
     ended
     June 30,
     2008                 N/A   $    5   $    1   $    1   $    1   $    8
    -------------------------------------------------------------------------

    Fair value per
     unit
    At grant date ($)  $12.60   $12.44   $13.36   $13.80   $ 9.19      N/A
    -------------------------------------------------------------------------

    Fair value of
     awards vested
     during period
    Six months ended
     June 30, 2009     $    -   $    3   $    3   $    3   $    3   $   12
    Six months ended
     June 30, 2008        N/A   $    -   $    3   $    3   $    3   $    9
    -------------------------------------------------------------------------

    Nonvested awards
     at June 30, 2009
    Unrecognized
     compensation
     cost              $    8   $    3   $    2   $    1   $    -   $   14
    Remaining
     recognition
     period (years)       3.5      2.5      1.5      0.5        -      N/A
    -------------------------------------------------------------------------

    Assumptions
    Grant price ($)    $42.13   $48.51   $52.79   $51.51   $36.33      N/A
    Expected stock
     price
     volatility(2)         39%      27%      24%      25%      25%     N/A
    Expected term
     (years)(3)           5.3      5.3      5.2      5.2      5.2      N/A
    Risk-free interest
     rate(4)             1.97%    3.58%    4.12%    4.04%    3.50%     N/A
    Dividend rate
     ($)(5)            $ 1.01   $ 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 average of the historical volatility of the Company's
        stock over a period commensurate with the expected term of the award
        and the implied volatility from traded options on the Company's
        stock.

    (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 6 - Pensions and other postretirement benefits

    For the three and six months ended June 30, 2009 and 2008, the components
of net periodic benefit cost (income) for pensions and other postretirement
benefits were as follows:

    (a) Components of net periodic benefit income for pensions

    -------------------------------------------------------------------------
                                 Three months ended       Six months ended
                                       June 30                 June 30
                                ----------------------  ---------------------
    In millions                   2009        2008        2009        2008
    -------------------------------------------------------------------------
    Service cost              $     22    $     35    $     44    $     70
    Interest cost                  221         200         443         400
    Expected return on plan
     assets                       (252)       (251)       (504)       (502)
    Amortization of prior
     service cost                    -           5           -          10
    Recognized net actuarial
     loss                            2           -           3           -
    -------------------------------------------------------------------------
    Net periodic benefit
     (income)                 $     (7)   $    (11)   $    (14)   $    (22)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    -------------------------------------------------------------------------
                                 Three months ended       Six months ended
                                       June 30                 June 30
                                ----------------------  ---------------------
    In millions                   2009        2008        2009        2008
    -------------------------------------------------------------------------
    Service cost              $      1    $      1    $      2    $      2
    Interest cost                    4           4           8           8
    Curtailment gain                 -          (1)         (3)         (3)
    Amortization of prior
     service cost                    -           1           1           2
    Recognized net actuarial
     gain                           (1)         (1)         (2)         (2)
    -------------------------------------------------------------------------
    Net periodic benefit
     cost                     $      4    $      4    $      6    $      7
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

In 2009, the Company expects to make total contributions of approximately $130 million for all its defined benefit plans, of which $28 million was disbursed as at June 30, 2009.

Note 7 - Income taxes

In 2009, the Company recorded a deferred income tax recovery of $43 million in the Consolidated Statement of Income, of which $12 million and $15 million, recorded in the second and first quarters, respectively, resulted from the enactment of lower provincial corporate income tax rates; and $16 million recorded in the second quarter resulted from the recapitalization of a foreign investment.

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

Note 8 - Major commitments and contingencies

A. Commitments

As at June 30, 2009, 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 $797 million ($1,006 million at December 31, 2008). The Company also has agreements with fuel suppliers to purchase approximately 95% of the estimated remaining 2009 volume, 64% of its anticipated 2010 volume, and 28% of its anticipated volumes for each of the years from 2011 through 2013, at market prices prevailing on the date of the purchase.

B. Contingencies

The Company becomes involved, from time to time, in various legal actions, including actions brought on behalf of various purported classes of claimants and claims relating to personal injuries, occupational disease, and property damage, arising out of harm to individuals or property allegedly caused by, but not limited to, derailments or other accidents.

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. With limited exceptions where claims are evaluated on a case-by-case basis, 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 and non-occupational disease claims. On an ongoing basis, management reviews and compares the assumptions inherent in the latest actuarial study with the current claim experience and, if required, adjustments to the liability are recorded.

As at June 30, 2009, the Company had aggregate reserves for personal injury and other claims of $424 million, of which $114 million was recorded as a current liability ($454 million, of which $118 million was recorded as a current liability at December 31, 2008).

Although the Company considers such provisions to be adequate for all its outstanding and pending claims, the final outcome with respect to actions outstanding or pending at June 30, 2009, 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 results of operations, financial position or liquidity 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.

Known existing environmental concerns

The Company has identified approximately 325 sites at which it is or may be liable for remediation costs, in some cases along with other potentially responsible parties, associated with alleged contamination and is subject to environmental clean-up and enforcement actions, including those imposed by the United States Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also known as the Superfund law, or analogous state laws. CERCLA and similar state laws, in addition to other similar Canadian and U.S. laws generally impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site, as well as those whose waste is disposed of at the 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 10 sites governed by the Superfund law (and analogous 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.

The ultimate cost of addressing these known contaminated sites cannot be definitely established given that the estimated environmental liability for any given site may vary depending on the nature and extent of the contamination, the available clean-up techniques, the Company's share of the costs and evolving regulatory standards governing environmental liability. As a result, a liability is initially recorded when environmental assessments occur and/or remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used and the extent of the corrective action required, can be reasonably estimated. Adjustments to initial estimates are recorded as additional information becomes available.

The Company's provision for specific environmental sites is undiscounted, is recorded net of insurance recoveries, and includes costs for remediation and restoration of sites, as well as significant monitoring costs. Environmental accruals, which are classified as Casualty and other in the Consolidated Statement of Income, include amounts for newly identified sites or contaminants as well as adjustments to initial estimates.

As at June 30, 2009, the Company had aggregate accruals for environmental costs of $112 million, of which $31 million was recorded as a current liability ($125 million, of which $30 million was recorded as a current liability as at December 31, 2008). The Company anticipates that the majority of the liability at June 30, 2009 will be paid out over the next five years. However, some costs may be paid out over a longer period. No individual site is considered to be material. Based on the information currently available, the Company considers its provisions to be adequate.

Unknown existing environmental concerns

While the Company believes that it has identified the costs likely to be incurred for environmental matters in the next several years based on known information, newly discovered facts, changes in law, the possibility of spills and releases of hazardous materials into the environment and the Company's ongoing efforts to identify potential environment liabilities that may be associated with its properties may lead to future environmental investigations, which may result in the identification of additional environmental liabilities and related costs. The magnitude of such additional liabilities and the costs of complying with future environmental laws and containing or remediating contamination cannot be reasonably estimated due to many factors, including:

    (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 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 liabilities or costs, although management believes, based on current information, that the costs to address environmental matters will not have a material adverse effect on the Company's financial condition or liquidity. Costs related to any unknown existing or future contamination will be accrued in the period in which they become probable and reasonably estimable.

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 2009 and 2020, for the benefit of the lessor. If the fair value of the assets, at the end of their respective lease term, is less than the fair value, as estimated at the inception of the lease, then the Company must, under certain conditions, compensate the lessor for the shortfall. At June 30, 2009, the maximum exposure in respect of these guarantees was $225 million. There are no recourse provisions to recover any amounts from third parties.

(ii) Other guarantees

The Company, including certain of its subsidiaries, has granted irrevocable standby letters of credit and surety and other bonds, issued by highly rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at June 30, 2009, the maximum potential liability under these guarantees was $466 million, of which $406 million was for workers' compensation and other employee benefits and $60 million was for equipment under leases and other. During 2009, the Company has granted guarantees for which no liability has been recorded, as they relate to the Company's future performance.

As at June 30, 2009, 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 2009 and 2012.

(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.

During the period, 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 9 - Fair value of financial instruments

Generally accepted accounting principles define the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which the carrying amounts are included in the Consolidated Balance Sheet under the following captions:

    (i) Cash and cash equivalents, Accounts receivable, Other current assets,
        Accounts payable and other:

    The carrying amounts approximate fair value because of the short maturity
of these instruments.

    (ii) Other assets:

    Investments: The Company has various equity investments for which the
carrying value approximates the fair value, with the exception of certain cost
investments for which the fair value was estimated based on the Company's
proportionate share of the underlying net assets.

    (iii) Long-term debt:

    The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar debt instruments, as well as
discounted cash flows using current interest rates for debt with similar
terms, company rating, and remaining maturity.

    The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments as at June 30, 2009 and December
31, 2008 for which the carrying values on the Consolidated Balance Sheet are
different from their fair values:

    In millions                    June 30, 2009        December 31, 2008
    -------------------------------------------------------------------------
                              Carrying        Fair    Carrying        Fair
                                amount       value      amount       value
    -------------------------------------------------------------------------
    Financial assets
      Investments             $     23    $    119    $     24    $    127
    Financial liabilities
      Long-term debt
       (including current
        portion)              $  7,599    $  8,156    $  7,911    $  8,301
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note 10 - Earnings per share

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

    -------------------------------------------------------------------------
                                 Three months ended       Six months ended
                                       June 30                 June 30
    In millions, except per     ----------------------  ---------------------
     share data                   2009        2008        2009        2008
    -------------------------------------------------------------------------

    Net income                $    387    $    459    $    811    $    770

    Weighted-average shares
     outstanding                 468.7       476.4       468.5       479.6
    Effect of stock options        4.3         5.6         4.2         5.7
    -------------------------------------------------------------------------
    Weighted-average diluted
     shares outstanding          473.0       482.0       472.7       485.3

    Basic earnings per share  $   0.83    $   0.96    $   1.73    $   1.61
    Diluted earnings per
     share                    $   0.82    $   0.95    $   1.72    $   1.59
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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 0.4 million and 0.7 million for the three and six months ended June 30, 2009 and 0.1 million for both corresponding periods in 2008.

Note 11 - Comparative figures

Certain figures, previously reported in 2008, have been reclassified to conform with the basis of presentation adopted in 2009.

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


                                 Three months ended       Six months ended
                                       June 30                 June 30
                                ----------------------  ---------------------
                                  2009        2008        2009        2008
    -------------------------------------------------------------------------
                                                 (Unaudited)

    Statistical operating data

    Rail freight revenues
     ($ millions)                1,601       1,876       3,297       3,636
    Gross ton miles (GTM)
     (millions)                 74,556      87,287     148,113     171,614
    Revenue ton miles (RTM)
     (millions)                 38,865      45,264      77,556      90,223
    Carloads (thousands)           928       1,188       1,882       2,320
    Route miles (includes
     Canada and the U.S.)       21,104      20,421      21,104      20,421
    Employees (end of period)   21,717      23,147      21,717      23,147
    Employees (average for the
     period)                    21,827      22,953      22,043      22,795
    -------------------------------------------------------------------------

    Productivity

    Operating ratio (%)           67.3        66.3        70.8        69.4
    Rail freight revenue per
     RTM (cents)                  4.12        4.14        4.25        4.03
    Rail freight revenue per
     carload ($)                 1,725       1,579       1,752       1,567
    Operating expenses per
     GTM (cents)                  1.61        1.59        1.74        1.63
    Labor and fringe benefits
     expense per GTM (cents)      0.55        0.45        0.59        0.50
    GTMs per average number of
     employees (thousands)       3,416       3,803       6,719       7,529
    Diesel fuel consumed
     (U.S. gallons in millions)     80          96         165         195
    Average fuel price
     ($/U.S. gallon)              2.00        3.82        1.99        3.41
    GTMs per U.S. gallon of
     fuel consumed                 932         909         898         880
    -------------------------------------------------------------------------

    Safety indicators

    Injury frequency rate per
     200,000 person hours(2)      1.68        1.16        1.48        1.64
    Accident rate per million
     train miles(2)               1.71        2.68        1.92        2.67
    -------------------------------------------------------------------------

    Financial ratio

    Debt to total capitalization
     ratio (% at end of period)   40.6        39.0        40.6        39.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (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 June 30   Six months ended June 30
                      ---------------------------- --------------------------
                                       Variance                   Variance
                                            Fav                        Fav
                         2009     2008   (Unfav)    2009     2008   (Unfav)
    -------------------------------------------------------------------------
                                             (Unaudited)
    Revenues (millions
     of dollars)
    Petroleum and
     chemicals            309      322       (4%)    649      641        1%
    Metals and minerals   158      239      (34%)    356      444      (20%)
    Forest products       283      357      (21%)    585      687      (15%)
    Coal                  111      107        4%     214      206        4%
    Grain and
     fertilizers          330      334       (1%)    687      674        2%
    Intermodal            318      393      (19%)    637      744      (14%)
    Automotive             92      124      (26%)    169      240      (30%)
    -----------------------------------           ----------------
    Total rail freight
     revenue            1,601    1,876      (15%)  3,297    3,636       (9%)
    Other revenues        180      222      (19%)    343      389      (12%)
    -----------------------------------           ----------------
    Total revenues      1,781    2,098      (15%)  3,640    4,025      (10%)
    -------------------------------------------------------------------------

    Revenue ton miles
     (millions)
    Petroleum and
     chemicals          7,114    7,970      (11%) 14,641   16,396      (11%)
    Metals and
     minerals           2,813    4,740      (41%)  6,065    8,831      (31%)
    Forest products     6,782    8,826      (23%) 13,396   17,284      (22%)
    Coal                3,445    3,638       (5%)  6,286    7,030      (11%)
    Grain and
     fertilizers       10,049   10,707       (6%) 20,607   22,536       (9%)
    Intermodal          8,108    8,666       (6%) 15,584   16,755       (7%)
    Automotive            554      717      (23%)    977    1,391      (30%)
    -----------------------------------           ----------------
                       38,865   45,264      (14%) 77,556   90,223      (14%)
    Rail freight
     revenue/RTM
     (cents)
    Total rail freight
    revenue per RTM      4.12     4.14        -     4.25     4.03        5%
    Commodity groups:
    Petroleum and
     chemicals           4.34     4.04        7%    4.43     3.91       13%
    Metals and minerals  5.62     5.04       12%    5.87     5.03       17%
    Forest products      4.17     4.04        3%    4.37     3.97       10%
    Coal                 3.22     2.94       10%    3.40     2.93       16%
    Grain and
     fertilizers         3.28     3.12        5%    3.33     2.99       11%
    Intermodal           3.92     4.53      (13%)   4.09     4.44       (8%)
    Automotive          16.61    17.29       (4%)  17.30    17.25        -
    -----------------------------------           ----------------

    Carloads (thousands)
    Petroleum and
     chemicals            125      140      (11%)    253      285      (11%)
    Metals and minerals   128      272      (53%)    308      510      (40%)
    Forest products       100      136      (26%)    200      263      (24%)
    Coal                  107       90       19%     197      177       11%
    Grain and
     fertilizers          130      148      (12%)    262      299      (12%)
    Intermodal            300      348      (14%)    592      675      (12%)
    Automotive             38       54      (30%)     70      111      (37%)
    -----------------------------------           ----------------
                          928    1,188      (22%)  1,882    2,320      (19%)
    Rail freight
     revenue/carload
     (dollars)
    Total rail freight
     revenue per
     carload            1,725    1,579        9%   1,752    1,567       12%
    Commodity groups:
    Petroleum and
     chemicals          2,472    2,300        7%   2,565    2,249       14%
    Metals and
     minerals           1,234      879       40%   1,156      871       33%
    Forest products     2,830    2,625        8%   2,925    2,612       12%
    Coal                1,037    1,189      (13%)  1,086    1,164       (7%)
    Grain and
     fertilizers        2,538    2,257       12%   2,622    2,254       16%
    Intermodal          1,060    1,129       (6%)  1,076    1,102       (2%)
    Automotive          2,421    2,296        5%   2,414    2,162       12%
    -------------------------------------------------------------------------

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


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

Adjusted performance measures

During the three and six months ended June 30, 2009, the Company reported adjusted net income of $361 million, or $0.76 per diluted share and $663 million, or $1.40 per diluted share, respectively. The adjusted figures for the three months ended June 30, 2009 exclude a deferred income tax recovery of $28 million ($0.06 per diluted share), of which $12 million ($0.03 per diluted share) resulted from the enactment of a lower provincial corporate income tax rate and $16 million ($0.03 per diluted share) resulted from the recapitalization of a foreign investment, as well as the impact of EJ E acquisition-related costs of $3 million or $2 million after tax. The adjusted figures for the six months ended June 30, 2009 exclude the gain on sale of the Weston subdivision of $157 million or $135 million after-tax ($0.29 per diluted share), EJ E acquisition-related costs of $49 million or $30 million after-tax ($0.06 per diluted share) and a deferred income tax recovery of $43 million ($0.09 per diluted share), of which $27 million ($0.06 per diluted share) resulted from the enactment of lower provincial corporate income tax rates and $16 million ($0.03 per diluted share) resulted from the recapitalization of a foreign investment.

During the three and six months ended June 30, 2008, the Company reported adjusted net income of $436 million, or $0.90 per diluted share and $736 million, or $1.52 per diluted share, respectively. These adjusted figures exclude a deferred income tax recovery of $23 million ($0.05 per diluted share) for both the three- and six-month periods that resulted from the enactment of lower provincial corporate income tax rates. Also excluded from adjusted net income for the six-month period was a deferred income tax recovery of $11 million ($0.02 per diluted share) due to net capital losses arising from the reorganization of a subsidiary.

Management believes that adjusted net income and adjusted earnings per share are useful measures of performance that can facilitate period-to-period comparisons, as they exclude items that do not necessarily arise as part of the normal day-to-day operations of the Company and could distort the analysis of trends in business performance. The exclusion of such items in adjusted net income and adjusted earnings per share does not, however, imply that such items are necessarily non-recurring. These adjusted measures do not have any standardized meaning prescribed by GAAP and may, therefore, not be comparable to similar measures presented by other companies. The reader is advised to read all information provided in the Company's 2009 unaudited interim Consolidated Financial Statements and Notes thereto. The following tables provide a reconciliation of net income and earnings per share, as reported for the three and six months ended June 30, 2009 and 2008, to the adjusted performance measures presented herein.

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                          Three months ended          Six months ended
                            June 30, 2009              June 30, 2009
                     ---------------------------   --------------------------
    In millions,
     except per                 Adjust-   Adjus-   Repor-  Adjust-   Adjus-
     share data      Reported    ments      ted      ted    ments      ted
    -------------------------------------------------------------------------

    Revenues           $1,781   $    -   $1,781   $3,640   $    -   $3,640
    Operating
     expenses           1,198       (3)   1,195    2,576      (49)   2,527
    -------------------------------------------------------------------------
    Operating income      583        3      586    1,064       49    1,113
    Interest expense     (108)       -     (108)    (220)       -     (220)
    Other income            9        -        9      170     (157)      13
    -------------------------------------------------------------------------
    Income before
     income taxes         484        3      487    1,014     (108)     906
    Income tax
     expense              (97)     (29)    (126)    (203)     (40)    (243)
    -------------------------------------------------------------------------

    Net income         $  387   $  (26)  $  361   $  811   $ (148)  $  663
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Operating Ratio      67.3%             67.1%    70.8%             69.4%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings
     per share         $ 0.83   $(0.06)  $ 0.77   $ 1.73   $(0.32)  $ 1.41
    Diluted earnings
     per share         $ 0.82   $(0.06)  $ 0.76   $ 1.72   $(0.32)  $ 1.40
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                          Three months ended          Six months ended
                            June 30, 2008              June 30, 2008
                     ---------------------------   --------------------------
    In millions,
     except per                 Adjust-   Adjus-   Repor-  Adjust-   Adjus-
     share data      Reported    ments      ted      ted    ments      ted
    -------------------------------------------------------------------------

    Revenues           $2,098   $    -   $2,098   $4,025   $    -   $4,025
    Operating
     expenses           1,391        -    1,391    2,795        -    2,795
    -------------------------------------------------------------------------
    Operating
     income               707        -      707    1,230        -    1,230
    Interest
     expense              (87)       -      (87)    (173)       -     (173)
    Other income            9        -        9        3        -        3
    -------------------------------------------------------------------------
    Income before
     income taxes         629        -      629    1,060        -    1,060
    Income tax
     expense             (170)     (23)    (193)    (290)     (34)    (324)
    -------------------------------------------------------------------------

    Net income         $  459   $  (23)  $  436   $  770   $  (34)  $  736
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Operating Ratio      66.3%             66.3%    69.4%             69.4%
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic earnings
     per share         $ 0.96   $(0.05)  $ 0.91   $ 1.61   $(0.07)  $ 1.54
    Diluted earnings
     per share         $ 0.95   $(0.05)  $ 0.90   $ 1.59   $(0.07)  $ 1.52
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Free cash flow

    The Company generated $256 million and $463 million of free cash flow for
the three and six months ended June 30, 2009, compared to $164 million and
$225 million for the same periods in 2008. 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, adjusted for changes in the accounts receivable
securitization program and in cash and cash equivalents resulting from foreign
exchange fluctuations, less cash used by investing activities, adjusted for
the impact of major acquisitions, and the payment of dividends, calculated as
follows:

    -------------------------------------------------------------------------
                                 Three months ended       Six months ended
                                       June 30                 June 30
                                ----------------------  ---------------------
    In millions                   2009        2008        2009        2008
    -------------------------------------------------------------------------

    Cash provided from
     operating activities     $    632    $    409    $    950    $    574
    Cash used by investing
     activities                   (236)       (343)       (682)       (509)
    -------------------------------------------------------------------------
    Cash provided before
     financing activities          396          66         268          65
    -------------------------------------------------------------------------

    Adjustments:
      Change in accounts
       receivable
       securitization                -         209          68         372
      Dividends paid              (118)       (109)       (236)       (220)
      Acquisition of EJ&E            -           -         373           -
      Effect of foreign
       exchange fluctuations
       on U.S. dollar-
       denominated cash and
       cash equivalents            (22)         (2)        (10)          8
    -------------------------------------------------------------------------
    Free cash flow            $    256    $    164    $    463    $    225
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

SOURCE CN

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