Edgar Filing: CANADIAN NATIONAL RAILWAY CO

form6k.htm

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

For the month of July, 2011

Commission File Number: 001-02413

Canadian National Railway Company

(Translation of registrant’s name into English)

935 de la Gauchetiere Street West

Montreal, Quebec

Canada H3B 2M9

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under

cover of Form 20-F or Form 40-F:

Form 20-F ____ Form 40-F X

Indicate by check mark if the registrant is submitting the Form 6-K in paper as

permitted by Regulation S-T Rule 101(b)(1):

Yes ____ No X

Indicate by check mark if the registrant is submitting the Form 6-K in paper as

permitted by Regulation S-T Rule 101(b)(7):

Yes ____ No X

Indicate by check mark whether by furnishing the information contained in this

Form, the Registrant is also thereby furnishing the information to the Commission

pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes ____ No X

If “Yes” is marked, indicate below the file number assigned to the registrant in

connection with Rule 12g3-2(b): N/A

Canadian National Railway Company

Table of Contents

Item

1.	News Release dated July 25, 2011 entitled, "CN reports Q2-2011 net income of C$538 million, or C$1.18 per diluted share” “Adjusted net income for second-quarter 2011 was C$578 million, or C$1.26 per diluted share, an adjusted EPS increase of 12 per cent over 2010 (1)”

2.	Interim Consolidated Financial Statements and Notes thereto (U.S. GAAP)

3.	Management’s Discussion and Analysis (U.S. GAAP)

4.	Certificate of CEO

5.	Certificate of CFO

CANADIAN NATIONAL RAILWAY COMPANY

PRESS RELEASE

Item 1

North America’s Railroad

CN reports Q2-2011 net income of C$538 million,

or C$1.18 per diluted share

Adjusted net income for second-quarter 2011 was C$578 million, or C$1.26 per diluted share, an adjusted EPS increase of 12 per cent over 2010 (1)

MONTREAL, July 25, 2011 — CN (TSX: CNR) (NYSE: CNI) today reported its financial and operating results for the second quarter and first half ended June 30, 2011.

Second-quarter 2011 highlights

Net income increased from the year-earlier quarter to C$538 million, with diluted earnings per share (EPS) rising four per cent to C$1.18. The results included a net deferred income tax expense of C$40 million, or C$0.08 per diluted share, resulting from the enactment of state corporate income tax rate changes and other legislated state tax revisions.

·	Excluding the net deferred income tax expense, adjusted diluted EPS for the second quarter of 2011 rose to C$1.26 -- an increase of 12 per cent over C$1.13 for the same quarter of 2010. (1)

·	Revenues for second-quarter 2011 rose eight per cent to C$2,260 million, while carloadings increased four per cent and revenue ton-miles increased five per cent.

·	Operating income increased eight per cent to C$874 million.

·	CN’s operating ratio was 61.3 per cent, essentially in line with the operating ratio of 61.2 per cent for second-quarter 2010.

·	Free cash flow for the first half of 2011 was C$823 million, compared with C$958 million for the same period of 2010. (1)

Claude Mongeau, president and chief executive officer, said: “CN delivered a solid second-quarter performance as a result of continued improvements in freight volumes and strong operational execution. CN railroaders responded quickly and effectively to a series of weather challenges including floods, forest fires and mudslides. Their tireless efforts and dedication helped to protect the integrity of our network, the reliability of the supply chain we serve and our service to customers.”

Mongeau said that all of CN’s commodity groups posted revenue gains during the quarter. Intermodal – CN’s largest revenue segment – was a bright spot, benefiting principally from higher import volumes over the ports of Vancouver and Prince Rupert and increased domestic retail shipments. Total intermodal volumes rose 10 per cent and intermodal revenues increased 14 per cent.

“Intermodal was one of the first areas where we applied our new end-to-end supply chain collaboration approach,” Mongeau said. “This approach is really starting to pay off, and we hope to enjoy gains in other segments of our business where we have brought forward a similar focus on innovation and service excellence.”

CANADIAN NATIONAL RAILWAY COMPANY

PRESS RELEASE

Foreign currency impact on results

Although CN reports its earnings in Canadian dollars, a large portion of its revenues and expenses is denominated in U.S. dollars. As such, the Company’s results are affected by exchange-rate fluctuations. On a constant currency basis that excludes the impact of fluctuations in foreign currency exchange rates, CN’s second-quarter 2011 net income would have been higher by C$14 million, or C$0.03 per diluted share. (1)

Second-quarter 2011 revenues, traffic volumes and expenses

The eight per cent rise in second-quarter revenues mainly resulted from higher freight volumes as a result of continued though modest improvements in North American and global economic conditions; the impact of a higher fuel surcharge, as a result of year-over-year increases in applicable fuel prices and higher volumes; and freight rate increases. These factors were partly offset by the negative translation impact of the stronger Canadian dollar on U.S.-dollar-denominated revenues.

Revenues increased for metals and minerals (17 per cent), intermodal (14 per cent), grain and fertilizers (13 per cent), forest products (six per cent), coal (five per cent), petroleum and chemicals (three per cent), and automotive (two per cent).

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased five per cent from the year-earlier period.

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, increased four per cent over the second quarter of 2010, largely due to the impact of a higher fuel surcharge and freight rate increases, partly offset by the negative translation impact of the stronger Canadian dollar.

Operating expenses increased by eight per cent to C$1,386 million, mainly owing to higher fuel costs, increased purchased services and materials expense, and higher labor and fringe benefits expense. These factors were partly offset by the positive translation impact of the stronger Canadian dollar on U.S.-dollar-denominated expenses, and lower casualty and other expense.

2011 financial outlook (2)

CN remains comfortable with the financial guidance it issued on April 26, 2011. CN expects to generate double-digit diluted EPS growth of up to 15 per cent in 2011, on an adjusted basis, compared with adjusted diluted EPS of C$4.20 achieved in 2010. CN also expects free cash flow for 2011 to be in the order of C$1.2 billion, which takes into consideration a potential C$200 million additional voluntary pension contribution.

Mongeau said: “I am pleased with CN’s second-quarter results. While there is some growing uncertainty about the pace of growth of the U.S. and global economies, we believe our performance in the first half of 2011 positions us to finish the year on a positive note.”

CANADIAN NATIONAL RAILWAY COMPANY

PRESS RELEASE

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

(2)	See Forward-Looking Statements for a summary of the key assumptions and risks regarding CN’s 2011 financial outlook.

Forward-Looking Statements

Certain information included in this news release constitutes “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and under Canadian securities laws. CN cautions that, by their nature, these forward-looking statements involve risks, uncertainties and assumptions. The Company cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company or the rail industry to be materially different from the outlook or any future results or performance implied by such statements. To the extent that CN has provided guidance that are non-GAAP financial measures, the Company may not be able to provide a reconciliation to the GAAP measures, due to unknown variables and uncertainty related to future results. Key assumptions used in determining forward-looking information are set forth below.

Key assumptions

CN announced a revised 2011 financial outlook in the news release of April 26, 2011, announcing its first-quarter 2011 financial results.

CN’s 2011 outlook is based on a number of economic and market assumptions. The Company forecasts that North American industrial production will increase by about 4.5 per cent in 2011. CN also expects U.S. housing starts to be about 650,000 units and U.S. motor vehicles sales to be approximately 13 million units for the year. Although the Company anticipates the 2011/2012 Canadian grain crop will be in-line with the five-year average, its impact on 2011 results is expected to be modest. In the first half of 2011, CN experienced the effects of a weaker 2010/2011 Canadian grain crop that was partly offset by a higher carry-over stock. With these assumptions, CN is targeting solid, mid-single-digit carload growth for 2011, along with continued pricing improvement above inflation. CN assumes the Canadian-U.S. exchange rate to be in the range of C$1.00 to C$1.05, and that the price of crude oil (West Texas Intermediate) for the year will be in the range of US$100 to US$110 per barrel. In 2011, CN plans to invest approximately C$1.7 billion in capital programs, of which more than C$1 billion will be targeted on track infrastructure to maintain a safe and fluid railway network. The Company will also invest in projects to support a number of productivity and growth initiatives.

Important risk factors that could affect the forward-looking statements include, but are not limited to, the effects of general economic and business conditions, 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 risk factors.

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 Canadian securities 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.

CANADIAN NATIONAL RAILWAY COMPANY

PRESS RELEASE

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.

- 30 -

Contacts:

Media	Investment Community
Mark Hallman	Robert Noorigian
Director	Vice-President
Communications and Public Affairs	Investor Relations
(905) 669-3384	(514) 399-0052

CANADIAN NATIONAL RAILWAY COMPANY

CONSOLIDATED STATEMENT OF INCOME (U.S. GAAP) - unaudited

(In millions, except per share data)

Item 2


		Three months ended				Six months ended
		June 30				June 30

			2011		2010		2011		2010

Revenues		$	2,260	$	2,093	$	4,344	$	4,058

Operating expenses
	Labor and fringe benefits		432		414		905		884
	Purchased services and material		268		250		554		508
	Fuel		353		255		680		508
	Depreciation and amortization		217		205		435		410
	Equipment rents		54		60		105		120
	Casualty and other		62		96		146		212
Total operating expenses			1,386		1,280		2,825		2,642

Operating income			874		813		1,519		1,416

Interest expense			(85)		(91)		(171)		(183)
Other income (Note 2)			10		14		310		176
Income before income taxes			799		736		1,658		1,409

Income tax expense (Note 6)			(261)		(202)		(452)		(364)
Net income		$	538	$	534	$	1,206	$	1,045

Earnings per share (Note 9)
	Basic	$	1.19	$	1.14	$	2.64	$	2.22
	Diluted	$	1.18	$	1.13	$	2.63	$	2.21

Weighted-average number of shares
	Basic		453.9		468.8		456.1		469.9
	Diluted		457.1		472.6		459.4		473.7
See accompanying notes to unaudited consolidated financial statements.

CANADIAN NATIONAL RAILWAY COMPANY

CONSOLIDATED BALANCE SHEET (U.S. GAAP) - unaudited

(In millions)


	June 30		December 31		June 30
		2011		2010		2010

Assets

Current assets:
Cash and cash equivalents (Note 3)	$	175	$	490	$	896
Accounts receivable		825		775		794
Material and supplies		240		210		255
Deferred income taxes		50		53		96
Other (Note 3)		551		62		64
Total current assets		1,841		1,590		2,105

Properties		22,789		22,917		22,801
Intangible and other assets		840		699		1,221

Total assets	$	25,470	$	25,206	$	26,127

Liabilities and shareholders' equity

Current liabilities:
Accounts payable and other	$	1,452	$	1,366	$	1,341
Current portion of long-term debt and short-term debt (Note 3)		530		540		210
Total current liabilities		1,982		1,906		1,551

Deferred income taxes		5,301		5,152		5,298
Other liabilities and deferred credits		1,284		1,333		1,256
Long-term debt		5,432		5,531		6,345

Shareholders' equity:
Common shares		4,211		4,252		4,275
Accumulated other comprehensive loss		(1,741)		(1,709)		(929)
Retained earnings		9,001		8,741		8,331

Total shareholders' equity		11,471		11,284		11,677

Total liabilities and shareholders' equity	$	25,470	$	25,206	$	26,127
See accompanying notes to unaudited consolidated financial statements.

CANADIAN NATIONAL RAILWAY COMPANY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (U.S. GAAP) - unaudited

(In millions)


	Three months ended				Six months ended
	June 30				June 30
		2011		2010		2011		2010

Common shares (1)
Balance, beginning of period	$	4,228	$	4,301	$	4,252	$	4,266
Stock options exercised and other		34		23		56		79
Share repurchase programs (Note 3)		(51)		(49)		(97)		(70)
Balance, end of period	$	4,211	$	4,275	$	4,211	$	4,275

Accumulated other comprehensive loss
Balance, beginning of period	$	(1,736)	$	(980)	$	(1,709)	$	(948)
Other comprehensive income (loss):
Unrealized foreign exchange gain (loss) on:
Translation of the net investment in foreign operations		(33)		286		(180)		79
Translation of US dollar-denominated debt
designated as a hedge of the net investment in U.S. subsidiaries		29		(279)		169		(80)
Pension and other postretirement benefit plans (Note 5):
Amortization of prior service cost included in net
periodic benefit cost		1		-		1		1
Amortization of net actuarial loss included in net
periodic benefit cost (income)		2		-		4		1
Derivative instruments		-		(1)		(1)		(1)
Other comprehensive income (loss) before income taxes		(1)		6		(7)		-
Income tax recovery (expense)		(4)		45		(25)		19
Other comprehensive income (loss)		(5)		51		(32)		19
Balance, end of period	$	(1,741)	$	(929)	$	(1,741)	$	(929)

Retained earnings
Balance, beginning of period	$	8,966	$	8,191	$	8,741	$	7,915
Net income		538		534		1,206		1,045
Share repurchase programs (Note 3)		(356)		(268)		(650)		(376)
Dividends		(147)		(126)		(296)		(253)
Balance, end of period	$	9,001	$	8,331	$	9,001	$	8,331
See accompanying notes to unaudited consolidated financial statements.

(1)

During the three and six months ended June 30, 2011, the Company issued 0.9 million and 1.7 million common shares, respectively, as a result of stock options exercised and repurchased 5.5 million and 10.5 million common shares, respectively, under its current share repurchase program. At June 30, 2011, the Company had 450.6 million common shares outstanding.

CANADIAN NATIONAL RAILWAY COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS (U.S. GAAP) - unaudited

(In millions)

		Three months ended				Six months ended
		June 30				June 30
		2011		2010		2011		2010

Operating activities
Net income	$	538	$	534	$	1,206	$	1,045
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		217		205		435		410
Deferred income taxes		119		41		223		111
Gain on disposal of property (Note 2)		-		-		(288)		(152)
Changes in operating assets and liabilities:
Accounts receivable		(54)		14		(72)		13
Material and supplies		(13)		(17)		(32)		(84)
Accounts payable and other		106		98		42		199
Other current assets		3		11		(7)		12
Other, net		(17)		(27)		(109)		(98)
Net cash provided by operating activities		899		859		1,398		1,456

Investing activities
Property additions		(377)		(301)		(597)		(435)
Disposal of property (Note 2)		-		23		299		167
Change in restricted cash and cash equivalents (Note 3)		(467)		-		(467)		-
Other, net		3		11		17		18
Net cash used in investing activities		(841)		(267)		(748)		(250)

Financing activities
Issuance of debt (Note 3)		64		-		64		-
Repayment of debt		(17)		(22)		(39)		(40)
Issuance of common shares due to exercise of stock
options and related excess tax benefits realized		31		22		51		74
Repurchase of common shares (Note 3)		(407)		(317)		(747)		(446)
Dividends paid		(147)		(126)		(296)		(253)
Net cash used in financing activities		(476)		(443)		(967)		(665)
Effect of foreign exchange fluctuations on US
dollar-denominated cash and cash equivalents		-		(1)		2		3
Net increase (decrease) in cash and cash equivalents		(418)		148		(315)		544
Cash and cash equivalents, beginning of period		593		748		490		352
Cash and cash equivalents, end of period	$	175	$	896	$	175	$	896

Supplemental cash flow information
Net cash receipts from customers and other	$	2,228	$	2,093	$	4,333	$	4,150
Net cash payments for:
Employee services, suppliers and other expenses		(1,156)		(1,076)		(2,427)		(2,304)
Interest		(75)		(81)		(162)		(172)
Personal injury and other claims		(16)		(17)		(33)		(31)
Pensions (Note 5)		(5)		(8)		(98)		(110)
Income taxes		(77)		(52)		(215)		(77)
Net cash provided by operating activities	$	899	$	859	$	1,398	$	1,456
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, 2011, December 31, 2010, and June 30, 2010, and its results of operations, changes in shareholders’ equity and cash flows for the three and six months ended June 30, 2011 and 2010.

These unaudited Interim Consolidated Financial Statements and Notes thereto have been prepared using accounting policies consistent with those used in preparing the Company’s 2010 Annual Consolidated Financial Statements. While management believes that the disclosures presented are adequate to make the information not misleading, these unaudited Interim Consolidated Financial Statements and Notes thereto should be read in conjunction with the Company’s Interim Management’s Discussion and Analysis (MD&A) and the 2010 Annual Consolidated Financial Statements and Notes thereto.

Note 2 - Disposal of property

2011 - Disposal of IC RailMarine Terminal

In June 2011, the Company entered into an agreement with Raven Energy, LLC, an affiliate of Foresight Energy, LLC (“Foresight”) and the Cline Group (“Cline”), to sell substantially all of the assets of IC RailMarine Terminal Company (“ICRMT”), an indirect subsidiary of the Company, for cash proceeds of US$73 million before transaction costs. ICRMT is located on the east bank of the Mississippi River and stores and transfers bulk commodities and liquids between rail, ship and barge, serving customers in North American and global markets.

Under the sale agreement, the Company would benefit from a 10-year rail transportation agreement with Savatran LLC, an affiliate of Foresight and Cline, to haul a minimum annual volume of coal from four Illinois mines to the ICRMT transfer facility. The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to be finalized in the third quarter of 2011. The net book value of the assets being sold has been reclassified to Other current assets. The proceeds of disposition are expected to exceed the Company’s net book value of the underlying assets.

2011 - Disposal of Lakeshore East

In March 2011, the Company entered into an agreement with Metrolinx to sell a segment of the Kingston subdivision known as the Lakeshore East in Pickering and Toronto, Ontario, together with the rail fixtures and certain passenger agreements (collectively the “Rail Property”), for cash proceeds of $299 million before transaction costs. 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 disposal of $288 million ($254 million after-tax) that was recorded in Other income under the full accrual method of accounting for real estate transactions.

2010 - Disposal of Oakville subdivision

In March 2010, the Company entered into an agreement with Metrolinx to sell a portion of the property known as the Oakville subdivision in Toronto, Ontario, together with the rail fixtures and certain passenger agreements (collectively the “Rail Property”), for proceeds of $168 million before transaction costs, of which $24 million placed in escrow at the time of disposal was entirely released by December 31, 2010 in accordance with the terms of the agreement. 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 disposal of $152 million ($131 million after-tax) that was recorded in Other income under the full accrual method of accounting for real estate transactions.

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

Note 3 - Financing activities

Revolving credit facility

In May 2011, the Company entered into a $800 million four-year revolving credit facility agreement with a consortium of lenders. The agreement allows for an increase in amount, up to a maximum of $500 million, as well as an extension of one year at each anniversary date, subject to the consent of individual lenders. The Company plans to use the credit facility for working capital and general corporate purposes including backstopping its commercial paper program. This facility, containing customary terms and conditions, replaces the US$1 billion credit facility that was scheduled to expire in October 2011. As at June 30, 2011, the Company had no outstanding borrowings under its revolving credit facility (nil as at December 31, 2010).

Commercial paper

The Company has a commercial paper program, which is backed by its revolving credit facility, enabling it to issue commercial paper up to a maximum aggregate principal amount of $800 million, or the US dollar equivalent. As at June 30, 2011, the Company had borrowings of $64 million of commercial paper (nil as at December 31, 2010), which were presented in Current portion of long-term debt and short-term debt on the Balance Sheet.

Bilateral letter of credit facilities

In April 2011, the Company entered into a series of three-year bilateral letter of credit facility agreements with various banks to support its requirements to post letters of credit in the ordinary course of business. As at June 30, 2011, from a total committed amount of $495 million by the various banks, the Company had letters of credit drawn of $467 million ($436 million as at December 31, 2010, under its previous US$1 billion credit facility). Under these agreements, the Company has the option from time to time to pledge collateral, in the form of cash or cash equivalents, for a minimum term of three months, equal to at least the face value of the letters of credit issued. As at June 30, 2011, cash and cash equivalents of $467 million were pledged as collateral and recorded as Restricted cash and cash equivalents in Other current assets.

Share repurchase programs

In January 2011, the Board of Directors of the Company approved a new share repurchase program which allows for the repurchase of up to 16.5 million common shares to the end of December 2011 pursuant to a normal course issuer bid, at prevailing market prices or such other price as may be permitted by the Toronto Stock Exchange.

The following table provides the activity under such share repurchase program as well as the share repurchase program of the prior year:

	Three months ended June 30				Six months ended June 30
In millions, except per share data	2011		2010		2011		2010
Number of common shares repurchased (1)		5.5		5.4		10.5		7.7
Weighted-average price per share (2)	$	74.08	$	58.70	$	71.18	$	57.92
Amount of repurchase	$	407	$	317	$	747	$	446
(1) Includes common shares purchased pursuant to private agreements between the Company and arm's-length third-party sellers.
(2) Includes brokerage fees.

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

Note 4 - Stock plans

The Company has various stock-based incentive plans for eligible employees. A description of the Company’s major plans is provided in Note 11 – Stock plans, to the Company’s 2010 Annual Consolidated Financial Statements. The following table provides total stock-based compensation expense for awards under all plans, as well as the related tax benefit recognized in income, for the three and six months ended June 30, 2011 and 2010.

		Three months ended June 30				Six months ended June 30
In millions		2011		2010		2011		2010

Cash settled awards
Restricted share unit plan	$	18	$	12	$	47	$	39
Voluntary Incentive Deferral Plan (VIDP)		7		(3)		18		6
		25		9		65		45
Stock option awards		3		1		5		5
Total stock-based compensation expense	$	28	$	10	$	70	$	50

Tax benefit recognized in income	$	7	$	2	$	18	$	13

Cash settled awards

Following approval by the Board of Directors in January 2011, the Company granted 0.5 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, 2011, 0.2 million RSUs remained authorized for future issuance under this plan.

The following table provides the 2011 activity for all cash settled awards:

	RSUs		VIDP
In millions	Nonvested	Vested	Nonvested	Vested
Outstanding at December 31, 2010	1.3	0.7	-	1.5
Granted (Payout)	0.5	(0.7)	-	(0.1)
Outstanding at June 30, 2011	1.8	-	-	1.4

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

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

In millions, unless otherwise indicated		RSUs (1)									VIDP (2)		Total

Year of grant		2011		2010		2009		2008

Stock-based compensation expense
	recognized over requisite service period
Six months ended June 30, 2011		$	6	$	16	$	25	$	-	$	18	$	65
Six months ended June 30, 2010			N/A	$	7	$	17	$	15	$	6	$	45

Liability outstanding
June 30, 2011		$	6	$	33	$	71	$	-	$	115	$	225
December 31, 2010			N/A	$	17	$	46	$	37	$	99	$	199

Fair value per unit
June 30, 2011 ($)		$	51.76	$	71.73	$	76.49		N/A	$	77.14		N/A

Fair value of awards vested during the period
Six months ended June 30, 2011		$	-	$	-	$	-		N/A	$	1	$	1
Six months ended June 30, 2010			N/A	$	-	$	-	$	-	$	1	$	1

Nonvested awards at June 30, 2011
Unrecognized compensation cost		$	17	$	21	$	7		N/A	$	1	$	46
Remaining recognition period (years)			2.5		1.5		0.5		N/A		N/A (3)		N/A

Assumptions (4)
Stock price ($)		$	77.14	$	77.14	$	77.14		N/A	$	77.14		N/A
Expected stock price volatility (5)			26%		19%		14%		N/A		N/A		N/A
Expected term (years) (6)			2.5		1.5		0.5		N/A		N/A		N/A
Risk-free interest rate (7)			1.71%		1.40%		1.04%		N/A		N/A		N/A
Dividend rate ($) (8)		$	1.30	$	1.30	$	1.30		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)	The remaining recognition period has not been quantified as it relates solely to the 25% Company grant and the dividends earned thereon, representing a minimal number of units.
(4)	Assumptions used to determine fair value are at June 30, 2011.
(5)	Based on the historical volatility of the Company's stock over a period commensurate with the expected term of the award.
(6)	Represents the remaining period of time that awards are expected to be outstanding.
(7)	Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(8)	Based on the annualized dividend rate.

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

Stock option awards

Following approval by the Board of Directors in January 2011, the Company granted 0.6 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, 2011, 11.0 million common shares remained authorized for future issuances under this plan. The total number of options outstanding at June 30, 2011, including conventional and performance-accelerated options, was 6.2 million and 1.6 million, respectively. As at June 30, 2011, the performance-accelerated stock options were fully vested.

The following table provides the activity of stock option awards in 2011. The table also provides the aggregate intrinsic value for in-the-money stock options, which represents the value that would have been received by option holders had they exercised their options on June 30, 2011 at the Company’s closing stock price of $77.14.

		Options outstanding
		Number	Weighted-average		Weighted-average	Aggregate
		of options	exercise price		years to expiration	intrinsic value
		In millions					In millions
Outstanding at December 31, 2010 (1)		8.9	$	34.23
Granted		0.6	$	68.93
Exercised		(1.7)	$	25.12
Outstanding at June 30, 2011 (1)		7.8	$	38.46	4.9	$	302
Exercisable at June 30, 2011 (1)		5.8	$	33.89	3.7	$	252
(1)	Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date.

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

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

In millions, unless otherwise indicated
Year of grant			2011		2010		2009		2008		2007		Total

Stock-based compensation expense
recognized over requisite service period (1)
Six months ended June 30, 2011		$	2	$	1	$	1	$	1	$	-	$	5
Six months ended June 30, 2010			N/A	$	3	$	1	$	1	$	-	$	5

Fair value per unit
At grant date ($)		$	15.66	$	13.09	$	12.60	$	12.44	$	13.36		N/A

Fair value of awards vested during the period
Six months ended June 30, 2011		$	-	$	2	$	4	$	3	$	3	$	12
Six months ended June 30, 2010			N/A	$	-	$	4	$	3	$	3	$	10

Nonvested awards at June 30, 2011
Unrecognized compensation cost		$	7	$	4	$	3	$	-	$	-	$	14
Remaining recognition period (years)			3.5		2.5		1.5		0.5		-		N/A

Assumptions
Grant price ($)		$	68.93	$	54.76	$	42.14	$	48.51	$	52.79		N/A
Expected stock price volatility (2)			26%		28%		39%		27%		24%		N/A
Expected term (years) (3)			5.3		5.4		5.3		5.3		5.2		N/A
Risk-free interest rate (4)			2.53%		2.44%		1.97%		3.58%		4.12%		N/A
Dividend rate ($) (5)		$	1.30	$	1.08	$	1.01	$	0.92	$	0.84		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.

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

Note 5 - Pensions and other postretirement benefits

For the three and six months ended June 30, 2011 and 2010, 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		2011		2010		2011		2010
Service cost	$	31	$	26	$	62	$	53
Interest cost		196		210		393		418
Expected return on plan assets		(251)		(252)		(502)		(504)
Recognized net actuarial loss		2		1		4		2
Net periodic benefit (income)	$	(22)	$	(15)	$	(43)	$	(31)

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

		Three months ended				Six months ended
		June 30				June 30
In millions		2011		2010		2011		2010
Service cost	$	1	$	1	$	2	$	2
Interest cost		3		5		7		8
Amortization of prior service cost		1		-		1		1
Recognized net actuarial gain		-		(1)		-		(1)
Net periodic benefit cost	$	5	$	5	$	10	$	10

The Company continuously monitors the various economic elements which affect the level of contribution it considers necessary to maintain the financial health of its various pension plans. For 2011, the Company currently expects to make contributions of approximately $110 million for all its pension plans, including its defined contribution plans, of which $98 million was disbursed as at June 30, 2011.

Additional information relating to the plans is provided in Note 12 – Pensions and other postretirement benefits to the Company’s 2010 Annual Consolidated Financial Statements.

Note 6 – Income taxes

The Company recorded income tax expense of $261 million for the three months ended June 30, 2011 and $452 million for the six months ended June 30, 2011, compared to $202 million and $364 million, respectively, for the same periods in 2010. Included in the 2011 figures was a net deferred income tax expense of $40 million resulting from the enactment of state corporate income tax rate changes and other legislated state tax revisions.

Note 7 - Major commitments and contingencies

A. Commitments

As at June 30, 2011, 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 $786 million ($740 million as at December 31, 2010). The Company also has remaining estimated commitments in relation to the acquisition of the principal lines of the former Elgin, Joliet and Eastern Railway Company to be spent over the next few years, of approximately $140 million for railroad infrastructure improvements, grade separation projects, as well as commitments under a series of agreements with individual communities and a comprehensive voluntary mitigation program established to address surrounding municipalities' concerns. The commitment for the grade separation projects is based on estimated costs provided by the Surface Transportation Board (STB) at the time of acquisition and could be subject to adjustment. In addition, implementation costs associated with the U.S. federal government legislative requirement to

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

implement positive train control (PTC) by 2015 are estimated to be $193 million (US$200 million). The Company also has agreements with fuel suppliers to purchase approximately 71% of its estimated remaining 2011 volume, 49% of its anticipated 2012 volume, 35% of its anticipated 2013 volume and 11% of its anticipated 2014 volume, at market prices prevailing on the date of the purchase.

B. Contingencies

In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party 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. As such, the provision for employee injury claims is discounted. In the provinces where the Company is self-insured, it 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. A comprehensive actuarial study is generally performed at least on a triennial basis. 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

Personal injury claims by the Company’s employees, including claims alleging occupational disease and work-related injuries, are subject to the provisions of the Federal Employers’ Liability Act (FELA). Employees are compensated under FELA for damages assessed based on a finding of fault through the U.S. jury system or through individual settlements. As such the provision is undiscounted. 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, including asserted and unasserted occupational disease claims, and property damage claims, based on actuarial estimates of their ultimate cost. A comprehensive actuarial study is performed annually.

For employee work-related injuries, including asserted occupational disease claims, and third-party claims, including grade crossing, trespasser and property damage claims, the actuarial valuation considers, among other factors, CN’s historical patterns of claims filings and payments. For unasserted occupational disease claims, the actuarial study includes the projection of CN’s experience into the future considering the potentially exposed population. The Company adjusts its liability based upon management’s assessment and the results of the study. 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, 2011, the Company had aggregate reserves for personal injury and other claims of $339 million, of which $82 million was recorded as a current liability ($346 million as at December 31, 2010, of which $83 million was recorded as a current liability).

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, 2011, 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 300 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

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

(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 nature of anticipated response actions, taking into account the available clean-up techniques; evolving regulatory standards governing environmental liability; and the number of potentially responsible parties and their financial viability. As a result, liabilities are recorded based on the results of a four-phase assessment conducted on a site-by-site basis. A liability is initially recorded when environmental assessments occur, 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. The Company estimates the costs related to a particular site using cost scenarios established by external consultants based on the extent of contamination and expected costs for remedial efforts. In the case of multiple parties, the Company accrues its allocable share of liability taking into account the Company’s alleged responsibility, the number of potentially responsible parties and their ability to pay their respective share of the liability. Adjustments to initial estimates are recorded as additional information becomes available.

The Company’s provision for specific environmental sites is undiscounted and includes costs for remediation and restoration of sites, as well as 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. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

As at June 30, 2011, the Company had aggregate accruals for environmental costs of $132 million, of which $36 million was recorded as a current liability ($150 million as at December 31, 2010, of which $34 million was recorded as a current liability). The Company anticipates that the majority of the liability at June 30, 2011 will be paid out over the next five years. However, some costs may be paid out over a longer period. The Company expects to partly recover certain accrued remediation costs associated with alleged contamination and has recorded a receivable in Intangible and other assets for such recoverable amount. 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 laws, the possibility of releases of hazardous materials into the environment and the Company’s ongoing efforts to identify potential environmental liabilities that may be associated with its properties 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 determination of the Company’s liability in proportion to other potentially responsible parties and 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 position 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.

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

D. Guarantees and indemnifications

In the normal course of business, the Company, including certain of its subsidiaries, enters into agreements that may involve providing guarantees or indemnifications to third parties and others, which may extend beyond the term of the agreements. 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 2011 and 2022, 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, 2011, the maximum exposure in respect of these guarantees was $147 million. There are no recourse provisions to recover any amounts from third parties.

(ii) Other guarantees

As at June 30, 2011, the Company, including certain of its subsidiaries, has granted $467 million of irrevocable standby letters of credit and $10 million of 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, 2011, the maximum potential liability under these guarantee instruments was $477 million, of which $421 million related to workers’ compensation and other employee benefit liabilities and $56 million related to equipment under leases and other liabilities. The letters of credit were drawn on the Company’s bilateral letter of credit facilities. The Company has not recorded a liability in respect of these guarantee instruments as they relate to the Company’s future performance. In addition, as the Company does not expect to make any payments under these guarantee instruments, the Company has not recorded an additional liability at June 30, 2011 with respect to such guarantees. The majority of the guarantee instruments mature at various dates between 2011 and 2013.

(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;

(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; and

(l)	acquisition 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.

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

During the six months ended June 30, 2011, the Company 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 8 – 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:

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) Debt:

The fair value of the Company’s 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, 2011 and December 31, 2010 for which the carrying values on the Consolidated Balance Sheet are different from their fair values:

In millions			June 30, 2011				December 31, 2010
			Carrying		Fair		Carrying		Fair
			amount		value		amount		value
Financial assets
	Investments	$	24	$	112	$	25	$	114
Financial liabilities
	Debt (including current portion of long-term debt and short-term debt)	$	5,962	$	6,808	$	6,071	$	6,937

CANADIAN NATIONAL RAILWAY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. GAAP)

Note 9 – 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		2011		2010		2011		2010

Net income	$	538	$	534	$	1,206	$	1,045

Weighted-average shares outstanding		453.9		468.8		456.1		469.9
Effect of stock options		3.2		3.8		3.3		3.8
Weighted-average diluted shares outstanding		457.1		472.6		459.4		473.7

Basic earnings per share	$	1.19	$	1.14	$	2.64	$	2.22
Diluted earnings per share	$	1.18	$	1.13	$	2.63	$	2.21

Basic earnings per share are calculated based on the weighted-average number of common shares outstanding over each period. Diluted earnings per share are calculated based on the weighted-average diluted shares outstanding using the treasury stock method, which assumes that any proceeds received from the exercise of in-the-money stock options, would be used to purchase common shares at the average market price for the period. 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 0.1 million for both the three and six months ended June 30, 2011, and nil and 0.1 million, respectively, for the corresponding periods in 2010.

Note 10 – Comparative figures

Certain of the 2010 comparative figures have been restated to conform with the 2011 presentation.

CANADIAN NATIONAL RAILWAY COMPANY

SELECTED RAILROAD STATISTICS (U.S. GAAP) - unaudited


	Three months ended		Six months ended
	June 30		June 30
	2011	2010	2011	2010

Statistical operating data

Rail freight revenues ($ millions)	2,016	1,846	3,920	3,634
Gross ton miles (GTM) (millions)	89,615	85,129	176,282	169,119
Revenue ton miles (RTM) (millions)	46,683	44,576	92,836	88,656
Carloads (thousands)	1,234	1,182	2,380	2,290
Route miles (includes Canada and the U.S.) (1)	20,500	20,900	20,500	20,900
Employees (end of period)	23,315	22,127	23,315	22,127
Employees (average for the period)	23,060	22,019	22,682	21,750

Productivity

Operating ratio (%)	61.3	61.2	65.0	65.1
Rail freight revenue per RTM (cents)	4.32	4.14	4.22	4.10
Rail freight revenue per carload ($)	1,634	1,562	1,647	1,587
Operating expenses per GTM (cents)	1.55	1.50	1.60	1.56
Labor and fringe benefits expense per GTM (cents)	0.48	0.49	0.51	0.52
GTMs per average number of employees (thousands)	3,886	3,866	7,772	7,776
Diesel fuel consumed (US gallons in millions)	91.3	87.5	184.2	178.6
Average fuel price ($/US gallon)	3.42	2.60	3.31	2.58
GTMs per US gallon of fuel consumed	982	973	957	947

Safety indicators

Injury frequency rate per 200,000 person hours (2)	1.71	1.61	1.58	1.64
Accident rate per million train miles (2)	2.44	1.97	2.36	2.02

Financial ratio

Debt-to-total capitalization ratio (% at end of period)	34.2	36.0	34.2	36.0
(1) Rounded to the nearest hundred miles.
(2) Based on Federal Railroad Administration (FRA) reporting criteria.

Certain of the 2010 comparative figures have been restated to conform with the 2011 presentation. 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

SUPPLEMENTARY INFORMATION (U.S. GAAP) - unaudited

	Three months ended June 30				Six months ended June 30
	2011	2010	% Change Fav (Unfav)	% Change at constant currency Fav (Unfav) (1)	2011	2010	% Change Fav (Unfav)	% Change at constant currency Fav (Unfav) (1)
Revenues (millions of dollars)
Petroleum and chemicals	340	329	3%	8%	682	650	5%	9%
Metals and minerals	245	210	17%	22%	454	420	8%	13%
Forest products	317	299	6%	10%	616	587	5%	9%
Coal	162	155	5%	8%	303	287	6%	9%
Grain and fertilizers	368	327	13%	16%	774	699	11%	14%
Intermodal	454	398	14%	15%	846	749	13%	14%
Automotive	130	128	2%	6%	245	242	1%	6%
Total rail freight revenues	2,016	1,846	9%	13%	3,920	3,634	8%	11%
Other revenues	244	247	(1%)	2%	424	424	-	3%
Total revenues	2,260	2,093	8%	11%	4,344	4,058	7%	10%
Revenue ton miles (millions)
Petroleum and chemicals	7,847	7,680	2%	2%	16,076	15,544	3%	3%
Metals and minerals	4,611	4,084	13%	13%	8,568	7,988	7%	7%
Forest products	7,302	7,460	(2%)	(2%)	14,433	14,636	(1%)	(1%)
Coal	5,330	4,941	8%	8%	9,949	9,267	7%	7%
Grain and fertilizers	11,157	10,447	7%	7%	24,116	22,561	7%	7%
Intermodal	9,756	9,230	6%	6%	18,374	17,295	6%	6%
Automotive	680	734	(7%)	(7%)	1,320	1,365	(3%)	(3%)
	46,683	44,576	5%	5%	92,836	88,656	5%	5%
Rail freight revenue / RTM (cents)
Total rail freight revenue per RTM	4.32	4.14	4%	8%	4.22	4.10	3%	6%
Commodity groups:
Petroleum and chemicals	4.33	4.28	1%	5%	4.24	4.18	1%	5%
Metals and minerals	5.31	5.14	3%	8%	5.30	5.26	1%	5%
Forest products	4.34	4.01	8%	12%	4.27	4.01	6%	10%
Coal	3.04	3.14	(3%)	-	3.05	3.10	(2%)	1%
Grain and fertilizers	3.30	3.13	5%	9%	3.21	3.10	4%	6%
Intermodal	4.65	4.31	8%	9%	4.60	4.33	6%	7%
Automotive	19.12	17.44	10%	15%	18.56	17.73	5%	9%

Carloads (thousands)
Petroleum and chemicals	138	138	-	-	278	272	2%	2%
Metals and minerals	265	249	6%	6%	480	489	(2%)	(2%)
Forest products	113	107	6%	6%	221	210	5%	5%
Coal	113	132	(14%)	(14%)	232	242	(4%)	(4%)
Grain and fertilizers	145	136	7%	7%	305	282	8%	8%
Intermodal	400	364	10%	10%	752	690	9%	9%
Automotive	60	56	7%	7%	112	105	7%	7%
	1,234	1,182	4%	4%	2,380	2,290	4%	4%
Rail freight revenue / carload (dollars)
Total rail freight revenue per carload	1,634	1,562	5%	8%	1,647	1,587	4%	7%
Commodity groups:
Petroleum and chemicals	2,464	2,384	3%	8%	2,453	2,390	3%	7%
Metals and minerals	925	843	10%	15%	946	859	10%	15%
Forest products	2,805	2,794	-	4%	2,787	2,795	-	3%
Coal	1,434	1,174	22%	26%	1,306	1,186	10%	13%
Grain and fertilizers	2,538	2,404	6%	9%	2,538	2,479	2%	5%
Intermodal	1,135	1,093	4%	5%	1,125	1,086	4%	5%
Automotive	2,167	2,286	(5%)	(1%)	2,188	2,305	(5%)	(1%)
(1) See supplementary schedule entitled Non-GAAP Measures for an explanation of this Non-GAAP measure.
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

For the three and six months ended June 30, 2011, the Company reported adjusted net income of $578 million, or $1.26 per diluted share and $992 million, or $2.16 per diluted share, respectively. The adjusted figures for the three and six months ended June 30, 2011 exclude a net deferred income tax expense of $40 million ($0.08 per diluted share) resulting from the enactment of state corporate income tax rate changes and other legislated state tax revisions. The adjusted figures for the six months ended June 30, 2011 also exclude a gain on disposal of a segment of the Company’s Kingston subdivision of $288 million, or $254 million after-tax ($0.55 per diluted share).

For the three and six months ended June 30, 2010, the Company reported adjusted net income of $534 million, or $1.13 per diluted share and $914 million, or $1.93 per diluted share, respectively. The adjusted figures for the six months ended June 30, 2010 also exclude a gain on disposal of the Company’s Oakville subdivision of $152 million, or $131 million after-tax ($0.28 per diluted share).

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 2011 unaudited Interim Consolidated Financial Statements and Notes thereto. The following table provides a reconciliation of net income and earnings per share, as reported for the three and six months ended June 30, 2011 and 2010, to the adjusted performance measures presented herein.

		Three months ended						Six months ended
		June 30, 2011						June 30, 2011

In millions, except per share data		Reported		Adjustments		Adjusted		Reported		Adjustments		Adjusted


Revenues	$	2,260	$	-	$	2,260	$	4,344	$	-	$	4,344
Operating expenses		1,386		-		1,386		2,825		-		2,825
Operating income		874		-		874		1,519		-		1,519
Interest expense		(85)		-		(85)		(171)		-		(171)
Other income		10		-		10		310		(288)		22
Income before income taxes		799		-		799		1,658		(288)		1,370
Income tax expense		(261)		40		(221)		(452)		74		(378)
Net income	$	538	$	40	$	578	$	1,206	$	(214)	$	992
Operating ratio		61.3%				61.3%		65.0%				65.0%
Basic earnings per share	$	1.19	$	0.08	$	1.27	$	2.64	$	(0.47)	$	2.17
Diluted earnings per share	$	1.18	$	0.08	$	1.26	$	2.63	$	(0.47)	$	2.16

CANADIAN NATIONAL RAILWAY COMPANY

NON-GAAP MEASURES - unaudited

		Three months ended						Six months ended
		June 30, 2010						June 30, 2010

In millions, except per share data		Reported		Adjustments		Adjusted		Reported		Adjustments		Adjusted


Revenues	$	2,093	$	-	$	2,093	$	4,058	$	-	$	4,058
Operating expenses		1,280		-		1,280		2,642		-		2,642
Operating income		813		-		813		1,416		-		1,416
Interest expense		(91)		-		(91)		(183)		-		(183)
Other income		14		-		14		176		(152)		24
Income before income taxes		736		-		736		1,409		(152)		1,257
Income tax expense		(202)		-		(202)		(364)		21		(343)
Net income	$	534	$	-	$	534	$	1,045	$	(131)	$	914
Operating ratio		61.2%				61.2%		65.1%				65.1%
Basic earnings per share	$	1.14	$	-	$	1.14	$	2.22	$	(0.28)	$	1.94
Diluted earnings per share	$	1.13	$	-	$	1.13	$	2.21	$	(0.28)	$	1.93

Constant currency

Although CN conducts its business and reports its earnings in Canadian dollars, a large portion of revenues and expenses is denominated in US dollars. As such, the Company’s results are affected by exchange-rate fluctuations.

Financial results at “constant currency” allow results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons in the analysis of trends in business performance. Measures at constant currency are considered non-GAAP measures and do not have any standardized meaning prescribed by GAAP and may, therefore, not be comparable to similar measures presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US dollars at the foreign exchange rates of the comparable period of the prior year. The average foreign exchange rates for the three and six months ended June 30, 2011 were 0.97 and 0.98, respectively, and 1.03 for both the three and six months ended June 30, 2010.

On a constant currency basis, the Company’s 2011 second quarter and first half net income would have been higher by $14 million, or $0.03 per diluted share and $23 million, or $0.05 per diluted share, respectively. The following table presents a reconciliation of 2011 net income as reported to net income on a constant currency basis:

		Three months ended		Six months ended
In millions		June 30, 2011		June 30, 2011

Net income, as reported		$	538	$	1,206
Add back:
	Negative impact due to the strengthening Canadian dollar included in net income		14		23
Add:
	Increase due to the strengthening Canadian dollar on additional year-over-year US$ net income		-		-
Impact of foreign exchange using constant currency rates			14		23
Net income, on a constant currency basis		$	552	$	1,229

CANADIAN NATIONAL RAILWAY COMPANY

NON-GAAP MEASURES - unaudited

Free cash flow

The Company generated $378 million and $823 million of free cash flow for the three and six months ended June 30, 2011, respectively, compared to $465 million and $958 million for the same periods in 2010, respectively. 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 the sum of net cash provided by operating activities, adjusted for changes in the accounts receivable securitization program, if any, and in cash and cash equivalents resulting from foreign exchange fluctuations; and net cash used in investing activities, adjusted for changes in restricted cash and cash equivalents, if any, for the impact of major acquisitions, if any, and the payment of dividends, calculated as follows:

	Three months ended				Six months ended
	June 30				June 30
In millions		2011		2010		2011		2010

Net cash provided by operating activities	$	899	$	859	$	1,398	$	1,456
Net cash used in investing activities		(841)		(267)		(748)		(250)
Net cash provided before financing activities		58		592		650		1,206

Adjustments:
Change in restricted cash and cash equivalents		467		-		467		-
Dividends paid		(147)		(126)		(296)		(253)
Change in accounts receivable securitization		-		-		-		2
Effect of foreign exchange fluctuations on US dollar-denominated
cash and cash equivalents		-		(1)		2		3
Free cash flow	$	378	$	465	$	823	$	958

CANADIAN NATIONAL RAILWAY COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS (U.S. GAAP)

Item 3

Management’s discussion and analysis (MD&A) relates to the financial position and results of operations of Canadian National Railway Company, together with its wholly-owned subsidiaries, collectively “CN” or “the Company.” Canadian National Railway Company’s common shares are listed on the Toronto and New York stock exchanges. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars and determined on the basis of United States generally accepted accounting principles (U.S. GAAP). The Company’s objective is to provide meaningful and relevant information reflecting the Company’s financial position and results of operations. In certain instances, the Company may make reference to certain non-GAAP measures that, from management’s perspective, are useful measures of performance. The reader is advised to read all information provided in the MD&A in conjunction with the Company’s 2011 unaudited Interim Consolidated Financial Statements and Notes thereto as well as the 2010 Annual MD&A.

Business profile

CN is engaged in the rail and related transportation business. CN’s network of approximately 20,500 route miles of track spans Canada and mid-America, connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico. CN’s extensive network, and its co-production arrangements, routing protocols, marketing alliances, and interline agreements, provide CN customers access to all three North American Free Trade Agreement (NAFTA) nations.

CN’s freight revenues are derived from seven commodity groups representing a diversified and balanced portfolio of goods transported between a wide range of origins and destinations. This product and geographic diversity better positions the Company to face economic fluctuations and enhances its potential for growth opportunities. For the current year, from a geographic standpoint, 18% of revenues relate to United States (U.S.) domestic traffic, 28% transborder traffic, 22% Canadian domestic traffic and 32% overseas traffic. The Company is the originating carrier for approximately 85% of traffic moving along its network, which allows it both to capitalize on service advantages and build on opportunities to efficiently use assets. In 2010, no individual commodity group accounted for more than 19% of revenues.

Corporate organization

The Company manages its rail operations in Canada and the United States as one business segment. Financial information reported at this level, such as revenues, operating income and cash flow from operations, is used by the Company’s corporate management in evaluating financial and operational performance and allocating resources across CN’s network. The Company’s strategic initiatives, which drive its operational direction, are developed and managed centrally by corporate management and are communicated to its regional activity centers (the Western Region, Eastern Region and Southern Region), whose role is to manage the day-to-day service requirements of their respective territories, control direct costs incurred locally, and execute the corporate strategy and operating plan established by corporate management.

See Note 15 – Segmented information, to the Company’s 2010 Annual Consolidated Financial Statements for additional information on the Company’s corporate organization, as well as selected financial information by geographic area.

Strategy overview

CN’s focus is on running a safe and efficient railroad. While remaining at the forefront of the rail industry, CN’s goal is to be internationally regarded as one of the best-performing transportation companies.

CN’s commitment is to create value for both its customers and shareholders. By staying engaged with customers and leveraging the strength of its franchise, the Company seeks to provide quality and cost-effective service that creates value for its customers.

CN’s corporate goals are generally based on five key financial performance targets: revenues, operating income, earnings per share, free cash flow and return on invested capital, as well as various key operating metrics, including safety metrics, that the Company focuses on to measure efficiency and quality of service. By striving for sustainable financial performance through profitable growth, adequate free cash flow and return on invested capital, CN seeks to deliver increased shareholder value. For 2011, the Company’s Board of Directors has approved an increase of 20% to the quarterly dividend to common shareholders, from $0.270 to $0.325, as well as a share repurchase program to be funded mainly from cash generated from operations. The share repurchase program allows for the repurchase of up to 16.5 million common shares to the end of December 2011 pursuant to a normal course issuer bid, at prevailing market prices, or such other price as may be permitted by the Toronto Stock Exchange.

CANADIAN NATIONAL RAILWAY COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS (U.S. GAAP)

CN’s business model is anchored on five core principles: providing quality service, controlling costs, focusing on asset utilization, committing to safety, and developing people. Precision Railroading is at the core of CN’s business model. It is a highly disciplined process whereby CN handles individual rail shipments according to a specific trip plan and manages all aspects of railroad operations to meet customer commitments efficiently and profitably. Precision Railroading demands discipline to execute the trip plan, the relentless measurement of results, and the use of such results to generate further execution improvements in the service provided to customers. Precision Railroading aims to increase velocity, improve reliability, lower costs, enhance asset utilization and, ultimately, help the Company to grow the top line. It has been a key contributor to CN’s earnings growth and improved return on invested capital. The success of the business model is dependent on commercial principles and a supportive regulatory environment, both of which are key to an effective rail transportation marketplace throughout North America.

Providing quality service, controlling costs and focusing on asset utilization

The basic driver of the Company’s business is demand for reliable, efficient, and cost effective transportation. As such, the Company’s focus is the pursuit of its long-term business plan, providing a high level of service to customers, operating safely and efficiently, and meeting short- and long-term financial commitments.

In 2010, the Company benefitted from a recovery in many markets reflecting a strengthening global economy, an increase in North American industrial production, a turnaround in automotive production and a modest improvement in housing and related segments, as well as from share gains in several markets. In 2011, the Company is expecting North American industrial production growth to slow to around four and one half percent, following the large gains in 2010 that were supported by government stimulus and inventory restocking. The Company is expecting moderate growth in automotive production and housing and related segments. While in the first half of 2011 CN experienced the effects of a weaker 2010/2011 Canadian grain crop that was partly offset by a higher carry-over stock, the 2011/2012 North American grain crop is expected to be in-line with the 5-year average.

To meet its business plan objectives, the Company’s first priority is to grow the business at low incremental cost. The Company’s strategy to pursue deeper customer engagement and service improvements is expected to continue to drive growth. Improvements are expected to come from several key thrusts, including “first mile-last mile” initiatives that improve customer service at origin and destination, and a supply chain perspective that emphasizes collaboration and better end-to-end service. In support of top-line growth for 2011, CN expects to take advantage of continued solid growth in overseas container traffic, metal products, commodities related to oil and gas development and wood pulp and lumber offshore. Other growth opportunities include Canadian metallurgical coal, U.S. thermal coal for export and share gains against truck in domestic intermodal.

To grow the business at low incremental cost and to operate efficiently and safely while maintaining a high level of customer service, the Company continues to invest in capital programs to maintain a safe and fluid railway and pursue strategic initiatives to improve its franchise, as well as undertake productivity initiatives to reduce costs and leverage its assets. Opportunities to improve productivity extend across all functions in the organization. Train productivity is being improved through the acquisition of locomotives that are more fuel-efficient than the ones they replace, which will also improve service reliability for customers and reduce greenhouse gas emissions. In addition, these locomotives are being equipped with distributed power capability, which allows the Company to run longer, more efficient trains, particularly in cold weather conditions, while improving train handling, reducing train separations and improving the overall safety of operations. These initiatives, combined with CN’s investments in longer sidings over the years, offer train-mile savings, allow for efficient long-train operations and reduce wear on rail and wheels. Yard throughput is being improved through SmartYard, an innovative use of real-time traffic information to sequence cars effectively and get them out on the line more quickly in the face of constantly changing conditions. In Engineering, the Company is continuously working to increase the productivity of its field forces, through better use of traffic information and the optimization of work scheduling, and as a result, better management of its engineering forces on the track. The Company also intends to continue focusing on the reduction of accidents and related costs, as well as costs for legal claims and health care.

CN’s capital expenditure programs support the Company’s commitment to its core principles and strategy and its ability to grow the business profitably. In 2011, CN plans to invest approximately $1.7 billion on capital programs, of which approximately $1.0 billion is targeted towards track infrastructure to continue operating a safe railway and improve the productivity and fluidity of the network; and includes the replacement of rail, ties, and other track materials, bridge improvements, as well as rail-line improvements for the Elgin, Joliet and Eastern Railway Company (EJ&E) property that was acquired in 2009. This amount also includes funds for strategic initiatives and additional enhancements to the track infrastructure in western and eastern Canada. CN’s equipment spending, targeted to reach approximately $200 million in 2011, is intended to improve the quality of the fleet to meet customer requirements, and includes the acquisition of 12 new high-horsepower locomotives. CN also expects to spend approximately $500 million on facilities to grow the business,

CANADIAN NATIONAL RAILWAY COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS (U.S. GAAP)

including transloads and distribution centers; on information technology to improve service and operating efficiency; and on other projects to increase productivity.

To meet short- and long-term financial commitments, the Company pursues a solid financial policy framework with the goal of maintaining a strong balance sheet, by monitoring its credit ratios, and preserving an investment-grade credit rating to be able to maintain access to public financing. The Company’s principal source of liquidity is cash generated from operations, which can be supplemented by its commercial paper program to meet short-term liquidity needs. The Company’s primary uses of funds are for working capital requirements, including income tax installments as they become due and pension contributions, contractual obligations, capital expenditures relating to track infrastructure and other, acquisitions, dividend payouts, and the repurchase of shares through share buyback programs, when applicable. The Company sets priorities on its uses of available funds based on short-term operational requirements, expenditures to continue to operate a safe railway and pursue strategic initiatives, while also considering its long-term contractual obligations and returning value to its shareholders.

Delivering responsibly

The Company’s commitment to safety is reflected in the wide range of initiatives that CN is pursuing and in the size of its capital programs. Comprehensive plans are in place to address safety, security, employee well-being and environmental management. CN's Safety Management Plan is the framework for putting safety at the center of its day-to-day operations. This proactive plan is designed to minimize risk and drive continuous improvement in the reduction of injuries and accidents, and engages employees at all levels of the organization.

The Company has made sustainability an integral part of its business strategy by aligning its sustainability agenda with its business model. As part of the Company’s comprehensive sustainability action plan and to comply with the CN Environmental Policy, the Company engages in a number of initiatives, including the use of fuel-efficient locomotives that reduce greenhouse gas emissions; increasing operational and building efficiencies; investing in virtualization technologies, energy-efficient data centers and recycling programs for information technology systems; reducing, recycling and reusing waste at its facilities and on its network; engaging in modal shift agreements that favor low emission transport services; and participating in the Carbon Disclosure Project to gain a more comprehensive view of its carbon footprint.

The Company's Environmental Policy aims to minimize the impact of the Company's activities on the environment. The Company strives to contribute to the protection of the environment by integrating environmental priorities into the Company's overall business plan and through the specific monitoring and measurement of such priorities against historical performance and in some cases, specific targets. All employees must demonstrate commitment to this Policy at all times and it is the Environment, Safety and Security Committee of the Board of Directors who has the responsibility of overseeing the Policy. The Committee is composed of CN Directors and its responsibilities, powers and operation are further described in the charter of such committee, which is included in the Company’s Corporate Governance Manual available on CN’s website. Certain risk mitigation strategies, such as periodic audits, employee training programs and emergency plans and procedures, are in place to minimize the environmental risks to the Company. The Company’s Environmental Policy, its Carbon Disclosure Project report, and its Corporate Citizenship Report “Delivering Responsibly” are available on CN’s website.

Developing people

CN’s ability to develop the best railroaders in the industry has been a key contributor to the Company’s success. CN recognizes that without the right people – no matter how good a service plan or business model a company may have – it will not be able to fully execute. The Company is focused on recruiting the right people, developing employees with the right skills, motivating them to do the right thing, and training them to be the future leaders of the Company. The Company continues to address changes in employee demographics that will span multiple years. The Human Resources and Compensation Committee of the Board of Directors reviews the progress made in developing current and future leaders through the Company’s leadership development programs. These programs and initiatives provide a solid platform for the assessment and development of the Company’s talent pool. The leadership development programs are tightly integrated with the Company’s business strategy.

The forward-looking statements provided in the above section and in other parts of this MD&A are subject to risks and uncertainties that could cause actual results or performance to differ materially from those expressed or implied in such statements and are based on certain factors and assumptions which the Company considers reasonable, about events, developments, prospects and opportunities that may not materialize or that may be offset entirely or partially by other events and developments. See the section of this MD&A entitled Forward-looking statements for assumptions and risk factors affecting such forward-looking statements.

CANADIAN NATIONAL RAILWAY COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS (U.S. GAAP)

Impact of foreign currency translation on reported results

Although the Company conducts its business and reports its earnings in Canadian dollars, a large portion of revenues and expenses is denominated in US dollars. As such, the Company’s results are affected by exchange-rate fluctuations.

Management’s discussion and analysis includes reference to “constant currency,” which allows the financial results to be viewed without the impact of fluctuations in foreign exchange rates, thereby facilitating period-to-period comparisons in the analysis of trends in business performance. Financial results at constant currency are obtained by translating the current period results denominated in US dollars at the foreign exchange rate of the comparable period of the prior year. The average foreign exchange rates for the three and six months ended June 30, 2011 were 0.97 and 0.98, respectively, and 1.03 for both the three and six months ended June 30, 2010. Measures at constant currency are considered non-GAAP measures and do not have any standardized meaning prescribed by GAAP and may, therefore, not be comparable to similar measures presented by other companies.

Forward-looking statements

Certain information included in this MD&A are “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and under Canadian securities laws. CN cautions that, by their nature, forward-looking statements involve risks, uncertainties and assumptions. The Company cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. These forward-looking statements include, but are not limited to, statements with respect to growth opportunities; statements that the Company will benefit from positive North American and global economic conditions; the anticipation that cash flow from operations and from various sources of financing will be sufficient to meet debt repayments and future obligations in the foreseeable future; statements regarding future payments, including income taxes and pension contributions; as well as the projected capital spending program. Forward-looking statements could further be identified by the use of terminology such as the Company “believes,” “expects,” “anticipates” or other similar words.

Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company or the rail industry to be materially different from the outlook or any future results or performance implied by such statements. Key assumptions used in determining forward-looking information are set forth below.

Forward-looking statements	Key assumptions or expectations
Statements relating to general economic and business conditions, including those referring to growth opportunities	·	Positive North American and global economic conditions
	·	Long-term growth opportunities being less affected by current economic conditions
	·	Improving carload traffic
Statements relating to the Company’s ability to meet debt repayments and future obligations in the foreseeable future, including income tax payments and capital spending	·	Positive North American and global economic conditions
	·	Adequate credit ratios
	·	Investment grade credit rating
	·	Access to capital markets
	·	Adequate cash generated from operations
Statements relating to pension contributions	·	Reasonable level of funding as determined by actuarial valuations
	·	Adequate return on investment on pension plan assets
	·	Adequate cash generated from operations

Important risk factors that could affect the forward-looking statements include, but are not limited to, the effects of general economic and business conditions; 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. See the section of this MD&A entitled Business risks for detailed information on major risk factors.

CANADIAN NATIONAL RAILWAY COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS (U.S. GAAP)

Financial and statistical highlights

	Three months ended June 30				Six months ended June 30
$ in millions, except per share data, or unless otherwise indicated		2011		2010		2011		2010
	(Unaudited)
Financial results
Revenues	$	2,260	$	2,093	$	4,344	$	4,058
Operating income	$	874	$	813	$	1,519	$	1,416
Net income (1) (2)	$	538	$	534	$	1,206	$	1,045

Operating ratio		61.3%		61.2%		65.0%		65.1%

Basic earnings per share (1) (2)	$	1.19	$	1.14	$	2.64	$	2.22
Diluted earnings per share (1) (2)	$	1.18	$	1.13	$	2.63	$	2.21

Dividend declared per share	$	0.325	$	0.270	$	0.650	$	0.540

Financial position
Total assets	$	25,470	$	26,127	$	25,470	$	26,127
Total long-term financial liabilities and other	$	12,017	$	12,899	$	12,017	$	12,899
Statistical operating data and productivity measures (3)
Employees (average for the period)		23,060		22,019		22,682		21,750
Gross ton miles (GTM) per average number of employees (thousands)		3,886		3,866		7,772		7,776
GTMs per US gallon of fuel consumed		982		973		957		947