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 October, 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 October 25, 2011 entitled, "CN's Q3-2011 net income rises to C$659 million, or C$1.46 per diluted share, as the Company posts record carloadings and revenues” “Excluding gain on sale, adjusted Q3-2011 net income increased 12 per cent to C$621 million, with adjusted diluted EPS up 16 per cent to C$1.38”

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’s Q3-2011 net income rises to C$659 million,

or C$1.46 per diluted share, as the Company posts record carloadings and revenues

Excluding gain on sale, adjusted Q3-2011 net income increased

12 per cent to C$621 million, with adjusted diluted EPS up 16 per cent

to C$1.38 (1)

MONTREAL, Oct. 25, 2011 — CN (TSX: CNR) (NYSE: CNI) today reported its financial and operating results for the third quarter and nine-month period ended Sept. 30, 2011.

Third-quarter 2011 highlights

Net income increased 19 per cent from the year-earlier quarter to C$659 million, with diluted earnings per share (EPS) rising 23 per cent to C$1.46. The results included an after-tax gain of C$38 million, or C$0.08 per diluted share, on the sale of substantially all of the assets of IC RailMarine Terminal Company.

·	Excluding the gain on the sale, adjusted net income increased 12 per cent over the year-earlier quarter to C$621 million, with adjusted diluted EPS rising 16 per cent to C$1.38. (1)

·	Revenues for third-quarter 2011 rose nine per cent to C$2,307 million, while carloadings grew by four per cent and revenue ton-miles increased six per cent.

·	Operating income increased 12 per cent to C$938 million.

·	CN’s operating ratio was 59.3 per cent, a 1.4-point improvement over the 60.7 per cent operating ratio for third-quarter 2010.

·	Free cash flow for the first nine months of 2011 was C$1,328 million, compared with C$938 million for the same period of 2010. (1)

·	CN to launch a new share repurchase program on Oct. 28, 2011, to buy back up to 17 million common shares.

Claude Mongeau, president and chief executive officer, said: “CN posted impressive third-quarter results, driven by record carloadings and revenues, strong operational execution, and rigorous cost control. The four per cent rise in carloadings and nine per cent increase in revenues outpaced general economic activity during the quarter, reflecting CN’s improved service and market positioning.

“All commodity groups posted revenue gains in the quarter, benefiting from modest growth in overall economic activity, as well as from CN’s continued focus on supply chain collaboration and service innovation with its customers and transportation partners.”

CANADIAN NATIONAL RAILWAY COMPANY

PRESS RELEASE

New CN share repurchase program

Mongeau said: “With a strong balance sheet and solid prospects, we are pleased to announce that our Board of Directors has approved a new share repurchase program to buy back up to 17 million CN common shares. CN believes this is a timely, responsible use of cash to deliver increased shareholder value.”

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 third-quarter 2011 net income would have been higher by C$22 million, or C$0.05 per diluted share. (1)

Third-quarter 2011 revenues, traffic volumes and expenses

The nine per cent rise in third-quarter revenues was mainly attributable to higher freight volumes, due in part to modest improvements in North American and global economic conditions and in the Company’s performance above market conditions in various segments; 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 (21 per cent), intermodal (12 per cent), automotive (nine per cent), forest products (seven per cent), grain and fertilizers (six per cent), petroleum and chemicals (six per cent), and coal (one per cent). Other revenues increased by six per cent.

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased six 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 three per cent over the third 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 and an increase in the Company’s average length of haul.

Operating expenses increased by six per cent to C$1,369 million, mainly owing to higher fuel costs, purchased services and material expense as well as depreciation and amortization expense. These factors were partially offset by the positive translation impact of the stronger Canadian dollar on U.S.-dollar-denominated expenses, lower casualty and other expense, as well as a decline in labor and fringe benefits expense in part due to lower incentive compensation.

2011 financial outlook (2)

CN reaffirms the financial guidance it issued on April 26, 2011, despite a weaker economic environment than previously anticipated. 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 an expected additional pension contribution of approximately C$350 million.

CANADIAN NATIONAL RAILWAY COMPANY

PRESS RELEASE

Mongeau said: “I’m pleased with our solid third quarter results and feel confident about our ability to finish the year on a positive note despite growing concerns about the economy.”

(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, detailing 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 3.5 per cent in 2011. CN also expects U.S. housing starts to be about 600,000 units and U.S. motor vehicles sales to be approximately 12.5 million units for the year. CN anticipates the Canadian 2011/2012 grain crop will be in-line with 2010/2011 crop, and that the U.S. 2011/2012 grain crop will be in line with the five-year average. With these assumptions, CN is targeting 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 parity, and that the price of crude oil (West Texas Intermediate) for the year will be in the range of US$90 to US$100 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				Nine months ended
		September 30				September 30

			2011		2010		2011		2010

Revenues		$	2,307	$	2,122	$	6,651	$	6,180

Operating expenses
	Labor and fringe benefits		396		437		1,301		1,321
	Purchased services and material		271		246		825		754
	Fuel		350		249		1,030		757
	Depreciation and amortization		218		204		653		614
	Equipment rents		60		61		165		181
	Casualty and other		74		91		220		303
Total operating expenses			1,369		1,288		4,194		3,930

Operating income			938		834		2,457		2,250

Interest expense			(85)		(90)		(256)		(273)
Other income (Note 2)			70		24		380		200
Income before income taxes			923		768		2,581		2,177

Income tax expense (Note 6)			(264)		(212)		(716)		(576)
Net income		$	659	$	556	$	1,865	$	1,601

Earnings per share (Note 9)
	Basic	$	1.47	$	1.20	$	4.11	$	3.42
	Diluted	$	1.46	$	1.19	$	4.08	$	3.39

Weighted-average number of shares
	Basic		448.3		464.6		453.4		468.1
	Diluted		451.4		468.4		456.9		471.9
See accompanying notes to unaudited consolidated financial statements.

CANADIAN NATIONAL RAILWAY COMPANY

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

(In millions)


	September 30		December 31		September 30
		2011		2010		2010

Assets

Current assets:
Cash and cash equivalents (Note 3)	$	192	$	490	$	548
Accounts receivable		801		775		810
Material and supplies		272		210		271
Deferred income taxes		52		53		55
Other (Note 3)		551		62		127
Total current assets		1,868		1,590		1,811

Properties		23,800		22,917		22,646
Intangible and other assets		899		699		1,571

Total assets	$	26,567	$	25,206	$	26,028

Liabilities and shareholders' equity

Current liabilities:
Accounts payable and other	$	1,565	$	1,366	$	1,193
Current portion of long-term debt and short-term debt (Note 3)		525		540		109
Total current liabilities		2,090		1,906		1,302

Deferred income taxes		5,613		5,152		5,442
Other liabilities and deferred credits		1,330		1,333		1,310
Long-term debt		5,878		5,531		6,117

Shareholders' equity:
Common shares		4,149		4,252		4,270
Accumulated other comprehensive loss		(1,647)		(1,709)		(973)
Retained earnings		9,154		8,741		8,560

Total shareholders' equity		11,656		11,284		11,857

Total liabilities and shareholders' equity	$	26,567	$	25,206	$	26,028
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				Nine months ended
	September 30				September 30
		2011		2010		2011		2010

Common shares (1)
Balance, beginning of period	$	4,211	$	4,275	$	4,252	$	4,266
Stock options exercised and other		(6)		30		50		109
Share repurchase programs (Note 3)		(56)		(35)		(153)		(105)
Balance, end of period	$	4,149	$	4,270	$	4,149	$	4,270

Accumulated other comprehensive loss
Balance, beginning of period	$	(1,741)	$	(929)	$	(1,709)	$	(948)
Other comprehensive income (loss):
Foreign exchange gain (loss) on:
Translation of the net investment in foreign operations		495		(208)		315		(129)
Translation of US dollar-denominated debt
designated as a hedge of the net investment in U.S. subsidiaries		(471)		202		(302)		122
Pension and other postretirement benefit plans (Note 5):
Amortization of prior service cost included in net
periodic benefit cost		1		1		2		2
Amortization of net actuarial loss included in net
periodic benefit cost		2		1		6		2
Derivative instruments		-		-		(1)		(1)
Other comprehensive income (loss) before income taxes		27		(4)		20		(4)
Income tax recovery (expense)		67		(40)		42		(21)
Other comprehensive income (loss)		94		(44)		62		(25)
Balance, end of period	$	(1,647)	$	(973)	$	(1,647)	$	(973)

Retained earnings
Balance, beginning of period	$	9,001	$	8,331	$	8,741	$	7,915
Net income		659		556		1,865		1,601
Share repurchase programs (Note 3)		(361)		(202)		(1,011)		(578)
Dividends		(145)		(125)		(441)		(378)
Balance, end of period	$	9,154	$	8,560	$	9,154	$	8,560
See accompanying notes to unaudited consolidated financial statements.

(1)

During the three and nine months ended September 30, 2011, the Company issued 0.2 million and 1.9 million common shares, respectively, as a result of stock options exercised and repurchased 6.0 million and 16.5 million common shares, respectively, under its current share repurchase program. At September 30, 2011, the Company had 444.8 million common shares outstanding.

CANADIAN NATIONAL RAILWAY COMPANY

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

(In millions)


	Three months ended September 30				Nine months ended September 30
		2011		2010		2011		2010

Operating activities
Net income	$	659	$	556	$	1,865	$	1,601
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		218		204		653		614
Deferred income taxes		104		233		327		344
Gain on disposal of property (Note 2)		(60)		-		(348)		(152)
Changes in operating assets and liabilities:
Accounts receivable		55		(35)		(17)		(22)
Material and supplies		(27)		(18)		(59)		(102)
Accounts payable and other		60		(187)		102		12
Other current assets		16		13		9		25
Other, net		(38)		(278)		(147)		(376)
Net cash provided by operating activities		987		488		2,385		1,944

Investing activities
Property additions		(415)		(389)		(1,012)		(824)
Disposal of property (Note 2)		70		-		369		167
Change in restricted cash and cash equivalents (Note 3)		(22)		-		(489)		-
Other, net		5		3		22		21
Net cash used in investing activities		(362)		(386)		(1,110)		(636)

Financing activities
Issuance of debt (Note 3)		132		-		196		-
Repayment of debt		(186)		(118)		(225)		(158)
Issuance of common shares due to exercise of stock
options and related excess tax benefits realized		5		27		56		101
Repurchase of common shares (Note 3)		(417)		(237)		(1,164)		(683)
Dividends paid		(145)		(125)		(441)		(378)
Net cash used in financing activities		(611)		(453)		(1,578)		(1,118)
Effect of foreign exchange fluctuations on US
dollar-denominated cash and cash equivalents		3		3		5		6
Net increase (decrease) in cash and cash equivalents		17		(348)		(298)		196
Cash and cash equivalents, beginning of period		175		896		490		352
Cash and cash equivalents, end of period	$	192	$	548	$	192	$	548

Supplemental cash flow information
Net cash receipts from customers and other	$	2,326	$	2,053	$	6,659	$	6,203
Net cash payments for:
Employee services, suppliers and other expenses		(1,124)		(1,043)		(3,551)		(3,347)
Interest		(87)		(92)		(249)		(264)
Personal injury and other claims		(15)		(16)		(48)		(47)
Pensions (Note 5)		(5)		(305)		(103)		(415)
Income taxes		(108)		(109)		(323)		(186)
Net cash provided by operating activities	$	987	$	488	$	2,385	$	1,944
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 September 30, 2011, December 31, 2010, and September 30, 2010, and its results of operations, changes in shareholders’ equity and cash flows for the three and nine months ended September 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 August 2011, the Company sold substantially all of the assets of IC RailMarine Terminal Company (ICRMT), an indirect subsidiary of the Company, to Raven Energy, LLC, an affiliate of Foresight Energy, LLC (Foresight) and the Cline Group (Cline), for cash proceeds of $70 million (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 will 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 resulted in a gain on disposal of $60 million ($38 million after-tax) that was recorded in Other income.

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 was placed in escrow at the time of disposal and 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 the option to extend the term by an additional 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 September 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 September 30, 2011, the Company had borrowings of $23 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 September 30, 2011, from a total committed amount of $520 million by the various banks, the Company had letters of credit drawn of $489 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 September 30, 2011, cash and cash equivalents of $489 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 share repurchase program which allowed 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 prices as may be permitted by the Toronto Stock Exchange. This share repurchase program was completed by September 30, 2011.

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 September 30				Nine months ended September 30
In millions, except per share data	2011		2010		2011		2010
Number of common shares repurchased (1)		6.0		3.8		16.5		11.5
Weighted-average price per share (2)	$	69.48	$	62.26	$	70.56	$	59.35
Amount of repurchase	$	417	$	237	$	1,164	$	683
(1) Includes common shares purchased in the first quarter of 2011 and in the second and third quarters of 2010 pursuant to private agreements between the Company and arm's-length third-party sellers.
(2) Includes brokerage fees.

See Note 10 – Subsequent events for additional information on the Company’s new share repurchase program approved on October 25, 2011.

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 nine months ended September 30, 2011 and 2010. For the three months ended September 30, 2011, the Company recorded a stock-based compensation benefit and the related tax expense recognized in income due to a decrease in the fair value for the Company’s cash settled awards resulting from the lower stock price at September 30, 2011.

		Three months ended September 30				Nine months ended September 30
In millions		2011		2010		2011		2010

Cash settled awards
Restricted share unit plan	$	(8)	$	22	$	39	$	61
Voluntary Incentive Deferral Plan (VIDP)		(13)		9		5		15
		(21)		31		44		76
Stock option awards		2		3		7		8
Total stock-based compensation expense (benefit)	$	(19)	$	34	$	51	$	84

Tax benefit (expense) recognized in income	$	(6)	$	8	$	12	$	21

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 September 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 September 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
Nine months ended September 30, 2011		$	6	$	12	$	21	$	-	$	5	$	44
Nine months ended September 30, 2010			N/A	$	9	$	29	$	23	$	15	$	76

Liability outstanding
September 30, 2011		$	6	$	30	$	68	$	-	$	105	$	209
December 31, 2010			N/A	$	17	$	46	$	37	$	99	$	199

Fair value per unit
September 30, 2011 ($)		$	38.83	$	57.35	$	69.71		N/A	$	70.03		N/A

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

Nonvested awards at September 30, 2011
Unrecognized compensation cost		$	11	$	13	$	3		N/A	$	1	$	28
Remaining recognition period (years)			2.3		1.3		0.3		N/A		N/A (3)		N/A

Assumptions (4)
Stock price ($)		$	70.03	$	70.03	$	70.03		N/A	$	70.03		N/A
Expected stock price volatility (5)			25%		18%		17%		N/A		N/A		N/A
Expected term (years) (6)			2.3		1.3		0.3		N/A		N/A		N/A
Risk-free interest rate (7)			0.96%		0.85%		0.80%		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 September 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 September 30, 2011, 11.0 million common shares remained authorized for future issuances under this plan. The total number of options outstanding at September 30, 2011, including conventional and performance-accelerated options, was 6.0 million and 1.6 million, respectively. As at September 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 September 30, 2011 at the Company’s closing stock price of $70.03.

		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	$	68.94
Exercised		(1.9)	$	26.42
Outstanding at September 30, 2011 (1)		7.6	$	40.28	4.7	$	227
Exercisable at September 30, 2011 (1)		5.6	$	35.18	3.5	$	195
(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)
Nine months ended September 30, 2011		$	3	$	1	$	2	$	1	$	-	$	7
Nine months ended September 30, 2010			N/A	$	4	$	2	$	1	$	1	$	8

Fair value per unit
At grant date ($)		$	15.66	$	13.09	$	12.60	$	12.44	$	13.37		N/A

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

Nonvested awards at September 30, 2011
Unrecognized compensation cost		$	6	$	4	$	2	$	-	$	-	$	12
Remaining recognition period (years)			3.3		2.3		1.3		0.3		-		N/A

Assumptions
Grant price ($)		$	68.94	$	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 nine months ended September 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				Nine months ended
		September 30				September 30
In millions		2011		2010		2011		2010
Service cost	$	31	$	27	$	93	$	80
Interest cost		196		209		589		627
Expected return on plan assets		(251)		(253)		(753)		(757)
Amortization of prior service cost		1		-		1		-
Recognized net actuarial loss		2		1		6		3
Net periodic benefit ( income)	$	(21)	$	(16)	$	(64)	$	(47)

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

		Three months ended				Nine months ended
		September 30				September 30
In millions		2011		2010		2011		2010
Service cost	$	1	$	1	$	3	$	3
Interest cost		4		3		11		11
Amortization of prior service cost		-		1		1		2
Recognized net actuarial gain		-		-		-		(1)
Net periodic benefit cost	$	5	$	5	$	15	$	15

Pension contributions made in the first nine months of 2011 and 2010 of $103 million and $415 million, respectively, mainly represent contributions to the Company’s main pension plan, CN Pension Plan. These contributions are for current service costs as determined under its current actuarial valuations, in addition to voluntary contributions of $300 million, mainly to the CN Pension Plan, made in 2010. The Company continuously monitors the various economic elements that affect the level of contribution it considers necessary to maintain the financial health of its various pension plans. In 2011, the Company expects to make total contributions of approximately $470 million for all its pension plans, including its defined contribution plans. Of the $470 million, approximately $350 million represents additional contributions mainly to strengthen the financial position of the CN Pension Plan, and the remainder mainly represents current service costs as determined under its current actuarial valuations. 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 $264 million for the three months ended September 30, 2011 and $716 million for the nine months ended September 30, 2011, compared to $212 million and $576 million, respectively, for the same periods in 2010. 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, was recorded in the second quarter of 2011.

Note 7 - Major commitments and contingencies

A. Commitments

As at September 30, 2011, the Company had commitments to acquire railroad ties, rail, freight cars, locomotives, and other equipment and services, as well as for outstanding information technology service contracts and licenses, at an aggregate cost of $721 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 $150 million for railroad

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

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, remaining implementation costs associated with the U.S. federal government legislative requirement to implement positive train control (PTC) by 2015 are estimated to be approximately $210 million (US$200 million). The Company also has agreements with fuel suppliers to purchase approximately 74% of its estimated remaining 2011 volume, 50% 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 September 30, 2011, the Company had aggregate reserves for personal injury and other claims of $353 million, of which $85 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 September 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.

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

Known existing environmental concerns

The Company has identified approximately 310 sites at which it is or may be liable for remediation costs, in some cases along with other potentially responsible parties, associated with alleged contamination and is subject to environmental clean-up and enforcement actions, including those imposed by the United States Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also known as the Superfund law, or analogous state laws. CERCLA and similar state laws, in addition to other similar Canadian and U.S. laws, generally impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site, as well as those whose waste is disposed of at the site, without regard to fault or the legality of the original conduct. The Company has been notified that it is a potentially responsible party for study and clean-up costs at approximately 10 sites governed by the Superfund law (and analogous state laws) for which investigation and remediation payments are or will be made or are yet to be determined and, in many instances, is one of several potentially responsible parties.

The ultimate cost of addressing these known contaminated sites cannot be definitely established given that the estimated environmental liability for any given site may vary depending on the nature and extent of the contamination; the 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 September 30, 2011, the Company had aggregate accruals for environmental costs of $158 million, of which $30 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 September 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; and

(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.

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

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

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.

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 September 30, 2011, the maximum exposure in respect of these guarantees was $152 million. There are no recourse provisions to recover any amounts from third parties.

(ii) Other guarantees

As at September 30, 2011, the Company, including certain of its subsidiaries, has granted $489 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 September 30, 2011, the maximum potential liability under these guarantee instruments was $499 million, of which $440 million related to workers’ compensation and other employee benefit liabilities and $59 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 September 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.

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

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

During the nine months ended September 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 September 30, 2011 and December 31, 2010 for which the carrying values on the Consolidated Balance Sheet are different from their fair values:

In millions			September 30, 2011				December 31, 2010
			Carrying		Fair			Carrying		Fair
			amount		value			amount		value
Financial assets
	Investments	$	30	$	127	$		25	$	114
Financial liabilities
	Debt (including current portion of long-term debt and short-term debt)	$	6,403	$	7,817	$		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				Nine months ended
	September 30				September 30
In millions, except per share data		2011		2010		2011		2010

Net income	$	659	$	556	$	1,865	$	1,601

Weighted-average shares outstanding		448.3		464.6		453.4		468.1
Effect of stock options		3.1		3.8		3.5		3.8
Weighted-average diluted shares outstanding		451.4		468.4		456.9		471.9

Basic earnings per share	$	1.47	$	1.20	$	4.11	$	3.42
Diluted earnings per share	$	1.46	$	1.19	$	4.08	$	3.39

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 nine months ended September 30, 2011, and nil for both the three and nine months ended September 30, 2010.

Note 10 – Subsequent events

On October 12, 2011, the Company, through a wholly-owned subsidiary, repurchased 76% of the 6.38% Notes due on October 15, 2011 with a carrying value of US$303 million pursuant to a tender offer for a total cost of US$304 million, including consent payments. The remaining 24% of the 6.38% Notes with a carrying value of US$97 million were paid upon maturity.

On October 25, 2011, the Board of Directors of the Company approved a new share repurchase program which allows for the repurchase of up to 17.0 million common shares between October 28, 2011 and October 27, 2012 pursuant to a normal course issuer bid at prevailing market prices or such other prices as may be permitted by the Toronto Stock Exchange.

Note 11 – 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		Nine months ended
	September 30		September 30
	2011	2010	2011	2010

Statistical operating data

Rail freight revenues ($ millions)	2,059	1,887	5,979	5,521
Gross ton miles (GTM) (millions)	89,517	84,287	265,799	253,406
Revenue ton miles (RTM) (millions)	46,761	43,990	139,597	132,646
Carloads (thousands)	1,261	1,216	3,641	3,506
Route miles (includes Canada and the U.S.) (1)	20,500	20,800	20,500	20,800
Employees (end of period)	23,353	22,163	23,353	22,163
Employees (average for the period)	23,264	22,141	22,876	21,880

Productivity

Operating ratio (%)	59.3	60.7	63.1	63.6
Rail freight revenue per RTM (cents)	4.40	4.29	4.28	4.16
Rail freight revenue per carload ($)	1,633	1,552	1,642	1,575
Operating expenses per GTM (cents)	1.53	1.53	1.58	1.55
Labor and fringe benefits expense per GTM (cents)	0.44	0.52	0.49	0.52
GTMs per average number of employees (thousands)	3,848	3,807	11,619	11,582
Diesel fuel consumed (US gallons in millions)	89.2	85.9	273.4	264.5
Average fuel price ($/US gallon)	3.37	2.56	3.33	2.57
GTMs per US gallon of fuel consumed	1,004	981	972	958

Safety indicators

Injury frequency rate per 200,000 person hours (2)	1.73	1.85	1.63	1.71
Accident rate per million train miles (2)	2.33	2.35	2.35	2.13

Financial ratio

Debt-to-total capitalization ratio (% at end of period)	35.5	34.4	35.5	34.4
(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 September 30				Nine months ended September 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	361	341	6%	10%	1,043	991	5%	9%
Metals and minerals	274	227	21%	26%	728	647	13%	17%
Forest products	325	303	7%	12%	941	890	6%	10%
Coal	166	164	1%	4%	469	451	4%	7%
Grain and fertilizers	336	318	6%	9%	1,110	1,017	9%	12%
Intermodal	480	427	12%	14%	1,326	1,176	13%	14%
Automotive	117	107	9%	15%	362	349	4%	9%
Total rail freight revenues	2,059	1,887	9%	13%	5,979	5,521	8%	12%
Other revenues	248	235	6%	9%	672	659	2%	5%
Total revenues	2,307	2,122	9%	12%	6,651	6,180	8%	11%
Revenue ton miles (millions)
Petroleum and chemicals	8,354	7,696	9%	9%	24,430	23,240	5%	5%
Metals and minerals	5,212	4,301	21%	21%	13,780	12,289	12%	12%
Forest products	7,558	7,245	4%	4%	21,991	21,881	1%	1%
Coal	5,346	5,381	(1%)	(1%)	15,295	14,648	4%	4%
Grain and fertilizers	9,452	9,288	2%	2%	33,568	31,849	5%	5%
Intermodal	10,239	9,497	8%	8%	28,613	26,792	7%	7%
Automotive	600	582	3%	3%	1,920	1,947	(1%)	(1%)
	46,761	43,990	6%	6%	139,597	132,646	5%	5%
Rail freight revenue / RTM (cents)
Total rail freight revenue per RTM	4.40	4.29	3%	6%	4.28	4.16	3%	6%
Commodity groups:
Petroleum and chemicals	4.32	4.43	(2%)	2%	4.27	4.26	-	4%
Metals and minerals	5.26	5.28	-	4%	5.28	5.26	-	5%
Forest products	4.30	4.18	3%	7%	4.28	4.07	5%	9%
Coal	3.11	3.05	2%	5%	3.07	3.08	-	3%
Grain and fertilizers	3.55	3.42	4%	7%	3.31	3.19	4%	7%
Intermodal	4.69	4.50	4%	6%	4.63	4.39	5%	7%
Automotive	19.50	18.38	6%	12%	18.85	17.93	5%	10%
Carloads (thousands)
Petroleum and chemicals	143	141	1%	1%	421	413	2%	2%
Metals and minerals	272	257	6%	6%	752	746	1%	1%
Forest products	113	107	6%	6%	334	317	5%	5%
Coal	122	134	(9%)	(9%)	354	376	(6%)	(6%)
Grain and fertilizers	135	133	2%	2%	440	415	6%	6%
Intermodal	424	396	7%	7%	1,176	1,086	8%	8%
Automotive	52	48	8%	8%	164	153	7%	7%
	1,261	1,216	4%	4%	3,641	3,506	4%	4%
Rail freight revenue / carload (dollars)
Total rail freight revenue per carload	1,633	1,552	5%	9%	1,642	1,575	4%	8%
Commodity groups:
Petroleum and chemicals	2,524	2,418	4%	9%	2,477	2,400	3%	7%
Metals and minerals	1,007	883	14%	19%	968	867	12%	16%
Forest products	2,876	2,832	2%	6%	2,817	2,808	-	4%
Coal	1,361	1,224	11%	15%	1,325	1,199	11%	14%
Grain and fertilizers	2,489	2,391	4%	8%	2,523	2,451	3%	6%
Intermodal	1,132	1,078	5%	7%	1,128	1,083	4%	5%
Automotive	2,250	2,229	1%	6%	2,207	2,281	(3%)	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 nine months ended September 30, 2011, the Company reported adjusted net income of $621 million, or $1.38 per diluted share and $1,613 million, or $3.53 per diluted share, respectively. The adjusted figures for the three and nine months ended September 30, 2011 exclude a gain on disposal of substantially all of the assets of ICRMT of $60 million, or $38 million after-tax ($0.08 per diluted share). The adjusted figures for the nine months ended September 30, 2011 also 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, and 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 nine months ended September 30, 2010, the Company reported adjusted net income of $556 million, or $1.19 per diluted share and $1,470 million, or $3.11 per diluted share, respectively. The adjusted figures for the nine months ended September 30, 2010 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 nine months ended September 30, 2011 and 2010, to the adjusted performance measures presented herein.

CANADIAN NATIONAL RAILWAY COMPANY

NON-GAAP MEASURES - unaudited

		Three months ended						Nine months ended
		September 30, 2011						September 30, 2011

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


Revenues	$	2,307	$	-	$	2,307	$	6,651	$	-	$	6,651
Operating expenses		1,369		-		1,369		4,194		-		4,194
Operating income		938		-		938		2,457		-		2,457
Interest expense		(85)		-		(85)		(256)		-		(256)
Other income		70		(60)		10		380		(348)		32
Income before income taxes		923		(60)		863		2,581		(348)		2,233
Income tax expense		(264)		22		(242)		(716)		96		(620)
Net income	$	659	$	(38)	$	621	$	1,865	$	(252)	$	1,613
Operating ratio		59.3%				59.3%		63.1%				63.1%
Basic earnings per share	$	1.47	$	(0.08)	$	1.39	$	4.11	$	(0.55)	$	3.56
Diluted earnings per share	$	1.46	$	(0.08)	$	1.38	$	4.08	$	(0.55)	$	3.53


		Three months ended						Nine months ended
		September 30, 2010						September 30, 2010

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


Revenues	$	2,122	$	-	$	2,122	$	6,180	$	-	$	6,180
Operating expenses		1,288		-		1,288		3,930		-		3,930
Operating income		834		-		834		2,250		-		2,250
Interest expense		(90)		-		(90)		(273)		-		(273)
Other income		24		-		24		200		(152)		48
Income before income taxes		768		-		768		2,177		(152)		2,025
Income tax expense		(212)		-		(212)		(576)		21		(555)
Net income	$	556	$	-	$	556	$	1,601	$	(131)	$	1,470
Operating ratio		60.7%				60.7%		63.6%				63.6%
Basic earnings per share	$	1.20	$	-	$	1.20	$	3.42	$	(0.28)	$	3.14
Diluted earnings per share	$	1.19	$	-	$	1.19	$	3.39	$	(0.28)	$	3.11

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 rate was $0.98 per US$1.00 for both the three and nine months ended September 30, 2011, and $1.04 per US$1.00 for both the three and nine months ended September 30, 2010.

CANADIAN NATIONAL RAILWAY COMPANY

NON-GAAP MEASURES - unaudited

On a constant currency basis, the Company’s 2011 third quarter and first nine-month net income would have been higher by $22 million, or $0.05 per diluted share and $45 million, or $0.10 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		Nine months ended
In millions		September 30, 2011		September 30, 2011

Net income, as reported		$	659	$	1,865
Add back:
	Negative impact due to the strengthening Canadian dollar included in net income		18		41
Add:
	Increase due to the strengthening Canadian dollar on additional year-over-year US$ net income		4		4
Impact of foreign exchange using constant currency rates			22		45
Net income, on a constant currency basis		$	681	$	1,910

Free cash flow

The Company generated $505 million and $1,328 million of free cash flow for the three and nine months ended September 30, 2011, respectively, compared to utilized free cash flow of $20 million and generated free cash flow of $938 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				Nine months ended
	September 30				September 30
In millions		2011		2010		2011		2010

Net cash provided by operating activities	$	987	$	488	$	2,385	$	1,944
Net cash used in investing activities		(362)		(386)		(1,110)		(636)
Net cash provided before financing activities		625		102		1,275		1,308

Adjustments:
Change in restricted cash and cash equivalents		22		-		489		-
Dividends paid		(145)		(125)		(441)		(378)
Change in accounts receivable securitization		-		-		-		2
Effect of foreign exchange fluctuations on US dollar-denominated
cash and cash equivalents		3		3		5		6
Free cash flow	$	505	$	(20)	$	1,328	$	938

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 nine months ended September 30, 2011, 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. For the nine months ended September 30, 2011, no individual commodity group accounted for more than 20% 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 approved an increase of 20% to the quarterly dividend to common shareholders, from $0.270 to $0.325, as well as share repurchase programs funded mainly from cash generated from operations. The share repurchase program, which was completed by September 30, 2011, allowed for the repurchase of up to 16.5 million common shares to the end of December 2011. On October 25, 2011, the Board of Directors of the

CANADIAN NATIONAL RAILWAY COMPANY

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

Company approved a new share repurchase program which allows for the repurchase of up to 17.0 million common shares between October 28, 2011 and October 27, 2012. Share repurchases are made pursuant to a normal course issuer bid at prevailing market prices or such other prices as may be permitted by the Toronto Stock Exchange.

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 benefited 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 the Company’s performance above market conditions in various segments. In 2011, the Company expects growth in North American industrial production to slow to around three and one half percent, following the large gains in 2010 that were supported by government stimulus and inventory restocking. The Company expects moderate growth in automotive production and expects U.S. housing starts to be relatively flat. 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 Canadian grain crop is expected to be in line with the 2010/2011 crop and the 2011/2012 U.S. grain crop is expected to be in line with the five-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 is also taking advantage of growth in overseas container traffic, metal products, commodities related to oil and gas development as well as wood pulp and lumber to offshore markets. 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

CANADIAN NATIONAL RAILWAY COMPANY

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

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, 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.

CANADIAN NATIONAL RAILWAY COMPANY

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

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.

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 rate was $0.98 per US$1.00 for both the three and nine months ended September 30, 2011, and $1.04 per US$1.00 for both the three and nine months ended September 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 growth in North American and global economies; 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		· North American and global economic growth
conditions, including those referring to growth opportunities		· Long-term growth opportunities being less affected by current economic
		conditions
		· Year-over-year improvement in carload traffic

Statements relating to the Company's ability to meet debt		· North American and global economic growth
repayments and future obligations in the foreseeable future,		· Adequate credit ratios
including income tax payments and capital spending		· Investment grade credit rating
		· Access to capital markets
		· Adequate cash generated from operations

Statements relating to pension contributions		· Adequate cash generated from operations and other sources of financing
		· Adequate long-term return on investment on pension plan assets
		· Level of funding as determined by actuarial valuations

CANADIAN NATIONAL RAILWAY COMPANY

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

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.

Financial and statistical highlights

		Three months ended September 30				Nine months ended September 30
$ in millions, except per share data or unless otherwise indicated			2011		2010		2011		2010
		(Unaudited)
Financial results
Revenues		$	2,307	$	2,122	$	6,651	$	6,180
Operating income		$	938	$	834	$	2,457	$	2,250
Net income (1) (2)		$	659	$	556	$	1,865	$	1,601

Operating ratio			59.3%		60.7%		63.1%		63.6%

Basic earnings per share (1) (2)		$	1.47	$	1.20	$	4.11	$	3.42
Diluted earnings per share (1) (2)		$	1.46	$	1.19	$	4.08	$	3.39

Dividend declared per share		$	0.325	$	0.270	$	0.975	$	0.810

Financial position
Total assets		$	26,567	$	26,028	$	26,567	$	26,028
Total long-term financial liabilities and other		$	12,821	$	12,869	$	12,821	$	12,869
Statistical operating data and productivity measures (3)
Employees (average for the period)			23,264		22,141		22,876		21,880
Gross ton miles (GTM) per average number of employees (thousands)			3,848		3,807		11,619		11,582
GTMs per US gallon of fuel consumed			1,004		981		972		958

(1)	The figures for the three and nine months ended September 30, 2011 include a gain on disposal of substantially all of the assets of IC RailMarine Terminal Company (ICRMT) of $60 million, or $38 million after-tax ($0.08 per basic or diluted share). Also included in the results for the nine months ended September 30, 2011 was a net deferred income tax expense of $40 million ($0.08 per basic or diluted share) resulting from the enactment of state corporate income tax rate changes and other legislated state tax revisions, and a gain on disposal of a segment of the Company's Kingston subdivision of $288 million, or $254 million after-tax ($0.55 per basic or diluted share) recorded in the first quarter.

(2)	The figures for the nine months ended September 30, 2010 include a gain on disposal of the Company's Oakville subdivision of $152 million, or $131 million after-tax ($0.28 per basic or diluted share).

(3)	Based on estimated data available at such time and subject to change as more complete information becomes available.

CANADIAN NATIONAL RAILWAY COMPANY

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

Financial results

Third quarter and first nine months of 2011 compared to corresponding periods in 2010