Second-quarter 2011 highlights

• Net income increased from the year-earlier quarter to C$538 million, with diluted earnings per share (EPS) rising four per cent to C$1.18. The results included a net deferred income tax expense of C$40 million, or C$0.08 per diluted share, resulting from the enactment of state corporate income tax rate changes and other legislated state tax revisions.
• Excluding the net deferred income tax expense, adjusted diluted EPS for the second quarter of 2011 rose to C$1.26 — an increase of 12 per cent over C$1.13 for the same quarter of 2010. (1)
• Revenues for second-quarter 2011 rose eight per cent to C$2,260 million, while carloadings increased four per cent and revenue ton-miles increased five per cent.
• Operating income increased eight per cent to C$874 million.
• CN’s operating ratio was 61.3 per cent, essentially in line with the operating ratio of 61.2 per cent for second-quarter 2010.
• Free cash flow for the first half of 2011 was C$823 million, compared with C$958 million for the same period of 2010.

Keith Creel, executive vice-president and chief operating officer, said: “CN’s main line through Northern Ontario is a critical link in our transcontinental network connecting Central, Eastern and Western Canada. The strategic investments in longer sidings will help to further increase our ability to process freight trains efficiently across this line, enhance network velocity and productivity, and improve the safety of operations.”

CN’s longer sidings program is creating sidings of 12,000 to 13,000 feet long from sidings that were previously 6,000 to 7,000 feet in length.

CN’s main line through Northern Ontario sees an average of 14 freight trains daily, including intermodal trains between Toronto, the principal cities of Winnipeg, Edmonton and Calgary, and the west coast ports of Vancouver and Prince Rupert. The corridor also hosts two transcontinental passenger trains three days a week.

Extended sidings allow CN to maximize the benefits of its longer-train operating plan in main-line corridors across its system. These more efficient trains are equipped with distributed power (DP) technology, which permits remote control of a locomotive or locomotives throughout a train from the lead control locomotive. DP provides faster, smoother train starts, improved braking and lower pulling forces at the head-end of a train, and improved safety. With more optimum matching of motive power to train weight, DP locomotives also allow CN to reduce fuel consumption and reduce emissions.

CN’s infrastructure improvements to date in Northern Ontario permit the highest average freight train speeds on its entire system – as high as 40 miles per hour. And those investments, along with DP locomotive technology, significantly improve winter operations in the region.

CN’s Northern Ontario siding investments are part of the company’s C$1.7-billion 2011 capital expenditure program to maintain a safe and fluid railway network, to grow the business efficiently and to continue to provide customers with a high level of service.

Keith Creel, executive vice-president and chief operating officer, said: “CN is making significant strides in improving the fuel efficiency of its freight train operations, obtaining important sustainability gains and delivering a cost-effective transportation service through a series of initiatives, including the acquisition of modern locomotives, new technology applications to existing locomotives, enhanced analytic abilities, and employee training.

“We are particularly excited about our leading-edge work to set fuel efficiency targets for specific trains by route and to monitor train performance against these goals. The targets are based on established benchmarks for key fuel consumption variables such as train make-up, locomotives, train handling, route gradients and curvature, and weather. This strategy to produce real-time information by train and by locomotive is truly the next frontier in precision fuel management.”

On average, railroads are four times more fuel-efficient than trucks, according to a recent independent study for the U.S. Federal Railroad Administration. And, importantly, CN leads the North American rail industry in fuel efficiency, consuming, overall, 10 per cent less fuel per gross-ton-mile than the rail industry average. This has helped CN to reduce greenhouse gas emissions and resulted in the lowest fuel surcharge in the industry, helping our customers save on transportation costs.

CN’s FMX program includes:

• The acquisition of new fuel-efficient locomotives – in 2010 CN purchased 102 new high-horsepower locomotives, as well as 102 second-hand high-horsepower locomotives that are being upgraded. These locomotives are approximately 15 per cent more fuel-efficient than the ones they replace and comply fully with applicable regulatory requirements for reduced locomotive exhaust emissions.
• Installation of Wi-Tronix telemetry systems on high-horsepower locomotives. Wi-Tronix provides real-time information about locomotive and train performance through remote measurement and reporting of data, including precise fuel consumption, to an off-board CN computer system at regular intervals or at request. The technology allows CN to optimize the match of locomotive horsepower to the trailing tonnage of the train by isolating or shutting down locomotives and reducing throttle settings. It continuously scans train operations for the proper application of train handling rules to optimize fuel use, determines when and where fueling is required, and ensures temporarily inactive locomotives are shut down. CN expects to equip up to 1,200 high-horsepower locomotives with locomotive telemetry technology by 2013.
• Trip Optimizer technology from GE Transportation. Trip Optimizer is a train “cruise control” system that follows a pre-determined speed trajectory over a GPS track map to optimize fuel consumption. It minimizes braking by planning miles in advance for speed zone and terrain changes. CN’s Vancouver-Montreal corridor is fully mapped for this technology, and CN is now moving intermodal trains equipped with the technology over key sections of this corridor. By September 2011, CN plans to have intermodal and merchandise trains in the corridor running with Trip Optimizer technology. CN has 125 locomotives with Trip Optimizer and plans to install this type of technology on up to 400 locomotives by the end of 2013.
• Installation of Auto Engine Start Stop (AESS) technology, which automatically shuts down an idle diesel engine, while keeping the locomotive in the proper operating state to start on demand. CN has more than 600 locomotives with this technology, and plans to apply AESS-type technology on up to 800 units by 2013.
• Training of train crews and rail traffic controllers. These employees are continually being schooled on best practices, including fuel-efficient train handling techniques, matching power to train tonnage and limiting throttle use, and taking advantage of train pacing opportunities at train meets.

Creel said: “FMX is a vital part of taking our precision railroading model to the next level. We believe sophisticated fuel-efficiency and monitoring systems will aid our efforts to measure and report reductions of greenhouse gas emissions and the scope of the carbon footprints of CN and our customers. All this is vital as fuel prices remain a challenge and freight customers put greater emphasis on sustainable transportation options.”

“CN has stepped up to the plate in Alberta with sizable rail infrastructure investments,” Mongeau told the Edmonton Chamber of Commerce today. “Since 2006, we’ve purchased four rail short lines that are key to economic growth and prosperity in northern Alberta and have spent significant sums to maintain and improve them.

“Reliable, consistent rail service is essential to current and future oil sands and resource developments, and our infrastructure investments represent a clear and meaningful commitment to help foster that growth with quality rail transportation for our customers.”

Mongeau said CN’s short-line acquisitions and improvements have helped solidify its freight franchise in northern Alberta, characterized by important volumes of coal, sulphur, petroleum coke, steel pipe, grain, wood pulp, lumber and diesel fuel.

CN paid a total of C$76 million in 2006 and 2007 to buy the Mackenzie Northern Railway (MKNR), Lakeland & Waterways Railway (LWR), Savage Alberta Railway, Inc., (SAR), and the Athabasca Northern Railway (ANY). Click on http://www.cn.ca/documents/About-CN/map-alberta-shortline-railway-acquisition-en.pdf for a map of the former short lines CN has acquired.

Between 2006 and 2010, CN spent C$260 million to upgrade the infrastructure of these lines — including the installation of new rail, ties, ballast, track, other track materials, bridges, sidings and communication technology – and expects to spend another C$45 million this year on further upgrades. In addition to these expenditures, CN invested approximately C$10 million in a petroleum coke transload operation atFort McMurray, the logistics gateway to Alberta’s oil sands production region.

ICRMT is an indirect subsidiary of CN, located on the east bank of the Mississippi River at Convent, La., west of New Orleans. The terminal stores and transfers bulk commodities and liquids between rail, ship and barge, serving customers in North American and global markets.

CN expects the transaction to close in approximately 45 days, following receipt of regulatory approvals. Upon closing, CN would enter a 10-year rail transportation agreement with Savatran LLC, another affiliate of Foresight and Cline, to haul coal from four Illinois mines to theConvent transfer facility. Under the agreement, Savatran would ship a minimum annual volume of coal via CN.

Luc Jobin, executive vice-president and chief financial officer of CN, said: “We are pleased to have concluded an agreement for the sale of ICRMT assets, with plans to enter into a long-term transportation agreement for CN coal shipments to the terminal. These initiatives will allow CN to make better use of its southern rail corridor while expanding its participation in the growing export of Illinois Basin coal.”

Michael Beyer, chief executive officer of Foresight Energy, said: “The acquisition of these terminal assets, as well as the signing of the transportation agreement with CN, is an important next step in our continuing investment in infrastructure assets that provide transportation and market optionality for our low-cost coal mining operations. This firms up the logistics for our coal sales into the international coal markets, which are a significant and growing part of our business.”

Foresight will expand the capacity of the facility to eight million tons of export coal per year, from a current capacity of approximately four million tons, with the potential for an additional eight-million-ton expansion as market conditions warrant.

Claude Mongeau, president and chief executive officer, said: “CN is eager to break ground for the new logistics park, which will provide seamless transportation solutions to rail customers moving products and commodities into and out of Calgary, one of the fastest growing cities in North America and a key logistics hub for consumer and industrial goods markets in southern Alberta.”

The 680-acre logistics park in Conrich, Alta., located in Rocky View County northeast of Calgary, will feature:

• A state-of-the-art intermodal terminal for containerized goods moving between rail and truck, with ample room for customers to build on-site distribution centres that will eliminate costly handling and drayage cost to move product to other facilities;
• More than two million square feet of warehousing capacity, including a multi-commodity rail-to-truck transload and warehouse facility, and
• Dimensional shipment and heavy container handling capacity.

CN also plans to have an automotive compound for regional vehicle distribution ready during 2013, and to add a liquid and dry-bulk transload and distribution facility to the logistics park at a later date.

CN expects to complete construction of the logistics park by the end of 2012, when it will transfer intermodal activities and Calgarypersonnel to the new facility. Operations will start in early 2013.

The new facility, with ready access to Stoney Trail and other major roadways including the Trans Canada Highway, is situated on Twp Road 250/McKnight Boulevard and is just 10 kilometres from Calgary International Airport.

CN provides competitive rail transit times to and from Calgary from eastern and Western Canada, including the ports of Vancouver andPrince Rupert, B.C., and direct access to markets in the United States.

“We are thrilled with the news of this new facility and with the collaborative partnership we have formed with CN,” said Rolly Ashdown, Rocky View County Reeve. “The Logistics Park is a great addition to Rocky View County and the region, helping to support our goal of a healthy and diversified economy. CN’s investment in our community demonstrates the region’s capacity to attract business investment due to our wide range of rural and urban amenities.”

CN received the prize for the second straight year in recognition of its commitment to helping communities prepare for and respond to potential transportation incidents involving hazardous materials.

The award recognizes extraordinary achievement in support of the TRANSCAER initiative that extends beyond the geographic boundaries of any one region.

“Safety is a core value at CN and it is important for us to partner with communities to integrate their safety procedures with ours,” said Paul Miller, CN’s chief safety and sustainability officer. “We are proud that CN’s continued efforts to go beyond the normal call of duty to advocate and implement the principles of TRANSCAER have been recognized once again.

“In 2010, CN’s Dangerous Goods Team held a total of 257 TRANSCAER events across its network, reaching more than 5,000 participants.”

Through TRANSCAER, free emergency preparedness training is provided to local and regional emergency response organizations, as well as education to communities near major rail routes about rail equipment, chemical transportation, and the importance of planning for potential hazardous material transportation emergencies.

BIT, located in the prime logistics area of Greater Toronto, is Canada’s largest rail intermodal terminal and a key component in CN’s distribution network — almost 60 per cent of the railway’s system-wide intermodal business touches the terminal. CN’s rail intermodal traffic consists primarily of containerized cargoes moving in cooperation with other transportation modes.

Claude Mongeau, president and chief executive officer of CN, said: “Intermodal is one of CN’s fastest-growing business segments. We are investing in new track, equipment and other infrastructure improvements at BIT to take our intermodal service offering to the next level in efficiently distributing growing overseas container traffic reaching our network over Canadian ports as well as rising domestic intermodal shipments across Canada. These investments will increase supply chain efficiencies for our customers and help them grow their businesses.

“CN Intermodal is an increasingly attractive transportation solution as fuel prices rise and freight customers put greater emphasis on sustainable options. We offer the marketplace competitive rail transit times and reliable drayage services in an environmentally friendly package.”

“CN is experiencing continued growth in Western Canadian freight volumes,” Keith Creel, CN executive vice-president and chief operating officer, said. “We are making strategic rail investments in Alberta to increase network capacity and improve train velocity along our transcontinental main line between Edmonton and Winnipeg, and to be positioned to handle greater volumes of freight over our line to Fort McMurray, the gateway to Alberta’s oil sands production region.”

CN’s capacity investments include:

– C$12 million to construct 3.5 miles of track between two sidings located approximately 20 miles east of Edmonton on the Wainwright Subdivision, creating 7.9 miles of double track. The new track will help dispatchers to expedite the meeting of trains and to increase train velocity on one of the highest-density corridors on the CN system.

– C$12 million to build 11,400 feet of track east of Clover Bar yard on the Wainwright Subdivision in the greater Edmonton area to facilitate switching in the terminal. The additional track will help to expedite arrivals and departures of freight trains at the yard.

– C$10 million on CN’s secondary Lac La Biche Subdivision in northern Alberta to support additional traffic to and from Fort McMurray. CN’s Fort McMurray yard gives customers direct rail access to the major energy projects in development in the Athabasca, Peace River and Cold Lake oil sands regions.

– C$3 million to reconfigure tracks at Walker Yard in Edmonton to increase the velocity of the terminal in handling greater volumes of freight traffic.

CN plans to use the credit facility for working capital and general corporate purposes, including backstopping the Company’s commercial paper program.

The facility, containing customary terms and conditions, replaces the US$1-billion credit facility that was scheduled to expire in October 2011.

CN has also entered into a series of three-year letter of credit agreements with various banks to support its requirements to post letters of credit in the ordinary course of business.