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 April 2014

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

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

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

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

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

Item1

News Release dated April 22, 2014 entitled, "CN reports Q1-2014 net income of C$623 million, or C$0.75 per diluted share"

"Adjusted diluted earnings per share for Q1-2014 increased eight per cent to C$0.66 (1)"

Item2

Unaudited Consolidated Financial Statements and Notes thereto

Item3

Management's Discussion and Analysis

Press Release

North America’s Railroad

CN reports Q1-2014 net income of C$623 million,

or C$0.75 per diluted share

Adjusted diluted earnings per share for Q1-2014

increased eight per cent to C$0.66 (1)

VANCOUVER, B.C., April 22, 2014 — CN (TSX: CNR) (NYSE: CNI) today reported its financial and operating results for the first quarter ended March 31, 2014.

First-quarter 2014 financial highlights

·	Net income was C$623 million, or C$0.75 per diluted share, compared with net income of C$555 million, or C$0.65 per diluted share, for the year-earlier quarter.

·	Excluding gains on rail line sales in both the 2014 and 2013 periods, first-quarter 2014 adjusted diluted earnings per share (EPS) increased eight per cent to C$0.66 from adjusted diluted EPS of C$0.61 in Q1-2013. (1)

·	Adjusted Q1-2014 net income of C$551 million increased six per cent over adjusted net income of C$519 million for the first quarter of 2013. (1)

·	Q1-2014 operating income increased five per cent to C$820 million.

·	First-quarter 2014 revenues increased nine per cent to C$2,693 million, revenue ton-miles grew by five per cent, and carloadings increased one per cent.

·	CN’s operating ratio for Q1-2014 deteriorated by 1.2 points to 69.6 per cent from 68.4 per cent the year before.

·	Free cash flow for the first quarter of 2014 was C$494 million, compared with C$151 million for the year-earlier quarter. (1)

Claude Mongeau, president and chief executive officer, said: “CN delivered solid first-quarter results thanks to a dedicated team of railroaders who labored long and hard to keep us rolling through the harshest winter in decades. The winter of a lifetime took its toll on network capacity and affected all of our customers, but I’m pleased that CN’s recovery is now well underway, with key safety, operating and service metrics returning to pre-winter levels.

“With continued focus on supply chain collaboration and solid execution, CN is reaffirming its 2014 financial outlook and increasing its capital envelope to C$2.25 billion in support of its commitment to growth, efficiency and safety.”

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. The fluctuation of the Canadian dollar relative to the U.S. dollar, which affects the conversion of the Company’s U.S.-dollar-denominated revenues and expenses, resulted in a positive impact to net income of C$26 million (C$0.03 per diluted share) in the first quarter of 2014. (1)

Canadian National Railway Company

Press Release

CN maintains positive 2014 outlook, increases capital spending (1) (2)

CN reaffirms the 2014 financial guidance that it announced on Dec. 10, 2013. CN is aiming to deliver double-digit EPS growth in 2014 over adjusted diluted 2013 EPS of C$3.06, as well as free cash flow in the range of C$1.6 billion to C$1.7 billion. (1)

CN is now targeting 2014 capital spending of C$2.25 billion, an increase of C$150 million over its previous spending forecast of C$2.1 billion announced on Dec. 10, 2013, and C$250 million higher than 2013 capital spending of C$2.0 billion. (2)

First-quarter 2014 revenues, traffic volumes and expenses

Revenues for the first quarter of 2014 increased by nine per cent to C$2,693 million. Revenues increased for petroleum and chemicals (23 per cent), intermodal (12 per cent), metals and minerals (seven per cent), coal (seven per cent), and grain and fertilizers (six per cent). Forest products revenues were flat, and automotive revenues declined by four per cent.

The increase in revenues was mainly attributable to the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues; freight rate increases; higher freight volumes due to strong energy markets and market share gains, particularly in intermodal; and the impact of a higher fuel surcharge as a result of higher volumes. Revenues were negatively affected by operational challenges due to an unusually harsh winter that reduced CN’s capacity to serve its customers.

Carloadings for the quarter rose one per cent to 1,239 thousand.

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased by five per cent over the year-earlier quarter. 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 by four per cent over the year-earlier period, driven by the positive translation impact of the weaker Canadian dollar and freight rate increases, partly offset by an increase in the average length of haul.

Operating expenses for the quarter increased by 11 per cent to C$1,873 million, mainly attributable to the negative translation impact of a weaker Canadian dollar on U.S.-dollar-denominated expenses, operational challenges due to an unusually harsh winter resulting in increased purchased services and material expense, increased fuel costs and higher casualty and other expense.

The first-quarter 2014 operating ratio was 69.6 per cent, compared with 68.4 per cent for the year-earlier quarter, a 1.2-point deterioration.

Canadian National Railway Company

Press Release

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.

2014 key assumptions

CN has made a number of economic and market assumptions in preparing its 2014 outlook. The Company is forecasting that North American industrial production for the year will increase by about three per cent. CN also expects U.S. housing starts to be in the range of 1.1 million units and U.S. motor vehicles sales to be approximately 16 million units. In addition, the U.S. 2013/2014 grain crop was above the five-year average, the Canadian 2013/2014 grain crop was well above the five-year average, and CN is assuming 2014/2015 grain crops in both countries will be in-line with their respective five-year averages. With these assumptions, CN assumes mid-single digit carload growth, along with continued pricing improvement above inflation. CN also assumes that the value of the Canadian dollar in U.S. currency will be in the range of $0.90 to $0.95 and the price of crude oil (West Texas Intermediate) to be in the range of US$95-$105 per barrel. In 2014, CN plans to invest approximately C$2.25 billion in capital programs – compared with its previous 2014 capital spending forecast of C$2.1 billion announced on Dec. 10, 2013 -- of which approximately C$1.2 billion is targeted toward maintaining the safety and integrity of the network, particularly track infrastructure. The capital program also includes funds for projects supporting growth and productivity.

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.

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 2014 outlook.

Canadian National Railway Company

Press Release

CN is a true backbone of the economy, transporting approximately C$250 billion worth of goods annually for a wide range of business sectors, ranging from resource products to manufactured products to consumer goods, across a rail network spanning Canada and mid-America. CN – Canadian National Railway Company, along with its operating railway subsidiaries -- serves the cities and ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the metropolitan areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth, Minn./Superior, Wis., 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.

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Contacts:

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

Canadian National Railway Company

Consolidated Statement of Income - unaudited

Item 2


	Three months ended
	March 31
In millions, except per share data		2014		2013

Revenues	$	2,693	$	2,466

Operating expenses
Labor and fringe benefits		587		569
Purchased services and material		388		328
Fuel		468		405
Depreciation and amortization		256		235
Equipment rents		77		68
Casualty and other		97		81

Total operating expenses		1,873		1,686
Operating income		820		780

Interest expense		(92)		(89)

Other income (Note 2)		94		42
Income before income taxes		822		733

Income tax expense (Note 6)		(199)		(178)

Net income	$	623	$	555

Earnings per share (Note 9)
Basic	$	0.75	$	0.65
Diluted	$	0.75	$	0.65

Weighted-average number of shares (Note 9)
Basic		828.0		853.4
Diluted		831.3		856.5
See accompanying notes to unaudited consolidated financial statements.

Canadian National Railway Company

Consolidated Statement of Comprehensive Income - unaudited

	Three months ended March 31
In millions		2014		2013

Net income	$	623	$	555

Other comprehensive income (Note 10)
Net gain on foreign currency translation		25		12
Net change in pension and other postretirement benefit plans		33		60
Other comprehensive income before income taxes		58		72
Income tax recovery (expense)		24		(2)
Other comprehensive income		82		70
Comprehensive income	$	705	$	625
See accompanying notes to unaudited consolidated financial statements.

Canadian National Railway Company

Consolidated Balance Sheet - unaudited


	March 31		December 31		March 31
In millions		2014		2013		2013

Assets

Current assets
Cash and cash equivalents	$	198	$	214	$	128
Restricted cash and cash equivalents (Note 3)		471		448		512
Accounts receivable (Note 3)		899		815		900
Material and supplies		331		274		289
Deferred and receivable income taxes		162		137		75
Other		117		89		95
Total current assets		2,178		1,977		1,999

Properties		26,643		26,227		24,733
Intangible and other assets		2,072		1,959		260
Total assets	$	30,893	$	30,163	$	26,992

Liabilities and shareholders’ equity

Current liabilities
Accounts payable and other	$	1,547	$	1,477	$	1,332
Current portion of long-term debt (Note 3)		912		1,021		1,466
Total current liabilities		2,459		2,498		2,798

Deferred income taxes		6,748		6,537		5,700
Pension and other postretirement benefits, net of current portion		546		541		659
Other liabilities and deferred credits		757		815		778
Long-term debt		7,287		6,819		5,945

Shareholders’ equity
Common shares		3,994		4,015		4,088
Accumulated other comprehensive loss (Note 10)		(1,768)		(1,850)		(3,187)
Retained earnings		10,870		10,788		10,211
Total shareholders’ equity		13,096		12,953		11,112
Total liabilities and shareholders’ equity	$	30,893	$	30,163	$	26,992
See accompanying notes to unaudited consolidated financial statements.

Canadian National Railway Company

Consolidated Statement of Changes in Shareholders’ Equity - unaudited


	Three months ended
	March 31
In millions		2014		2013

Common shares (1)
Balance, beginning of period	$	4,015	$	4,108
Stock options exercised and other		9		17
Share repurchase programs (Note 3)		(30)		(37)
Balance, end of period	$	3,994	$	4,088

Accumulated other comprehensive loss (Note 10)
Balance, beginning of period	$	(1,850)	$	(3,257)
Other comprehensive income		82		70
Balance, end of period	$	(1,768)	$	(3,187)

Retained earnings
Balance, beginning of period	$	10,788	$	10,167
Net income		623		555
Share repurchase programs (Note 3)		(335)		(328)
Dividends		(206)		(183)
Balance, end of period	$	10,870	$	10,211
See accompanying notes to unaudited consolidated financial statements.

(1)	During the three months ended March 31, 2014, the Company issued 0.3 million common shares as a result of stock options exercised and repurchased 6.3 million common shares under its current share repurchase program. At March 31, 2014, the Company had 824.6 million common shares outstanding.

Canadian National Railway Company

Consolidated Statement of Cash Flows - unaudited

	Three months ended
	March 31
In millions		2014		2013

Operating activities
Net income	$	623	$	555
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		256		235
Deferred income taxes		95		83
Gain on disposal of property (Note 2)		(80)		(40)
Changes in operating assets and liabilities:
Accounts receivable		(52)		(59)
Material and supplies		(54)		(57)
Accounts payable and other		(47)		(321)
Other current assets		(13)		(3)
Pensions and other, net		(83)		(72)
Net cash provided by operating activities		645		321

Investing activities
Property additions		(248)		(228)
Disposal of property (Note 2)		97		52
Change in restricted cash and cash equivalents		(23)		9
Other, net		-		6
Net cash used in investing activities		(174)		(161)

Financing activities
Issuance of debt (Note 3)		536		1,071
Repayment of debt		(456)		(740)
Issuance of common shares due to exercise of stock
options and related excess tax benefits realized		7		14
Repurchase of common shares (Note 3)		(365)		(361)
Dividends paid		(206)		(183)
Net cash used in financing activities		(484)		(199)
Effect of foreign exchange fluctuations on US
dollar-denominated cash and cash equivalents		(3)		12
Net decrease in cash and cash equivalents		(16)		(27)
Cash and cash equivalents, beginning of period		214		155
Cash and cash equivalents, end of period	$	198	$	128

Supplemental cash flow information
Net cash receipts from customers and other	$	2,672	$	2,509
Net cash payments for:
Employee services, suppliers and other expenses		(1,684)		(1,672)
Interest		(105)		(90)
Personal injury and other claims		(13)		(14)
Pensions (Note 5)		(93)		(101)
Income taxes		(132)		(311)
Net cash provided by operating activities	$	645	$	321
See accompanying notes to unaudited consolidated financial statements.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

1 - Basis of presentation

In management’s opinion, the accompanying unaudited Interim Consolidated Financial Statements and Notes thereto, expressed in Canadian dollars, and prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial statements, contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Canadian National Railway Company’s (the Company) financial position as at March 31, 2014, December 31, 2013 and March 31, 2013, and its results of operations, changes in shareholders’ equity and cash flows for the three months ended March 31, 2014 and 2013.

To be consistent with the basis of presentation used in preparing the Company’s 2013 Annual Consolidated Financial Statements, these unaudited Interim Consolidated Financial Statements and Notes thereto reflect the fourth quarter 2013 common stock split and net basis disclosure of commercial paper as described below.

On October 22, 2013, the Board of Directors of the Company approved a two-for-one common stock split in the form of a stock dividend of one additional common share of CN for each share outstanding, paid on November 29, 2013 to shareholders of record on November 15, 2013. At the effective date of the stock split, all equity-based benefit plans and share repurchase programs were adjusted to reflect the issuance of such additional shares. All share and per share data presented herein reflect the impact of the stock split.

Beginning with the fourth quarter of 2013, the Company revised the Consolidated Statement of Cash Flows to present on a net basis the issuances and repayments of commercial paper, all of which have a maturity of less than 90 days and which were previously reported on a gross basis.

These unaudited Interim Consolidated Financial Statements and Notes thereto have been prepared using accounting policies consistent with those used in preparing the Company’s 2013 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 2013 Annual Consolidated Financial Statements and Notes thereto.

2 - Disposal of property

2014

Deux-Montagnes

On February 28, 2014, the Company closed a transaction with Agence Métropolitaine de Transport to sell the Deux-Montagnes subdivision between Saint-Eustache and Montreal, Quebec, including the Mont-Royal tunnel, together with the rail fixtures (collectively the “Deux-Montagnes”), for cash proceeds of $97 million before transaction costs. Under the agreement, the Company obtained the perpetual right to operate freight trains over the Deux-Montagnes 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 $80 million ($72 million after-tax) that was recorded in Other income under the full accrual method of accounting for real estate transactions.

2013

Lakeshore West

On March 19, 2013, the Company entered into an agreement with Metrolinx to sell a segment of the Oakville subdivision in Oakville and Burlington, Ontario, together with the rail fixtures and certain passenger agreements (collectively the “Lakeshore West”), for cash proceeds of $52 million before transaction costs. Under the agreement, the Company obtained the perpetual right to operate freight trains over the Lakeshore West 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 $40 million ($36 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

3 - Financing activities

Shelf prospectus and registration statement

On February 11, 2014, under its current shelf prospectus and registration statement which expires January 2016, the Company issued $250 million 2.75% Notes due 2021 in the Canadian capital markets, which resulted in net proceeds of $247 million, intended for general corporate purposes, including the redemption and refinancing of outstanding indebtedness and share repurchases.

Revolving credit facility

The Company has an $800 million revolving credit facility agreement with a consortium of lenders. The agreement, which contains customary terms and conditions, allows for an increase in the facility amount, up to a maximum of $1.3 billion, 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 exercised such option and on March 14, 2014, the expiry date of the agreement was extended by one year to May 5, 2019. The Company plans to use the credit facility for working capital and general corporate purposes, including backstopping its commercial paper program. As at March 31, 2014 and December 31, 2013, the Company had no outstanding borrowings under its revolving credit facility and there were no draws during the three months ended March 31, 2014.

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 March 31, 2014, the Company had total borrowings of $465 million ($273 million as at December 31, 2013) presented in Current portion of long-term debt on the Consolidated Balance Sheet at a weighted-average interest rate of 1.14% (1.14% as at December 31, 2013).

Accounts receivable securitization program

The Company has a three-year agreement which commenced on February 1, 2013, to sell an undivided co-ownership interest in a revolving pool of accounts receivable to unrelated trusts for maximum cash proceeds of $450 million.

The Company accounts for the proceeds of its accounts receivable securitization program as a secured borrowing under Accounting Standards Codification (ASC) 860, Transfers and Servicing. As such, as at March 31, 2014, the Company recorded $350 million ($250 million as at December 31, 2013) of proceeds received under the accounts receivable securitization program in the Current portion of long-term debt on the Consolidated Balance Sheet at a weighted-average interest rate of 1.18% (1.18% as at December 31, 2013) which is secured by and limited to $401 million ($281 million as at December 31, 2013) of accounts receivable.

Bilateral letter of credit facilities and Restricted cash and cash equivalents

The Company has a series of bilateral letter of credit facility agreements with various banks to support its requirements to post letters of credit in the ordinary course of business. On March 14, 2014, the expiry date of these agreements was extended by one year to April 28, 2017. 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 one month, equal to at least the face value of the letters of credit issued. As at March 31, 2014, the Company had letters of credit drawn of $496 million ($481 million as at December 31, 2013) from a total committed amount of $510 million ($503 million as at December 31, 2013) by the various banks. As at March 31, 2014, cash and cash equivalents of $471 million ($448 million as at December 31, 2013) were pledged as collateral and recorded as Restricted cash and cash equivalents on the Consolidated Balance Sheet.

Share repurchase programs

On October 22, 2013, the Board of Directors of the Company approved a share repurchase program which allows for the repurchase of up to 30.0 million common shares, between October 29, 2013 and October 23, 2014 pursuant to a normal course issuer bid at prevailing market prices plus brokerage fees, or such other prices as may be permitted by the Toronto Stock Exchange.

The following table provides the information related to the share repurchase programs for the three months ended March 31, 2014 and 2013:

		Three months ended March 31
In millions, except per share data		2014		2013
Number of common shares repurchased (1)			6.3		7.8
Weighted-average price per share (2)		$	58.22	$	47.03
Amount of repurchase		$	365	$	365
(1)	Includes common shares purchased in the first quarters of 2014 and 2013 pursuant to private agreements between the Company and arm's length third-party sellers.
(2)	Includes brokerage fees.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

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 10 – Stock plans to the Company’s 2013 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 months ended March 31, 2014 and 2013.

		Three months ended March 31
In millions			2014		2013
Cash settled awards
Share Unit Plan (1)		$	14	$	10
Voluntary Incentive Deferral Plan (VIDP)			1		14
Total cash settled awards			15		24
Stock option awards			2		2
Total stock-based compensation expense		$	17	$	26
Tax benefit recognized in income		$	4	$	6
(1)	2013 includes the reversal of approximately $20 million of stock-based compensation expense related to the forfeiture of performance share units by former executives.

Cash settled awards

Share Unit Plan

Following approval by the Board of Directors in January 2014, the Company granted 0.8 million performance share units (PSUs), previously known as restricted share units (RSUs) to designated management employees entitling them to receive payout in cash based on the Company’s share price. The PSUs granted are generally scheduled for payout 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. In addition, commencing at various dates, for senior and executive management employees (“executive employees”), payout on PSUs is also conditional on compliance with the conditions of their benefit plans, award or employment agreements, including but not limited to non-compete, non-solicitation, and non-disclosure of confidential information conditions. Current or former executive employees who breach such conditions of their benefit plans, award or employment agreements will forfeit the PSU payout. Should the Company reasonably determine that a current or former executive employee may have violated the conditions of their benefit plans, award or employment agreement, the Company may at its discretion change the manner of vesting of the PSUs to suspend payout on any PSUs pending resolution of such matter.

The following table provides the 2014 activity for all cash settled awards:

	PSUs		VIDP
In millions	Nonvested	Vested	Nonvested	Vested
Outstanding at December 31, 2013	1.7	0.9	-	2.3
Granted (Payout)	0.8	(0.9)	-	(0.1)
Outstanding at March 31, 2014	2.5	-	-	2.2

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

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

In millions, unless otherwise indicated				PSUs (1)										VIDP (2)			Total
Year of grant		2014		2013		2012		2011		2010		2009
Stock-based compensation expense (recovery)
	recognized over requisite service period
Three months ended March 31, 2014		$	4	$	7	$	5	$	(2)	$	-	$	-	$	1	$	15
Three months ended March 31, 2013 (3)			N/A	$	4	$	11	$	8	$	(4)	$	(9)	$	14	$	24

Liability outstanding
March 31, 2014		$	4	$	41	$	67	$	-	$	-	$	-	$	145	$	257
December 31, 2013			N/A	$	34	$	61	$	80	$	-	$	-	$	145	$	320

Fair value per unit
March 31, 2014 ($)		$	36.01	$	58.51	$	61.37		N/A		N/A		N/A	$	62.11		N/A

Fair value of awards vested during the period
Three months ended March 31, 2014		$	-	$	-	$	-	$	-		N/A		N/A	$	1	$	1
Three months ended March 31, 2013			N/A	$	-	$	-	$	-	$	-		N/A	$	1	$	1

Nonvested awards at March 31, 2014
Unrecognized compensation cost		$	22	$	25	$	12	$	-		N/A		N/A	$	2	$	61
Remaining recognition period (years)			2.8		1.8		0.8		N/A		N/A		N/A		N/A(4)		N/A

Assumptions (5)
Stock price ($)		$	62.11	$	62.11	$	62.11		N/A		N/A		N/A	$	62.11		N/A
Expected stock price volatility (6)			15%		13%		13%		N/A		N/A		N/A		N/A		N/A
Expected term (years) (7)			2.8		1.8		0.8		N/A		N/A		N/A		N/A		N/A
Risk-free interest rate (8)			1.20%		1.04%		0.94%		N/A		N/A		N/A		N/A		N/A
Dividend rate ($) (9)		$	1.00	$	1.00	$	1.00		N/A		N/A		N/A		N/A		N/A
(1)	Compensation cost is based on the fair value of the awards at period-end using the lattice-based valuation model that uses the assumptions as presented herein.
(2)	Compensation cost is based on intrinsic value.
(3)	Includes the reversal of approximately $20 million of stock-based compensation expense related to the forfeiture of PSUs by former executives.
(4)	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.
(5)	Assumptions used to determine fair value are at March 31, 2014.
(6)	Based on the historical volatility of the Company's stock over a period commensurate with the expected term of the award.
(7)	Represents the remaining period of time that awards are expected to be outstanding.
(8)	Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(9)	Based on the annualized dividend rate.

Stock option awards

Following approval by the Board of Directors in January 2014, the Company granted 1.0 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 issued by the Company are conventional options that vest over a period of time. 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 and expire after 10 years. At March 31, 2014, 19.2 million common shares remained authorized for future issuances under this plan. The total number of options outstanding at March 31, 2014 was 8.4 million.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

The following table provides the activity of stock option awards during 2014, and for options outstanding and exercisable at March 31, 2014, the weighted-average exercise price and the weighted-average years to expiration. 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 March 31, 2014 at the Company’s closing stock price of $62.11 on the Toronto Stock Exchange.

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, 2013 (1)		7.7	$	30.97
Granted		1.0	$	58.72
Exercised		(0.3)	$	25.09
Outstanding at March 31, 2014 (1)		8.4	$	34.93		6.0	$	228
Exercisable at March 31, 2014 (1)		5.9	$	28.45		4.9	$	197
(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.

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

In millions, unless otherwise indicated
Year of grant			2014		2013		2012		2011		2010		2009		Total
Stock-based compensation expense
recognized over requisite service period (1)
Three months ended March 31, 2014		$	2	$	-	$	-	$	-	$	-	$	-	$	2
Three months ended March 31, 2013			N/A	$	1	$	1	$	-	$	-	$	-	$	2

Fair value per unit
At grant date ($)		$	11.08	$	8.52	$	7.74	$	7.83	$	6.55	$	6.30		N/A

Fair value of awards vested during the period
Three months ended March 31, 2014		$	-	$	2	$	2	$	3	$	2	$	-	$	9
Three months ended March 31, 2013			N/A	$	-	$	2	$	3	$	2	$	3	$	10

Nonvested awards at March 31, 2014
Unrecognized compensation cost		$	8	$	3	$	2	$	1	$	-	$	-	$	14
Remaining recognition period (years)			3.8		2.8		1.8		0.8		-		-		N/A

Assumptions
Grant price ($)		$	58.72	$	47.47	$	38.35	$	34.47	$	27.38	$	21.07		N/A
Expected stock price volatility (2)			23%		23%		26%		26%		28%		39%		N/A
Expected term (years) (3)			5.4		5.4		5.4		5.3		5.4		5.3		N/A
Risk-free interest rate (4)			1.51%		1.41%		1.33%		2.53%		2.44%		1.97%		N/A
Dividend rate ($) (5)		$	1.00	$	0.86	$	0.75	$	0.65	$	0.54	$	0.51		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

5 - Pensions and other postretirement benefits

The Company has various retirement benefit plans under which substantially all of its employees are entitled to benefits at retirement age, generally based on compensation and length of service and/or contributions. Senior and executive management employees (“executive employees”) subject to certain minimum service and age requirements, are also eligible for an additional retirement benefit under their Special Retirement Stipend Agreements (SRS), the Supplemental Executive Retirement Plan (SERP) or the Defined Contribution Supplemental Executive Retirement Plan (DC SERP). Executive employees who breach the non-compete, non-solicitation and non-disclosure of confidential information conditions of the SRS, SERP or DC SERP plans or other employment agreement will forfeit the retirement benefit under these plans. Should the Company reasonably determine that a current or former executive employee may have violated the conditions of their SRS, SERP, or DC SERP plan or other employment agreement, the Company may at its discretion withhold or suspend payout of the retirement benefit pending resolution of such matter.

For the three months ended March 31, 2014 and 2013, the components of net periodic benefit cost for pensions and other postretirement benefits were as follows:

Components of net periodic benefit cost for pensions
	Three months ended March 31
In millions		2014		2013
Service cost	$	35	$	41
Interest cost		178		164
Settlement gain		-		(1)
Expected return on plan assets		(245)		(239)
Amortization of prior service cost		1		1
Amortization of net actuarial loss		32		59
Net periodic benefit cost	$	1	$	25

Components of net periodic benefit cost for other postretirement benefits
	Three months ended March 31
In millions		2014		2013
Service cost	$	1	$	1
Interest cost		2		2
Amortization of prior service cost		1		-
Amortization of net actuarial gain		(1)		-
Net periodic benefit cost	$	3	$	3

Company contributions to its various pension plans are made in accordance with the applicable legislation in Canada and the United States (U.S.) and are determined by actuarial valuations. Actuarial valuations are generally required on an annual basis both in Canada and the U.S. The actuarial valuations for funding purposes for the Company’s Canadian pension plans, based on a valuation date of December 31, 2013, will be performed and filed by June 30, 2014 and are expected to identify a going-concern surplus of approximately $1.6 billion and a solvency deficit of approximately $1.7 billion calculated using the three-year average of the Company’s hypothetical wind-up ratio in accordance with the Pension Benefit Standards Regulations, 1985. Under Canadian legislation, the solvency deficit is required to be funded through special solvency payments, for which each annual amount is equal to one fifth of the solvency deficit, and is re-established at each valuation date.

Pension contributions made in the first three months of 2014 and 2013 of $93 million and $101 million, respectively, mainly represent contributions to the Company’s main pension plan, the CN Pension Plan. These pension contributions are for the current service cost as determined under the Company’s current actuarial valuations for funding purposes. The Company expects to make total cash contributions in 2014 of approximately $130 million for all of the Company’s pension plans.

Voluntary contributions can be treated as a prepayment against the Company’s required special solvency deficit payments. As at December 31, 2013, the Company had approximately $470 million of accumulated prepayments available to offset future required solvency deficit payments. The Company applied approximately $85 million of such prepayments during the first three months of 2014 and will apply approximately $250 million for the remainder of the year.

Additional information relating to the pension plans is provided in Note 11 – Pensions and other postretirement benefits to the Company’s 2013 Annual Consolidated Financial Statements.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

6 - Income taxes

The Company recorded income tax expense of $199 million for the three months ended March 31, 2014 compared to $178 million for the same period in 2013. Included in the 2014 figure was an income tax recovery of $18 million resulting from a change in estimate of the deferred income tax liability related to properties. Included in the 2013 figure was an income tax recovery of $16 million resulting from a revision of the apportionment of U.S. state taxes.

7 - Major commitments and contingencies

Commitments

As at March 31, 2014, the Company had commitments to acquire railroad ties, rail, freight cars, locomotives, and other equipment and services, as well as outstanding information technology service contracts and licenses, at an aggregate cost of $735 million ($482 million as at December 31, 2013). The Company also has estimated remaining commitments of approximately $297 million (US$269 million), in relation to the U.S. federal government legislative requirement to implement Positive Train Control (PTC) by December 31, 2015.

In addition, it has estimated remaining commitments, through to December 31, 2016, of approximately $76 million (US$69 million), in relation to the acquisition of the principal lines of the former Elgin, Joliet and Eastern Railway Company. These commitments are for railroad infrastructure improvements, grade separation projects as well as commitments under a series of agreements with individual communities and a comprehensive voluntary mitigation program established to address surrounding municipalities’ concerns.

The Company also has agreements with fuel suppliers which allow but do not require the Company to purchase approximately 80% of its estimated remaining 2014 volume, 60% of its anticipated 2015 volume, 55% of its anticipated 2016 volume and 20% of its anticipated 2017 volume at market prices prevailing on the date of the purchase.

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 a 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, costs related to employee work-related injuries are accounted for 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, the Company’s historical patterns of claims filings and payments. For unasserted occupational disease claims, the actuarial study includes the projection of the Company’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.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

As at March 31, 2014, the Company had aggregate reserves for personal injury and other claims of $315 million, of which $48 million was recorded as a current liability ($316 million as at December 31, 2013, of which $45 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 March 31, 2014, or with respect to future claims, cannot be reasonably determined. When establishing provisions for contingent liabilities the Company considers, where a probable loss estimate cannot be made with reasonable certainty, a range of potential probable losses for each such matter, and records the amount it considers the most reasonable estimate within the range. However, when no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. For matters where a loss is reasonably possible but not probable, a range of potential losses cannot be estimated due to various factors which may include the limited availability of facts, the lack of demand for specific damages and the fact that proceedings were at an early stage. Based on information currently available, the Company believes that the eventual outcome of the actions against the Company will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position. However, due to the inherent inability to predict with certainty unforeseeable future developments, there can be no assurance that the ultimate resolution of these actions 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.

Environmental matters

The Company’s operations are subject to numerous federal, provincial, state, municipal and local environmental laws and regulations in Canada and the U.S. concerning, among other things, emissions into the air; discharges into waters; the generation, handling, storage, transportation, treatment and disposal of waste, hazardous substances, and other materials; decommissioning of underground and aboveground storage tanks; and soil and groundwater contamination. A risk of environmental liability is inherent in railroad and related transportation operations; real estate ownership, operation or control; and other commercial activities of the Company with respect to both current and past operations.

Known existing environmental concerns

The Company has identified approximately 275 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 expenses, 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 March 31, 2014, the Company had aggregate accruals for environmental costs of $118 million, of which $43 million was recorded as a current liability ($119 million as at December 31, 2013, of which $41 million was recorded as a current liability). The Company anticipates that the majority of the liability at March 31, 2014 will be paid out over the next five years. However, some costs may be paid out over a longer period. Based on the information currently available, the Company considers its provisions to be adequate.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

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, the discovery of new facts, future 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:

(a)	the lack of specific technical information available with respect to many sites;

(b)	the absence of any government authority, third-party orders, or claims with respect to particular sites;

(c)	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

(d)	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 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.

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, 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.

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 2014 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. As at March 31, 2014, the maximum exposure in respect of these guarantees was $176 million. There are no recourse provisions to recover any amounts from third parties.

Other guarantees

As at March 31, 2014, the Company, including certain of its subsidiaries, had granted $496 million of irrevocable standby letters of credit and $92 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 March 31, 2014, the maximum potential liability under these guarantee instruments was $588 million, of which $528 million related to workers’ compensation and other employee benefit liabilities and $60 million related to other liabilities. The letters of credit were drawn on the Company’s bilateral letter of credit facilities. The Company had not recorded a liability as at March 31, 2014 with respect to these guarantee instruments as they related to the Company’s future performance and the Company did not expect to make any payments under these guarantee instruments. The majority of the guarantee instruments mature at various dates between 2014 and 2016.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

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;

(d)	contracts for the acquisition of services;

(e)	financing agreements;

(f)	trust indentures, fiscal agency agreements, underwriting agreements or similar agreements relating to debt or equity securities of the Company and engagement agreements with financial advisors;

(g)	transfer agent and registrar agreements in respect of the Company’s securities;

(h)	trust and other agreements relating to pension plans and other plans, including those establishing trust funds to secure payment to certain officers and senior employees of special retirement compensation arrangements;

(i)	pension transfer agreements;

(j)	master agreements with financial institutions governing derivative transactions;

(k)	settlement agreements with insurance companies or other third parties whereby such insurer or third-party has been indemnified for any present or future claims relating to insurance policies, incidents or events covered by the settlement agreements; and

(l)	acquisition agreements.

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

During the period, the Company entered into various indemnification contracts with third parties for which the maximum exposure for future payments cannot be reasonably determined. 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.

8 - Financial instruments

For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is believed to be consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

Level 1: Quoted prices for identical instruments in active markets.

Level 2:

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable.

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:

Cash and cash equivalents, Restricted 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. Cash and cash equivalents and Restricted cash and cash equivalents include highly liquid investments purchased three months or less from maturity and are classified as Level 1. Accounts receivable, Other current assets, and Accounts payable and other are classified as Level 2 as they may not be priced using quoted prices, but rather determined from market observable information.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

Intangible and other assets

Included in Intangible and other assets are equity investments for which the carrying value approximates the fair value, with the exception of certain cost investments for which the fair value is estimated based on the Company’s proportionate share of the underlying net assets. Investments are classified as Level 3 as their fair value is based on significant unobservable inputs.

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 Company’s debt is classified as Level 2.

The following table provides the carrying amounts and estimated fair values of the Company’s financial instruments as at March 31, 2014 and December 31, 2013 for which the carrying values on the Consolidated Balance Sheet are different from their fair values:

In millions		March 31, 2014				December 31, 2013
		Carrying		Fair		Carrying		Fair
		amount		value		amount		value
Financial assets
Investments	$	57	$	171	$	57	$	164
Financial liabilities
Total debt	$	8,199	$	9,297	$	7,840	$	8,683

9 - Earnings per share

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

	Three months ended March 31
In millions, except per share data		2014		2013
Net income	$	623	$	555

Weighted-average shares outstanding		828.0		853.4
Effect of stock options		3.3		3.1
Weighted-average diluted shares outstanding		831.3		856.5

Basic earnings per share	$	0.75	$	0.65
Diluted earnings per share	$	0.75	$	0.65

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.

Canadian National Railway Company

Notes to Unaudited Consolidated Financial Statements

10 – Accumulated other comprehensive loss

The components of Accumulated other comprehensive loss are as follows:

In millions			Foreign currency translation adjustments		Pension and other postretirement benefit plans		Derivative instruments		Total before tax		Income tax recovery (expense)		Total net of tax
Balance at December 31, 2013		$	(533)	$	(1,515)	$	8	$	(2,040)	$	190	$	(1,850)
Other comprehensive income before reclassifications:

	Unrealized foreign exchange gain on translation of net investment in foreign operations		276						276		-		276
	Unrealized foreign exchange loss on translation of US dollar- denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries		(251)						(251)		32		(219)

Amounts reclassified from accumulated
	other comprehensive income:
	Amortization of net actuarial loss				31				31	(1)	(8)	(2)	23
	Amortization of prior service cost				2				2	(1)	-	(2)	2
Other comprehensive income			25		33		-		58		24		82
Balance at March 31, 2014		$	(508)	$	(1,482)	$	8	$	(1,982)	$	214	$	(1,768)

In millions			Foreign currency translation adjustments		Pension and other postretirement benefit plans		Derivative instruments		Total before tax		Income tax recovery (expense)		Total net of tax
Balance at December 31, 2012		$	(579)	$	(3,290)	$	8	$	(3,861)	$	604	$	(3,257)
Other comprehensive income before reclassifications:

	Unrealized foreign exchange gain on translation of net investment in foreign operations		130						130		-		130
	Unrealized foreign exchange loss on translation of US dollar- denominated long-term debt designated as a hedge of the net investment in U.S. subsidiaries		(118)						(118)		14		(104)

Amounts reclassified from accumulated
	other comprehensive income:
	Amortization of net actuarial loss				59				59	(1)	(16)	(2)	43
	Amortization of prior service cost				1				1	(1)	-	(2)	1
Other comprehensive income			12		60		-		72		(2)		70
Balance at March 31, 2013		$	(567)	$	(3,230)	$	8	$	(3,789)	$	602	$	(3,187)

(1) Reclassified to Labor and fringe benefits on the Consolidated Statement of Income and included in components of net periodic benefit cost. See Note 5 - Pensions and other postretirement benefits.
(2) Included in Income tax expense on the Consolidated Statement of Income.

Canadian National Railway Company

Selected Railroad Statistics - unaudited


		Three months ended March 31
		2014	2013

Statistical operating data
Rail freight revenues ($ millions) (1)		2,578	2,355
Gross ton miles (GTM) (millions)		101,476	96,301
Revenue ton miles (RTM) (millions)		53,334	50,576
Carloads (thousands)		1,239	1,231
Route miles (includes Canada and the U.S.) (2)		20,000	20,100
Employees (end of period)		23,992	23,624
Employees (average for the period)		23,756	23,435

Productivity
Operating ratio (%)		69.6	68.4
Rail freight revenue per RTM (cents) (1)		4.83	4.66
Rail freight revenue per carload ($) (1)		2,081	1,913
Operating expenses per GTM (cents)		1.85	1.75
Labor and fringe benefits expense per GTM (cents)		0.58	0.59
GTMs per average number of employees (thousands)		4,272	4,109
Diesel fuel consumed (US gallons in millions)		106.9	101.7
Average fuel price ($/US gallon)		3.95	3.61
GTMs per US gallon of fuel consumed		949	947

Safety indicators
Injury frequency rate (per 200,000 person hours) (3)		2.07	1.41
Accident rate (per million train miles) (3)		2.36	2.12

Financial ratio
Debt-to-total capitalization ratio (% at end of period) (4)		38.5	40.0
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, as such, certain of the 2013 comparative data and related productivity measures have been restated.


(1)	In 2014, certain Other revenues were reclassified to the commodity groups within rail freight revenues. This change has no impact on the Company’s previously reported results of operations as total revenues remain unchanged. The 2013 comparative figures have been reclassified in order to be consistent with the 2014 presentation.
(2)	Rounded to the nearest hundred miles.
(3)	Based on Federal Railroad Administration (FRA) reporting criteria.
(4)	Debt-to-total capitalization is calculated as total long-term debt plus current portion of long-term debt, divided by the sum of total debt plus total shareholders’ equity.

Canadian National Railway Company

Supplementary Information - unaudited

	Three months ended March 31
	2014	2013	% Change Fav (Unfav)	% Change at constant currency Fav (Unfav) (2)
Revenues (millions of dollars) (1)
Petroleum and chemicals	568	461	23%	16%
Metals and minerals	308	288	7%	-
Forest products	339	338	-	(6%)
Coal	182	170	7%	2%
Grain and fertilizers	431	408	6%	1%
Intermodal	621	556	12%	9%
Automotive	129	134	(4%)	(10%)
Total rail freight revenues	2,578	2,355	9%	4%
Other revenues	115	111	4%	(1%)
Total revenues	2,693	2,466	9%	4%
Revenue ton miles (millions)
Petroleum and chemicals	12,879	10,554	22%	22%
Metals and minerals	5,009	4,990	-	-
Forest products	6,555	7,266	(10%)	(10%)
Coal	5,294	5,340	(1%)	(1%)
Grain and fertilizers	11,313	11,009	3%	3%
Intermodal	11,661	10,747	9%	9%
Automotive	623	670	(7%)	(7%)
Total revenue ton miles	53,334	50,576	5%	5%
Rail freight revenue / RTM (cents) (1)
Petroleum and chemicals	4.41	4.37	1%	(5%)
Metals and minerals	6.15	5.77	7%	-
Forest products	5.17	4.65	11%	4%
Coal	3.44	3.18	8%	3%
Grain and fertilizers	3.81	3.71	3%	(2%)
Intermodal	5.33	5.17	3%	-
Automotive	20.71	20.00	4%	(4%)
Total rail freight revenue per RTM	4.83	4.66	4%	(2%)
Carloads (thousands)
Petroleum and chemicals	161	151	7%	7%
Metals and minerals	207	244	(15%)	(15%)
Forest products	100	111	(10%)	(10%)
Coal	125	97	29%	29%
Grain and fertilizers	140	142	(1%)	(1%)
Intermodal	457	432	6%	6%
Automotive	49	54	(9%)	(9%)
Total carloads	1,239	1,231	1%	1%
Rail freight revenue / carload (dollars) (1)
Petroleum and chemicals	3,528	3,053	16%	9%
Metals and minerals	1,488	1,180	26%	18%
Forest products	3,390	3,045	11%	4%
Coal	1,456	1,753	(17%)	(21%)
Grain and fertilizers	3,079	2,873	7%	2%
Intermodal	1,359	1,287	6%	3%
Automotive	2,633	2,481	6%	(1%)
Total rail freight revenue per carload	2,081	1,913	9%	3%
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.

(1) In 2014, certain Other revenues were reclassified to the commodity groups within rail freight revenues. This change has no impact on the Company’s previously reported results of operations as total revenues remain unchanged. The 2013 comparative figures have been reclassified in order to be consistent with the 2014 presentation.
(2) See supplementary schedule entitled Non-GAAP Measures for an explanation of this Non-GAAP measure.

Canadian National Railway Company

Non-GAAP Measures

Adjusted performance measures

For the three months ended March 31, 2014, the Company reported adjusted net income of $551 million, or $0.66 per diluted share. The adjusted figures exclude a gain on disposal of the Deux-Montagnes subdivision, including the Mont-Royal tunnel, together with the rail fixtures, of $80 million, or $72 million after-tax ($0.09 per diluted share). For the three months ended March 31, 2013, the Company reported adjusted net income of $519 million, or $0.61 per diluted share. The adjusted figures exclude a gain on disposal of a segment of the Oakville subdivision, together with the rail fixtures and certain passenger agreements, of $40 million, or $36 million after-tax ($0.04 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 therefore, may not be comparable to similar measures presented by other companies. The reader is advised to read all information provided in the Company’s 2014 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 months ended March 31, 2014 and 2013, to the adjusted performance measures presented herein.

		Three months ended March 31, 2014							Three months ended March 31, 2013
In millions, except per share data		Reported		Adjustments			Adjusted		Reported		Adjustments			Adjusted
Revenues	$	2,693	$		-	$	2,693	$	2,466	$		-	$	2,466
Operating expenses		1,873			-		1,873		1,686			-		1,686
Operating income		820			-		820		780			-		780
Interest expense		(92)			-		(92)		(89)			-		(89)
Other income		94			(80)		14		42			(40)		2
Income before income taxes		822			(80)		742		733			(40)		693
Income tax expense		(199)			8		(191)		(178)			4		(174)
Net income	$	623	$		(72)	$	551	$	555	$		(36)	$	519
Operating ratio		69.6%					69.6%		68.4%					68.4%
Effective tax rate		24.2%					25.7%		24.3%					25.1%
Basic earnings per share	$	0.75	$		(0.09)	$	0.66	$	0.65	$		(0.04)	$	0.61
Diluted earnings per share	$	0.75	$		(0.09)	$	0.66	$	0.65	$		(0.04)	$	0.61

Canadian National Railway Company

Non-GAAP Measures

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 therefore, may not be comparable to similar measures presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US dollars at the foreign exchange rates of the comparable period of the prior year. The average foreign exchange rates were $1.10 and $1.01 per US$1.00, respectively, for the three months ended March 31, 2014 and 2013.

On a constant currency basis, the Company’s net income for the three months ended March 31, 2014 would have been lower by $26 million, or $0.03 per diluted share. The following table presents a reconciliation of 2014 net income as reported to net income on a constant currency basis:

		Three months ended
In millions		March 31, 2014
Net income, as reported		$	623

	Impact due to the weakening Canadian dollar included in net income		(26)
Net income, on a constant currency basis		$	597

Free cash flow

Free cash flow does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies. The Company believes that free cash flow is a useful measure of performance as it demonstrates the Company’s ability to generate cash. In the past, the Company defined free cash flow as the difference between net cash provided by operating activities and net cash used in investing activities; adjusted for changes in restricted cash and cash equivalents, the payment of dividends, changes in cash and cash equivalents resulting from foreign exchange fluctuations, and the impact of major acquisitions, if any.

Beginning with the fourth quarter of 2013, the Company redefined its free cash flow measure as the difference between net cash provided by operating activities and net cash used in investing activities; adjusted for changes in restricted cash and cash equivalents and the impact of major acquisitions, if any. The Company believes that free cash flow, as redefined, is a better measure of the Company’s available cash for debt obligations and for discretionary uses such as payment of dividends and strategic opportunities.

	Three months ended March 31
In millions		2014		2013
Net cash provided by operating activities	$	645	$	321
Net cash used in investing activities		(174)		(161)
Net cash provided before financing activities		471		160

Adjustment:
Change in restricted cash and cash equivalents		23		(9)
Free cash flow	$	494	$	151

Canadian National Railway Company

Management’s Discussion and Analysis

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 2014 unaudited Interim Consolidated Financial Statements and Notes thereto as well as the 2013 Annual MD&A .

Business profile

CN is engaged in the rail and related transportation business. CN’s network of approximately 20,000 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 three months ended March 31, 2014, no individual commodity group accounted for more than 23% of total revenues. From a geographic standpoint, 16% of revenues relate to United States (U.S.) domestic traffic, 33% transborder traffic, 19% 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.

Corporate organization

The Company manages its rail operations in Canada and the U.S. 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 14 – Segmented information to the Company’s 2013 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 deepening customer engagement, leveraging the strength of its franchise, and delivering operational and service excellence, 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 and customer service metrics that the Company focuses on to measure efficiency, safety 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. On October 22, 2013, the Board of Directors of the Company approved a two-for-one common stock split in the form of a stock dividend of one additional common share of CN for each share outstanding, paid on November 29, 2013 to shareholders of record on November 15, 2013. At the effective date of the stock split, all equity-based benefit plans and share repurchase programs were adjusted to reflect the issuance of such additional shares. All share and per share data presented herein reflect the impact of the stock split.

For 2014, the Company’s Board of Directors approved a share repurchase program which allows for the repurchase of up to 30.0 million common shares, between October 29, 2013 and October 23, 2014. Share repurchases are made pursuant to a normal course issuer bid at prevailing market prices, plus brokerage fees, or such other prices as may be permitted by the Toronto Stock Exchange. In addition, the

Canadian National Railway Company

Management’s Discussion and Analysis

Company’s Board of Directors approved an increase of 16% to the quarterly dividend to common shareholders, from $0.215 in 2013 to $0.250 in 2014.

CN’s business model is anchored on five core principles: providing quality service, controlling costs, focusing on asset utilization, committing to safety and sustainability, and developing people. For many years, CN has operated with a mindset that drives efficiency. The CN Precision Railroading model, which focuses on improving every process that affects delivery of customers’ goods, continues to guide the Company’s performance. 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. It 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. It also aims to increase velocity, improve reliability, lower costs, enhance asset utilization and, ultimately, help the Company to grow the top line. The Company maintains that philosophy today and works hard to run more efficient trains, reduce dwell times at terminals and improve overall network velocity. With CN’s business model, fewer railcars and locomotives are needed to ship the same amount of freight in a tight, reliable and efficient operation. The railroad is run based on a disciplined operating methodology, executing with a sense of urgency and accountability. This philosophy has been a key contributor to CN’s earnings growth and improved return on invested capital. The Company has also set its sights on becoming a true supply chain enabler by helping to elevate service performance end-to-end. CN is pursuing better end-to-end service and greater operating efficiencies while helping customers win in their own markets. While CN is a leader in fast and reliable service hub-to-hub, the Company strives to distinguish itself by bringing greater value to the entire range of customer touch points. The Company continues to strengthen its commitment to operational and service excellence through a wide range of innovations anchored on its continuous improvement philosophy. CN’s major push in first-mile/last-mile activities is all about quality interaction with customers – from developing a sharper outside-in perspective to better monitoring of traffic forecasts; from the Company’s car management distribution activities to higher and more responsive car order fulfillment; and from improving customer communication to iAdvise (proactive customer communication system at the local level). CN’s broad-based service innovations benefit customers and support the Company’s goal to grow the business faster than the overall economy. CN understands the importance of being the best operator in the business, and being the best service innovator as well. Service excellence means expanding CN’s perspective, working more closely, and building on mutual trust, with customers and supply chain customers as well as involving all relevant areas of the Company in the process. 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, delivering operational and service excellence by providing a high level of service to customers while operating safely and efficiently, and meeting short- and long-term financial commitments.

In 2014, the Company expects North American industrial production to increase by approximately three percent as well as continued improvements in U.S. housing starts and U.S. automotive sales. For the 2013/2014 crop year, Canadian grain production was well above the five-year average and U.S. grain production was above the five-year average. With respect to the 2014/2015 crop year, the Company assumes Canadian and U.S. grain production to be in line with their respective five-year averages.

To meet its business plan objectives, the Company’s 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 coming 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. The Company sees opportunities for growth across most markets, led by energy-related commodities, particularly crude oil and frac sand; by overseas container traffic; by market share gains against truck in domestic intermodal; by a continued recovery in the U.S. housing market; as well as by strong offshore grain exports due to a record western Canadian crop. Longer term, the Company expects continued growth in offshore export markets including metallurgical and thermal coal as well as potash.

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, the Company’s 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

Canadian National Railway Company

Management’s Discussion and Analysis

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 2014, CN plans to invest approximately $2.25 billion on capital programs, of which approximately $1.2 billion is targeted toward maintaining the safety and integrity of the network, particularly track infrastructure. This investment will include the replacement of rail, ties, and other track materials, bridge improvements, as well as various branch line upgrades.

In 2014, CN’s equipment capital expenditures are targeted to reach approximately $350 million, allowing the Company to tap growth opportunities and improve the quality of the fleet. In order to handle expected traffic increase and improve operational efficiency, in 2013 CN took delivery of 44 new and 37 second-hand high-horsepower locomotives. In 2014, CN expects to take delivery of an additional 60 new high-horsepower locomotives.

In 2014, CN also expects to spend approximately $700 million on facilities, such as transloads and distribution centers; to grow the business; and to improve the productivity and fluidity of the network. The investment includes funds for strategic initiatives, 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 and its accounts receivable securitization program to meet short-term liquidity needs. The Company’s primary uses of funds are for working capital requirements, including income tax installments, pension contributions, contractual obligations; capital expenditures relating to track infrastructure and other; acquisitions; dividend payouts; and the repurchase of shares through share buyback programs. 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 CN 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 the CN Environmental Policy at all times and it is the Environment, Safety and Security Committee of the Board of Directors that has the responsibility of overseeing this policy. This committee’s responsibilities, powers and operation are further described in its charter, 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 CN Environmental Policy, the Company’s Carbon Disclosure Project report, and the Corporate Citizenship Report “Delivering Responsibly” are available on CN’s website. In 2013, the Company’s sustainability practices earned it a place as the leader in the Transportation and Transportation Infrastructure Industry sector of the Dow Jones Sustainability World Index (DJSI). This was the second consecutive year that the Company had been listed on the DJSI World Index and the fifth straight year on the DJSI North American Index.

Canadian National Railway Company

Management’s Discussion and Analysis

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. As part of a new revitalized company-wide training program aimed at preparing railroaders to be highly skilled, safety conscious and confident in their work environment, CN opened a new state-of-the-art training center located in Winnipeg, Manitoba, in April 2014, and plans to open another one in suburban Chicago, Illinois, later this year. The Company continues to address changes in employee demographics that will span multiple years. The Human Resources and Compensation Committee of the Board of Directors reviews the progress made in developing current and future leaders through the Company’s leadership development programs. These programs and initiatives provide a solid platform for the assessment and development of the Company’s talent pool. The leadership development programs are tightly integrated with the Company’s business strategy.

The forward-looking statements discussed in 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 for the three months ended March 31, 2014 was $1.10 per US$1.00 compared to $1.01 per US$1.00 for the same period in 2013. Measures at constant currency are considered non-GAAP measures and do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other companies.

Canadian National Railway Company

Management’s Discussion and Analysis

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,” “assumes” 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 revenue	∙ Long-term growth opportunities being less affected by current economic
growth opportunities	conditions
	∙ Year-over-year carload growth

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 and other sources of financing

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, particularly
	influenced by discount rates for funding purposes

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 U.S. See the section of this MD&A entitled Business risks for detailed information on major risk factors.

Canadian National Railway Company

Management’s Discussion and Analysis

Financial and statistical highlights

		Three months ended March 31
$ in millions, except per share data or unless otherwise indicated			2014		2013

Financial results
Revenues		$	2,693	$	2,466
Operating income		$	820	$	780
Net income (1) (2)		$	623	$	555
Operating ratio			69.6%		68.4%
Basic earnings per share (1) (2)		$	0.75	$	0.65
Diluted earnings per share (1) (2)		$	0.75	$	0.65
Dividend declared per share		$	0.250	$	0.215

Financial position
Total assets		$	30,893	$	26,992
Total long-term liabilities		$	15,338	$	13,082

Statistical operating data and productivity measures (3)
Employees (average for the period)			23,756		23,435
Gross ton miles (GTM) per average number of employees (thousands)			4,272		4,109
GTMs per US gallon of fuel consumed			949		947
(1)	The figures for the three months ended March 31, 2014 include a gain on disposal of the Deux-Montagnes subdivision of $80 million, or $72 million after-tax ($0.09 per basic or diluted share).
(2)	The figures for the three months ended March 31, 2013 include a gain on disposal of a segment of the Oakville subdivision of $40 million, or $36 million after-tax ($0.04 per basic or diluted share).
(3)	Based on estimated data available at such time and subject to change as more complete information becomes available.

Financial results

First quarter of 2014 compared to corresponding period in 2013

First quarter of 2014 net income was $623 million, an increase of $68 million, or 12%, when compared to the same period in 2013, with diluted earnings per share rising 15% to $0.75.

Included in the first quarter of 2014 was a gain on disposal of the Deux-Montagnes subdivision between Saint-Eustache and Montreal, Quebec, including the Mont-Royal tunnel, together with the rail fixtures (collectively the “Deux-Montagnes”), of $80 million, or $72 million after-tax ($0.09 per diluted share). Included in the first-quarter 2013 figures was a gain on disposal of a segment of the Oakville subdivision, together with the rail fixtures and certain passenger agreements (collectively the “Lakeshore West”), of $40 million, or $36 million after-tax ($0.04 per diluted share).

Foreign exchange fluctuations have an impact on the comparability of the results of operations. The fluctuation of the Canadian dollar relative to the US dollar, which affects the conversion of the Company’s US dollar-denominated revenues and expenses, resulted in a positive impact to net income of $26 million ($0.03 per diluted share) in the first quarter of 2014.

Revenues for the three months ended March 31, 2014 increased by $227 million, or 9%, to $2,693 million, mainly attributable to the positive translation impact of the weaker Canadian dollar; freight rate increases; higher freight volumes due to strong energy markets and market share gains, particularly in intermodal; and the impact of a higher fuel surcharge as a result of higher volumes. Revenues were negatively impacted by operational challenges due to an unusually harsh winter that reduced the Company’s capacity to serve its customers.

Operating expenses for the three months ended March 31, 2014 increased by $187 million, or 11%, to $1,873 million, mainly attributable to the negative translation impact of a weaker Canadian dollar, operational challenges due to an unusually harsh winter resulting in increased purchased services and material expense, increased fuel costs and higher casualty and other expense.

The operating ratio, defined as operating expenses as a percentage of revenues, was 69.6% in first-quarter 2014, compared to 68.4% in first-quarter 2013, a 1.2-point deterioration.

Canadian National Railway Company

Management’s Discussion and Analysis

Revenues
	Three months ended March 31
In millions, unless otherwise indicated		2014		2013	% Change	% Change at constant currency

Rail freight revenues	$	2,578	$	2,355	9%	4%
Other revenues		115		111	4%	(1%)
Total revenues	$	2,693	$	2,466	9%	4%

Rail freight revenues
Petroleum and chemicals	$	568	$	461	23%	16%
Metals and minerals		308		288	7%	-
Forest products		339		338	-	(6%)
Coal		182		170	7%	2%
Grain and fertilizers		431		408	6%	1%
Intermodal		621		556	12%	9%
Automotive		129		134	(4%)	(10%)
Total rail freight revenues	$	2,578	$	2,355	9%	4%
Revenue ton miles (RTM) (millions)		53,334		50,576	5%	5%
Rail freight revenue/RTM (cents)		4.83		4.66	4%	(2%)

In order to better represent rail freight and related revenues within the commodity groups and to maintain non-rail services that support CN’s rail business within Other revenues, certain other revenues were reclassified to the commodity groups within rail freight revenues. Revenues earned from trucking intermodal goods were reclassified from Other revenues to the Intermodal commodity group and services that relate to the movement of rail freight were reclassified from Other revenues to the related commodity groups. The 2013 comparative figures have been reclassified in order to be consistent with the 2014 presentation as discussed herein. This change has no impact on the Company’s previously reported results of operations as total revenues remains unchanged.

Revenues for the quarter ended March 31, 2014 totaled $2,693 million compared to $2,466 million in the same period in 2013. The increase of $227 million, or 9%, was mainly attributable to the positive translation impact of the weaker Canadian dollar on US dollar-denominated revenues; freight rate increases; higher freight volumes due to strong energy markets and market share gains, particularly in intermodal; and the impact of a higher fuel surcharge of approximately $12 million as a result of higher volumes. Revenues were negatively impacted by operational challenges due to an unusually harsh winter that reduced the Company’s capacity to serve its customers.

In the first quarter of 2014, revenue ton miles (RTM), measuring the relative weight and distance of rail freight transported by the Company, increased by 5% relative to the same period in 2013. 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 by 4% when compared to the same period in 2013, driven by the positive translation impact of the weaker Canadian dollar and freight rate increases, partly offset by an increase in the average length of haul.

Petroleum and chemicals
	Three months ended March 31
		2014		2013	% Change	% Change at constant currency
Revenues (millions)	$	568	$	461	23%	16%
RTMs (millions)		12,879		10,554	22%	22%
Revenue/RTM (cents)		4.41		4.37	1%	(5%)

The petroleum and chemicals commodity group comprises a wide range of commodities, including chemicals and plastics, refined petroleum products, natural gas liquids, crude oil and sulfur. The primary markets for these commodities are within North America, and as such, the performance of this commodity group is closely correlated with the North American economy as well as oil and gas production. Most of the Company’s petroleum and chemicals shipments originate in the Louisiana petrochemical corridor between New Orleans and Baton Rouge; in Western Canada, a key oil and gas development area and a major center for natural gas feedstock and world-scale petrochemicals and plastics; and in eastern Canadian regional plants.

For the quarter ended March 31, 2014, revenues for this commodity group increased by $107 million, or 23%, when compared to the same period in 2013. The increase was mainly due to higher crude oil shipments, the positive translation impact of a weaker Canadian

Canadian National Railway Company

Management’s Discussion and Analysis

dollar, freight rate increases, and a higher fuel surcharge due to higher volumes. These factors were partly offset by lower volumes of sulfur. Revenue per revenue ton mile increased by 1% in the first quarter of 2014, when compared to the same period in 2013, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases, partly offset by a significant increase in the average length of haul.

Metals and minerals
	Three months ended March 31
		2014		2013	% Change	% Change at constant currency
Revenues (millions)	$	308	$	288	7%	-
RTMs (millions)		5,009		4,990	-	-
Revenue/RTM (cents)		6.15		5.77	7%	-

The metals and minerals commodity group consists primarily of materials related to oil and gas development, steel, iron ore, non-ferrous base metals and ores, construction materials and machinery and dimensional (large) loads. The Company provides unique rail access to base metals, iron ore and frac sand mining as well as aluminum and steel producing regions, which are among the most important in North America. This strong origin franchise, coupled with the Company’s access to port facilities and the end markets for these commodities, has made CN a leader in the transportation of metals and minerals products. The key drivers for this market segment are oil and gas development, automotive production, and non-residential construction.

For the quarter ended March 31, 2014, revenues for this commodity group increased by $20 million, or 7%, when compared to the same period in 2013. The increase was mainly due to the positive translation impact of a weaker Canadian dollar. Also, higher volumes of frac sand and freight rate increases were partly offset by reduced shipments of short haul iron ore traffic and lower volumes of large diameter pipe due to the completion of pipeline projects last year. Revenue per revenue ton mile increased by 7% in the first quarter of 2014 when compared to the same period in 2013, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases, partly offset by a significant increase in the average length of haul.

Forest products
	Three months ended March 31
		2014		2013	% Change	% Change at constant currency
Revenues (millions)	$	339	$	338	-	(6%)
RTMs (millions)		6,555		7,266	(10%)	(10%)
Revenue/RTM (cents)		5.17		4.65	11%	4%

The forest products commodity group includes various types of lumber, panels, paper, wood pulp and other fibers such as logs, recycled paper, wood chips, and wood pellets. The Company has extensive rail access to the western and eastern Canadian fiber-producing regions, which are among the largest fiber source areas in North America. In the U.S., the Company is strategically located to serve both the midwest and southern U.S. corridors with interline connections to other Class I railroads. The key drivers for the various commodities are: for newsprint, advertising lineage, non-print media and overall economic conditions, primarily in the U.S.; for fibers (mainly wood pulp), the consumption of paper, pulpboard and tissue in North American and offshore markets; and for lumber and panels, housing starts and renovation activities primarily in the U.S.

For the quarter ended March 31, 2014, revenues for this commodity group increased by $1 million, when compared to the same period in 2013. The increase was mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases. These factors were mostly offset by decreased shipments of lumber and wood pulp to offshore markets. Revenue per revenue ton mile increased by 11% in the first quarter of 2014 when compared to the same period in 2013, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases.

Canadian National Railway Company

Management’s Discussion and Analysis

Coal
	Three months ended March 31
		2014		2013	% Change	% Change at constant currency
Revenues (millions)	$	182	$	170	7%	2%
RTMs (millions)		5,294		5,340	(1%)	(1%)
Revenue/RTM (cents)		3.44		3.18	8%	3%

The coal commodity group consists of thermal grades of bituminous coal, metallurgical coal and petroleum coke. Canadian thermal and metallurgical coal are largely exported via terminals on the west coast of Canada to offshore markets. In the U.S., thermal coal is transported from mines served in southern Illinois, or from western U.S. mines via interchange with other railroads, to major utilities in the midwest and southeast U.S., as well as offshore markets via terminals in the Gulf and the Port of Prince Rupert.

For the quarter ended March 31, 2014, revenues for this commodity group increased by $12 million, or 7%, when compared to the same period in 2013. The increase was mainly due to the positive translation impact of a weaker Canadian dollar, freight rate increases, and higher shipments of thermal coal to U.S. utilities and to the west coast ports. These factors were partly offset by lower export volumes of petroleum coke and metallurgical coal through west coast ports. Revenue per revenue ton mile increased by 8% in the first quarter of 2014 when compared to the same period in 2013, mainly due to the positive translation impact of a weaker Canadian dollar, freight rate increases, and a significant decrease in the average length of haul.

Grain and fertilizers
	Three months ended March 31
		2014		2013	% Change	% Change at constant currency
Revenues (millions)	$	431	$	408	6%	1%
RTMs (millions)		11,313		11,009	3%	3%
Revenue/RTM (cents)		3.81		3.71	3%	(2%)

The grain and fertilizers commodity group depends primarily on crops grown and fertilizers processed in western Canada and the U.S. midwest. The grain segment consists of three primary segments: food grains (mainly wheat, oats and malting barley), feed grains and feed grain products (including feed barley, feed wheat, peas, corn, ethanol and dried distillers grains), and oilseeds and oilseed products (primarily canola seed, oil and meal, and soybeans). Production of grain varies considerably from year to year, affected primarily by weather conditions, seeded and harvested acreage, the mix of grains produced and crop yields. Grain exports are sensitive to the size and quality of the crop produced, international market conditions and foreign government policy. The majority of grain produced in western Canada and moved by CN is exported via the ports of Vancouver, Prince Rupert and Thunder Bay. Certain of these rail movements are subject to government regulation and to a revenue cap, which effectively establishes a maximum revenue entitlement that railways can earn. In the U.S., grain grown in Illinois and Iowa is exported as well as transported to domestic processing facilities and feed markets. The Company also serves major producers of potash in Canada, as well as producers of ammonium nitrate, urea and other fertilizers across Canada and the U.S.

For the quarter ended March 31, 2014, revenues for this commodity group increased by $23 million, or 6%, when compared to the same period in 2013. The increase was mainly due to the positive translation impact of a weaker Canadian dollar, freight rate increases and higher volumes of export corn and soybeans and increased shipments of Canadian wheat. These factors were partly offset by lower shipments of fertilizer and potash for domestic markets, and lower export shipments of peas. Revenue per revenue ton mile increased by 3% in the first quarter of 2014 when compared to the same period in 2013, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases.

Canadian National Railway Company

Management’s Discussion and Analysis

Intermodal
	Three months ended March 31
		2014		2013	% Change	% Change at constant currency
Revenues (millions)	$	621	$	556	12%	9%
RTMs (millions)		11,661		10,747	9%	9%
Revenue/RTM (cents)		5.33		5.17	3%	-

The intermodal commodity group includes rail and trucking services and is comprised of two segments: domestic and international. The domestic segment transports consumer products and manufactured goods, serving both retail and wholesale channels, within domestic Canada, domestic U.S., Mexico and transborder, while the international segment handles import and export container traffic, directly serving the major ports of Vancouver, Prince Rupert, Montreal, Halifax and New Orleans. The domestic segment is driven by consumer markets, with growth generally tied to the economy. The international segment is driven by North American economic and trade conditions.

For the quarter ended March 31, 2014, revenues for this commodity group increased by $65 million, or 12%, when compared to the same period in 2013. The increase was mainly due to higher shipments through the Port of Vancouver and Montreal, in part as a result of new business; the positive translation impact of a weaker Canadian dollar; the impact of a higher fuel surcharge; and freight rate increases. Revenue per revenue ton mile increased by 3% in the first quarter of 2014 when compared to the same period in 2013, mainly due to the positive translation impact of a weaker Canadian dollar and freight rate increases.

Automotive
	Three months ended March 31
		2014		2013	% Change	% Change at constant currency
Revenues (millions)	$	129	$	134	(4%)	(10%)
RTMs (millions)		623		670	(7%)	(7%)
Revenue/RTM (cents)		20.71		20.00	4%	(4%)

The automotive commodity group moves both finished vehicles and parts throughout North America, providing rail access to certain vehicle assembly plants in Canada, and Michigan and Mississippi in the U.S. The Company also serves vehicle distribution facilities in Canada and the U.S., as well as parts production facilities in Michigan and Ontario. The Company serves shippers of import vehicles via the ports of Halifax and Vancouver, and through interchange with other railroads. The Company’s automotive revenues are closely correlated to automotive production and sales in North America.

For the quarter ended March 31, 2014, revenues for this commodity group decreased by $5 million, or 4%, when compared to the same period in 2013. The decrease was mainly due to lower volumes of domestic finished vehicle traffic. This was mostly offset by the positive translation impact of a weaker Canadian dollar. Revenue per revenue ton mile increased by 4% in the first quarter of 2014 when compared to the same period in 2013, mainly due to the positive translation impact of a weaker Canadian dollar.

Other revenues
	Three months ended March 31
		2014		2013	% Change	% Change at constant currency
Revenues (millions)	$	115	$	111	4%	(1%)

Other revenues are largely derived from non-rail services that support CN’s rail business including vessels, docks, warehousing and distribution and automotive logistic services, as well as commuter train revenues.

For the quarter ended March 31, 2014, Other revenues amounted to $115 million, an increase of $4 million, or 4%, when compared to the same period in 2013, mainly due to higher revenues from freight forwarding and automotive logistic services, partly offset by lower revenues from warehousing and distribution, as well as vessels and docks.

Canadian National Railway Company

Management’s Discussion and Analysis

Operating expenses

Operating expenses for the first quarter of 2014 amounted to $1,873 million, compared to $1,686 million in the same quarter of 2013. The increase of $187 million, or 11%, in the first quarter of 2014 was mainly attributable to the negative translation impact of a weaker Canadian dollar on US dollar-denominated expenses, operational challenges due to an unusually harsh winter resulting in increased purchased services and material expense, increased fuel costs and higher casualty and other expense.

	Three months ended March 31
					% Change	% Change at constant currency		Percentage of revenues
In millions		2014		2013	% Change	% Change at constant currency		2014	2013

Labor and fringe benefits	$	587	$	569	(3%)	-	21.8%		23.1%
Purchased services and material		388		328	(18%)	(15%)	14.4%		13.3%
Fuel		468		405	(16%)	(6%)	17.4%		16.4%
Depreciation and amortization		256		235	(9%)	(6%)	9.5%		9.5%
Equipment rents		77		68	(13%)	(6%)	2.9%		2.8%
Casualty and other		97		81	(20%)	(14%)	3.6%		3.3%
Total operating expenses	$	1,873	$	1,686	(11%)	(6%)	69.6%		68.4%

Labor and fringe benefits

Labor and fringe benefits expense includes wages, payroll taxes, and employee benefits such as incentive compensation, including stock-based compensation; health and welfare; and pension and other postretirement benefits. Certain incentive and stock-based compensation plans are based on financial and market performance targets and the related expense is recorded in relation to the attainment of such targets.

Labor and fringe benefits expense increased by $18 million, or 3%, in the first quarter of 2014 when compared to the same quarter in 2013. The increase was primarily a result of higher wages due to volume growth, general wage increases and higher overtime costs as a result of harsher weather conditions; as well as the negative translation impact of the weaker Canadian dollar. The increase was partly offset by a decrease in pension expense and lower stock-based compensation expense.

Purchased services and material

Purchased services and material expense primarily includes the cost of services purchased from outside contractors; materials used in the maintenance of the Company’s track, facilities and equipment; transportation and lodging for train crew employees; utility costs; and the net costs of operating facilities jointly used by the Company and other railroads.

These expenses increased by $60 million, or 18%, in the first quarter of 2014 when compared to the same quarter in 2013. The increase was mainly due to increased snow clearing expenses, higher maintenance costs for rolling stock and higher utilities costs, as well as the negative translation impact of the weaker Canadian dollar.

Fuel

Fuel expense includes fuel consumed by assets, including locomotives, vessels, vehicles and other equipment as well as federal, provincial and state fuel taxes.

These expenses increased by $63 million, or 16%, in the first quarter of 2014 when compared to the same quarter in 2013. The increase was primarily due to the negative translation impact of the weaker Canadian dollar and higher freight volumes.

Depreciation and amortization

Depreciation and amortization expense relates to the Company’s rail and related operations. Depreciation expense is affected by capital additions, railroad property retirements from disposal, sale and/or abandonment and other adjustments including asset impairments.

These expenses increased by $2