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 February, 2008
 
Commission File Number: 001-02413
 
Canadian National Railway Company
(Translation of registrant’s name into English)
 
935 de la Gauchetiere Street West
Montreal, Quebec
Canada H3B 2M9
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F           Form 40-F    X  

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes           No    X  

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes           No    X  

Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes           No    X  

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A
 
 
Canadian National Railway Company

Table of Contents
 
Items
 
1.
Management’s Report on Internal Control over Financial Reporting
   
2.
Reports of Independent Registered Public Accounting Firm
   
3.
Financial Statements and Notes thereto - U.S. GAAP
   
4.
Management’s Discussion and Analysis - U.S. GAAP
   
5.
Certificate of CEO Regarding Facts and Circumstances Relating to Exchange Act Filings
   
6.
Certificate of CFO Regarding Facts and Circumstances Relating to Exchange Act Filings
   
 
 
 
Item 1
 
Management’s Report on Internal Control over Financial Reporting

 
Management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Management has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of December 31, 2007.

KPMG LLP, an independent registered public accounting firm, has issued an unqualified audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 and has also expressed an unqualified opinion on the Company's 2007 consolidated financial statements as stated in their Reports of Independent Registered Public Accounting Firm dated February 11, 2008.

 
(s) E. Hunter Harrison
President and Chief Executive Officer

February 11, 2008
 
 

 
(s) Claude Mongeau
Executive Vice-President and Chief Financial Officer

February 11, 2008
 
1
Item 2

 
Report of Independent Registered Public Accounting Firm
 

To the Board of Directors and Shareholders of the Canadian National Railway Company:

We have audited the Canadian National Railway Company’s (the “Company”) internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

We also have audited, in accordance with Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated February 11, 2008 expressed an unqualified opinion on those consolidated financial statements.
 

 
(s) KPMG LLP
Chartered Accountants
 
Montreal, Canada
February 11, 2008
 
2
 
Report of Independent Registered Public Accounting Firm
 
 
To the Board of Directors and Shareholders of the Canadian National Railway Company:

We have audited the accompanying consolidated balance sheets of the Canadian National Railway Company (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with generally accepted accounting principles in the United States.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 11, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 
 
(s) KPMG LLP
Chartered Accountants
 
Montreal, Canada
February 11, 2008
 
3
Item 3

Consolidated Statement of Income
U.S. GAAP
 
 
In millions, except per share data
Year ended December 31,
  
2007
    
2006
    
2005
  
                     
Revenues
     $
7,897
     $
7,929
     $
7,446
  
                           
Operating expenses
                          
Labor and fringe benefits
      
1,701
      
1,823
      
1,856
  
Purchased services and material
      
1,045
      
1,027
      
993
  
Fuel
      
1,026
      
892
      
730
  
Depreciation and amortization
      
677
      
650
      
627
  
Equipment rents
      
247
      
198
      
192
  
Casualty and other
      
325
      
309
      
424
  
Total operating expenses
      
5,021
      
4,899
      
4,822
  
                           
Operating income
      
2,876
      
3,030
      
2,624
  
Interest expense
       (336 )     (312 )     (299 )
Other income (Note 14)
      
166
      
11
      
12
  
Income before income taxes
      
2,706
      
2,729
      
2,337
  
Income tax expense (Note 15)
       (548 )     (642 )     (781 )
Net income
     $
2,158
     $
2,087
     $
1,556
  
                           
Earnings per share (Note 17)
                          
Basic
     $
4.31
     $
3.97
     $
2.82
  
                           
Diluted
     $
4.25
     $
3.91
     $
2.77
  
 
 
See accompanying notes to consolidated financial statements.
 
4
 
Consolidated Statement of Comprehensive Income
U.S. GAAP
 
 
In millions
Year ended December 31,
  
2007
    
2006
    
2005
  
                     
Net income
     $
2,158
     $
2,087
     $
1,556
  
                           
Other comprehensive income (loss) (Note 20) :
                          
Unrealized foreign exchange gain (loss) on:
                          
Translation of the net investment in foreign operations
       (1,004 )    
32
       (233 )
Translation of U.S. dollar-denominated long-term debt designated as a hedge
                        
of the net investment in U.S. subsidiaries
      
788
       (33 )    
152
  
                           
Pension and other postretirement benefit plans (Notes 9, 13) :
                          
Net actuarial gain arising during the period
      
391
      
-
      
-
  
Prior service cost arising during the period
       (12 )    
-
      
-
  
Amortization of net actuarial loss included in net periodic benefit cost
    
49
      
-
      
-
  
Amortization of prior service cost included in net periodic benefit cost
    
21
      
-
      
-
  
Minimum pension liability adjustment
      
-
      
1
      
4
  
Derivative instruments (Note 19)
       (1 )     (57 )     (35 )
Other comprehensive income (loss) before income taxes
      
232
       (57 )     (112 )
Income tax recovery (expense) on other comprehensive income (loss)
       (219 )     (179 )    
38
  
Other comprehensive income (loss)
      
13
       (236 )     (74 )
Comprehensive income
     $
2,171
     $
1,851
     $
1,482
  
 
 
See accompanying notes to consolidated financial statements.
 
5
 
Consolidated Balance Sheet
U.S. GAAP
 
 
In millions
December 31,
  
2007
    
2006
  
               
Assets
              
               
Current assets:
              
Cash and cash equivalents
     $
310
     $
179
  
Accounts receivable (Note 4)
      
370
      
692
  
Material and supplies
      
162
      
189
  
Deferred income taxes (Note 15)
      
68
      
84
  
Other
      
138
      
192
  
       
1,048
      
1,336
  
                   
Properties (Note 5)
      
20,413
      
21,053
  
Intangible and other assets (Note 6)
      
1,999
      
1,615
  
                   
Total assets
     $
23,460
     $
24,004
  
                   
Liabilities and shareholders’ equity
                  
                   
Current liabilities:
                  
Accounts payable and accrued charges (Note 8)
     $
1,282
     $
1,823
  
Current portion of long-term debt (Note 10)
      
254
      
218
  
Other
      
54
      
73
  
       
1,590
      
2,114
  
                   
Deferred income taxes (Note 15)
      
4,908
      
5,215
  
Other liabilities and deferred credits (Note 9)
      
1,422
      
1,465
  
Long-term debt (Note 10)
      
5,363
      
5,386
  
                   
Shareholders’ equity:
                  
Common shares (Note 11)
      
4,283
      
4,459
  
Accumulated other comprehensive loss (Note 20)
       (31 )     (44 )
Retained earnings
      
5,925
      
5,409
  
                   
       
10,177
      
9,824
  
                   
Total liabilities and shareholders’ equity
     $
23,460
     $
24,004
  
 
 
On behalf of the Board:
  
   
   
David G.A. McLean
E. Hunter Harrison
Director
Director
 
 
See accompanying notes to consolidated financial statements.
 
6
 
Consolidated Statement of Changes in Shareholders’ Equity
U.S. GAAP
 
 
   
Issued and
          
Accumulated
              
   
outstanding
          
other
          
Total
  
   
common
    
Common
    
comprehensive
    
Retained
    
shareholders’
  
In millions
  
shares
    
shares
    
loss
    
earnings
    
equity
  
                               
Balances at December 31, 2004
    
566.2
     $
4,706
     $ (148 )   $
4,726
     $
9,284
  
Net income
    
-
      
-
      
-
      
1,556
      
1,556
  
Stock options exercised and other (Notes 11, 12)
    
6.6
      
176
      
-
      
-
      
176
  
Share repurchase programs (Note 11)
     (36.0 )     (302 )    
-
       (1,116 )     (1,418 )
Other comprehensive loss (Note 20)
    
-
      
-
       (74 )    
-
       (74 )
Dividends ($0.50 per share)
    
-
      
-
      
-
       (275 )     (275 )
                                         
Balances at December 31, 2005
    
536.8
      
4,580
       (222 )    
4,891
      
9,249
  
Net income
    
-
      
-
      
-
      
2,087
      
2,087
  
Stock options exercised and other (Notes 11, 12)
    
5.1
      
133
      
-
      
-
      
133
  
Share repurchase programs (Note 11)
     (29.5 )     (254 )    
-
       (1,229 )     (1,483 )
Other comprehensive loss (Note 20)
    
-
      
-
       (236 )    
-
       (236 )
Adjustment to Accumulated other comprehensive
                                        
loss (Notes 2, 20)
    
-
      
-
      
414
      
-
      
414
  
Dividends ($0.65 per share)
    
-
      
-
      
-
       (340 )     (340 )
                                         
Balances at December 31, 2006
    
512.4
      
4,459
       (44 )    
5,409
      
9,824
  
Adoption of accounting pronouncements (Note 2)
    
-
      
-
      
-
      
95
      
95
  
Restated balance, beginning of year
    
512.4
      
4,459
       (44 )    
5,504
      
9,919
  
Net income
    
-
      
-
      
-
      
2,158
      
2,158
  
Stock options exercised and other (Notes 11, 12)
    
3.0
      
89
      
-
      
-
      
89
  
Share repurchase programs (Note 11)
     (30.2 )     (265 )    
-
       (1,319 )     (1,584 )
Other comprehensive income (Note 20)
    
-
      
-
      
13
      
-
      
13
  
Dividends ($0.84 per share)
    
-
      
-
      
-
       (418 )     (418 )
                                         
Balances at December 31, 2007
    
485.2
     $
4,283
     $ (31 )   $
5,925
     $
10,177
  
 
 
See accompanying notes to consolidated financial statements.
 
7
 
Consolidated Statement of Cash Flows
U.S. GAAP
 
 
In millions
Year ended December 31,
  
2007
    
2006
    
2005
  
                     
Operating activities
                    
                     
Net income
     $
2,158
     $
2,087
     $
1,556
  
Adjustments to reconcile net income to net cash provided
                          
from operating activities:
                          
Depreciation and amortization
      
678
      
653
      
630
  
Deferred income taxes (Note 15)
       (82 )    
3
      
547
  
Gain on sale of Central Station Complex (Note 5)
       (92 )    
-
      
-
  
Gain on sale of investment in English Welsh and Scottish Railway (Note 6)
     (61 )    
-
      
-
  
Other changes in:
                          
Accounts receivable (Note 4)
      
229
       (17 )    
142
  
Material and supplies
      
18
       (36 )     (25 )
Accounts payable and accrued charges
       (351 )    
197
       (156 )
Other net current assets and liabilities
      
39
      
58
      
8
  
Other
       (119 )    
6
      
6
  
Cash provided from operating activities
      
2,417
      
2,951
      
2,708
  
                           
Investing activities
                          
                           
Property additions
       (1,387 )     (1,298 )     (1,180 )
Acquisitions, net of cash acquired (Note 3)
       (25 )     (84 )    
-
  
Sale of Central Station Complex (Note 5)
      
351
      
-
      
-
  
Sale of investment in English Welsh and Scottish Railway (Note 6)
    
114
      
-
      
-
  
Other, net
      
52
      
33
      
105
  
Cash used by investing activities
       (895 )     (1,349 )     (1,075 )
                           
Financing activities
                          
                           
Issuance of long-term debt
      
4,171
      
3,308
      
2,728
  
Reduction of long-term debt
       (3,589 )     (3,089 )     (2,865 )
Issuance of common shares due to exercise of stock options
                          
and related excess tax benefits realized (Note 12)
      
77
      
120
      
115
  
Repurchase of common shares (Note 11)
       (1,584 )     (1,483 )     (1,418 )
Dividends paid
       (418 )     (340 )     (275 )
Cash used by financing activities
       (1,343 )     (1,484 )     (1,715 )
                         
Effect of foreign exchange fluctuations on U.S. dollar-denominated
                        
cash and cash equivalents
       (48 )     (1 )     (3 )
Net increase (decrease) in cash and cash equivalents
      
131
      
117
       (85 )
Cash and cash equivalents, beginning of year
      
179
      
62
      
147
  
Cash and cash equivalents, end of year
     $
310
     $
179
     $
62
  
                           
Supplemental cash flow information
                          
Net cash receipts from customers and other
     $
8,139
     $
7,946
     $
7,581
  
Net cash payments for:
                          
Employee services, suppliers and other expenses
       (4,323 )     (4,130 )     (4,075 )
Interest
       (340 )     (294 )     (306 )
Workforce reductions (Note 9)
       (31 )     (45 )     (87 )
Personal injury and other claims (Note 18)
       (86 )     (107 )     (92 )
Pensions (Note 13)
       (75 )     (112 )     (127 )
Income taxes (Note 15)
       (867 )     (307 )     (186 )
Cash provided from operating activities
     $
2,417
     $
2,951
     $
2,708
  
 
 
See accompanying notes to consolidated financial statements. 
 
8
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
Canadian National Railway Company, together with its wholly owned subsidiaries, collectively “CN” or “the Company,” is engaged in the rail and related transportation business. CN spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans and Mobile, Alabama, and the key cities of Toronto, Buffalo, Chicago, Detroit, Duluth, Minnesota/Superior, Wisconsin, Green Bay, Wisconsin, Minneapolis/St. Paul, Memphis, St. Louis, and Jackson, Mississippi, with connections to all points in North America. CN’s freight revenues are derived from the movement of a diversified and balanced portfolio of goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive.

1 Summary of significant accounting policies

These consolidated financial statements are expressed in Canadian dollars, except where otherwise indicated, and have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management reviews its estimates, including those related to personal injury and other claims, environmental claims, depreciation, pensions and other postretirement benefits, and income taxes, based upon currently available information. Actual results could differ from these estimates.

A. Principles of consolidation

These consolidated financial statements include the accounts of all subsidiaries. The Company’s investments in which it has significant influence are accounted for using the equity method and all other investments are accounted for using the cost method.

B. Revenues

Freight revenues are recognized using the percentage of completed service method based on the transit time of freight as it moves from origin to destination. Costs associated with movements are recognized as the service is performed. Revenues are presented net of taxes collected from customers and remitted to governmental authorities.

C. Foreign exchange

All of the Company’s United States (U.S.) operations are self-contained foreign entities with the U.S. dollar as their functional currency. Accordingly, the U.S. operations’ assets and liabilities and the Company’s foreign equity investment are translated into Canadian dollars at the rate in effect at the balance sheet date and the revenues and expenses are translated at average exchange rates during the year. All adjustments resulting from the translation of the foreign operations are recorded in Other comprehensive income (loss) (Note 20).

The Company designates the U.S. dollar-denominated long-term debt of the parent company as a foreign exchange hedge of its net investment in U.S. subsidiaries. Accordingly, unrealized foreign exchange gains and losses, from the dates of designation, on the translation of the U.S. dollar-denominated long-term debt are also included in Other comprehensive income (loss).

D. Cash and cash equivalents

Cash and cash equivalents include highly liquid investments purchased three months or less from maturity and are stated at cost, which approximates market value.
 
9
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
1 Summary of significant accounting policies (continued)

E. Accounts receivable

Accounts receivable are recorded at cost net of billing adjustments and an allowance for doubtful accounts. The allowance for doubtful accounts is based on expected collectibility and considers historical experience as well as known trends or uncertainties related to account collectibility.  Any gains or losses on the sale of accounts receivable are calculated by comparing the carrying amount of the accounts receivable sold to the total of the cash proceeds on sale and the fair value of the retained interest in such receivables on the date of transfer. Costs related to the sale of accounts receivable are recognized in earnings in the period incurred.

F. Material and supplies

Material and supplies, which consist mainly of rail, ties, and other items for construction and maintenance of property and equipment, as well as diesel fuel, are valued at weighted-average cost.

G. Properties

Railroad properties are carried at cost less accumulated depreciation including asset impairment write-downs. Labor, materials and other costs associated with the installation of rail, ties, ballast and other track improvements are capitalized to the extent they meet the Company’s minimum threshold for capitalization. Major overhauls and large refurbishments are also capitalized when they result in an extension to the useful life or increase the functionality of the asset.  Included in property additions are the costs of developing computer software for internal use. Maintenance costs are expensed as incurred.

The cost of railroad properties, less net salvage value, retired or disposed of in the normal course of business is charged to accumulated depreciation, in accordance with the group method of depreciation. The Company reviews the carrying amounts of properties held and used whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable based on future undiscounted cash flows. Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value.

Assets held for sale are measured at the lower of their carrying amount or fair value, less cost to sell. Losses resulting from significant line sales are recognized in income when the asset meets the criteria for classification as held for sale whereas losses resulting from significant line abandonments are recognized in the statement of income when the asset ceases to be used. Gains are recognized in income when they are realized.

H. Depreciation

The cost of properties, including those under capital leases, net of asset impairment write-downs, is depreciated on a straight-line basis over their estimated useful lives as follows:

Asset class
Annual rate 
Track and roadway
2
%
Rolling stock
3
%
Buildings
3
%
Information technology
11
%
Other
8
%

The Company follows the group method of depreciation for railroad properties and, as such, conducts comprehensive depreciation studies on a periodic basis to assess the reasonableness of the lives of properties based upon current information and historical activities. Changes in estimated useful lives are accounted for prospectively. In 2007, the Company completed a depreciation study for all of its U.S. assets, for which there was no significant impact on depreciation expense. The Company is also conducting a depreciation study of its Canadian properties, plant and equipment, and expects to finalize this study by the first quarter of 2008.

I. Intangible assets

Intangible assets relate to customer contracts and relationships assumed through past acquisitions and are being amortized on a straight-line basis over 40 to 50 years.

 
10
 
Notes to Consolidated Financial Statements
U.S. GAAP
 
 
1 Summary of significant accounting policies (continued)

J. Pensions

Pension costs are determined using actuarial methods. Net periodic benefit cost is charged to income and includes:

(i)   
the cost of pension benefits provided in exchange for employees’ services rendered during the year,
(ii)   
the interest cost of pension obligations,
(iii)   
the expected long-term return on pension fund assets,
(iv)   
the amortization of prior service costs and amendments over the expected average remaining service life of the employee group covered by the plans, and
(v)   
the amortization of cumulative net actuarial gains and losses in excess of 10% of, the greater of the beginning of year balances of the projected benefit obligation or market-related value of plan assets, over the expected average remaining service life of the employee group covered by the plans.
 
The pension plans are funded through contributions determined in accordance with the projected unit credit actuarial cost method.
 
K. Postretirement benefits other than pensions

The Company accrues the cost of postretirement benefits other than pensions using actuarial methods. These benefits, which are funded by the Company as they become due, include life insurance programs, medical benefits and free rail travel benefits.

The Company amortizes the cumulative net actuarial gains and losses in excess of 10% of the projected benefit obligation at the beginning of the year, over the expected average remaining service life of the employee group covered by the plans.

L. Personal injury and other claims

In Canada, the Company accounts for costs related to employee work-related injuries based on actuarially developed estimates of the ultimate cost associated with such injuries, including compensation, health care and third-party administration costs.

In the U.S., the Company accrues the expected cost for personal injury, property damage and occupational disease claims, based on actuarial estimates of their ultimate cost.

For all other legal actions in Canada and the U.S., 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.

M. Environmental expenditures

Environmental expenditures that relate to current operations are expensed unless they relate to an improvement to the property. Expenditures that relate to an existing condition caused by past operations and which are not expected to contribute to current or future operations are expensed. Liabilities are recorded when environmental assessments occur and/or remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used and the extent of the corrective action required, can be reasonably estimated.

N. Income taxes

The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method, the change in the net deferred tax asset or liability is included in the computation of net income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled.

O. Derivative financial instruments

The Company uses derivative financial instruments from time to time in the management of its interest rate and foreign currency exposures. Derivative instruments are recorded on the balance sheet at fair value and the changes in fair value are recorded in earnings or Other comprehensive income (loss) depending on the nature and effectiveness of the hedge transaction. Income and expense related to hedged derivative financial instruments are recorded in the same category as that generated by the underlying asset or liability.
 
11
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
1Summary of significant accounting policies (continued)

P. Stock-based compensation

The Company follows the fair value based approach for stock option awards based on the grant-date fair value using the Black-Scholes option-pricing model. The Company expenses the fair value of its stock option awards on a straight-line basis, over the period during which an employee is required to provide service (vesting period) or until retirement eligibility is attained, whichever is shorter. The Company also follows the fair value based approach for cash settled awards. Compensation cost for cash settled awards is based on the fair value of the awards at period-end and is recognized over the period during which an employee is required to provide service (vesting period) or until retirement eligibility is attained, whichever is shorter. See Note 12 – Stock plans, for the assumptions used to determine fair value and for other required disclosures.

Q. Recent accounting pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R), “Business Combinations,” which requires that assets acquired and liabilities assumed be measured at fair value as of the acquisition date and goodwill acquired from a bargain purchase (previously referred to as negative goodwill) be recognized in the Consolidated Statement of Income in the period the acquisition occurs. The Standard also prescribes disclosure requirements to enable users of financial statements to evaluate and understand the nature and financial effects of the business combination. The Standard is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company will apply SFAS No. 141(R) on a prospective basis.  The Standard may have a material impact on the reporting of future acquisitions in the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115,” which permits entities to elect to measure eligible items at fair value at specified election dates. For items for which the fair value option has been elected, an entity shall report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option: (i) may be applied instrument by instrument, such as investments otherwise accounted for by the equity method; (ii) is irrevocable (unless a new election date occurs); and (iii) is applied only to entire instruments and not to portions of instruments. This statement is effective as of an entity’s first fiscal year beginning after November 15, 2007. The Company does not expect this standard to have a significant impact on its financial statements.

2 Accounting changes
 
2007

Income taxes
On January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes,” which prescribes the criteria for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This Interpretation also provides guidance on derecognition, classification, interest and penalties, disclosure, and transition. The application of FIN No. 48 on January 1, 2007 had the effect of decreasing the net deferred income tax liability and increasing Retained earnings by $98 million. Disclosures prescribed by FIN No. 48 are presented in Note 15 – Income taxes.

Pensions and other postretirement benefits
On January 1, 2007, pursuant to SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R),” the Company early adopted the requirement to measure the defined benefit plan assets and the projected benefit obligation as of the date of the fiscal year-end statement of financial position for its U.S. plans. The Company elected to use the 15-month transition method, which allows for the extrapolation of net periodic benefit cost based on the September 30, 2006 measurement date to the fiscal year-end date of December 31, 2007. As a result, the Company recorded a reduction of $3 million to Retained earnings at January 1, 2007, which represented the net periodic benefit cost pursuant to the actuarial valuation attributable to the period between the early measurement date of September 30, 2006 and January 1, 2007 (the date of adoption).
 
12
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
2 Accounting changes (continued)
 
2006

Stock-based compensation
On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” which required the expensing of all options issued, modified or settled based on the grant date fair value over the period during which an employee is required to provide service (vesting period) or until retirement eligibility is attained, whichever is shorter. Compensation cost for cash settled awards is based on the fair value of the awards at period-end and is recognized over the period during which an employee is required to provide service (vesting period) or until retirement eligibility is attained, whichever is shorter.

The Company adopted SFAS No. 123(R) using the modified prospective approach, which required application of the standard to all awards granted, modified, repurchased or cancelled on or after January 1, 2006, and to all awards for which the requisite service had not been rendered as at such date. Since January 1, 2003, the Company had been following the fair value based approach prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure,” for stock option awards granted, modified or settled on or after such date, while cash settled awards were measured at their intrinsic value at each reporting period until December 31, 2005. As such, the application of SFAS No. 123(R) on January 1, 2006 to all awards granted prior to its adoption did not have a significant impact on the financial statements. In accordance with the modified prospective approach, prior period financial statements were not restated to reflect the impact of SFAS No. 123(R).

For the year ended December 31, 2006, the application of SFAS No. 123(R) had the effect of increasing stock-based compensation expense and decreasing net income by $16 million and $12 million, respectively, or $0.02 per basic and diluted earnings per share. Disclosures prescribed by SFAS No. 123(R) for the Company’s various stock-based compensation plans are presented in Note 12 – Stock plans.

Pension and other postretirement plans
On December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R),” which requires the Company to recognize the funded status of its various benefit plans in its Consolidated Balance Sheet. As such, on December 31, 2006, the Company increased its pension asset by $599 million, to $1,275 million, and decreased its pension and other postretirement benefits liability by $7 million, to $481 million. Pursuant to SFAS No. 158, the Company recognizes changes in the funded status in the year in which the changes occur, through Other comprehensive income (loss). The actuarial gains/losses and prior service costs/credits that arise during the period but are not recognized as components of net periodic benefit cost will be recognized as a component of Other comprehensive income (loss). These amounts recognized in Accumulated other comprehensive loss will be adjusted as they are subsequently recognized as components of net periodic benefit cost. Prior to December 31, 2006, actuarial gains/losses and prior service costs/credits were deferred in their recognition, and amortized into net periodic benefit cost over the expected average remaining service life of the employee group covered by the plans. The adoption of SFAS No. 158 had no impact on years prior to 2006 as retrospective application was not allowed. This standard has no effect on the computation of net periodic benefit cost for pensions and other postretirement benefits. See Note 9 – Other liabilities and deferred credits and Note 13 – Pensions, for the prospective application of SFAS No. 158 to the Company’s benefit plans.

The following table illustrates the incremental effect of applying SFAS No. 158 on individual line items in the Company’s Consolidated Balance Sheet at December 31, 2006:

   
Assets   
    
Liabilities
    
Shareholders' equity
  
In millions
  
Pension
    
Total
    
Other
postretirement
benefits
    
Pension (1)
    
Net deferred
income tax
    
Total
    
Accumulated
other
comprehensive
loss
    
Total
  
Balance at December 31, 2006 before application of SFAS No. 158
   $
676
     $
23,405
     $
313
     $
175
     $
4,939
     $
13,995
     $ (458 )   $
9,410
  
Adjustments
    
599
      
599
       (27 )    
20
      
192
      
185
      
414
      
414
  
Balance at December 31, 2006 after application of SFAS No. 158
   $
1,275
     $
24,004
     $
286
     $
195
     $
5,131
     $
14,180
     $ (44 )   $
9,824
  
(1)    On December 31, 2006, just prior to the adoption of SFAS No. 158, the Company had a minimum pension liability recorded of $17 million, with the offsetting amount recorded in Accumulated other comprehensive loss ($11 million after-tax).
13
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
3 Acquisitions

2007

Agreement to acquire Elgin, Joliet and Eastern Railway Company (EJ&E)
In September 2007, the Company entered into an agreement with the U.S. Steel Corporation (U.S. Steel) for the acquisition of the key operations of EJ&E for a purchase price of approximately U.S.$300 million. Under the terms of the agreement, the Company will acquire substantially all of the railroad assets and equipment of EJ&E, except those that support the Gary Works site in northwest Indiana and the steelmaking operations of U.S. Steel. The acquisition will be financed by debt and cash on hand.

In accordance with the terms of the agreement, the Company’s obligation to consummate the acquisition is subject to the Company having obtained from the U.S. Surface Transportation Board (STB) a final, unappealable decision that approves the acquisition or exempts it from regulation and does not impose on the parties conditions that would significantly and adversely affect the anticipated economic benefits of the acquisition to the Company.

On November 26, 2007, the STB accepted the Company’s application to consider the acquisition as a minor transaction that would normally provide for a decision by mid-2008.  The STB, however, is also requiring an Environmental Impact Statement (EIS) for the transaction, and it has indicated that its decision on the transaction will not be issued until the EIS process is completed. The Company believes that the STB should be able to conclude its environmental review and issue a decision that would enable the transaction to close by late 2008.  If the transaction is approved by the STB, the Company will account for the acquisition using the purchase method of accounting.

Acquisition of the Athabasca Northern Railway (ANY)
In December 2007, the Company acquired the rail assets of ANY for $25 million, for which it plans to invest $135 million in rail-line upgrades over the next three years.

2006

In 2006, the Company acquired the following three entities for a total acquisition cost of $84 million, paid in cash:

(i)  
Alberta short-line railways, composed of the 600-mile Mackenzie Northern Railway, the 118-mile Lakeland & Waterways Railway and the 21-mile Central Western Railway,
(ii)  
Savage Alberta Railway, Inc., a 345-mile short-line railway, and
(iii)  
the remaining 51% of SLX Canada Inc., a company engaged in equipment leasing in which the Company previously had a 49% interest that had been consolidated.

All acquisitions were accounted for using the purchase method of accounting. As such, the Company’s consolidated financial statements include the assets, liabilities and results of operations of the acquired entities from the dates of acquisition.
 
14
 
Notes to Consolidated Financial Statements
U.S. GAAP

4 Accounts receivable
 
In millions
December 31,
  
2007
    
2006
  
Freight
     $
146
     $
398
  
Non-freight
      
251
      
313
  
       
397
      
711
  
Allowance for doubtful accounts
       (27 )     (19 )
      $
370
     $
692
  

The Company has a five-year agreement, expiring in May 2011, to sell an undivided co-ownership interest for maximum cash proceeds of $600 million in a revolving pool of freight receivables to an unrelated trust. Pursuant to the agreement, the Company sells an interest in its receivables and receives proceeds net of the retained interest as stipulated in the agreement.

The Company has retained the responsibility for servicing, administering and collecting the receivables sold. At December 31, 2007, the servicing asset and liability were not significant.  Subject to customary indemnifications, the trust’s recourse is generally limited to the receivables.

The Company accounted for the accounts receivable securitization program as a sale, because control over the transferred accounts receivable was relinquished. Due to the relatively short collection period and the high quality of the receivables sold, the fair value of the undivided interest transferred to the trust approximated the book value thereof.

At December 31, 2007, the Company had sold receivables that resulted in proceeds of $588 million under the accounts receivable securitization program ($393 million at December 31, 2006), and recorded the retained interest of approximately 10% of this amount in Other current assets (retained interest of approximately 10% recorded at December 31, 2006).

Other income included $24 million in 2007, $12 million in 2006 and $16 million in 2005, for costs related to the agreement, which fluctuate with changes in prevailing interest rates.
 
5 Properties

In millions
  
December 31, 2007
    
December 31, 2006
  
         
Accumulated
                
Accumulated
        
   
Cost
    
depreciation
    
Net
    
Cost
    
depreciation
    
Net
  
Track and roadway (1)
   $
22,020
     $
6,433
     $
15,587
     $
22,579
     $
6,445
     $
16,134
  
Rolling stock
    
4,702
      
1,606
      
3,096
      
4,833
      
1,676
      
3,157
  
Buildings
    
1,105
      
498
      
607
      
1,251
      
609
      
642
  
Information technology
    
667
      
131
      
536
      
622
      
101
      
521
  
Other
    
829
      
242
      
587
      
1,226
      
627
      
599
  
    $
29,323
     $
8,910
     $
20,413
     $
30,511
     $
9,458
     $
21,053
  
                                                 
Capital leases included in properties
                                                
Track and roadway (1)
   $
457
     $
38
     $
419
     $
450
     $
25
     $
425
  
Rolling stock
    
1,591
      
310
      
1,281
      
1,442
      
275
      
1,167
  
Buildings
    
119
      
2
      
117
      
38
      
3
      
35
  
Information technology
    
14
      
2
      
12
      
20
      
6
      
14
  
Other
    
211
      
63
      
148
      
188
      
41
      
147
  
    $
2,392
     $
415
     $
1,977
     $
2,138
     $
350
     $
1,788
  
(1)  
Includes the cost of land of $1,530 million and $1,746 million as at December 31, 2007 and 2006, respectively, of which $108 million was for right-of-way access and was recorded as a capital lease in both years.

Sale of Central Station Complex
In November 2007, CN finalized an agreement with Homburg Invest Inc., to sell its Central Station Complex in Montreal for proceeds of $355 million before transaction costs.  Under the agreement, CN has entered into long-term arrangements to lease back its corporate headquarters building and the Central Station railway passenger facilities. The transaction resulted in a gain on disposition of $222 million,
 
15
 
Notes to Consolidated Financial Statements
U.S. GAAP
 
 
5 Properties (continued)

including amounts related to the corporate headquarters building and the Central Station railway passenger facilities, which are being deferred and amortized over their respective lease terms. A gain of $92 million ($64 million after-tax) was recognized immediately in Other income (see Note 14).

6 Intangible and other assets

In millions
December 31,
  
2007
    
2006
  
Pension asset (Notes 2,13)
     $
1,768
     $
1,275
  
Investments (A)
      
24
      
142
  
Other receivables
      
106
      
95
  
Intangible assets (B)
      
54
      
65
  
Other
      
47
      
38
  
      $
1,999
     $
1,615
  

A. Investments

As at December 31, 2007, the Company had $17 million ($134 million at December 31, 2006) of investments accounted for under the equity method and $7 million ($8 million at December 31, 2006) of investments accounted for under the cost method.

In November 2007, Germany's state-owned railway, Deutsche Bahn AG, acquired all of the shares of English Welsh and Scottish Railway (EWS), a company that provides most of the rail freight services in Great Britain and operates freight trains through the English Channel Tunnel, and in which the Company had a 32% ownership interest. The Company accounted for its investment in EWS using the equity method. The Company's share of the cash proceeds was $114 million (net after-tax proceeds are expected to approximate $84 million) resulting in a gain on disposition of the investment of $61 million ($41 million after-tax) which was recorded in Other income (see Note 14). An additional £18 million (Cdn$36 million) was placed in escrow and will be recognized when defined contingencies are resolved.

B. Intangible assets

Intangible assets relate to customer contracts and relationships assumed through past acquisitions.

7 Credit facility

The Company has a U.S.$1 billion revolving credit facility expiring in October 2011. The credit facility is available for general corporate purposes, including back-stopping the Company’s commercial paper program, and provides for borrowings at various interest rates, including the Canadian prime rate, bankers’ acceptance rates, the U.S. federal funds effective rate and the London Interbank Offer Rate, plus applicable margins. The credit facility agreement has one financial covenant, which limits debt as a percentage of total capitalization, and with which the Company is in compliance. As at December 31, 2007, the Company had no outstanding borrowings under its revolving credit facility (nil as at December 31, 2006) and had letters of credit drawn of $57 million ($308 million as at December 31, 2006).

The Company’s commercial paper program is backed by a portion of its revolving credit facility. As at December 31, 2007, the Company had total borrowings under its commercial paper program of $122 million, of which $114 million was denominated in Canadian dollars and $8 million was denominated in U.S. dollars (U.S.$8 million).  The weighted-average interest rate on these borrowings was 5.01%.  The Company had no commercial paper outstanding as at December 31, 2006.
 
16
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
8 Accounts payable and accrued charges

In millions
December 31,
  
2007
    
2006
  
Trade payables
     $
457
     $
529
  
Payroll-related accruals
      
234
      
232
  
Accrued charges
      
146
      
184
  
Income and other taxes
      
123
      
566
  
Accrued interest
      
118
      
124
  
Personal injury and other claims provision
      
102
      
115
  
Workforce reduction provisions
      
19
      
23
  
Other
      
83
      
50
  
      $
1,282
     $
1,823
  

9 Other liabilities and deferred credits

In millions
December 31,
  
2007
    
2006
  
Personal injury and other claims provision, net of current portion
     $
344
     $
487
  
Other postretirement benefits liability, net of current portion (A)
      
248
      
269
  
Pension liability (Note 13)
      
187
      
195
  
Environmental reserve, net of current portion
      
83
      
106
  
Workforce reduction provisions, net of current portion (B)
      
53
      
74
  
Deferred credits and other
      
507
      
334
  
      $
1,422
     $
1,465
  

A. Other postretirement benefits liability

The following disclosures in relation to the Company’s other postretirement benefit plans are made pursuant to SFAS No. 158 requirements.

(i) Obligations and funded status

In millions
Year ended December 31,
  
2007
    
2006
  
Change in benefit obligation
              
Benefit obligation at beginning of year
     $
286
     $
300
  
Amendments
      
12
      
2
  
Adoption of SFAS No. 158 measurement date provision (Note 2)
      
2
      
-
  
Actuarial gain
       (7 )     (19 )
Interest cost
      
15
      
16
  
Service cost
      
5
      
4
  
Curtailment gain
       (9 )    
-
  
Foreign currency changes
       (21 )    
-
  
Benefits paid
       (17 )     (17 )
Benefit obligation at end of year
     $
266
     $
286
  
Unfunded status
     $
266
     $
286
  
 
17
 
Notes to Consolidated Financial Statements
U.S. GAAP
 
 
9 Other liabilities and deferred credits (continued)

(ii) Amount recognized in the Consolidated Balance Sheet

In millions
December 31,
  
2007
    
2006
  
Current liabilities
     $
18
     $
17
  
Noncurrent liabilities
      
248
      
269
  
Total amount recognized
     $
266
     $
286
  

(iii) Amounts recognized in Accumulated other comprehensive loss (Note 20)

In millions
December 31,
  
2007
    
2006
  
Net actuarial gain
     $
27
     $
34
  
Prior service cost
       (8 )     (7 )

(iv) Components of net periodic benefit cost

In millions
Year ended December 31,
  
2007
    
2006
    
2005
  
Service cost
     $
5
     $
4
     $
5
  
Interest cost
      
15
      
16
      
19
  
Curtailment gain
       (4 )    
-
      
-
  
Amortization of prior service cost
      
2
      
2
      
1
  
Recognized net actuarial gain
       (4 )     (5 )     (1 )
Net periodic benefit cost
     $
14
     $
17
     $
24
  

The estimated prior service cost and net actuarial gain for other postretirement benefits that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $3 million and $2 million, respectively.
 
(v) Weighted-average assumptions

The following assumptions are used in accounting for other postretirement benefits:

December 31,
  
2007 
  
2006 
  
2005 
To determine benefit obligation
                  
Discount rate
     5.84 %     5.44 %     5.30 %
Rate of compensation increase
     3.50 %     3.50 %     3.75 %
                         
To determine net periodic benefit cost
                        
Discount rate
     5.44 %     5.30 %     5.90 %
Rate of compensation increase
     3.50 %     3.75 %     3.75 %

(vi) Health care cost trend rate

For measurement purposes, increases in the per capita cost of covered health care benefits were assumed to be 12% for 2008 and 13% for 2007. It is assumed that the rate will decrease gradually to 6% in 2013 and remain at that level thereafter.
 
18
 
Notes to Consolidated Financial Statements
U.S. GAAP
 

9 Other liabilities and deferred credits (continued)

A one-percentage-point change in the assumed health care cost trend rates would have the following effect:

In millions
  
One-percentage-point
  
   
Increase
    
Decrease
  
Effect on total service and interest costs
   $
2
     $ (1 )
Effect on benefit obligation
    
17
       (14 )

(vii) Estimated future benefit payments

The estimated future benefit payments for each of the next five years and the subsequent five-year period are as follows:

In millions
            
2008
      
$
18
  
2009
        
18
  
2010
        
19
  
2011
        
19
  
2012
        
20
  
Years 2013 to 2017
        
107
  

B. Workforce reduction provisions

The workforce reduction provisions, which cover employees in both Canada and the United States, are mainly comprised of payments related to severance, early retirement incentives and bridging to early retirement, the majority of which will be disbursed within the next four years. In 2007, net charges and adjustments increased the provisions by $6 million (nil for the year ended December 31, 2006). Payments have reduced the provisions by $31 million for the year ended December 31, 2007 ($45 million for the year ended December 31, 2006). As at December 31, 2007, the aggregate provisions, including the current portion, amounted to $72 million ($97 million as at December 31, 2006).
 
19
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
10 Long-term debt

         
U.S. dollar-
              
         
denominated
    
December 31,
  
In millions
Maturity
  
amount
    
2007
    
2006
  
Debentures and notes: (A)
                    
                     
Canadian National series:
                    
 
4.25%   5-year notes (B)
Aug. 1, 2009
   $
300
     $
297
     $
350
  
 
6.38%   10-year notes (B)
Oct. 15, 2011
    
400
      
397
      
466
  
 
4.40%   10-year notes (B)
Mar. 15, 2013
    
400
      
397
      
466
  
 
5.80%   10-year notes (B)
June 1, 2016
    
250
      
248
      
291
  
 
5.85%   10-year notes (B)
Nov. 15, 2017
    
250
      
248
      
-
  
 
6.80%   20-year notes (B)
July 15, 2018
    
200
      
198
      
233
  
 
7.63%   30-year debentures
May 15, 2023
    
150
      
149
      
175
  
 
6.90%   30-year notes (B)
July 15, 2028
    
475
      
471
      
554
  
 
7.38%   30-year debentures (B)
Oct. 15, 2031
    
200
      
198
      
233
  
 
6.25%   30-year notes (B)
Aug. 1, 2034
    
500
      
496
      
583
  
 
6.20%   30-year notes (B)
June 1, 2036
    
450
      
446
      
524
  
 
6.71%   Puttable Reset SecuritiesSM (B)(C)
July 15, 2036
    
250
      
248
      
291
  
 
6.38%   30-year debentures (B)
Nov. 15, 2037
    
300
      
297
      
-
  
                           
Illinois Central series:
                          
 
6.98%   12-year notes
July 12, 2007
    
50
      
-
      
58
  
 
6.63%   10-year notes
June 9, 2008
    
20
      
20
      
23
  
 
5.00%   99-year income debentures
Dec. 1, 2056
    
7
      
7
      
9
  
 
7.70%   100-year debentures
Sept. 15, 2096
    
125
      
124
      
146
  
                             
Wisconsin Central series:
                          
 
6.63%   10-year notes
April 15, 2008
    
150
      
149
      
175
  
                     
4,390
      
4,577
  
BC Rail series:
                          
Non-interest bearing 90-year subordinated notes (D)
July 14, 2094
    
-
      
842
      
842
  
Total debentures and notes
              
5,232
      
5,419
  
                               
Other:
                              
Commercial paper (E) (Note 7)
              
122
      
-
  
Capital lease obligations and other (F)
              
1,114
      
1,038
  
Total other 
              
1,236
      
1,038
  
                     
6,468
      
6,457
  
Less:
                              
Current portion of long-term debt
              
254
      
218
  
Net unamortized discount
              
851
      
853
  
                     
1,105
      
1,071
  
                    $
5,363
     $
5,386
  
 
A.  The Company’s debentures, notes and revolving credit facility are unsecured.
 
B.  These debt securities are redeemable, in whole or in part, at the option of the Company, at any time, at the greater of par and a formula price based on interest rates prevailing at the time of redemption.
 
20
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
10 Long-term debt (continued)

C. On July 15, 2006, the interest rate on the Company’s U.S.$250 million Puttable Reset SecuritiesSM (PURS) was reset at a new rate of 6.71% for the remaining 30-year term ending July 15, 2036. The remarketing did not trigger an extinguishment of debt, as the provisions for the reset of the interest rate were set forth in the original PURS. As such, the original PURS remain outstanding but accrue interest at the new rate until July 2036. Under securities laws, the remarketing required utilization of the Company's shelf prospectus and registration statement.

D. The Company records these notes as a discounted debt of $6 million, using an imputed interest rate of 5.75%. The discount of $836 million is included in the net unamortized discount.

E. The Company has a commercial paper program, which is backed by a portion of its revolving credit facility, enabling it to issue commercial paper up to a maximum aggregate principal amount of $800 million, or the U.S. dollar equivalent. Commercial paper debt is due within one year but is classified as long-term debt, reflecting the Company’s intent and contractual ability to refinance the short-term borrowings through subsequent issuances of commercial paper or drawing down on the long-term revolving credit facility.

F. During 2007, the Company recorded $213 million ($264 million in 2006) in assets it acquired through equipment leases and $90 million relating to the leaseback arrangement from the Central Station Complex transaction (see Note 5), for which an equivalent amount was recorded in debt.

Interest rates for capital lease obligations range from approximately 3.0% to 7.9% with maturity dates in the years 2008 through 2037. The imputed interest on these leases amounted to $515 million as at December 31, 2007 and $384 million as at December 31, 2006.

The capital lease obligations are secured by properties with a net carrying amount of $1,566 million as at December 31, 2007 and $1,368 million as at December 31, 2006.

G. Long-term debt maturities, including repurchase arrangements and capital lease repayments on debt outstanding as at December 31, 2007, for the next five years and thereafter, are as follows:

In millions
    
2008
$
254
2009
  
409
2010
  
48
2011
  
628
2012
  
27
2013 and thereafter
  
4,251

H.  The aggregate amount of debt payable in U.S. currency as at December 31, 2007 was U.S.$5,280 million (Cdn$5,234 million) and U.S.$4,636 million (Cdn$5,403 million) as at December 31, 2006.
 
I.  The Company has U.S.$2.5 billion available under its currently effective shelf prospectus and registration statement, expiring in January 2010, providing for the issuance of debt securities in one or more offerings.

11 Capital stock

A. Authorized capital stock
 
The authorized capital stock of the Company is as follows:

•   
Unlimited number of Common Shares, without par value
•   
Unlimited number of Class A Preferred Shares, without par value, issuable in series
•   
Unlimited number of Class B Preferred Shares, without par value, issuable in series
 
21
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
11 Capital stock (continued)

B. Issued and outstanding common shares

During 2007, the Company issued 3.0 million shares (5.1 million shares in 2006 and 6.6 million shares in 2005) related to stock options exercised. The total number of common shares issued and outstanding was 485.2 million as at December 31, 2007. 

C. Share repurchase programs

In July 2007, the Board of Directors of the Company approved a new share repurchase program which allows for the repurchase of up to 33.0 million common shares between July 26, 2007 and July 25, 2008 pursuant to a normal course issuer bid, at prevailing market prices or such other price as may be permitted by the Toronto Stock Exchange.

As at December 31, 2007, under this current share repurchase program, the Company repurchased 17.7 million common shares for $897 million, at a weighted-average price of $50.70 per share.

In June 2007, the Company completed its 28.0 million share repurchase program, which began on July 25, 2006, for a total of $1,453 million, at a weighted-average price of $51.88 per share. Of this amount, 12.5 million common shares were repurchased in 2007 for $687 million, at a weighted-average price of $54.93 per share.

12 Stock plans

The Company has various stock-based incentive plans for eligible employees. A description of the Company’s major plans is provided below:

A. Employee Share Investment Plan

The Company has an Employee Share Investment Plan (ESIP) giving eligible employees the opportunity to subscribe for up to 10% of their gross salaries to purchase shares of the Company’s common stock on the open market and to have the Company invest, on the employees’ behalf, a further 35% of the amount invested by the employees, up to 6% of their gross salaries.

The number of participants holding shares at December 31, 2007 was 14,206 (12,590 at December 31, 2006 and 11,010 at December 31, 2005). The total number of ESIP shares purchased on behalf of employees, including the Company’s contributions, was 1.3 million in 2007, 1.3 million in 2006 and 1.6 million in 2005, resulting in a pre-tax charge to income of $16 million, $15 million and $12 million for the years ended December 31, 2007, 2006 and 2005, respectively.

B. Stock-based compensation plans

Compensation cost for awards under all stock-based compensation plans was $62 million, $79 million and $120 million for the years ended December 31, 2007, 2006 and 2005, respectively. The total tax benefit recognized in income in relation to stock-based compensation expense for the years ended December 31, 2007, 2006 and 2005 was $23 million, $22 million and $34 million, respectively.

(i) Cash settled awards
 
Restricted share units
The Company has granted restricted share units (RSUs), 0.7 million in 2007, 0.8 million in 2006, and 0.9 million in 2005, to designated management employees entitling them to receive payout in cash based on the Company’s share price.  The RSUs granted are generally scheduled for payout after three years (“plan period”) and vest upon the attainment of targets relating to return on invested capital over the plan period and to the Company’s share price during the last three months of the plan period. Given that the targets related to the 2005 grant were met at December 31, 2007, a payout of $47 million occurred in February of 2008, which was based on the Company’s share price during the 20-day period ending on January 31, 2008. As at December 31, 2007, 0.1 million of RSUs remained authorized for future issuance under this plan.

Vision 2008 Share Unit Plan
In the first quarter of 2005, the Board of Directors of the Company approved a special share unit plan with a four-year term to December 31, 2008, entitling designated senior management employees to receive cash payout in January 2009. The Company granted 0.9 million share
 
22
 
Notes to Consolidated Financial Statements
U.S. GAAP

 
12 Stock plans (continued)

units which vest conditionally upon the attainment of targets relating to the Company’s share price during the six-month period ending December 31, 2008. Payout is conditional upon the attainment of targets relating to return on invested capital over the four-year period and to the Company’s share price during the 20-day period ending on December 31, 2008. The award payout will be equal to the number of share units vested on December 31, 2008 multiplied by the Company’s 20-day average share price ending on such date. As at December 31, 2007, 0.1 million share units remained authorized for future issuance under this plan.

Voluntary Incentive Deferral Plan
The Company has a Voluntary Incentive Deferral Plan (VIDP), providing eligible senior management employees the opportunity to elect to receive their annual incentive bonus payment and other eligible incentive payments in deferred share units (DSUs). A DSU is equivalent to a common share of the Company and also earns dividends when normal cash dividends are paid on common shares. The number of DSUs received by each participant is established using the average closing price for the 20 trading days prior to and including the date of the incentive payment. For each participant, the Company will grant a further 25% of the amount elected in DSUs, which will vest over a period of four years.  The election to receive eligible incentive payments in DSUs is no longer available to a participant when the value of the participant's vested DSUs is sufficient to meet the Company's stock ownership guidelines. The value of each participant’s DSUs is payable in cash at the time of cessation of employment. The Company’s liability for DSUs is marked-to-market at each period-end based on the Company’s closing stock price.
 
The following table provides the 2007 activity for all cash settled awards: