Canadian National, Illinois Central Seek U.S. Surface Transportation Board Approval of Integrated North American Rail Network.

6 WASHINGTON, DC--(BUSINESS WIRE)--July 16, 1998-- CN(ME:CNR.) (TSE:CNR.) (NYSE:CNI) IC(NYSE:IC)

- CN-IC merger will allow efficient, single-line services along fast-growing north-south trade routes, offer shippers access to new markets and routing options and strengthen U.S. rail and truck industry competition -

Canadian National Railway Company (CN) and Illinois Central Corporation (IC) late yesterday, filed a formal application with the U.S. Surface Transportation Board seeking regulatory approval of CN's acquisition of IC and the integration of the companies' rail operations.

CN President and Chief Executive Officer Paul M. Tellier and IC President and Chief Executive Officer John D. McPherson said the 18,670 route-mile CN/IC network - with 26,000 employees and operations in 16 U.S. states and eight Canadian provinces - will significantly improve the U.S. rail transportation system. Describing their end-to-end joining of the railroads at Chicago, the two CEOs said it was a "simple, straightforward transaction that makes sense" because it:

- Increases job opportunities for employees in the U.S. while at the same time avoiding network restructuring, line abandonments, reductions in service or environmental damage. It also allows the historic Illinois Central to retain its logo, corporate identity and a significant corporate presence in Chicago;

- Extends new, efficient single-line services to numerous existing and prospective customers by uniting CN - North America's most improved railroad - with IC - the most efficient U.S. Class 1 rail carrier - thereby connecting the Atlantic (Halifax), Pacific (Vancouver and Prince Rupert, B.C.) and U.S. gulf coasts (New Orleans) with a single "Y-shaped" network;

- Offers customers new sources for supplies and parts, and new markets for finished products, raw materials and bulk commodities;

- Increases competition among rail and motor carriers in every market and at every gateway on the single-line CN/IC network. It also provides more routing options, more gateway choices and more service alternatives;

- Yields faster transit times, greater length-of-haul efficiencies, improved schedule reliability and better equipment utilization through new, more efficient CN/IC links in Chicago, reduced switching within the Chicago gateway, and streamlined marshaling of single-line and interline traffic. CN/IC will not have to rely as heavily on Chicago yards and terminals to switch cars and make up trains - it will be able to prepare blocks of freight cars, or entire trains, at uncongested yards in Canada and the U.S., which can move through Chicago with little or no handling;

- Responds directly to evolving customer requirements for improved rail services to accommodate rapidly growing north/south trade flows stimulated by the North American Free Trade Agreement. It enhances the benefits created by the alliance the two railroads have struck with Kansas City Southern Railway Company (KCSR) - an alliance that will enhance through-train service between Canada, the U.S. Midwest, the U.S. South and Mexico;

- Strengthens the competitiveness of CN/IC and generates new growth opportunities. The combined carriers will benefit from extended hauls of existing traffic and traffic diversions from other railroads and other modes.

The applicants also seek the imposition of terminal trackage rights in Springfield, Ill. This is necessary to enable CN/IC and Kansas City Southern Railway, a unit of Kansas City Southern Industries Inc. (NYSE: KSU), to operate an efficient Chicago-Kansas City service that the CN/IC transaction will make possible. CN, IC and KCSR began a 15-year marketing agreement in April 1998; at the same time, CN and KCSR also reached agreement on certain trackage and haulage rights and future terminal investments.

CN's Tellier said: "We are confident that the Surface Transportation Board will share our conviction that the transaction and alliance with KCSR offer clear-cut benefits that are in the public interest. Our transaction and alliance will promote efficiency, choice and competition in an era when north-south trade flows in North America are growing at double-digit rates. They will generate new traffic for CN/IC, strengthen the combined network and improve CN/IC's long-term ability to generate sustainable jobs and new job opportunities. In particular, the transaction and alliance will invigorate a key link - CN's Grand Trunk Western Railroad (GTW) - among markets served by CN in the corridor between southern Ontario and Chicago. This is important at a time of growing consolidation in the U.S. railroad industry. Significantly, the transaction has the support of many CN/IC customers."

IC's McPherson said: "The CN/IC network will be a major force in transportation in North America, particularly in the fiercely competitive rail market in the U.S. Midwest. CN is the perfect fit at the perfect time for IC - a transaction which is good for IC and good for its customers.

"Absent a merger with CN," McPherson added, "the IC faces an uncertain future in the consolidating U.S. railroad industry. Major rail consolidations in the eastern and western regions of the U.S. threaten IC's future traffic with more rigorous competition. Yet IC's opportunities to consolidate with any of the major U.S. rail carriers may have been limited by potential adverse impacts on competition. Any consolidation with one of these carriers also offered the prospect of significant adverse employee and post- consolidation implementation impacts. In the CN transaction, none of these problems exists."

Tellier and McPherson noted that CN/IC's improved connections, freight car blocking plans and routings through and around the Chicago terminal will reduce switching activity, improve equipment utilization and increase service reliability. The new CN/IC will adopt the most effective approaches to service quality and operating efficiency of the constituent railroads.

CN/IC's application identifies approximately US$216.2 million in total quantifiable benefits that will flow from the transaction in a normal year.

CN/IC expects to invest approximately US$141.5 million, including:

- US$54.6 million for new locomotives; - Up to US$37.3 million for new intermodal and automotive facilities;

- US$31.2 million for yard improvements and new connections;

- US$17.6 million on information technology.

In connection with the alliance, CN/IC and KCSR plan investments in intermodal facilities at multiple locations, including Kansas City, Memphis and Dallas, as the need develops. CN/IC will be positioned to increase capacity at an auto ramp at Jackson, Miss., and CN/IC and KCSR plan mutually beneficial investments in other automotive facilities as needed. These may include distribution facilities in Dallas, Kansas City, Shreveport, La., Memphis and the New Orleans area.

The investments in intermodal and automotive facilities - and other competition-enhancing provisions of an access agreement signed by CN and KCSR on April 16, 1998 - are contingent upon STB approval of the CN/IC merger.

The CN and KCSR access agreement encompasses certain haulage and trackage rights in the Southern U.S. that increase rail competition in Alabama, Mississippi, and Louisiana's "Chemical Coast".

The CN/KCSR access agreement was accompanied by a 15-year marketing alliance agreement signed by CN, IC and KCSR, which offers new services linking points in Canada and the major U.S. Midwest markets of Detroit, Chicago, Kansas City and St. Louis, along with the key Southern and Southwestern markets of Memphis, Dallas and Houston. The marketing alliance, which did not require STB approval, is now in effect. The alliance facilitates customer access via KCSR's affiliate, The Texas Mexican Railway Company, to markets served by Mexico's largest rail system, Transportacion Ferroviaria Mexicana, S.A. de C.V. CN/IC/KCSR are coordinating sales, marketing and operations in a large number of markets and interline traffic at key gateways.

CN announced its plans to acquire IC on Feb. 10, 1998, completed the cash acquisition of 75 per cent of IC's outstanding common stock by March 14 and consummated a "second-step" merger between IC and a CN subsidiary June 4. As a result of the second-step merger, the 25 per cent of outstanding IC common shares not acquired in the cash tender offer were exchanged for approximately 10.1 million common shares of CN, representing 10.3 per cent of the outstanding common shares of CN on a fully diluted basis. All IC shares acquired by CN are held in a voting trust pending a final STB ruling on the CN/IC combination.

New rail services are planned. The CN/IC transaction presents significant opportunities for creating efficient, reliable automotive service corridors in cooperation with alliance partner KCSR and other carriers in IC's territory. CN's and IC's train schedules and freight car blocking assignments will be changed, and many trains will either avoid the congestion inherent in train handling within the Chicago gateway, or move between CN and IC via their improved connection in south Chicago.

The train that today operates from Oshawa, Ont., a major automotive manufacturing Centre located east of Toronto, to Chicago, will be extended to operate over IC to Memphis. At Memphis this train will combine with an intermodal train and operate on a "run-through" basis to Shreveport and Dallas.

CN/IC, as traffic grows, plans to inaugurate a new automotive service from Flint, Mich., to Council Bluffs, Iowa, for interchange. Michigan traffic will be combined at Flint with traffic forwarded from Canada to form the new train. From Chicago's Markham Yard to Council Bluffs, Iowa, the Flint train will operate on a combined schedule with IC's present intermodal service over the tracks of IC's wholly-owned Chicago, Central & Pacific Railroad Company.

Also, a new service will be added to accommodate traffic growth from Oshawa to Kansas City, utilizing existing train service to Chicago. From Chicago, this train will operate as a new service over IC to Springfield, and from there over the tracks of KCSR's affiliate, Gateway Western Railway Company, to Kansas City.

CN/IC will inaugurate direct intermodal service between Montreal and Memphis, a lane where significant potential for diversions from trucks exists. This enhanced service is expected to handle traffic originating (via CN connections) in Eastern Canada and the State of Maine. Traffic will be consolidated at Montreal, adding Toronto, Detroit and Chicago traffic destined to Memphis en route. From Memphis southward, the intermodal and automotive traffic will initially be combined and operated on an expedited schedule to Shreveport and Dallas. The train will bypass the Jackson, Miss., yard and operate over KCSR directly to and from Dallas, and the Houston area via Port Arthur. A complementary northbound service will also be introduced.

With the anticipated growth in traffic, a direct Toronto to Shreveport manifest service will be inaugurated. This train will handle traffic from eastern Canada and Michigan points to significant concentration and interchange points at Memphis, Jackson, Miss., and Shreveport, which is also the site of KCSR's main classification yard. A complementary northbound service will also be inaugurated.

CN and IC believe their existing main-line tracks and rail facilities can readily handle the projected increases in train volumes.

CN/IC will gain efficiencies from integrating their operations by:

- Consolidating repair and scheduled inspections of GTW locomotives from GTW's Battle Creek, Mich., shops at IC's Woodcrest shop at Homewood, Ill.,

IC's Memphis shops and GTW's Flint shop. Battle Creek will retain responsibility for fueling and servicing local yard locomotives, terminating trains and foreign-line locomotives. This will permit the closing of the less-efficient Battle Creek locomotive shops. GTW employees at Battle Creek will be offered positions at Woodcrest, Memphis and Flint;

- Consolidating GTW and CN's Duluth, Winnipeg & Pacific (DW&P) division train dispatching, crew calling and time-keeping operations at IC's Homewood facility;

- Merging CN's Gateway and IC's Moyers intermodal facilities at Harvey, Ill., south of Chicago;

- Consolidating certain CN/IC general and administrative functions. These functions, including accounting, information technology and telecommunications, will be consolidated from locations on the IC and GTW to centralized locations;

- Retaining, initially, separate customer service organizations and facilities. Over time, CN/IC will take advantage of integration and efficiency opportunities as they present themselves, but not at the expense of quality of service. CN/IC, initially, will also maintain separate operations support centres on the IC, GTW and DW&P. However, CN/IC expects over time to integrate these operations support services in the U.S.;

- Combining purchasing functions to consolidate inventories and to achieve volume discounts.

CN/IC will file a comprehensive Safety Integration Plan with the STB.

CN/IC ( with a system-wide workforce of 26,000 ( will have approximately 5,200 employees and 4,520 route-miles of track in the U.S. The CN/IC application includes a detailed three-year labor impact statement for the combined workforce in the U.S.

CN/IC ( consistent with its continuing initiatives to improve efficiency ( is intensifying its efforts to boost the productivity of its Canadian asset base, train and yard operations and general and administrative functions. These actions will position CN/IC to take full advantage of long-term traffic growth opportunities arising from the transaction and alliance.

CN's rail network consists of approximately 15,300 route-miles in eight Canadian provinces and six U.S. states. CN has principal routes to every major metropolitan area in Canada, and to major U.S. rail hubs, including Buffalo, Detroit, Duluth/Superior and Chicago. The eastern terminus of CN's network is Halifax, N.S.; the western termini are Vancouver and Prince Rupert, B.C. The southern terminus is Chicago, which CN reaches from the east over its GTW subsidiary. From the West, CN reaches Chicago via haulage rights. CN recently signed an agreement to route its merchandise and bulk commodity trains between Superior, Wis., and Chicago over lines of Wisconsin Central Transportation Corporation. WC already hauls CN's intermodal traffic between Superior and Chicago.

IC's rail network consists of approximately 3,370 route-miles of track running north-south between Chicago and the Gulf of Mexico and east-west between Chicago and Nebraska and Iowa. IC's main north-south route reaches every major metropolitan area on the Mississippi River, including Chicago, St. Louis, Memphis, Baton Rouge, La., and New Orleans. IC's east-west route extends from Sioux City and Council Bluffs to Chicago in the East.

This press release contains forward-looking statements regarding future events and the future performance of CN that involve risks and uncertainties that could cause actual results to differ materially. Those risks and uncertainties include, but are not limited to, customer demand, industry competition and regulatory developments, natural events such as severe weather, floods and earthquakes, the effects of adverse economic conditions affecting the Company's shippers, changes in fuel prices, and the ultimate outcome of shipper claims, environmental investigations or proceedings and other types of claims and litigation. Reference should be made to the risks detailed from time to time in reports filed by the Company with securities regulators in Canada and the United States.

    CONTACT:  Canadian National Railway Company
               Mark Hallman (Media), 416/ 217-6390
               http://www.cn.ca
                   or
               Canadian National Railway Company
               Robert Noorigian (Invertors), 514/ 399-0052
               http://www.cn.ca
                   or
               Illinois Central
               Dorethy Toney, 312/ 755-7591