Canada's biggest railway reported net income of C$411 million, or C$1.47 a diluted share, for the third quarter ended September 30. That compared with a net profit of C$346 million, or C$1.19 a share, in the same three-month period of 2004.

Montreal-based Canadian National, which also has large operations in the United States, was the first of the major North American railroads to report its third-quarter results.

Chief Financial Officer Claude Mongeau said CN remained confident it can achieve the high end of previous guidance of earnings-per-share growth of 20 to 25 percent for the full year.

But Mongeau sounded a note of caution about repeating 2005's high growth rate in 2006 because of worries about rising fuel costs and noncash pension expenses.

"These are two potential headwinds, but having said that we remain quite bullish on our business," he said.

CN said revenue in the quarter climbed 6 percent to just over C$1.8 billion due to higher freight rates, including surcharges billed to most customers to pay for higher fuel prices.

Revenue was up for all the major product groups except petrochemicals, and CN's operating ratio, a measure of efficiency in hauling freight, was 63.3 percent, a 2.1 percentage point improvement.

Mongeau said CN also had a lower than expected tax rate in the quarter, due in part to a tax benefit provision in its deal to purchase of BC Rail last year that allows CN to shield some of its income from taxation.

ALBERTA DERAILMENT COSTLY

CN's operating expenses climbed by 2 percent to just over C$1.1 billion, due to higher fuel costs and accidents. It paid an average of C$1.79 per gallon for diesel in the quarter, up from C$1.31 in the third quarter of 2004.

An August derailment caused by a broken rail in Wabamun, Alberta, that resulted in an oil and toxic-liquid spill that contaminated a popular recreational lake, left CN with C$28 million in costs that were not covered by insurance.

It also suffered a fatal wreck in Mississippi, and hurricanes Katrina and Rita forced it to curtail operations in the Gulf Coast and put some customers there temporally out of business.

"Despite being proud that we had the financial where-with-all to deal with those incidents... I can tell you those incidents put a chilling impact on this organization," Chief Executive Hunter Harrison told analysts.

CN said it could end up getting a boost next year from the hurricanes if repairing storm damage requires increased lumber shipments, but did not offer any specific estimates.

Shares of CN Rail slid along with the rest of the Toronto Stock Exchange on Tuesday, closing down C$1.91 at C$82.