CNI

Business Context and Reporting Period

This Form 6-K filing by Canadian National Railway Company (CN) serves as a notice of the availability of materials for the 2019 Annual Meeting of Shareholders, scheduled for April 30, 2019. The filing includes the Management Information Circular and the 2018 Annual Report, covering the fiscal year ended December 31, 2018. The report highlights CN's 100th anniversary, its strategic focus on operational excellence and safety, and the appointment of Jean-Jacques Ruest as President and CEO effective July 24, 2018.

Key Financial Metrics (Year Ended December 31, 2018)

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased by 10% (C$1.28 billion) driven by freight rate increases, higher fuel surcharges, and a 5% increase in volume (Revenue Ton Miles). Key growth areas included petroleum crude, coal, intermodal, and Canadian grain.
• Net Income Decline: Reported Net Income decreased by 21% compared to 2017. This was primarily due to a one-time deferred income tax recovery of C$1.764 billion in 2017 resulting from the U.S. Tax Cuts and Jobs Act, which was not present in 2018.
• Adjusted Performance: Excluding non-recurring items, Adjusted Net Income increased by 7% and Adjusted Diluted EPS increased by 10%, reflecting underlying operational strength.
• Operating Ratio: The operating ratio increased by 1.8 percentage points to 61.6%, attributed to higher fuel prices, increased labor costs, and the adoption of new accounting standards (ASU 2017-07) regarding pension cost presentation.
• Leadership Transition: Luc Jobin departed as President and CEO in March 2018. Jean-Jacques Ruest served as Interim CEO and was appointed permanent President and CEO in July 2018.

Guidance, Outlook, and Management Commentary

• 2019 Outlook: Management expects high single-digit growth in Revenue Ton Miles (RTMs). The company anticipates growth in petroleum crude, coal, intermodal, lumber, and Canadian grain, offset by lower volumes in potash and U.S. grain.
• Capital Program: CN plans to invest approximately C$3.9 billion in 2019. This includes C$1.6 billion for track maintenance, C$1.2 billion for capacity expansion and IT, C$0.8 billion for equipment (including 140 new locomotives), and C$0.3 billion for Positive Train Control (PTC) implementation.
• Shareholder Returns: The Board approved an 18% increase in the quarterly dividend to C$0.5375 per share, effective Q1 2019. A new Normal Course Issuer Bid was approved to repurchase up to 22 million shares through January 31, 2020.
• Safety and Sustainability: Management emphasized a commitment to safety, noting a deterioration in the FRA accident ratio in 2018 due to higher volumes and new hires, though the injury ratio improved. CN continues to lead in fuel efficiency and sustainability rankings (CDP Climate A List, Dow Jones Sustainability Index).
• Acquisition: CN announced an agreement to acquire TransX Group of Companies to expand its intermodal and temperature-controlled supply chains, subject to regulatory approval.

Important Facts for Investor Verification

• Adjusted vs. GAAP Metrics: Verify the reconciliation of Adjusted Net Income and Adjusted EPS, as the reported GAAP Net Income was significantly impacted by the absence of the 2017 U.S. tax reform benefit.
• Accounting Standard Changes: Confirm the impact of ASU 2017-07 on the operating ratio, which reclassified non-service pension costs out of operating income, increasing the ratio by approximately 2.1 percentage points.
• Safety Metrics: Review the specific FRA accident and injury ratios, as management highlighted a deterioration in the accident ratio despite safety investments.
• Capital Expenditure Execution: Monitor the execution of the record C$3.5 billion capital program in 2018 and the planned C$3.9 billion program in 2019, particularly regarding PTC implementation and locomotive deliveries.
• Regulatory Approvals: Track the status of the proposed TransX acquisition and any regulatory hurdles related to the U.S. Tax Reform's Base Erosion Anti-abuse Tax (BEAT).