CNI

Business Context and Reporting Period

This Form 6-K filing, dated March 23, 2016, contains the Notice of Annual Meeting of Shareholders, Management Proxy Circular, and the 2015 Annual Report for Canadian National Railway Company (CN). The financial data presented covers the fiscal year ended December 31, 2015. The filing announces the annual meeting scheduled for April 26, 2016, in Montreal, Quebec, to elect directors, appoint auditors, and vote on executive compensation and a shareholder proposal.

Key Financial Metrics (Year Ended December 31, 2015)

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 4% primarily due to the positive translation impact of a weaker Canadian dollar, freight rate increases, and solid overseas intermodal demand. This was partially offset by lower fuel surcharges and decreased shipments of energy-related commodities (crude oil, frac sand) and coal.
• Operating Efficiency: The operating ratio improved significantly by 3.7 points to a record 58.2%, driven by lower fuel expenses and cost-management efforts despite volume headwinds.
• Capital Allocation: CN returned over C$2.7 billion to shareholders in 2015 through a 25% dividend increase (to C$1.25 per share) and share repurchases of C$1.75 billion (23.3 million shares).
• Capital Spending: Gross property additions totaled C$2.7 billion, with significant investment in track infrastructure and equipment.
• Accounting Changes: The company retrospectively adopted new accounting standards (ASU 2015-17 and ASU 2015-03) in Q4 2015, reclassifying deferred income taxes as non-current and debt issuance costs as a deduction from debt.

Guidance, Outlook, and Management Commentary

• 2016 Outlook: Management expects North American industrial production to increase by approximately 1%. Growth opportunities are identified in intermodal traffic and commodities tied to U.S. housing and automotive sales.
• Capital Program: CN plans to invest approximately C$2.9 billion in 2016, including C$1.5 billion for track infrastructure, C$0.6 billion for equipment (including 90 new locomotives), and C$0.4 billion for Positive Train Control (PTC) implementation.
• Dividend: The Board approved a 20% increase in the quarterly dividend to C$0.3750 per share for 2016.
• Safety Performance: Safety metrics improved with a 25% reduction in the FRA accident ratio and a 10% reduction in the FRA injury ratio compared to 2014.
• Executive Compensation: The "Say on Pay" vote received 97.3% support. On a constant currency basis, total compensation for the CEO decreased by 5.6% in 2015, while remaining unchanged for other Named Executive Officers (NEOs).
• Risks: Key risks include economic conditions affecting commodity demand, fuel price volatility, regulatory changes (specifically regarding crude oil transport and PTC), and labor negotiations.

Important Facts for Investor Verification

• Shareholder Proposal: A proposal by Qube Investment Management requesting the Audit Committee to request proposals for the audit engagement every 8 years is on the ballot. Management recommends voting AGAINST this proposal, citing existing robust audit oversight and partner rotation policies.
• CEO Health: CEO Claude Mongeau was on medical leave for part of late 2015 but resumed full duties in January 2016. CFO Luc Jobin received a special cash award of C$830,400 for additional leadership duties during this period.
• Debt Structure: As of December 31, 2015, total debt was C$10,427 million. The adjusted debt-to-total capitalization ratio was 42.5%, and the adjusted debt-to-adjusted EBITDA multiple was 1.71x.
• PTC Implementation: The estimated total cost for Positive Train Control implementation has been revised to US$1.2 billion, with US$0.2 billion spent as of year-end 2015.
• Major Shareholder: William H. Gates, III (via Cascade Investment and the Bill & Melinda Gates Foundation) controls approximately 14.99% of outstanding shares, nearing the 15% voting limit under CN's articles.