CNI

Business Context and Reporting Period

This Form 6-K filing, dated March 21, 2007, serves as a proxy statement for Canadian National Railway Company (CN). It solicits votes for the Annual Meeting of Shareholders scheduled for April 24, 2007, in Moncton, New Brunswick. The filing includes the Management Information Circular, which details the election of directors, the appointment of auditors, amendments to the Management Long-Term Incentive Plan (MLTIP), and two shareholder proposals. The financial data presented covers the fiscal year ended December 31, 2006.

Key Financial Metrics (Fiscal Year 2006)

Note: 2006 Net Income includes a non-recurring deferred income tax recovery of $277 million. Adjusted diluted EPS excluding this item was $3.40.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 7% year-over-year, driven by freight rate increases (including fuel surcharges) and volume growth in grain, intermodal, and metals/minerals sectors. This was partially offset by the translation impact of a stronger Canadian dollar.
• Operating Efficiency: The operating ratio improved by 3.1 percentage points to 60.7%, a record low, reflecting disciplined cost control and asset utilization.
• Profitability: Net income rose 34% to $2.087 billion. Excluding the $277 million tax recovery, organic growth was significant.
• Capital Expenditures: Net capital expenditures were $1.298 billion in 2006, with a planned increase to $1.6 billion for 2007 to support infrastructure renewal and growth initiatives like the Prince Rupert terminal.
• Shareholder Returns: The company repurchased 29.5 million shares for $1.483 billion and increased the quarterly dividend to $0.1625 per share (11th consecutive increase).

Guidance, Outlook, and Risks

• Management Outlook: Management expects a moderate slowdown in the North American economy but anticipates positive global economic conditions. The company aims to become one of the world's best transportation companies by extending its "precision railroading" model to integrated logistics services (CN WorldWide).
• Capital Plan: 2007 capital spending is budgeted at $1.6 billion, focusing on track infrastructure, rolling stock, and strategic projects (e.g., Prince Rupert, Johnston Yard).
• Key Risks:
  • Labor Relations: A work stoppage by the United Transportation Union (UTU) began on February 10, 2007. Management is seeking a declaration of illegality and expects a quick resolution with minimal financial impact.
  • Regulatory: The Surface Transportation Board (STB) directed changes to fuel surcharge practices, requiring adjustments by mid-2007. New homeland security regulations may also impact operations.
  • Environmental: Ongoing liabilities related to environmental clean-up and potential derailments remain a risk, though insurance coverage is expected to cover significant costs above retention limits.
• Shareholder Proposals: Management recommends voting AGAINST two shareholder proposals: one linking executive compensation to ESG metrics (arguing current plans already cover safety and service) and one requesting a specific audit of BC Rail integration (arguing integration is already complete and monitored).

Investor Verification Checklist

• Adjusted Earnings: Verify the impact of the $277 million deferred tax recovery on 2006 net income and EPS to assess organic performance trends.
• UTU Strike Impact: Monitor the resolution of the February 2007 UTU work stoppage and any resulting operational or financial disruptions.
• MLTIP Amendments: Review the proposed amendments to the Management Long-Term Incentive Plan regarding board authority to amend the plan without shareholder approval for certain provisions.
• Capital Allocation: Confirm the execution of the $1.6 billion 2007 capital budget, particularly regarding the Prince Rupert terminal opening and track infrastructure upgrades.
• Executive Compensation: Review the CEO's total compensation package, including the maximum bonus payout achieved in 2006 and the specific safety targets used in performance evaluations.