CNI

Business Context and Reporting Period

This Form 6-K filing, dated March 22, 2004, serves as a report of foreign issuer for Canadian National Railway Company (CN). The document primarily contains the Notice of Annual Meeting of Shareholders, the Management Proxy Circular, and the 2003 Annual Report. The financial data presented covers the fiscal year ended December 31, 2003. The filing announces the annual meeting scheduled for April 22, 2004, in Edmonton, Alberta, to elect directors, appoint auditors, and receive the 2003 financial statements.

Key Financial Metrics (Year Ended December 31, 2003)

Financial results are presented below in Canadian dollars (CAD) based on U.S. GAAP, as detailed in the Annual Report section of the filing.

Note: The filing also provides Canadian GAAP figures, which show Net Income of $734 million and an Operating Ratio of 76.8% for 2003 due to differences in property capitalization and stock-based compensation accounting.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 4% to $5,884 million. Management attributes this primarily to the strengthening Canadian dollar, which negatively impacted the translation of U.S. dollar-denominated revenues by approximately $380 million. Excluding currency effects, revenues would have increased 3%.
• Profitability Improvement: Despite lower reported revenues, Operating Income increased 21% to $1,777 million, and Net Income increased 27% to $1,014 million. This was driven by a significant improvement in the Operating Ratio, which dropped from 76.0% in 2002 to 69.8% in 2003.
• One-Time Items in 2002: The 2002 results were negatively impacted by a $281 million charge for U.S. personal injury claims and a $120 million workforce reduction charge. Excluding these items, adjusted net income was relatively flat between the two years.
• Coal Segment Weakness: Coal revenues declined 20% to $261 million due to reduced production in western Canada and a metallurgical mine closure.
• Intermodal Growth: Intermodal revenues increased 5% to $1,101 million, driven by increased import volumes and the launch of the Intermodal Excellence (IMX) initiative.

Guidance, Outlook, and Management Commentary

Management Commentary: CEO E. Hunter Harrison emphasized the company's focus on "precision scheduled railroading" to manage variables and improve execution. He highlighted the successful implementation of the IMX initiative for intermodal traffic and innovative labor agreements that replaced antiquated work rules with hourly wages and predictable schedules.

Strategic Outlook:

• Acquisitions: CN announced agreements to acquire BC Rail (Canada) for $1 billion and Great Lakes Transportation (GLT) (U.S.) for $380 million. Both transactions are subject to regulatory approval and are expected to close in the second quarter of 2004.
• Capital Expenditures: Net capital expenditures were $1,043 million in 2003. The company expects capital expenditures to increase slightly in 2004 for locomotive acquisitions and network renewals.
• Dividends: CN announced its eighth consecutive dividend increase, raising the quarterly dividend to $0.25 per share (totaling $1.00 for the year).

Risks and Contingencies:

• Personal Injury Claims: The company faces significant exposure to U.S. personal injury claims under the Federal Employers' Liability Act (FELA). A $281 million provision was recorded in 2002; reserves stood at $590 million at year-end 2003.
• Environmental Liabilities: The company has aggregate accruals of $83 million for environmental costs, with potential for additional unknown liabilities.
• Labor Negotiations: Approximately 97% of the Canadian unionized workforce agreements expired on December 31, 2003. While tentative agreements were reached with some unions, negotiations were ongoing with others, posing a risk of work stoppages.
• Foreign Exchange: A one-cent change in the Canadian dollar relative to the U.S. dollar is estimated to impact annual net income by approximately $8 million.

Important Facts for Investor Verification

• Stock Split: A three-for-two stock split was approved on January 27, 2004, and effected on February 27, 2004. All share and per-share data in the filing have been restated to reflect this split.
• Acquisition Regulatory Approval: The completion of the BC Rail and GLT acquisitions is contingent upon approval from the Competition Bureau (Canada) and the Surface Transportation Board (U.S.), respectively.
• Adjusted Performance Measures: Investors should review the reconciliation of non-GAAP adjusted performance measures, as the reported 2002 results were significantly distorted by one-time charges not present in 2003.
• Accounting Differences: There are material differences between U.S. GAAP and Canadian GAAP results (e.g., Net Income of $1,014M vs. $734M) due to property capitalization rules and stock-based compensation treatment.
• Debt Maturities: Significant debt maturities are scheduled for 2004 ($483 million) and 2005 ($214 million), though the company maintains a $1 billion revolving credit facility.