CNI

Business Context and Reporting Period

This Form 6-K filing, dated March 23, 2012, 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 2011 Annual Report. The financial data presented covers the fiscal year ended December 31, 2011. The Annual Meeting is scheduled for April 24, 2012, in Halifax, Nova Scotia, to elect directors, appoint auditors, and vote on executive compensation.

Key Financial Metrics (Year Ended December 31, 2011)

Material Changes Versus Prior Period

• Revenue Growth: Revenues increased 9% year-over-year, driven by higher freight volumes, a higher fuel surcharge (approx. $315 million), and freight rate increases. This growth was partially offset by the negative translation impact of a stronger Canadian dollar.
• Operating Expenses: Expenses rose 9% to $5,732 million, primarily due to higher fuel costs, purchased services, and labor costs. Fuel expenses specifically increased 35% due to higher average prices and volumes.
• Unusual Items: Net income included significant gains on property disposals: $288 million from the sale of the Lakeshore East subdivision and $60 million from the sale of IC RailMarine Terminal Company assets. Conversely, a net deferred income tax expense of $40 million impacted results due to state tax rate changes.
• Shareholder Returns: The company increased its quarterly dividend by 20% (from $0.325 to $0.375 per share) and repurchased approximately 20 million shares for $1,420 million in 2011.

Guidance, Outlook, and Management Commentary

• 2012 Outlook: Management expects North American industrial production growth to slow to around 3%. Capital spending for 2012 is planned at approximately $1.75 billion, with over $1 billion targeted for track infrastructure.
• Operational Strategy: CN continues to focus on "Precision Railroading" to improve velocity, reliability, and asset utilization. The company aims to grow the business at low incremental cost through supply chain collaboration and service level agreements.
• Executive Compensation: The 2011 compensation program was heavily performance-based, with approximately 80% of Named Executive Officers' (NEOs) target total direct compensation linked to company performance. Corporate performance was assessed as "far exceeds" targets, resulting in maximum bonus factors for executives.
• Risks: Key risks include fuel price volatility, foreign currency fluctuations, labor negotiations (with tentative agreements reached with major unions in late 2011), and regulatory changes regarding safety and environmental compliance.

Important Facts for Investor Verification

• Property Disposal Gains: Verify the sustainability of earnings by noting that 2011 net income included $348 million in gains from property disposals, which are non-recurring.
• Pension Funding: The company made a voluntary pension contribution of $350 million in 2011. Future funding requirements for 2012 are estimated between $275 million and $575 million, dependent on actuarial valuations.
• Debt Structure: Confirm the company's leverage ratios; the adjusted debt-to-total capitalization ratio increased to 40.0% in 2011 from 36.8% in 2010 due to net debt issuances.
• Share Repurchases: Note the active capital return program, with 19.9 million shares repurchased in 2011 and a new program approved for up to 17.0 million shares in 2012.
• Foreign Exchange Impact: Monitor the impact of the Canadian/US dollar exchange rate, which had a negative impact of $39 million on 2011 net income due to the stronger Canadian dollar.