CNI

Business Context and Reporting Period

This Form 6-K filing, dated March 23, 2009, serves as a report of a foreign issuer pursuant to Rule 13a-16 of the Securities Exchange Act of 1934. The filing includes the Notice of Annual Meeting of Shareholders, the Management Information Circular, and the 2008 Annual Report for Canadian National Railway Company (CN). The primary reporting period for financial data is the fiscal year ended December 31, 2008. The Annual Meeting of Shareholders is scheduled for April 21, 2009, in Calgary, Alberta.

Key Financial Metrics (Fiscal Year 2008)

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased by 7% ($585 million) primarily due to freight rate increases and higher volumes in metals and minerals, intermodal, and coal. This growth offset declines in forest products and automotive sectors.
• Profitability Decline: Net income decreased by 12% ($263 million) and diluted EPS fell 7%. This was largely driven by a significant reduction in deferred income tax recoveries compared to 2007 (which included a $328 million recovery vs. $117 million in 2008) and the absence of one-time gains from asset sales present in 2007.
• Operating Ratio Deterioration: The operating ratio increased by 2.3 percentage points to 65.9%, driven by an 11% increase in operating expenses. Key cost drivers included a 37% increase in fuel costs and higher purchased services.
• Debt Increase: Total long-term debt increased by approximately $2.3 billion, attributed to issuances of notes and commercial paper, as well as foreign exchange translation losses on U.S. dollar-denominated debt.

Guidance, Outlook, and Management Commentary

• Economic Outlook: Management acknowledges the North American recession and global economic slowdown. While commodity groups like forest products and automotive remain weak, the company expects growth opportunities in oil and gas development, coal, and intermodal traffic to be less affected by the downturn.
• Strategic Acquisitions: CN completed the acquisition of the Elgin, Joliet and Eastern Railway Company (EJ&E) in January 2009 for approximately $300 million. This acquisition is expected to significantly improve network fluidity by bypassing congestion in the Chicago hub.
• Capital Expenditures: For 2009, CN plans to invest approximately $1.5 billion in capital programs, with close to $1 billion targeted for track infrastructure to ensure safety and network fluidity.
• Executive Compensation: CEO E. Hunter Harrison received a total compensation of $13.35 million in 2008. His individual performance factor was rated at 150%, and the corporate performance factor was 114%, resulting in a bonus of approximately $3.58 million.
• Risks: Key risks include the volatility of fuel prices, foreign exchange fluctuations (specifically the CAD/USD rate), labor negotiations (with several collective agreements expiring or under negotiation), and environmental liabilities.

Important Facts for Investor Verification

• Deferred Tax Impact: Verify the sustainability of earnings by noting that 2007 net income included a $328 million deferred tax recovery, whereas 2008 included only $117 million. Adjusted net income (excluding these items) was $1.78 billion in 2008 versus $1.73 billion in 2007.
• Debt Leverage: Monitor the adjusted debt-to-total capitalization ratio, which rose to 45.2% in 2008 from 40.4% in 2007, and the adjusted debt-to-adjusted EBITDA ratio of 2.38 times.
• Share Repurchases: Confirm the impact of the share buyback program, under which CN repurchased 19.4 million shares for $1.02 billion in 2008.
• Acquisition Integration: Assess the operational impact of the EJ&E acquisition, which closed in January 2009, and the associated $100 million commitment for infrastructure improvements.
• Executive Retention: Note that CEO E. Hunter Harrison's employment agreement extends through December 31, 2009, with succession planning actively underway.