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ITEM 3
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GENERAL DEVELOPMENT OF THE BUSINESS
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3.1
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GENERAL DEVELOPMENT OF THE BUSINESS DURING THE LAST THREE
YEARS
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The initiatives undertaken by CN in the last three
years to achieve its growth and profitability goals and to enhance shareholder value can be grouped into a few key areas. These include
acquisitions and dispositions, targeted capital investment spending including deployment of advanced technologies, and other initiatives
to strengthen the Company’s position in the marketplace, as well as financial management initiatives, as described below.
2021 Highlights
Leadership Changes
On April 27, 2021, CN announced the appointment
of Denise Gray and Justin M. Howell as new directors of CN further to their election at CN’s annual shareholders meeting.
On September 16, 2021, CN announced that
Julie Godin had resigned from the Board of Directors of CN in order to focus on her expanding role as Co-Chair of the Board and Executive
Vice-President, Strategic Planning and Corporate Development of CGI Inc.
On October 1, 2021, CN announced the appointment
of Rance Randle as Senior Vice-President Network Operations and Transportation of the Company. Doug Ryhorchuk, previously in this position,
was appointed Senior Vice-President, Mechanical and Engineering.
On October 27, 2021, CN announced that Jo-ann
dePass Olsovsky had been appointed to serve on the Board of Directors of CN. Ms. dePass Olsovsky brings more than 35 years of technology,
infrastructure operations, and railroad experience to CN.
On January 25, 2022, CN announced the appointment
of The Hon. Jean Charest, P.C. as an independent director of CN, and the appointment of two new independent directors with North American
railroad experience to the Board of Directors by no later than its 2022 Annual General Meeting.
On the same date, CN also announced the appointment
of Tracy Robinson as President and Chief Executive Officer and as a member of the Board of Directors of CN, effective February 28,
2022. This appointment follows the previously announced retirement of Jean-Jacques Ruest, who will depart CN’s Board on February 28,
2022 but remain at CN in an advisory role until March 31, 2022 to ensure a seamless transition.
Near term - 2022: CN's performance improvement plan
On September 17, 2021, CN announced details
of its strategic and financial value creation plan for 2022, “Full Speed Ahead – Redefining Railroading,” which advances
CN’s strategic plan to lead on safety, customer value, operational excellence, sustainability and social inclusion, while continuing
to deliver high-quality service to customers and generating profitable growth and enhanced returns to shareholders.
Under the new strategic plan, CN’s focus
is on redefining railroading, driving profitable growth and making structural improvements for the next generation. CN has conducted an
extensive review of all revenue and cost levers and has targeted $700 million of operating income improvements to drive future growth.
To achieve these improvements in 2022, CN intends to use a balanced approach that includes a strategic review of non-rail businesses and
an optimization of labor productivity.
CN is also committed to operational excellence
and delivering value for its shareholders by resuming share repurchases, increasing shareholder returns, reducing capital expenditures,
producing compelling financial returns and lowering its operating ratio. CN is also focused on leading the industry with ESG commitments
and is committed to enhance competition.
Strategic
Initiatives
CN has long been a nation builder and trade enabler,
and is essential to the North American economy. The Company’s strengths are many: a unique tri-coastal network; a highly diverse
customer base; an early mover advantage on sustainability, including fuel efficiency and environmental stewardship; a proven ability to
innovate, including pioneering Precision Scheduled Railroading (PSR); and a focus on safety.
CN’s strategic plan is about redefining
railroading. The objective is clear: to deliver profitable growth by growing faster than the markets the Company participates in and continuously
improving its operating efficiency, while being a leader in sustainability. This is expected to drive consistent shareholder returns and
earnings growth.
CN's business strategy is anchored on the Company’s
vision of Powering Sustainable Growth for our customers, people and communities. This strategy rests on a strong commitment to
moving its customers’ goods safely and efficiently, having talented and engaged employees, being environmentally responsible, helping
build safer and stronger communities, all while adhering to the highest ethical standards of governance. CN calls this Delivering
Responsibly. Upon its solid strategic foundation rest four pillars: operational excellence every day, strong customer partnerships,
growing its reach, and industry-leading innovation.
CN’s strategy creates value for its shareholders
by striving for sustainable financial performance, including profitable top-line growth, strong free cash flow generation and return on
invested capital well above the Company’s cost of capital. CN also returns value to shareholders through dividend payments and share
repurchases. Through its strategic vision, CN is demonstrating the foresight, flexibility and resilience necessary to continue to create
sustainable value for all its stakeholders by redefining railroading for the 21st century.
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CN is going digital as the digital revolution transforms North American business.
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CN is using data as an asset for better operational efficiency.
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CN is focused on being part of the climate change solution.
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CN is creating new relationships with customers and new customer service models.
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CN is building a diverse and talented North American workforce of committed railroaders.
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CN’s strategy harnesses new technologies,
opportunities, and relationships to “Power Sustainable Growth for our customers, people, and communities".
Operational excellence every day
CN's goal is to deliver reliable, efficient and
cost-effective transportation services for its customers. CN continues to improve its service productivity and safety, with a focus on
investments in network fluidity, automation, big data analytics and the digital customer experience. CN's PSR operating model focuses
on improving every aspect of railroad operations to meet customer commitments efficiently and profitably. This calls for the continuous
measurement of results and the use of such information to generate further improvements in the service provided to customers and in the
efficiency of operations. The Company strives to run longer trains, reduce terminal dwell times and improve overall network velocity.
PSR is a disciplined operating methodology that CN executes with a sense of urgency and accountability.
Strong customer partnerships
CN aims to provide the best customer service by
anticipating its customers’ needs, understanding their growth plans, earning their trust, becoming a truly customer-centric organization
and demonstrating agility. CN is developing deeper and stronger customer partnerships, putting its customers, and ultimately their end
customers, at the center of its operations.
CN’s focus is on end-to-end collaboration
with its customers and supply chain partners to help them grow their markets while leveraging technological innovation to deliver value.
Supply chain collaboration agreements with ports, terminal operators and customers leverage key performance metrics that drive efficiencies
within CN's operations and across the entire supply chain. CN’s goal is to ensure a seamless end-to-end customer experience by
digitizing its operations, bringing transparency to the supply chain and adjusting its service performance measures to better reflect
its customers’ changing requirements.
CN is digitalizing the way it does business, including
sharing data through Application Programming Interfaces (APIs) and improving its communications and service performance through the use
of mobile reporting and enhanced digital customer interfaces. CN will take an industry-leading focus on measuring customer satisfaction
to consistently align to customer needs and maintain its everyday operational excellence.
Grow its reach
CN facilitates the end-to-end supply chain to
unlock long-term, profitable growth. With its unique tri-coastal network that spans North America, CN reaches farther, both physically
and commercially, for its existing customers and to find new ones by playing a lead role in connecting North America to the world. To
grow its reach for carload customers, CN is expanding its network of transload facilities across North America. In Western Canada, CN
invests in infrastructure and equipment to grow its capacity and increase its share of new industrial production while also responding
to shifting demands in commodities (e.g., transition to green energy). In Eastern Canada, CN aims to further densify its network by potentially
developing, through partnerships, port and inland terminals to promote gateway growth and provide customers with a cost-advantageous
intermodal route to Toronto and the American Midwest.
Industry-leading innovation
CN proactively pursues an ambitious innovation
strategy using technology, analytics and automation to increase safety and efficiency as well as deliver a reliable, low-carbon, seamless
service to its customers. As a pioneer of PSR, CN is well positioned to drive the next wave of change with Digital Scheduled Railroading
(DSR). DSR applies technology tools and new ways of working to unlock further operational excellence, customer service and employee
engagement. DSR features:
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Improved simplicity, reliability and predictability: Use advanced digital technologies, big data, artificial
intelligence (AI) and predictive analytics for better planning, efficiency, and safety.
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Better decision-making: Improved real-time data and analytical support tools available 24/7.
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Enhanced visibility: More accurate, consistent and relevant information provided to all stakeholders (e.g.,
customers, employees, communities).
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Digitized work: Automate manual processes to improve efficiency and safety.
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Enhanced cybersecurity protections: Protect the Company’s physical assets and data to keep its network
safe.
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Improved analytics with a focus on sustainability (e.g., safety, environment, people, communities).
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In December 2021, CN announced a seven-year
strategic partnership with Google Cloud to transform CN’s supply chain to deliver new customer experiences, and modernize its technology
infrastructure in the cloud.
Sustainability leadership
Sustainability is at the heart of how CN is building
for the future. Delivering Responsibly, the encapsulation of the Company’s sustainability leadership, underpins all of CN’s
decisions, commitments and investments. The Company is focused on transporting goods safely, engaging the best diverse team of railroaders,
protecting the environment, helping neighboring communities, and adhering to stringent ethical standards. CN understands that transparency
is essential for stakeholder trust concerning the Company’s Environmental, Social and Governance (ESG) commitments. In that regard,
CN seeks to align its ESG disclosures with global best practice frameworks.
Safety is a core value
CN is intensely focused on its uncompromising
commitment to the health and safety of its employees, the communities and environment in which it operates and the customers it serves.
The Company embraces a safety culture based on the fundamental belief that all injuries and accidents are preventable. CN’s objective
is simple: reduce on-the-job fatalities and serious injuries to zero. The Company is employing advanced technology and innovative training
models to help achieve this goal. CN also continues to train its people and build its infrastructure toward its goal of being the safest
railroad in North America. More specifically, CN is:
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Fostering an engaged workforce that respects
Life Critical Rules.
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Embedding a mindset whereby employees
take ownership for their own safety and the safety of others by Looking Out for Each Other.
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Training employees to identify and mitigate exposures.
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Using advanced technologies to proactively mitigate human error and reduce risk.
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Maintaining reliable and safe equipment and infrastructure.
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Investing in employee training, coaching, recognition and engagement initiatives.
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Capital Spending
In 2021, the Company completed a capital expenditure
program, investing approximately $2.9 billion, of which $1.7 billion were invested to maintain the safety and integrity of its network,
particularly track infrastructure. CN's capital spending also included $0.8 billion for strategic initiatives to increase capacity, enable
growth and improve network resiliency, including line capacity upgrades and information technology initiatives, and $0.4 billion on equipment
capital expenditures, including the acquisition of 69 high-horsepower locomotives and 491 new grain hopper cars.
Acquisitions and Dispositions
In the second quarter of 2020, the Company committed
to a plan and was actively marketing for sale for on-going rail operations, certain non-core lines in Wisconsin, Michigan and Ontario
representing approximately 850 miles and has met the criteria for classification of the related assets as assets held for sale. Accordingly,
a $486 million loss ($363 million after-tax) was recorded to adjust the carrying amount of these track and roadway assets to their estimated
net selling price. On March 31, 2021, CN entered into an agreement with a short line operator, for the sale of the non-core lines
plus an additional 50 miles of track and roadway assets not originally included within assets held for sale, subject to various conditions
including regulatory authorization by the Surface Transportation Board ("STB"). The carrying amount of assets held for sale
was adjusted in the first quarter of 2021 to $260 million ($90 million as at December 31, 2020), to reflect the contractual selling
price net of estimated transaction costs and the additional track and roadway assets included as part of the agreement. The increase of
$170 million included a $137 million recovery of the loss ($102 million after-tax) on the non-core lines and $33 million for the additional
track and roadway assets. The carrying amount of assets held for sale was included in Other current assets in the Consolidated Balance
Sheets. As at December 31, 2021, the criteria for the classification of assets held for sale continued to be met and there was no
change to the carrying amount of assets held for sale. In the fourth quarter of 2021, the STB approved the Company's agreement with the
short line operator without condition and the transaction closed on January 28, 2022 and January 31, 2022 for the U.S. and Canadian
assets, respectively.
On April 6, 2020, the STB issued its decision
conditionally approving the acquisition of the Massena rail line in New York from CSX Corporation ("CSX"), which the Company
announced its agreement to purchase on August 29, 2019. On June 6, 2020, CN and CSX sought reconsideration asking the STB to
remove its condition which requires the parties to propose a change to the line sale agreement for the STB's review. On February 25,
2021, the STB denied the parties’ petitions for reconsideration. On April 23, 2021, the Company appealed the STB's condition
in its April 6, 2020 and February 25, 2021 decisions. The case is pending in the United States Court of Appeals for the Seventh
Circuit. Briefing is suspended while the parties participate in the circuit mediation process.
Kansas City Southern ("KCS") merger
agreement
On April 20, 2021, CN announced that it had
made a superior proposal to combine with KCS in a cash-and-stock transaction valued at $33.6 billion, or $325 per share. On May 13,
2021, CN announced that following the completion of confirmatory due diligence, it submitted an enhanced binding superior proposal and
merger agreement to KCS’ board of directors, which determined that CN’s proposal was a “Company Superior Proposal”
and announced its intention to terminate the previously executed March 21, 2021 merger agreement with Canadian Pacific Railway Limited
(“CP”).
On May 21, 2021, CN and KCS announced that
they had entered into a definitive merger agreement (the “CN Merger Agreement”). Completion of the CN Merger Agreement was
subject to regulatory approvals, including from the STB and the Federal Economic Competition Commission (COFECE) and Federal Telecommunications
Institute (IFT) in Mexico. CN had proposed a “plain vanilla” voting trust to STB, pursuant to which, upon KCS shareholder
approval of the transaction and satisfaction of customary closing conditions, CN would acquire KCS shares and place them into the voting
trust. On August 31, 2021, the STB rejected the joint motion by CN and KCS to approve the proposed voting trust agreement.
On September 15, 2021, KCS and its board
of directors announced that a revised acquisition proposal submitted on September 12, 2021 by CP constituted a "Company Superior
Proposal" as defined in the CN Merger Agreement. Consequently, KCS entered into a waiver letter agreement with CN under which KCS
agreed to terminate the CN Merger Agreement and enter into a merger agreement with CP. As a result, CN received from KCS a merger termination
fee of US$700 million ($886 million). In addition, KCS also refunded Brooklyn US Holdings, Inc., a wholly owned subsidiary of the
Company, US$700 million ($886 million) that CN had previously paid as an advance to KCS in connection with KCS’ payment of the termination
fee to CP under KCS’ original merger agreement with CP.
Financial Management Initiatives
On January 26, 2021, the Company's Board
of Directors approved a new normal course issuer bid ("NCIB"), which allowed for the repurchase of up to 14 million common shares,
over a twelve-month period, between February 1, 2021 and January 31, 2022. The Company suspended its share repurchase program
at the end of March 2020 due to the economic circumstances resulting from the COVID-19 pandemic. The Company resumed its share repurchases
in February 2021 and suspended the share repurchases at the end of April 2021 in connection with the CN Merger Agreement with
KCS. Following the termination of the CN Merger Agreement, the Company resumed share repurchases at the end of September 2021.
The Company has a commercial paper program in
Canada and in the U.S. Both programs are backstopped by the Company's revolving credit facility. The maximum aggregate principal amount
of commercial paper that can be issued is $2.0 billion, or the US dollar equivalent, on a combined basis. The commercial paper programs,
which are subject to market rates in effect at the time of financing, provide the Company with a flexible financing alternative, and can
be used for general corporate purposes. As at December 31, 2021, the Company had total commercial paper borrowings of US$111 million
($140 million) at a weighted average interest rate of 0.18%.
The Company has an agreement to sell an undivided
co-ownership interest in a revolving pool of accounts receivable to unrelated trusts for maximum cash proceeds of $450 million. On December
20, 2021, the Company extended the term of its agreement by one year to February 1, 2024. The accounts receivable securitization program
provides the Company with readily available short-term financing for general corporate use. As at December 31, 2021, the Company had
no borrowings under the accounts receivable securitization program and there were no activities in 2021.
The
Company has an unsecured revolving credit facility with a consortium of lenders, which is available
for general corporate purposes including backstopping the Company's commercial paper programs. On June 22, 2021, the Company upsized
its existing revolving credit agreement from $2.0 billion to $2.5 billion and amended certain provisions. On March 31, 2021, the
Company's revolving credit facility agreement had been amended to extend the term of the credit facility by approximately two years and
to adopt a sustainability linked loan structure whereby its applicable margins are adjusted upon achievement of certain sustainability
targets, starting in 2022. The amended credit facility of 2.5 billion consists of a $1.25 billion tranche maturing on March 31,
2024 and a $1.25 billion tranche maturing on March 31, 2026. Subject to the consent of the individual lenders, the Company has the
option to increase the facility by an additional $500 million during its term and to request an extension once a year to maintain the
tenors of three year and five year of the respective tranches. The credit facility provides for borrowings at various benchmark interest
rates, such as LIBOR, plus applicable margins, based on CN's credit ratings and sustainability targets. As
at December 31, 2021, the Company had no outstanding
borrowings under this revolving credit facility and there were no draws in 2021.
The revolving credit facility agreement has one financial covenant, which limits debt as a percentage of total capitalization.
The Company is in compliance as of December 31, 2021.
During the second quarter of 2021, in connection
with the proposed KCS transaction, the Company obtained commitments for a US$14.3 billion 364-day senior unsecured bridge loan facility
and for a US$5 billion term loan credit agreement. On September 15, 2021, upon termination of the CN Merger Agreement with KCS, the
bridge loan facility and the term loan credit agreement were terminated. There were no draws in 2021.
The Company has a non-revolving term loan credit
facility for financing or refinancing the purchase of equipment, where US$300 million was available to be drawn upon through March 31,
2020 and US$310 million was available to be drawn upon through March 31, 2021. The equipment loans made
under the non-revolving credit facility have a tenor of 20 years, bear interest at a variable rate based on LIBOR plus a margin,
are repayable in equal quarterly installments, are prepayable at any time without penalty, and are secured by rolling stock. On
March 31, 2021, the Company issued a US$310 million ($389 million) equipment loan under this facility and repaid US$27 million ($33
million) over both equipment loans in 2021. As at December 31, 2021, the Company had outstanding borrowings of US$572 million ($723
million), at a weighted-average interest rate of 0.81% and had no further amount available under this non-revolving term loan facility.
The Company has a series of committed and
uncommitted bilateral letter of credit facility agreements. On March 31, 2021, the Company extended the maturity date of the
committed bilateral letter of credit facility agreements to April 28, 2024. The agreements are held with various banks to
support the Company's requirements to post letters of credit in the ordinary course of business. Under these agreements, the Company
has the option from time to time to pledge collateral in the form of cash or cash equivalents, for a minimum term of one month,
equal to at least the face value of the letters of credit issued. As at December 31,
2021, the Company had outstanding letters of credit of $394 million
under the committed facilities from a total available amount of $518 million and
$158 million under the uncommitted facilities. As
at December 31, 2021, included in Restricted cash and cash equivalents was $396 million and $100 million pledged
as collateral under the committed and uncommitted bilateral letter of credit facilities, respectively.
On January 25, 2022, the Company's Board
of Directors approved a new normal course issuer bid, which allows for the repurchase of up to 42.0 million common shares, over a twelve-month
period, between February 1, 2022 and January 31, 2023.
Significant Collective Agreements
Canadian workforce
On September 13, 2021, the Company served
notice to commence bargaining for the renewal of the collective agreement with the International Brotherhood of Electrical Workers (IBEW)
governing approximately 700 signals and communications workers, which expired on December 31, 2021. The collective agreement remains
in effect until the parties reach a new collective agreement.
On December 1, 2021, CN filed an application
with the Canadian Industrial Relations Board pursuant to Section 18.1. of the Canada Labor Code to review the current bargaining
unit structure applicable to running trades on its Canadian railway. There are currently 12 bargaining units, and 16 collective agreements
covering Locomotive Engineers and Conductors. CN believes that this structure is no longer appropriate for labor relations. A consolidated
unit of Locomotive Engineers and Conductors governed by one collective agreement will address these issues and would be a more appropriate
bargaining unit structure. The timeline for a decision from the Canadian Industrial Relations Board is uncertain at this time.
U.S. workforce
As of February 1, 2022, collective agreements
covering all non-operating and operating craft employees at Grand Trunk Western Railroad Company (GTW), companies owned by Illinois Central
Corporation (ICC), companies owned by Wisconsin Central Ltd. (WC) and Bessemer & Lake Erie Railroad Company (BLE), and all employees
at Pittsburgh and Conneaut Dock Company (PCD) were ratified and remain in place. The agreements in place have various moratorium provisions,
which preserve the status quo with respect to the given collective agreement during the terms of such moratoriums. Where negotiations
are ongoing, the terms and conditions of existing agreements generally continue to apply until new agreements are reached or the processes
of the Railway Labor Act have been exhausted.
The general approach to labor negotiations by
U.S. Class I railroads is to bargain on a collective national basis with the industry, which GTW, ICC, WC and BLE currently
participate in, for collective agreements covering all non-operating and operating employees, with the exception of two employee groups
working at PCD covering fewer than 35 employees. The national bargaining negotiations are underway.
2020 Highlights
Leadership Changes
On August 26, 2020, CN announced the appointment
of Dominique Malenfant as Executive Vice-President and Chief Information and Technology Officer (“CITO”) of the Company.
On October 6, 2020, CN announced that Margaret
A. McKenzie had been appointed to serve on the Board of Directors of CN.
Capital Spending
In 2020, the Company completed a capital expenditure
program, investing approximately $2.9 billion, of which $1.6 billion were invested to maintain the safety and integrity of its network,
particularly track infrastructure. CN's capital spending also included $0.8 billion on strategic initiatives to increase capacity, enable
growth and improve network resiliency, including line capacity upgrades and information technology initiatives, $0.4 billion on equipment
capital expenditures, including the acquisition of 41 new high-horsepower locomotives and 1449 new grain hopper cars, and $0.1 billion
on implementation of Positive Train Control (PTC), the safety technology system mandated by the U.S. Congress.
Acquisitions and Dispositions
In the second quarter of 2020, the Company had
committed to a plan for sale for on-going rail operations, and certain non-core lines in Wisconsin, Michigan and Ontario representing
approximately 850 miles and had met the criteria for classification of the related assets as assets held for sale. Accordingly, a $486
million loss ($363 million after-tax) was recorded to adjust the carrying amount of these track and roadway assets to their estimated
selling price.
On April 6, 2020, the Surface Transportation
Board (STB) issued its decision conditionally approving the acquisition of the Massena rail line from CSX Corporation ("CSX"),
which the Company had announced its agreement to purchase on August 29, 2019. On June 6, 2020, CN and CSX sought reconsideration
asking the STB to remove its condition which requires the parties to propose a change to the line sale agreement for the STB's review.
The acquisition represents more than 220 miles of track between Valleyfield, Quebec, and Woodard, New York, and will allow CN to continue
to expand its network and foster additional supply chain solutions.
Financial Management Initiatives
On January 28, 2020, the Company's Board
of Directors approved a new Normal Course Issuer Bid (NCIB) that allows for the repurchase of up to 16 million common shares between February 1,
2020 and January 31, 2021. CN paused its share repurchases between the end of March 2020 and January 2021 due to the economic
circumstances resulting from the pandemic.
In 2020, the Company had a commercial paper program
in Canada and in the U.S. Both programs are backstopped by the Company's revolving credit facility. The maximum aggregate principal amount
of commercial paper that could be issued was $2.0 billion, or the US dollar equivalent, on a combined basis. The commercial paper programs,
which were subject to market rates in effect at the time of financing, provided the Company with a flexible financing alternative, and
could be used for general corporate purposes. As at December 31, 2020, the Company had total commercial paper borrowings of $56 million
(U.S. $44 million). The weighted-average interest rate on these borrowings was 0.13%.
The Company had an agreement to sell an undivided
co-ownership interest in a revolving pool of accounts receivable to unrelated trusts for maximum cash proceeds of $450 million. On February 27,
2020, the Company extended the term of its agreement by two years to February 1, 2023. The accounts receivable securitization program
provided the Company with readily available short-term financing for general corporate use. As at December 31, 2020, the Company
had no borrowings under the accounts receivable securitization program.
The Company had an unsecured revolving credit
facility with a consortium of lenders, which was available for general corporate purposes, including backstopping the Company's commercial
paper programs. The Company's revolving credit facility of $2.0 billion consisted of a $1.0 billion tranche maturing on May 5, 2022
and a $1.0 billion tranche maturing on May 5, 2024. Subject to the consent of the individual lenders, the Company had the option
to increase the facility by an additional $500 million during its term and to request an extension once a year to maintain the tenors
of three years and five years of the respective tranches. The credit facility provided for borrowings at various benchmark interest rates,
plus applicable margins, based on CN's debt credit ratings. In 2020, the Company borrowed $100 million and repaid $100 million on this
facility. As at December 31, 2020, the Company had no outstanding borrowings under this revolving credit facility.
On March 27, 2020, the Company entered into
a $250 million one year revolving credit facility agreement. The credit facility was available for working capital and general corporate
purposes and provided for borrowings at various interest rates, plus a margin. On May 19, 2020, the Company entered into a supplement
to the original agreement to increase the credit facility to $390 million. As at December 31,
2020, the Company had no outstanding borrowings under this revolving credit facility and there were
no draws in 2020.
The Company had a US$300 million,
non-revolving term loan credit facility agreement for financing or refinancing the purchase of equipment, which was available to be
drawn upon through March 31, 2020. On March 27, 2020, the Company entered into loan supplements to the original agreement
for an additional principal amount of US$310 million, which is available to be drawn through March 31, 2021. Term loans made
under this facility have a tenor of 20 years, bear interest at a variable rate, are repayable in equal quarterly instalments, are
prepayable at any time without penalty, and are secured by rolling stock. On February 3,
2020, the Company issued a US$300 million ($397 million)
equipment loan under this facility and repaid US$11 million ($15 million) in 2020.
As at December 31, 2020, the Company had outstanding borrowings of US$289 million ($368 million), at an interest rate of
0.87% and had US$310 million available under this non-revolving term loan facility.
The Company had a series of committed and uncommitted
bilateral letter of credit facility agreements. On June 11, 2020, the Company extended the maturity date of certain committed bilateral
letter of credit facility agreements to April 28, 2023. The agreements were held with various banks to support the Company's requirements
to post letters of credit in the ordinary course of business. Under these agreements, the Company has the option from time to time to
pledge collateral in the form of cash or cash equivalents, for a minimum term of one month, equal to at least the face value of the letters
of credit issued. As at December 31, 2020, the Company had outstanding letters of credit of
$421 million under the committed facilities from a total available amount of $492
million and $165 million under the uncommitted facilities.
As at December 31, 2020, included in Restricted cash and cash equivalents was $424 million and $100 million pledged
as collateral under the committed and uncommitted bilateral letter of credit facilities, respectively.
On May 1, 2020, under its current shelf prospectus
and registration statement, the Company issued US$600 million ($837 million) 2.45% Notes due 2050 in the U.S. capital markets, which resulted
in net proceeds of $810 million.
Significant Collective Agreements
U.S. workforce
As of February 1, 2021, collective agreements
covering all non-operating and operating craft employees at Grand Trunk Western Railroad Company (GTW), companies owned by Illinois Central
Corporation (ICC), companies owned by Wisconsin Central Ltd. (WC) and Bessemer & Lake Erie Railroad Company (BLE), and all employees
at Pittsburgh and Conneaut Dock Company (PCD) were ratified. These agreements have various moratorium provisions, which preserve the status
quo with respect to the given collective agreement during the terms of such moratoriums.
2019 Highlights
Leadership Changes
On May 21, 2019, CN announced the retirement
of Mike Cory from his role as Executive Vice-President and COO of the Company and that Robert Reilly had been appointed as Executive Vice-President
and COO.
On November 29, 2019, Michael Foster left
the Company, and Robert Reilly, Executive Vice-President and COO, assumed the responsibility for the Company’s Information and Technology
function, while the Company carried out a global search for a chief information and technology officer.
Strategic Initiatives and Capital Spending
In 2019, the Company completed a record capital
expenditure program, investing approximately $3.9 billion, of which $1.6 billion were invested to maintain the safety and integrity of
its network, particularly track infrastructure. CN's capital spending also included $1.2 billion on strategic initiatives to increase
capacity, enable growth and improve network resiliency, including line capacity upgrades and information technology initiatives, $0.9
billion on equipment capital expenditures, including the acquisition of 154 new high-horsepower locomotives and 560 new grain hopper cars,
and $0.2 billion on implementation of Positive Train Control (PTC), the safety technology system mandated by the U.S. Congress.
In 2019, the Company initiated the deployment
of several technology initiatives to CN's network, including automated railcar inspection, automated track inspection and mobile digital
toolkits for field employees.
Acquisitions and Dispositions
On December 2, 2019, following satisfaction
of all closing conditions, the Company acquired the intermodal temperature-controlled transportation division of the Alberta-based H&R
Transport Limited ("H&R"). The acquisition positioned CN to expand its presence in moving customer goods by offering more
end-to-end rail supply chain solutions to a wider range of customers. H&R results of operations have been included in the Company's
results of operations since the acquisition date, December 2, 2019. H&R revenues are included as freight revenues in the intermodal
commodity group.
On August 29, 2019, the Company announced
it had reached an agreement to acquire the Massena rail line from CSX Corporation, which represents more than 220 miles of track between
Valleyfield, Quebec, and Woodard, New York. The acquisition allowed CN to continue to expand its network and foster additional supply
chain solutions.
On March 20, 2019, following satisfaction
of all closing conditions, the Company acquired the Manitoba-based TransX Group of Companies ("TransX"). TransX provides various
transportation and logistics services, including intermodal, truckload, less than truckload and specialized services. The acquisition
positioned CN to strengthen its intermodal business, and allowed the Company to expand capacity and foster additional supply chain solutions,
to continue to create value for customers. TransX's results of operations have been included in the Company's results of operations, since
the acquisition date, March 20, 2019. TransX’s revenues are included as freight revenues in the intermodal commodity group.
Financial Management Initiatives
On January 29, 2019, the Board of Directors
approved a new normal course issuer bid, which allowed for the repurchase of up to 22 million common shares, over a twelve-month period,
between February 1, 2019 and January 31, 2020, at prevailing market prices plus brokerage fees, or such other prices as may
be permitted by the TSX.
The Company had a commercial paper program in
Canada and in the U.S. Both programs were backstopped by the Company's revolving credit facility. As of May 5, 2019, the maximum
aggregate principal amount of commercial paper that could be issued increased from $1.8 billion to $2.0 billion, or the U.S. dollar equivalent,
on a combined basis. The commercial paper programs, which were subject to market rates in effect at the time of financing, provided the
Company with a flexible financing alternative, and could be used for general corporate purposes. As at December 31, 2019, the Company
had total commercial paper borrowings of $1,277 million (U.S. $983 million). The weighted-average interest rate on these borrowings was
1.77%.
The Company had an agreement, expiring on February 1,
2021, to sell an undivided co-ownership interest in a revolving pool of accounts receivable to unrelated trusts for maximum cash proceeds
of $450 million. As at December 31, 2019, the Company had accounts receivable securitization borrowings of $200 million, secured
by and limited to $224 million of accounts receivable. The accounts receivable securitization program provided the Company with readily
available short-term financing for general corporate use.
The Company had an unsecured revolving credit
facility with a consortium of lenders, which was available for general corporate purposes, including backstopping the Company's commercial
paper programs. On March 15, 2019, the Company's revolving credit facility agreement was amended, which extended the term of the
credit facility by one year and increased the credit facility from $1.8 billion to $2.0 billion, effective May 5, 2019. The amended
credit facility of $2.0 billion consisted of a $1.0 billion tranche maturing on May 5, 2022 and a $1.0 billion tranche maturing on
May 5, 2024. Under the amended credit facility, the Company had the option to request an extension once a year to maintain the tenors
of three years and five years of the respective tranches subject to the consent of the individual lenders. The accordion feature, which
provides for an additional $500 million of credit under the facility, remained unchanged. The credit facility agreement contained customary
terms and conditions, which were substantially unchanged by the amendment. The credit facility provided for borrowings at various benchmark
interest rates, plus applicable margins, based on CN's debt credit ratings. The credit facility agreement has one financial covenant,
which limits debt as a percentage of total capitalization. As at December 31, 2019, the Company had no outstanding borrowings under
its revolving credit facility and there were no draws during the year ended December 31, 2019.
On July 25, 2019, the Company entered into
an agreement for a non-revolving term loan credit facility in the principal amount of up to US$300 million, secured by rolling stock,
which may be drawn upon during the period from July 25, 2019 to March 31, 2020. Term loans made under the facility had a tenor
of 20 years, bear interest at a variable rate, and were prepayable at any time without penalty. The credit facility was available for
financing or refinancing the purchase of equipment. As at December 31, 2019, the Company had no outstanding borrowings under its
non-revolving credit facility and there were no draws during the year ended December 31, 2019. On January 24, 2020, the Company
requested a borrowing of US$300 million under its non-revolving credit facility.
The Company had a series of committed and uncommitted
bilateral letter of credit facility agreements. On March 15, 2019, the Company extended the maturity date of the committed bilateral
letter of credit facility agreements to April 28, 2022. The agreements were held with various banks to support the Company's requirements
to post letters of credit in the ordinary course of business. Under the agreements, the Company had the option from time to time to pledge
collateral in the form of cash or cash equivalents, for a minimum term of one month, equal to at least the face value of the letters of
credit issued. As at December 31, 2019, the Company had outstanding letters of credit of $424 million under the committed facilities
from a total available amount of $459 million and $149 million under the uncommitted facilities. As at December 31, 2019, included
in Restricted cash and cash equivalents was $429 million and $90 million pledged as collateral under the committed and uncommitted bilateral
letter of credit facilities, respectively.
On February 8, 2019, under its shelf prospectus
and registration statement, the Company issued $350 million 3.00% Notes due 2029 and $450 million 3.60% Notes due 2049 in the Canadian
capital markets, which resulted in total net proceeds of $790 million.
On November 1, 2019, under its shelf prospectus
and registration statement, the Company issued $450 million 3.05% Notes due 2050 in the Canadian capital markets, which resulted in net
proceeds of $443 million.
Significant Collective Agreements
Canadian workforce
On February 5, 2019, the collective agreement
with the United Steelworkers governing track and bridge workers was ratified by its members, renewing the collective agreement for a five-year
term expiring on December 31, 2023.
On January 31, 2020, the collective agreements
with the Teamsters Canada Rail Conference (TCRC) were ratified by its members, renewing the collective agreements for a three-year term,
retroactive from July 23, 2019.
On May 10, 2019, the collective agreements
with Unifor for three bargaining units covering clerical and intermodal employees, and other classifications, were ratified by its members,
renewing the collective agreements for a 45-month term expiring on December 31, 2022. On October 2, 2019, subsequent to the
tentative agreement reached with Unifor to renew the collective agreement governing owner-operator truck drivers, which was rejected by
the membership on May 10, 2019, a revised agreement was ratified by its members, renewing that collective agreement through December 31,
2023.
On June 14, 2019, the collective agreement
with the TCRC governing rail traffic controllers was ratified by its members, renewing the collective agreements for a four-year term
expiring on December 31, 2022.
U.S. workforce
As of January 31, 2020, collective agreements
covering all non-operating and operating craft employees at Grand Trunk Western Railroad Company (GTW), companies owned by Illinois Central
Corporation (ICC), companies owned by Wisconsin Central Ltd. (WC) and Bessemer & Lake Erie Railroad Company (BLE), and all employees
at Pittsburgh and Conneaut Dock Company (PCD) were ratified. The tentative agreement covering the laborers represented by the United Steelworkers
at PCD was reached on December 23, 2019 and was ratified by its members on December 27, 2019. Agreements in place had various
moratorium provisions, which preserved the status quo in respect of the given collective agreement during the terms of such moratoriums.
For a discussion
of the Company’s business strategy and anticipated developments for 2021, please see the section entitled “Strategy overview”
on pages 3 to 10 of the MD&A, which are incorporated by reference herein. The MD&A may be found online on SEDAR at www.sedar.com,
on the SEC’s website at www.sec.gov through EDGAR, and on the Company’s website
at www.cn.ca in the Investors section.
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ITEM 4
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DESCRIPTION OF THE BUSINESS
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CN is engaged in the rail and related transportation
business. CN's network of 19,500 route miles of track spans Canada and the United States of America (U.S.), the only railroad connecting
Canada’s Eastern and Western coasts with the U.S. South. CN's extensive network and efficient connections to all Class I railroads
provide CN customers access to Canada, the U.S. and Mexico. Essential to the economy, to the customers, and to the communities it serves,
CN safely transports every year more than 300 million tons of cargo, serving exporters, importers, retailers, farmers and manufacturers.
CN and its affiliates have been contributing to community prosperity and sustainable trade since 1919. CN is committed to programs supporting
social responsibility and environmental stewardship.
CN's freight revenues are derived from seven
commodity groups representing a diversified and balanced portfolio of goods transported between a wide range of origins and destinations.
This product and geographic diversity better position the Company to face economic fluctuations and enhances its potential for growth
opportunities. For the year ended December 31, 2021, CN's largest commodity group accounted for 28% of total revenues. From a geographic
standpoint, 16% of revenues relate to U.S. domestic traffic, 31% transborder traffic, 18% Canadian domestic traffic and 35% overseas
traffic. The Company is the originating carrier for over 85%, and the originating and terminating carrier for over 65%, of traffic moving
along its network, which allows it both to capitalize on service advantages and build on opportunities to efficiently use assets.
Revenues generated by the Company during the year
are influenced by seasonal weather conditions, general economic conditions, cyclical demand for rail transportation, and competitive forces
in the transportation marketplace. Operating expenses reflect the impact of freight volumes, seasonal weather conditions, labor costs,
fuel prices, and the Company’s productivity initiatives.
For a description of the various commodity groups
transported by CN, their principal markets, as well as select revenue, revenue ton miles and carload information, please see pages 22
to 27 of the MD&A, which are incorporated by reference herein.
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4.3
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COMPETITIVE CONDITIONS
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For a discussion of the competitive conditions
under which CN operates, please see the section entitled “Competition” in the Business risks discussion located on page 58
of the MD&A, which is incorporated by reference herein.
As at December 31, 2021, CN employed a total
of 22,604 employees, of which 17,167 were unionized employees.
For a discussion of CN’s labor negotiations,
please see the section entitled “Labor negotiations” in the Business risks discussion located on pages 59 to 60 of the
MD&A, which is incorporated by reference herein.
In addition to its Employment Equity Policy (for Canadian employees)
and Equal Employment Opportunity Policy (for U.S. employees), CN maintains a comprehensive Human Rights Policy and a Workplace Harassment
and Violence Prevention Policy for its Canadian employees and a Prohibited Harassment, Discrimination and Anti-Retaliation Policy for
its U.S. employees. These policies affirm CN’s commitment to ensuring that there is no harassment nor discrimination against any
employee or applicant based on grounds of religion, race, sex, nationality, disability or any other basis protected by law, ordinance
or regulation. The policies extend to recruitment, selection and compensation practices, as well as to working conditions and the work
environment. Internal complaint procedures have been established whereby any person covered by the Workplace Harassment and Violence Prevention
Policy and the Employment Equity Policy (for Canadian employees) or the Equal Employment Opportunity Policy and Prohibited Harassment,
Discrimination and Anti-Retaliation Policy (for U.S. employees) can contact his or her human resources director or human resources manager
who will address his or her complaint. The employee can also call either the Human Resources Center, which will forward the complaint
to the appropriate human resources manager for further handling, or the CN Ombudsman directly, who can be contacted on a confidential
basis.
The Company’s operations are subject to
regulations both in Canada and in the U.S. A summary of such regulations is provided below. For a complete discussion of recent and pending
legislative and other regulatory developments both in Canada and in the U.S., see the section entitled “Regulation” in the
Business risks discussion located on pages 60 to 64 of the MD&A, which is incorporated by reference herein.
In order to facilitate the continued movement
of goods during the COVID-19 pandemic, regulatory agencies in the U.S. and Canada have issued waivers or exemptions to railway companies
providing relief from the strict application of some regulations. These reliefs were provided to facilitate social distancing and compliance
with other constraints associated with the COVID-19 pandemic that would prevent railways from complying with requirements in a manner
consistent with existing provisions.
Economic regulation - Canada
The Company's rail operations in Canada are subject
to economic regulation by the Canadian Transportation Agency (“Agency”) under the Canada Transportation Act (“CTA”).
The CTA provides rate and service remedies, including final offer arbitration (“FOA”), long-haul interswitching rates and
mandatory interswitching. It also regulates the maximum revenue entitlement for the movement of regulated grain, charges for railway ancillary
services and noise-related disputes. In addition, various Company business transactions must gain prior regulatory approval, with attendant
risks and uncertainties, and the Company is subject to government oversight with respect to rate, service and business practice issues.
FOA is used in cases
of rate disputes between a shipper and a railway company and involves the selection by an arbitrator of either the shipper’s or
the carrier’s rate and service offer. Long haul interswitching provisions can be invoked to require an originating railway company
to issue to a shipper with access to a single rail carrier a rate covering the movement to the nearest interchange with another railroad
determined by the CTA on the basis of comparable commercial rates. In addition, certain rail shipments of export grain are
subject to a government-established revenue cap, which effectively specifies a maximum revenue entitlement that railways can earn.
In addition to public rates issued under tariffs,
the CTA permits confidential contracts to be negotiated between rail carriers and shippers to govern the terms, conditions and rates for
service. Furthermore, railway companies are subject to service level obligations and, in case of breach, shippers may seek redress from
the Agency. Railway companies are also required to enter into an agreement, at the request of a shipper, respecting the manner in which
they intend to fulfill their service obligations. In the absence of an agreement, the shipper may submit the matter for determination
by an arbitrator.
When a railway company wants to sell or abandon
lines, the CTA encourages their sale to other railway companies for continued operations and provides the framework for line discontinuance.
The railway companies are required to publish a plan for lines they intend to discontinue within the next three years. Prior to discontinuance,
the line must be advertised as being for sale for continued rail operation and, if no interest is shown, must be offered specifically
for sale to applicable federal, provincial and municipal governments as well as urban transit authorities. The entire process typically
takes less than 24 months. The Company’s operations are also subject to safety and environmental provisions relating to track standards,
equipment standards, transportation of hazardous materials, environmental assessments and certain labor regulations, which are in many
respects similar when comparing Canadian and U.S. regulations.
Economic regulation - U.S.
The Company's U.S. rail operations are subject
to economic regulation by the STB. The STB serves as both an adjudicatory and regulatory body and has jurisdiction over certain railroad
rate and service issues, and carrier practices. It also has jurisdiction over the situations and terms under which one railroad may gain
access to another railroad’s traffic or facilities, the construction, acquisition or abandonment of rail lines, railroad consolidations,
and labor protection provisions in connection with the foregoing. As such, various Company business transactions must gain prior regulatory
approval and aspects of its pricing and service practices may be subject to challenge, with attendant risks and uncertainties. Recent
proposals in proceedings undertaken by the STB in a number of significant matters remain pending. For further details on such proceedings,
see the section entitled “Regulation - Economic regulation - U.S.” in the Business risks discussion located on pages 60
to 61 of the MD&A, which is incorporated by reference herein.
Government regulation of the railroad industry
is a significant determinant of the competitiveness and profitability of railroads. Deregulation of certain rates and services, plus the
ability to enter into confidential contracts, pursuant to the Staggers Rail Act of 1980 (“Staggers Act”), has substantially
increased the flexibility of railroads to respond to market forces and has resulted in highly competitive rates. Various interests have
sought and continue to seek reimposition of government controls on the railroad industry in areas deregulated in whole or in part by the
Staggers Act. Additional regulation, changes in regulation and re-regulation of the industry through legislative, administrative, judicial
or other action could materially affect the Company.
Safety regulation - Canada
The Company's rail operations in Canada are subject
to safety regulation by the Minister under the Railway Safety Act as well as the rail portions of other safety-related statutes,
which are administered by Transport Canada. The Company may be required to transport toxic inhalation hazard materials as a result
of its common carrier obligations and, as such, is also subject to additional regulatory oversight in Canada. The Transportation of
Dangerous Goods Act, also administered by Transport Canada, establishes the safety requirements for the transportation of goods classified
as dangerous and enables the adoption of regulations for security training and screening of personnel working with dangerous goods, as
well as the development of a program to require a transportation security clearance for dangerous goods, the tracking of dangerous goods
during transport and the development of an emergency response plan.
On October 6, 2020, Transport Canada issued
new Passenger Rail Security Regulations, with their provisions coming into force in sequence. These regulations required passenger railway
and host companies to effectively manage their security risks by implementing risk-based security practices, including security awareness
training, security risk assessments, security plans and security inspections by July 6, 2021, the designation of a rail security
coordinator and security incident reporting by October 6, 2021 and security plan training and security exercises by January 6,
2022. CN has implemented all requirements applicable to its operations.
On February 22, 2021, the Minister approved
revisions to the Rules Respecting Key Trains and Key Routes proposed by the Canadian railway industry in response to the request
to do so issued on April 1, 2020. The speed of key trains carrying dangerous goods is based on cold temperature conditions and depends
on the safety measures implemented by railway companies to be detailed into a Winter Operation Risk Mitigation Plan. The maximum speed
also varies based on the type of railway signal and traffic control systems present on the railway networks, which take into account the
substantial investments made to equip main line tracks with automated signaling technology, on which the vast majority of CN's traffic
is handled. In addition, the new rules require railways to have in place a maintenance and inspection plan for permanent rail joints
and temporary rail joints. Considering that speed restrictions applicable to a single category of trains nevertheless affect the speed
of all trains operating on a rail network, the revised rules allow CN to maintain normal speed operations unless the conditions require
speed restrictions in the interest of safety. The revisions came into force on August 22, 2021.
On March 10, 2021, the Minister issued two
orders respecting railway uncontrolled movements. The first order imposes special interim procedures aimed at reducing the risks of uncontrolled
movements. The second order requires the Canadian railway industry to revise existing rules to incorporate design and performance
parameters for locomotives with roll-away protection, to develop a precise definition of attended versus unattended equipment as well
as incorporate requirements on the use of roll-away protection to reduce the risks of an uncontrolled movement. The revisions must be
filed with the Minister by March 10, 2022.
On May 31, 2021, the Minister of Transport
approved changes to the Rules Respecting Track Safety, which specify safety requirements that railway companies must follow
when inspecting and maintaining their railway track infrastructure. As a result of the new changes to the Rules, railway companies will
be required to put in place a certification process for employees who inspect tracks and supervise the restoration of tracks to make
sure their personnel have the proper knowledge and experience to carry out their safety duties. Railway companies must also establish
a process to ensure that track maintenance and repair work meets regulatory requirements and the railway companies’ own standards
to improve accountability. Finally, railway companies must develop and implement comprehensive plans to manage rail wear and the condition
of the rail surface, which are to be approved by a professional engineer to improve the integrity of railway tracks. These new rules came
into force on February 1, 2022.
On July 9 and 11, 2021, Transport Canada
issued orders pursuant to the Railway Safety Act in response to wildfires in British Columbia. In addition to requiring the implementation
of specific measures aimed at reducing the risk of fires and improving their detection, the Order directed railway companies to complete
and implement a Final Extreme Weather Fire Risk Mitigation Plan ("Final Plan") within 60 days following the issuance of these
orders. In accordance with this requirement, CN filed its Final Plan on September 9, 2021. This Final Plan addresses fire detection,
monitoring and response measures and was prepared after consulting municipal and other levels of local government, including Indigenous
government or other Indigenous governing bodies. On October 14, 2021, the Transportation Safety Board confirmed that its investigation
of the Lytton fire had not revealed any evidence to link railway operations to the fire.
On July 30, 2021, Transport Canada issued
Ministerial Order 21-04 pursuant to the Railway Safety Act. This Order provides for reporting requirements respecting the occurrence of
an emergency brake application that occurs when a train is stopped on heavy or mountain grade. Initially made mandatory between July 1,
2020 and July 1, 2021, the requirements began to apply again under the Order on September 1, 2021, and last for 12 months until
September 1, 2022.
On July 30, 2021, Transport Canada approved
amendments to the Canadian Railway Operating Rules proposed by the Railway Association of Canada on behalf of its members. The amendments
prescribe: 1) when air brakes must be used during switching operations (i.e. process of rearranging rail cars in a train yard) to ensure
a consistent approach across the railway system; 2) measures to ensure that stationary equipment is secured during switching operations
to prevent uncontrolled movements; and 3) speed restrictions when switching is conducted with a remotely controlled locomotive. The new
provisions are designed to improve safety and prevent uncontrolled movement while conducting switching operations, and to ensure that
equipment is properly secured while switching.
Transport Canada issued an order effective
October 30, 2021 requiring employers in the federally regulated rail sectors to either establish mandatory vaccination policies
for all employees in their organizations or require rail crew and track employees submit to rigorous testing protocols. Each railway
that implements a mandatory vaccination policy must include a provision for employee attestation/declaration of their vaccination
status; include a description of consequences for employees who do not comply or who falsify information; and meet standards
consistent with the approach taken by the Government of Canada for the Core Public Administration. After November 15, 2021,
each railway is required to guarantee employees have at least one shot of a COVID-19 vaccine or they will be unable to work. All
employees were required to be fully vaccinated by January 24, 2022.
On November 15, 2021, CN filed with Transport
Canada its Winter Operation Risk Mitigation Plan in accordance with the Rules Respecting Key Trains and Key Routes. This Plan deals
with specific measures associated with the movement of trains carrying crude oil or liquefied petroleum gases.
On November 25, 2020, the Minister approved
the new Duty and Rest Period Rules for Operating Employees subject to conditions clarifying some aspects of the Rules. In accordance
with the new Rules, CN filed with Transport Canada on November 25, 2021, its Fatigue Management Plan containing an extensive set
of prescriptive requirements for processes around scheduling, fitness for duty, deadheading, and other requirements of the new rules.
The other provisions of the Rules applicable to CN will come into effect on May 25, 2023.
On November 26, 2021, Transport Canada adopted
regulations revising the scope of application of the Grade Crossing Regulations by setting requirements for grade crossings according
to a risk-based model. Under this model, existing crossings considered to be low risk are exempted from upgrade requirements. The amendments
also extend the compliance deadline for upgrade requirements (previously November 28, 2021) on the basis of the risk-based model.
For crossings considered to be high priority, the deadline is extended by one year (until November 28, 2022), and for all other crossings
(i.e., crossings that do not meet the threshold criteria for low-risk or high priority) by three years (until November 28, 2024).
Safety regulation - U.S.
The Company's U.S. rail operations are subject
to safety regulation by the FRA under the Federal Railroad Safety Act as well as rail portions of other safety statutes, with the
transportation of certain hazardous commodities also governed by regulations promulgated by the Pipeline and Hazardous Materials Safety
Administration (“PHMSA”). PHMSA requires carriers operating in the U.S. to report annually the volume and route-specific data
for cars containing these commodities; conduct a safety and security risk analysis for each used route; identify a commercially practicable
alternative route for each used route; and select for use the practical route posing the least safety and security risk. In addition,
the Transportation Security Administration (“TSA”) requires rail carriers to provide upon request, within five minutes for
a single car and 30 minutes for multiple cars, location and shipping information on cars on their networks containing toxic inhalation
hazard materials and certain radioactive or explosive materials; and ensure the secure, attended transfer of all such cars to and from
shippers, receivers and other carriers that will move from, to, or through designated high-threat urban areas.
The FRA also has jurisdiction over railroad safety
and equipment standards, and most rail safety regulation is handled at the federal level. In contrast, however, to the exclusive role
of the STB over railroad economic regulation, state and local regulatory agencies have jurisdiction over certain local safety and operating
matters unless FRA has regulated the matter and these agencies are becoming more aggressive in their exercise of jurisdiction. State legislatures
have also recently enacted new laws in this regard that are intended to regulate railroads more extensively.
On February 18, 2020, the FRA issued a final
rule that requires each Class I railroad and certain shortline railroads to develop a Railroad Risk Reduction Program in a written
plan that will be reviewed and approved by the FRA and will be subject to audit. CN submitted its plan on August 16, 2021. Rail labor
previously challenged aspects of the FRA rule in the United States Court of Appeals for the DC Circuit, including protection from
discovery for information compiled by railroads for purposes of implementing the rule. On August 20, 2021, the United States Court
of Appeals for the DC Circuit denied the challenge filed by rail labor to the FRA's final rule concerning the risk reduction programs.
In November 2021, the FRA denied the Class I risk reduction program plans with comments. The Class I railroads will submit
revised plans by February 7, 2022.
On February 23, 2021, the United States Court
of Appeals for the Ninth Circuit vacated an FRA order from May 2019, which had withdrawn an agency proposed rule relating to
crew size. On April 9, 2021, the Association of American Railroads sought rehearing from the court. On May 6, 2021, the Ninth
Circuit denied the petition for rehearing. In a separate matter, a federal court in Illinois previously concluded that the Illinois crew
size statute was preempted under the FRA’s May 2019 order, and the Illinois Commerce Commission appealed that decision to the
United States Court of Appeals for the Seventh Circuit. That appeal was stayed pending resolution of the Ninth Circuit case. On July 2,
2021, the United States Court of Appeals for the Seventh Circuit remanded the case to the district court so that the district court will
vacate its prior decision based on the FRA’s May 2019 order and decide AAR’s other preemption arguments. On December 21,
2021, the district court held that the Illinois crew size statute was preempted by the Regional Rail Reorganization Act (known as the
3R Act).
On March 1, 2021, the FRA implemented an
emergency order governing the use of face masks in railroad operations. On June 10, 2021, FRA issued a Statement of Enforcement Discretion
Regarding FRA’s Emergency Order Requiring Face Mask Use in Railroad Operations that is focused on passenger transportation and will
exercise enforcement discretion while outdoors on a transportation conveyance or while outdoors at transportation hubs. FRA has not updated
its views on masks in the freight transportation context.
The US government announced that it would impose
vaccine mandates. The Biden Administration issued the Executive Order on Ensuring Adequate COVID-19 Safety Protocols for Federal Contractors
and COVID-19 workplace safety guidance for federal contractors and subcontractors from the Safer Federal Workforce Task Force, which is
scheduled to go into effect on January 10, 2022 and the US Department of Labor's Occupational Safety and Health Administration (OSHA)
will not issue citations for noncompliance until February 9, 2022. The OSHA issued an emergency temporary standard that would require
employers with 100 or more employees to ensure their workforce is fully vaccinated or subject to periodic testing. Opponents challenged
the vaccine mandates in court. The federal contractor mandate is subject to a nationwide injunction, which has been appealed, and oral
argument will be scheduled by the United States Court of Appeals for the Eleventh Circuit. The OSHA temporary standard was reinstated
by the United States Court of Appeals for the Sixth Circuit and allowed the OSHA rule to take effect. Applicants sought emergency
relief from the United States Supreme Court to stay the OSHA rule. On January 13, 2022, the Supreme Court stayed the OSHA temporary
standard pending the disposition of the Applicants’ petition for review pending before the Sixth Circuit. The Supreme Court concluded
that the Applicants were likely to succeed on the merits of their claim that the agency lacked authority to impose the mandate.
Other regulations - Canada and U.S.
Vessels
The Company's vessel operations are subject to
regulation by the U.S. Coast Guard and the Department of Transportation, Maritime Administration, which regulate the ownership and operation
of vessels operating on the Great Lakes and in U.S. coastal waters. In addition, the Environmental Protection Agency has authority to
regulate air emissions from these vessels.
Security
The Company is subject to statutory and regulatory
directives in the U.S. addressing homeland security concerns. In the U.S., safety matters related to security are overseen by the TSA,
which is part of the U.S. Department of Homeland Security ("DHS") and PHMSA, which, like the FRA, is part of the U.S. Department
of Transportation. Border security falls under the jurisdiction of U.S. Customs and Border Protection ("CBP"), which is part
of the DHS. In Canada, the Company is subject to regulation by the Canada Border Services Agency ("CBSA"). Matters related to
agriculture-related shipments crossing the Canada/U.S. border also fall under the jurisdiction of the U.S. Department of Agriculture ("USDA")
and the Food and Drug Administration ("FDA") in the U.S. and the Canadian Food Inspection Agency ("CFIA") in Canada.
More specifically, the Company is subject to:
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border security arrangements, pursuant to an agreement the Company and CP entered into with the CBP and
the CBSA;
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the CBP's Customs-Trade Partnership Against Terrorism (C-TPAT) program and designation as a low-risk carrier
under CBSA's Customs Self-Assessment (CSA) program;
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regulations imposed by the CBP requiring advance notification by all modes of transportation for all shipments
into the U.S. The CBSA is also working on similar requirements for Canada-bound traffic;
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inspection for imported fruits and vegetables grown in Canada and the agricultural quarantine and inspection
(AQI) user fee for all traffic entering the U.S. from Canada; and
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gamma ray screening of cargo entering the U.S. from Canada, and potential security and agricultural inspections
at the Canada/U.S. border.
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Transportation of hazardous materials
As a result of its common carrier obligations,
the Company is legally required to transport toxic inhalation hazard materials regardless of risk or potential exposure or loss. A train
accident involving the transport of these commodities could result in significant costs and claims for personal injury, property damage,
environmental penalties and remediation in excess of insurance coverage for these risks, which may materially adversely affect the Company's
results of operations, or its competitive and financial position.
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4.7
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ENVIRONMENTAL MATTERS
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Regulatory Compliance
A risk of environmental liability is inherent
in railroad and related transportation operations; real estate ownership, operation or control; and other commercial activities of the
Company with respect to both current and past operations. As a result, the Company incurs significant operating and capital costs, on
an ongoing basis, associated with environmental regulatory compliance and clean-up requirements in its railroad operations and relating
to its past and present ownership, operation or control of real property. In as much as such liability is inherent to railroad and transportation
operations, CN is in all material aspects similarly situated relative to its competitors and thus the resulting environmental protection
requirements and expenditures are not expected to have a material adverse effect on CN’s competitive position. Environmental expenditures
that relate to current operations, or to an existing condition caused by past operations, are expensed as incurred. Environmental expenditures
that provide a future benefit are capitalized.
In Canada, the matter of environmental permits
for the Company is complex because of an overlap between federal and provincial jurisdictions. When projects trigger an environmental
assessment, CN proceeds in accordance with the Impact Assessment Act, s.c. 2019, c.28. Provincial and municipal environmental
legislation may be applicable to CN if such legislation does not aim to regulate the management or operations of railways. Therefore,
the Company does not apply systematically for provincial, municipal or local environmental permits for its railway operations in Canada.
Because of the multiple jurisdictions, there can be no assurance that additional provincial, municipal or local environmental permits
will not be required in the future. The Company may incur additional expenses or changes in its operations if such additional permits
were to be required in the future.
See Note 21 - Major commitments and contingencies,
to CN’s 2021 Annual Consolidated Financial Statements ("Financial Statements") for a further discussion of environmental
matters, as well as the section entitled “Environmental matters” in the Critical accounting estimates discussion located on
pages 56 to 57 of the MD&A, and the section entitled “Environmental matters” in the Business risks discussion located
on page 59 of the MD&A, which are incorporated by reference herein.
Environmental Policy
CN is committed to conducting its operations and
activities in a manner that protects the natural environment. CN considers protecting the environment a fundamental corporate social responsibility
governing its activities. Consequently, CN has implemented comprehensive environmental management programs. The Company's programs aim
to minimize the impact of the Company's activities on the environment. The Company strives to contribute to the protection of the environment
by integrating environmental priorities into the Company’s overall business plan and through the specific monitoring and measurement
of such priorities against historical performance and, in some cases, specific targets.
The Governance,
Sustainability and Safety Committee of the Board of Directors has the responsibility of overseeing the Company's environmental programs.
The Governance, Sustainability and Safety Committee is composed of CN directors and its responsibilities, powers and operation are further
described in the charter of such committee, which is included in the Company’s Corporate Governance Manual available on CN’s
website. Certain risk mitigation strategies, such as periodic audits, employee training programs and emergency plans and procedures,
are in place to minimize the environmental risks to the Company. The Company’s CDP report, its Sustainability Report entitled “Delivering
Responsibly” and the Company’s Corporate Governance Manual, are available on CN’s website www.cn.ca in
the Delivering Responsibly section.
Legal Proceedings
As of the date hereof, there are no legal proceedings
to which CN is a party involving claims for damages, exclusive of interest and costs, in excess of 10% of its current assets. The Company
will regularly assess its position as events progress.
See Note 21 - Major commitments and contingencies
to the Financial Statements, for further discussion of legal actions, if any, as well as pages 54 to 56 of the MD&A, for a general
discussion of personal injury and other claims, which are incorporated by reference herein.
Aboriginal Claims
The Company believes that it possesses unrestricted
and absolute title to its lands. However, in recent years, some Aboriginal communities have claimed to have a continuing legal interest
in certain lands. They allege this interest prohibits the Company from disposing of the lands when they are no longer needed for railway
purposes, except by allowing them to revert to the Crown for the benefit of Aboriginals. This issue is one which will ultimately be decided
by the courts; however, regardless of the outcome, there is no perceived material adverse effect, as the right of the Company to continue
to occupy and operate over such lands is not being called into question.
As the issues surrounding Aboriginal claims are
complex and involve not only private interests but fiduciary and other obligations of the Crown in the right of Canada, CN has agreed
not to sell or otherwise dispose of land which is not essential to its rail operations and which is located in, or adjacent to, an Aboriginal
reserve, unless each of CN and the Government of Canada is satisfied that no legitimate Aboriginal claim exists with respect to such land.
In addition, CN has agreed to convey to the Government of Canada, for no consideration, any land not integral to its rail operations that
may be necessary to settle legitimate Aboriginal claims with respect to such land, or lands which were formerly reserve lands and have
become non-rail assets. The Government of Canada, for its part, has agreed that it will provide the necessary compensation for settlement
of legitimate Aboriginal claims which would otherwise result in CN having to relinquish land essential to its rail network, unless such
claims arise out of, or are substantially based upon, willful, known, negligent or fraudulent acts or omissions of CN which adversely
affected the rights or interests of Aboriginal people.
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4.9
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INTANGIBLE PROPERTIES
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CN uses various works protected by intellectual
property rights to which the Company owns or for which it has been granted rights to use. These works include customers’ lists,
copyrights, patents, trademarks, logos and trade names. This intellectual property is important to the Company’s operations and
its success.
A description of risks affecting CN and its business appears under
the heading “Business risks” located on pages 58 to 67 of the MD&A, and under the heading “Financial Instruments”
for risks associated with the Company’s use of financial instruments located on pages 46 to 48 of the MD&A, which pages are
incorporated by reference herein. See Item 1 of this AIF for a further discussion of risks associated with forward-looking statements.
As of the date hereof, the membership of each
Board committee is composed of the following directors:
Robert L. Phillips (chair), Shauneen Bruder, Denise Gray, the Hon.
Kevin G. Lynch, Margaret A. McKenzie, James E. O'Connor.
Shauneen Bruder (chair), Denise Gray, Justin M. Howell, the Hon. Kevin
G. Lynch, Robert Pace, Laura Stein.
The Hon. Kevin G. Lynch (chair), Shauneen Bruder,
Denise Gray, Justin M. Howell, Robert Pace, Robert L. Phillips.
Laura Stein (chair), Justin M. Howell, Margaret
A. McKenzie, James E. O'Connor.
The Audit, Finance and Risk Committee Charter
is reproduced in its entirety at Schedule A of this AIF.
As of the date hereof, the Audit, Finance and Risk Committee is composed
of six independent directors, namely, Robert L. Phillips (chair), Shauneen Bruder, Denise Gray, the Hon. Kevin G. Lynch, Margaret A. McKenzie,
James E. O'Connor.
The Board of Directors believes that the composition
of the Audit, Finance and Risk Committee reflects a high level of financial literacy and experience. Each member of the committee has
been determined by the Board of Directors to be financially literate, as such term is defined under Canadian and U.S. securities laws
and regulations and the NYSE Corporate Governance Standards. The Board of Directors has made such determination based on the education
and experience of each committee member. The following is a description of the education and experience of each member of the Audit, Finance
and Risk Committee that is relevant to the performance of his responsibilities as a member of the committee:
Mr. Phillips, Chair of the Audit,
Finance and Risk Committee since April 27, 2021, is the President of R.L. Phillips Investments Inc. and was previously
President and Chief Executive Officer and director of British Columbia Railway Company Limited from 2001-2004. Mr. Phillips was
Executive Vice-President, Business Development and Strategy for MacMillan Bloedel Ltd. and, before that, held the position of Chief
Executive Officer at PTI Group and Dreco Energy Services Limited. He also enjoyed a prestigious career as a corporate lawyer and was
appointed to the Queen's Counsel in Alberta in 1991. Mr. Phillips is currently the chairman of the board of directors and
member of the Audit Committee of the Canadian Western Bank, and a member of the board of directors and Audit Committee of Capital
Power Corporation. He is also Lead Director of West Fraser Timber Co. Ltd. Mr. Phillips received his Bachelor of Laws (Gold
Medalist), and Bachelor of Science, Chemical Engineering (Hons) from the University of Alberta.
Ms. Bruder is the retired Executive Vice-President,
Operations at the Royal Bank of Canada (“RBC”) where she was responsible for overseeing operations related to all personal
and business clients in Canada. She previously served for RBC as Executive Vice-President of Business and Commercial Banking, Chief Operating
Officer of the Global Wealth Management division and President of RBC Centura Banks, Inc. in North Carolina. Ms. Bruder is a
director and a member of the Audit, Finance and Risk Committee of Andrew Peller Limited. Ms. Bruder is also a member of the Institute
of Corporate Directors and is Chair of the Board of Governors for the University of Guelph. Previously, she was appointed as the Chairperson
of the Canadian Chamber of Commerce and the Canadian American Business Council. She serves as Honorary Consul for Luxembourg in Toronto.
Ms. Bruder holds a B.A. from the University of Guelph and an MBA from Queen’s University.
Ms. Gray is the President, LG Energy Solution
Michigan Inc. Tech Center, and a member of its board of directors. In this role, she oversees the North American subsidiary of South Korean
LG Energy Solution, one of the world’s largest lithium-ion battery manufacturers. Prior to March 2018, she was President and
Chief Executive Officer of LG Chem Power, Inc., a company focused on lithium-ion polymer battery technology applications in the North
American automotive and commercial markets. Ms. Gray has been a member of the board of Tenneco, Inc., a U.S. public company
and a manufacturer of automotive products for global markets, since 2019 and serves as a member of the board’s audit and compensation
committees. Ms. Gray also serves on the board of directors of the Original Equipment Suppliers Association (OESA), a non-profit trade
association that represents original equipment automotive suppliers in North America. She was awarded the 2017 Women of Color Technologist
of the Year Award and holds a bachelor’s degree in Electrical Engineering from Kettering University and a master’s degree
in Engineering Management Technology from Rensselaer Polytechnic Institute.
The Honorable Kevin G. Lynch is the retired
Vice-Chair, BMO Financial Group. In this role, Dr. Lynch was a key strategic advisor to senior management and represented BMO
in domestic and international markets. Prior to joining BMO, Dr. Lynch built a distinguished public service career in the
Government of Canada. Before his retirement in 2009, he served as Clerk of the Privy Council, Secretary to the Cabinet, and Head of
the Public Service of Canada. Dr. Lynch began his public service career at the Bank of Canada in 1976 and has held a number of
senior positions in the Government of Canada. These included the post of Deputy Minister of Industry, from 1995 to 2000, and Deputy
Minister of Finance, from 2000 to 2004. From 2004 to 2006, he served as Executive Director (for the Canadian, Irish and
Caribbean constituency) at the International Monetary Fund in Washington, D.C. Dr. Lynch was the Chair of SNC-Lavalin Group
Inc., and past director of Empire Ltd., CNOOC Ltd and various Crown corporations. He was made a Member of the Queen's Privy Council
for Canada in 2009 and an Officer of the Order of Canada in 2011. The Honorable Kevin G. Lynch earned his master’s in Economics from the University of Manchester and a
doctorate in Economics from McMaster University.
Ms. McKenzie is a Corporate Director with
more than 30 years of experience in the energy sector where she developed expertise in financial reporting, treasury, corporate finance
and risk management. She currently sits on the board of directors of PrairieSky Royalty Ltd., where she is the chair of the Audit Committee,
and Spur Petroleum Ltd., a private energy company in Western Canada. Ms. McKenzie is the founder and former Chief Financial Officer
of Range Royalty Management Ltd, a position she assumed from 2006 to 2014. Ms. McKenzie holds a Bachelor of Commerce Degree (Accounting)
from the University of Saskatchewan and has obtained her designation as ICD.D with the Institute of Corporate Directors. She has also
been Chartered Professional Accountant (CPA CA) since 1985.
Mr. O’Connor is the retired Chair of
the board of directors of Republic Services, Inc., a leading provider of non-hazardous solid waste collection, recycling and disposal
services in the U.S. From 1998 to 2011, Mr. O’Connor was Chair and Chief Executive Officer of Republic Services, Inc.
Prior to 1998, he had held various management positions at Waste Management, Inc. He was named to the list of America’s Best
CEOs each year between 2005 and 2010. In 2011, Mr. O’Connor was named to the Institutional Investors’ All American Executive
Team. He was Lead Director of Casella Waste Systems, Inc. and past director of Clean Energy Fuels Corp. Mr. O'Connor holds a
Bachelor of Science in Commerce (concentration in accounting) from DePaul University.
Pursuant to the terms of its charter, the Audit,
Finance and Risk Committee (previously referred to as the Audit Committee) approves all audit and audit-related services, audit engagement
fees and terms and all non-audit engagements with the independent auditor. The Audit, Finance and Risk Committee pre-approved all the
services performed by CN’s independent auditors for audit-related and non-audit related services for the years ended December 31,
2021 and 2020.
A discussion of the nature of the services under
each category is described below.
Consists of fees incurred for professional services
rendered by the auditors in relation to the audits of the Company’s consolidated annual financial statements and internal control
over financial reporting, review of quarterly reports and audits of the financial statements of certain of the Company’s subsidiaries
.
Audit-related fees were incurred for professional
services rendered by the auditors in relation to the audit of the financial statements for the Company’s pension plans, for attestation
services in connection with reports required by statute or regulation, audit of the accounting associated with new, complex and proposed
transactions and other services, including services required to be performed to issue consent or comfort letters, in connection with the
issuance of securities or the filing of registration statements.
Fees consist of compliance related services associated to cross-border
employee tax filings, for assistance related to the preparation of Canadian and U.S. research and development tax credit filings and other
tax advice and compliance services.
Consists of forensic investigation and accounting services related
to a foreign subsidiary.
The mandate of the Audit, Finance and Risk Committee,
attached as Schedule A to this AIF, provides that the Audit, Finance and Risk Committee determines which non-audit services the external
auditors are prohibited from providing, approves audit services and pre-approves permitted non-audit services to be provided by the external
auditors. CN’s Audit, Finance and Risk Committee and the Board of Directors have adopted resolutions prohibiting the Company from
engaging KPMG LLP to provide certain non-audit services to the Company and its subsidiaries, including bookkeeping or other services related
to the accounting records or financial statements, financial information systems design and implementation, appraisal or valuation services,
fairness opinions, or contribution in-kind reports, actuarial services, internal audit outsourcing services, management functions or human
resources functions, broker or dealer, investment adviser, or investment banking services and legal services and expert services unrelated
to the audit. Pursuant to such resolutions, the Company may engage KPMG LLP to provide non-audit services, including tax services, other
than the prohibited services listed above, but only if the services have specifically been pre-approved by the Audit, Finance and Risk
Committee.
The executive officers are appointed by the Board
of Directors and hold office until their successors are appointed subject to resignation, retirement or removal by the Board of Directors.
As at December 31, 2021, the directors and
the executive officers of the Company, as a group, beneficially owned, directly or indirectly, or exercised control or direction over
an aggregate of approximately 750 thousand common shares of the Company, representing approximately
0.11% of the outstanding common shares.
To the knowledge of the Company and based upon
information provided to it by the Company’s directors and executive officers, none of such directors or executive officers is or
has been, in the last 10 years, a director or executive officer of any company that, while such person was acting in that capacity: (a) was
the subject of a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation,
for a period of more than 30 consecutive days; (b) was subject to an event that resulted, after that person ceased to be a director
or executive officer, in the company being the subject of a cease trade or similar order or an order that denied the relevant company
access to any exemption under securities legislation, for a period of more than 30 consecutive days; or (c) within a year of that
person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or
was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee
appointed to hold its assets.