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| ITEM
3 | GENERAL
DEVELOPMENT OF THE BUSINESS |
| 3.1 | GENERAL
DEVELOPMENT OF THE BUSINESS DURING THE LAST THREE YEARS |
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.
2022 Annual Information Form
2022
Highlights
Leadership
changes
On
January 25, 2022, CN announced that Tracy Robinson was appointed as CN's President and CEO and as a member of the Board of Directors
of CN, effective February 28, 2022. This appointment followed the previously announced retirement of Jean-Jacques Ruest.
On
May 20, 2022 CN announced that Shauneen Bruder was unanimously elected by the board of directors as board chair, replacing Robert Pace
who retired from the board of directors the same day.
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 three-coast network; geographic, customer and product diversity; and a proven ability to innovate, including running a scheduled railroad.
CN's
business strategy is anchored on the Company’s vision of Powering Sustainable Growth for our customers, our people and the communities
in which we operate. CN’s strategic plan is anchored on driving operational excellence every day, developing strong customer partnerships,
growing geographic and product reach, and continuous innovation. CN's objective is to deliver sustainable, profitable growth by providing
superior customer service, growing faster than the economy, pricing ahead of rail inflation, and continuously improving operating efficiency.
This strategy rests on CN's strong commitment to Delivering Responsibly, moving its customers’ goods safely and efficiently, doing
so in a manner that seeks to minimize the impact on the environment, attracting and retaining top talent, helping build safer and stronger
communities, and adhering to the highest governance standards.
CN
aims to drive consistent shareholder returns and earnings growth 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.
Driving
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 scheduled railroading 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. By running a disciplined scheduled operation, with a focus on
car velocity, CN can lean into its strengths and pursue growth opportunities across its three-coast network.
Developing
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 to help our customers grow their markets. 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
2022 Annual Information Form
ensure a seamless end-to-end customer experience by bringing transparency to the supply chain and adjusting
its service performance measures to better reflect its customers’ changing requirements.
CN
is also leveraging technology in 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.
Growing
geographic and product reach
With
its three-coast network that spans North America, CN is helping its customers 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 is investing in
infrastructure and equipment to grow its capacity and increase its share of new industrial production while also responding to shifting
demands in commodities. In Eastern Canada and the U.S., CN aims to further densify its network through gateway growth and providing customers
with cost-advantageous intermodal routes.
Continuous
innovation
CN
proactively pursues an ambitious innovation strategy using technology, analytics and automation to increase safety and efficiency as
well as deliver a reliable, lower-carbon, seamless service to its customers. As a pioneer of scheduled railroading, CN is well positioned
to drive the next wave of change by applying technology and new ways of working to unlock further operational excellence, customer service
and employee engagement, including:
| • | Leveraging
a strategic partnership with Google Cloud to deliver new customer experiences and modernize
CN's technology infrastructure. |
| • | Using
advanced digital technologies, big data, artificial intelligence (AI) and predictive analytics
for better planning, efficiency, and safety. |
| • | Improving
real-time data and analytical support tools. |
| • | More
accurate, consistent and relevant information provided to all stakeholders (e.g., customers,
employees, communities). |
| • | Automating
manual processes to improve efficiency and safety. |
| • | Protecting
the Company’s physical assets, digital assets and data to keep its network safe. |
| • | Collaborating
on the transition to a lower carbon economy. |
Delivering
Responsibly
Sustainability
is at the heart of how CN is building for the future. Delivering Responsibly, the encapsulation of the Company’s sustainability
strategy and commitments, underpins all of CN’s decisions, commitments and investments. The Company is focused on transporting
goods safely and efficiently, doing so in a manner that seeks to minimize the impact on the environment, attracting, retaining and engaging
top talent, helping to build stronger, safer communities, while adhering to the highest governance 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, reporting on commitments and performance with focus, clarity
and comparability. In 2022, CN announced that it joined the United Nations Global Compact initiative – a voluntary platform for
the development, implementation, and disclosure of responsible business practices. CN is also proud of its 2022 accomplishments, including
being recognized on CDP’s prestigious "A List” for the Company’s efforts to tackle climate change, and for once
again being named to the Dow Jones Sustainability World and North American indices.
Safety
is a core value
CN
is intensely committed to the health and safety of its employees, the communities and environments in which it operates and the customers
it serves. The Company embraces a safety culture based on the
2022 Annual Information Form
fundamental
belief that all injuries and accidents are preventable. CN’s primary objective is to reduce serious injuries and fatalities to
zero. The Company is employing advanced technology and innovative training to help achieve this goal. More specifically, CN is:
| • | Fostering
an engaged workforce that understands and respects Life Critical Rules. |
| • | Embedding
a mindset whereby employees take ownership for their own safety and the safety of others
by Looking Out for Each Other. |
| • | Training
employees to identify and mitigate exposures. |
| • | Using
advanced technologies to proactively mitigate human error and reduce risk. |
| • | Maintaining
reliable and safe equipment and infrastructure. |
| • | Investing
in employee training, coaching, recognition and engagement initiatives. |
Capital
Spending
CN's
success depends on a steady stream of capital investments that are aligned with and support its business strategy. These investments
cover a wide range of areas, from track infrastructure and rolling stock to information and operating technologies, as well as other
equipment and assets that improve the safety, efficiency, capacity and reliability of CN's service offering. Investments in track infrastructure
enhance the safety and integrity of the physical plant, increase the capacity and fluidity of the network, promote service excellence,
and support growth. New locomotives equipped with distributed power capability increase capacity, fuel productivity and efficiency, and
improve service reliability, particularly in cold weather, while improving train handling and safety. Targeted railcar acquisitions aim
to tap growth opportunities, complementing the fleet of privately owned railcars that traverse CN's network. CN is also investing in
and deploying advanced technologies to automate labor-intensive tasks like track and railcar inspections, as well as to improve the customer
experience through ‘track and trace’ functionality. CN's long-term economic viability depends on the presence of a supportive
regulatory and government policy environment that encourages investment and innovation.
The
multi-year implementation of CN’s strategic plan requires a disciplined, analysis-driven approach to capital investment. Talent,
technology and capital need to be fully aligned. The Company’s capital investment roadmap includes several core elements:
| • | Investing
in the maintenance of a safe and reliable network. |
| • | Investing
in asset infrastructure to increase the capacity of its three-coast network. |
| • | Developing
a portfolio approach to technology with business-led investment decisions, delivering value
at each stage of implementation. |
| • | Deepening
supply chain partnerships with its customers, including road-to-rail conversion. |
| • | Investing
in data analytic systems, including AI, to support data-driven decision-making. |
| • | Investing
in technologies and capital assets to support decarbonization of its footprint. |
| • | Growing
its physical and commercial reach through strategic partnerships and acquisitions. |
Reinvestment
in the business
In
2022, CN spent approximately $2.75 billion in its capital program, of which $1.60 billion were invested to maintain the safety and integrity
of its network, particularly track infrastructure. CN's capital spending also included $0.75 billion for strategic initiatives to increase
capacity, enable growth and improve network resiliency, including line capacity upgrades and information technology initiatives, and
$0.40 billion on equipment, including the acquisition of 500 new grain hopper cars.
2022 Annual Information Form
Financial
Management Initiatives
Shelf
prospectus and registration statement
On
May 4, 2022, the Company filed a new shelf prospectus with Canadian securities regulators and a registration statement with the SEC,
pursuant to which CN may issue up to $6.0 billion of debt securities in the Canadian and U.S. capital markets over a 25-month
period following the filing date. This shelf prospectus and registration statement replaced CN's previous shelf prospectus and
registration statement that expired on March 11, 2022.
As
at December 31, 2022, the remaining capacity of this shelf prospectus and registration statement was $4.1 billion. Access to the Canadian
and U.S. capital markets under the shelf prospectus and registration statement is dependent on market conditions.
The
Company's access to long-term funds in the capital markets depends on its credit ratings and market conditions. The Company believes
that it continues to have access to the capital markets. If the Company were unable to borrow funds at acceptable rates in the capital
markets, the Company could borrow under its credit facilities, draw down on its accounts receivable securitization program, access the
pledged cash under its letter of credit facilities, raise cash by disposing of surplus properties or otherwise monetizing assets, reduce
discretionary spending or take a combination of these measures to assure that it has adequate funding for its business.
Revolving
credit facilities
On
March 31, 2022, the Company's revolving credit facility agreement was amended, to extend the term of the credit facility by one year
and transition from the benchmark on US borrowings from London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate
(SOFR). The credit facility of $2.5 billion consists of a $1.25 billion tranche maturing on March 31, 2025 and a $1.25 billion tranche
maturing on March 31, 2027. The revolving credit facility agreement is structured as a sustainability linked loan whereby its applicable
margins are adjusted upon achievement of certain sustainability targets. The credit facility provides for borrowings at various benchmark
interest rates, such as the SOFR and the Canadian Dollar Offered Rate (CDOR), plus applicable margins, based on CN's credit ratings and
sustainability targets. There is no fallback language for CDOR.
As at December 31, 2022 and 2021, the Company had no outstanding
borrowings under this revolving credit facility and there were no draws in 2022 and 2021.
On March 18, 2022, the Company entered
into a $1.0 billion two-year unsecured revolving credit facility agreement with a consortium of lenders. The credit facility is available
for working capital and general corporate purposes and provides for borrowings at various benchmark interest rates, such as SOFR and
CDOR, plus applicable margins, based on CN's credit ratings. As at December 31, 2022, the Company had no outstanding borrowings under
this revolving credit facility and there were no draws in 2022.
Both revolving credit facility agreements have one financial covenant,
which limits debt as a percentage of total capitalization. The Company is in compliance as at December 31, 2022.
Equipment
loans
The Company has a secured non-revolving term loan
credit facility for financing or refinancing the purchase of equipment. The equipment loans made under the non-revolving credit facility
have a tenor of 20 years, bear interest at variable rates such as LIBOR and CDOR plus a margin, are repayable in equal quarterly installments,
are prepayable at any time without penalty, and are secured by rolling stock.
2022 Annual Information Form
On March 31, 2021, the Company issued a US$310
million ($389 million) equipment loan under this facility. The Company repaid US$31 million ($40 million) and repaid US$27 million ($33
million) of equipment loans in 2022 and 2021, respectively.
As at December 31, 2022 and
2021, the Company had outstanding borrowings of US$542 million
($734 million) and US$572 million ($723 million), respectively, and had no further
amount available under this non-revolving term loan facility.
Commercial
paper
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 $2.5 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. The cost of commercial paper and access to the commercial
paper market in Canada and the U.S. are dependent on credit ratings and market conditions. If the Company were to lose access to its
commercial paper program for an extended period of time, the Company could rely on its revolving credit facilities to meet its short-term
liquidity needs.
As
at December 31, 2022 and
2021, the Company had total commercial paper borrowings of US$594 million
($805 million) and US$111 million ($140
million), respectively, presented in Current portion of long-term debt on the Consolidated Balance
Sheets.
Accounts
receivable securitization program
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 January 19, 2023, the Company extended
the term of its agreement by one year to February 1, 2025. The trusts are multi-seller trusts and the Company is not the primary beneficiary.
Funding for the acquisition of these assets is customarily through the issuance of asset-backed commercial paper notes by the unrelated
trusts.
The
Company has retained the responsibility for servicing, administering and collecting the receivables sold. The average servicing period
is approximately one month and the interest on borrowings under the Accounts receivable securitization program is renewed based on commercial
paper rates then in effect or SOFR or CDOR if the commercial paper market is inaccessible
and includes fallback language that allows for the succession of CDOR to an alternative rate consistent with market convention. Subject
to customary indemnifications, each trust's recourse is limited to the accounts receivable transferred.
The
accounts receivable securitization program provides the Company with readily available short-term financing for general corporate use.
In the event the program is terminated before its scheduled maturity, the Company expects to meet
its future payment obligations through its various sources of financing including its revolving credit facilities and commercial paper
program, and/or access to capital markets.
As at December 31, 2022, and 2021 the Company
had no outstanding borrowings under the accounts receivable securitization program and there were no activities in 2022 and 2021.
2022 Annual Information Form
Bilateral
letter of credit facilities
The
Company has a series of committed and uncommitted bilateral letter of credit facility agreements. On March 31, 2022, the Company extended
the maturity date of certain committed bilateral letter of credit facility agreements to April 28, 2025. 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, 2022, the Company had outstanding letters of credit of $396
million (2021 - $394 million)
under the committed facilities from a total available amount of $470 million (2021
- $518 million) and $100 million
(2021 - $158 million) under the uncommitted
facilities.
As
at December 31, 2022,
included in Restricted cash and cash equivalents was $397 million (2021 -
$396 million) and $100 million (2021
- $100 million) pledged as collateral under the committed
and uncommitted bilateral letter of credit facilities, respectively.
New
Normal Course Issuer Bid
On
January 24, 2023, the Board of Directors of the Company approved a new normal course issuer bid (NCIB), which allows for the repurchase
of up to 32.0 million common shares between February 1, 2023 and January 31, 2024.
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. After six months of bargaining, the IBEW served notice of dispute with the Minister of Labour which commences the conciliation/
mediation process under the Canada Labour Code. On June 15, 2022, the IBEW gave a 72-hour notice of its intention to strike and on June
18, 2022 the IBEW commenced their strike. On July 4, 2022, the IBEW agreed to binding arbitration, bringing the strike to an end. On
October 7, 2022, the arbitrator rendered a decision dated October 12, 2022 awarding a three percent wage increase per year from 2022
through 2024. This decision finalizes the collective agreement between CN and the IBEW, which expires on December 31, 2024.
On
December 1, 2021, CN filed an application with the Canadian Industrial Relations Board (CIRB) pursuant to Section 18.1 of the Canada
Labour 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. On March 23, 2022, the Teamsters Canada Rail Conference
(TCRC) served notice to commence bargaining for the renewal of the Conductor and Yard Coordinator collective agreement governing approximately
3,000 employees, which expired on July 22, 2022. In April 2022, CN filed a formal request with the CIRB requesting that the expiry date
of the collective agreement be extended until the CIRB has rendered a decision on our application to conduct a bargaining unit review.
On September 8, 2022, with the assistance of the CIRB as arbitrators, CN and the TCRC reached an agreement to consolidate 15 of
the 16 collective bargaining agreements into one single agreement, and the CIRB issued a bargaining unit for the remaining single agreement
on September 12, 2022. On September 29, 2022, the CIRB ruled that the sixteenth agreement, represented by Unifor, would be
2022 Annual Information Form
consolidated with the other Transportation agreements into one single
agreement, one bargaining unit. Collective bargaining with the TCRC on the single agreement will commence on January 30,
2023.
On
December 1, 2022, a tentative agreement was reached between CN and TCRC for Rail Traffic Controllers for the renewal of their collective
agreement. This agreement was ratified on December 23, 2022. This is a three-year agreement expiring on December 31, 2025 and impacts
approximately 160 employees.
On
December 16, 2022, Unifor filed a Notice of Dispute with the Minister of Labour in the ongoing collective bargaining negotiations with
CN, which impact the Clerical, Shopcraft and Intermodal groups. On December 30, 2022, the Minister of Labour appointed conciliators.
Either party could potentially be in a position of a labor disruption (strike or lock-out) as early as March 21, 2023.
U.S.
Workforce
As
of January 31, 2023, 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 bargaining agreements covering all union-represented employees,
with the exception of two employee groups working at PCD covering in total fewer than 35 employees. The national bargaining has
concluded in the United States. On December 2, 2022, the round of national bargaining between the nation’s freight railroads
(including the Company) and all 12 rail unions was fully resolved when President Biden signed legislation passed by Congress. The
legislation implemented collective bargaining agreement terms for the four unions that had not previously ratified their agreements.
These agreement terms are the same terms that previously were ratified and implemented by the other eight rail unions. All US
employees in the bargaining round are therefore now covered by new collective bargaining agreement terms based on the
recommendations of Presidential Emergency Board 250. The new terms increase wages by a compounded 24 percent over the five-year term
of the contract, from 2020 through 2024, with a 14.1 percent wage increase effective immediately. The agreements also include five
US$1,000 annual lump sum payments, adjustments to health care premiums, health benefit enhancements, and an additional personal
leave day for all employees. This resulted in an incremental wage accrual of $47 million, or $35 million after-tax ($0.05 per
diluted share), recorded in the third quarter of 2022 in Labor and fringe benefits within the Consolidated Statements of Income, to
reflect the terms of the new agreement.
2021
Highlights
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.
2022 Annual Information Form
Acquisitions
and Dispositions
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 purchase and sale agreement was terminated and on June 7, 2022, the Company,
CSX, and the STB filed a joint motion for dismissal of the appeal with the United States Court of Appeals for the Seventh Circuit because
the appeal was rendered moot and the Court dismissed the appeal.
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.
2022 Annual Information Form
Financial
Management Initiatives
On
January 26, 2021, the Board approved a new 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 had a commercial paper program in Canada and in the U.S. Both programs were backstopped by the Company's revolving credit facility.
The maximum aggregate principal amount of commercial paper that could be issued is $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, 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 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 December 20, 2021, the Company extended the term of its agreement by one year to February 1,
2024. The accounts receivable securitization program provided 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 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 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 were adjusted upon achievement of certain sustainability targets, starting in 2022. The amended credit
facility of $2.5 billion consisted 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 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 year and five year of the respective
tranches. The credit facility provided 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 had one financial covenant, which limits debt as a percentage of total capitalization. The Company was 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 had 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 had a tenor of 20 years, bore
interest at a variable rate based on LIBOR plus a margin, were repayable in equal quarterly installments, were prepayable at any time
without penalty, and
2022 Annual Information Form
were 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 had 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 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, 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 Board approved a new normal course issuer bid, which allowed 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 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.
U.S.
workforce
As
of February 1, 2022, collective agreements covering all non-operating and operating craft employees at GTW, companies owned by ICC, companies
owned by WC and BLE, and all employees at 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.
2022 Annual Information Form
2020
Highlights
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 and was actively marketing 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 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.
Financial
Management Initiatives
On
January 28, 2020, the Board approved a new NCIB that allowed 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 (US $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
2022 Annual Information Form
$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
Canadian
workforce
On
January 31, 2020, the collective agreements with the TCRC were ratified by its members, renewing the collective agreements for a three-year
term, retroactive from July 23, 2019.
U.S.
workforce
As
of January 31, 2020, collective agreements covering all non-operating and operating craft employees at GTW, companies owned by ICC, companies
owned by WC and BLE, and all employees at PCD were ratified.
As
of February 1, 2021, collective agreements covering all non-operating and operating craft employees at GTW, companies owned by ICC, companies
owned by WC and BLE, and all employees at PCD were
2022 Annual Information Form
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.
For
a discussion of the Company’s business strategy and anticipated developments for 2022, please see the section entitled “Strategy
overview” on pages 3 to 8 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.
| ITEM
4 | DESCRIPTION
OF THE BUSINESS |
CN
is engaged in the rail and related transportation business. CN's network of 18,600 route miles of track spans Canada and the U.S., 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, 2022, CN's largest commodity group accounted for
29% of total revenues. From a geographic standpoint, 16% of revenues relate to U.S. domestic traffic, 32% transborder traffic, 18% Canadian
domestic traffic and 34% 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, among other things, 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 20 to 24 of the MD&A, which are incorporated by reference herein.
| 4.3 | COMPETITIVE
CONDITIONS |
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 57 of the MD&A, which is incorporated by reference herein.
2022 Annual Information Form
As
at December 31, 2022, CN employed a total of 23,971 employees, of which 18,412 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 58 to 59 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 (i) comprehensive Human Rights Policy and (ii) 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 preventing harassment and 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 resolution procedures have been established whereby any
person covered by (i) the Workplace Harassment and Violence Prevention Policy and the Employment Equity Policy (for Canadian employees)
or (ii) 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. In Canada, all harassment complaints are submitted to CN’s
Designated Recipient in accordance with the Canada Labour Code Regulations on Work Place Harassment and Violence Prevention.
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 63 of the MD&A, which is incorporated
by reference herein.
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
2022 Annual Information Form
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.
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.
On
March 15 and 16, 2022, the STB held a public hearing concerning a proposal by the STB in 2016 to amend its regulations regarding reciprocal
switching. In addition to participating in the hearing, the Company, the Association of American Railroads, and other railroads submitted
written testimony and post-hearing comments in February and April 2022. The STB members conducted additional meetings with stakeholders.
On
April 22, 2022, the STB proposed to revise its existing service emergency rules for rail shippers seeking a directed service order during
a service emergency and propose accelerated process for acute service emergencies. Comments were submitted in May and June 2022.
On
April 26 and 27, 2022, the STB held a hearing on "Urgent Issues in Freight Rail Service". The STB required four Class I railroads
to attend and invited three other Class I railroads, including the Company, to attend. On May 6, 2022, the STB required all Class I railroads
to submit additional weekly service data and additional monthly employment data for six months. The STB also required certain Class I
railroads
2022 Annual Information Form
to submit service recovery plans, but the Company is not required to do so. On October 28, 2022, the STB extended the data
reporting for weekly service data and monthly employment data for another six months for all Class I railroads until May 5, 2023.
On
August 8, 2019, the STB issued interim findings and guidance to National Railroad Passenger Corporation (Amtrak) and the Company regarding
the terms and conditions for Amtrak’s use of the Company’s lines. On March 3, 2022, the STB issued a schedule for Amtrak
and the Company to submit opening, reply, and rebuttal submissions on the remaining issues in the case. Opening and reply submissions
were submitted in May and July 2022, and rebuttal submissions were submitted in August 2022.
On
December 19, 2022, the STB issued final decisions in two proceedings relating to small rate disputes (Final Offer Rate Review and Voluntary
Arbitration Program). On December 27, 2022, Union Pacific Railroad Company appealed the Final Offer Rate Review rule in the United States
Court of Appeals for the Eighth Circuit, and the Association of American Railroads has also subsequently filed an appeal. On December
29, 2022, the Company appealed the Voluntary Arbitration Program rule in the United States Court of Appeals for the Seventh Circuit,
and CSX also filed an appeal. On the same date, four railroads, including the Company, asked the STB to stay its deadline for Class I
railroads to opt-in to the Voluntary Arbitration Program while any appeal and any petition for reconsideration is decided. On January
24, 2023, the STB denied without prejudice the request for stay and have allowed the railroads to refile a stay request on February 3,
2023. On January 24, 2023, petitions for reconsideration were filed by three other Class I railroads.
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
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. In accordance with the second order, the Railway Association of Canada filed the requested revisions on March 10, 2022. The
Minister approved the revised rules on May 9, 2022 and they came into force on October 1, 2022.
On
November 25, 2020, the Minister approved the new Duty and Rest Period Rules for Operating Employees (the "Rules") 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. On March 11, 2022, Transport Canada opened pre-consultations on proposed Fatigue
Management System Regulations. On November 25, 2022, provisions of the Rules prohibiting employees from commencing a duty period or operating
railway equipment if unfit for duty came into force. The other provisions of the Rules applicable to CN will come into effect on May
25, 2023.
2022 Annual Information Form
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 proposed Final Plan on September
9, 2021. 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 June 15, 2022, the Minister approved the Railway Extreme Heat and Fire Risk Mitigation
Rules requiring railway companies to reduce speed and conduct additional track inspections when temperatures are high, inspect locomotive
exhaust systems more frequently, and implement a fire risk reduction plan.
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).
On
May 31, 2022, the Minister approved revisions to the Rules Respecting Track Safety which will come into force on May 31, 2023. The revisions
include requirements to make available to Transport Canada railway track standards and for the confidential treatment of technical sensitive
information provided by railway companies. The revisions also provide for the development of a plan for selecting, defining and analyzing
key performance indicators; new requirement for crossties and new inspection requirements for Class I track where occupied passenger
trains are operated.
On
July 25, 2022, the Minister issued an order requesting railway companies to revise the Railway Freight and Passenger Train Brake Inspection
and Safety Rules to incorporate enhanced inspection requirements for the performance of air brakes, including in cold temperatures. In
accordance with these directions, the Railway Association of Canada filed proposed revisions respecting air brake train tests on November
30, 2022. Revisions respecting test standards must be filed by May 31, 2023.
On
September 2, 2022, Transport Canada’s Locomotive Voice and Video Recorder (LVVR) Regulations came into force. These regulations
prohibit a railway company from operating railway equipment unless it is fitted with prescribed recording instruments and the prescribed
information is recorded, collected and preserved. LVVR technology will assist in preventing accidents and facilitate investigations to
better understand the circumstances of accidents. Supply chain disruptions have hampered the industry’s ability to strictly adhere
to the implementation timelines. Transport Canada acknowledges these challenges and encourages the industry to diligently equip their
operating railway equipment.
On
October 6, 2022, a Task Force appointed by the Minister on January 31, 2022 made recommendations regarding short and long-term actions
to alleviate supply chain congestion. No formal action has been announced by the Minister on the basis of this report.
On
November 17, 2022, the Minister tabled Bill C-33 in the House of Commons. The Bill is titled “An Act to amend the Customs Act,
the Railway Safety Act, the Transportation of Dangerous Goods Act, 1992, the Marine Transportation Security Act, the Canada Transportation
Act and the Canada Marine Act and to make a consequential amendment to another Act”. Key amendments are to the Railway Safety Act
which will provide the Minister the same power for security questions which he currently has to deal with safety issues.
On
January 9, 2023, Transport Canada published amendments to the Transportation Information Regulations which will require Canadian railways
to provide information respecting performance
2022 Annual Information Form
indicators such as transit time and dwell time. This information will be published each
week. The amendments will come into force on April 4, 2023.
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 (RRP) 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. In November 2021, the FRA denied the Class I risk reduction program plans with comments. CN submitted its
revised plan on February 7, 2022 and made further revisions in response to comments from the FRA on March 25, 2022. On July 7, 2022,
the FRA approved the Company's RRP. On September 8, 2022, the FRA issued a notice of proposed rulemaking regarding whether the FRA should
retain or remove a provision in the final RRP rule clarifying that contractors who perform a significant portion of a railroad’s
operations are considered the railroad’s directly affected employees for purposes of the RRP rule. The FRA is seeking comments
in response to a petition for reconsideration of the final rule filed by the Association of American Railroads (AAR). Comments were submitted
on November 7, 2022.
On
March 1, 2021, the FRA implemented an emergency order governing the use of face masks in railroad operations. On April 19, 2022, the
FRA announced that it will not enforce its face mask emergency order at this time in light of the court decision concerning the Centers
for Disease Control and Prevention (CDC) transportation mask order.
The
US government previously announced that it intended to impose vaccine mandates on (1) government contractors and (2) all private sector
employers with 100 or more employees. As to government contractors, the Biden Administration issued Executive Order 14042 called “Ensuring
Adequate COVID-19 Safety Protocols for Federal Contractors.” The Executive Order required federal government contractors and others
doing business with federal contractors to require vaccination of their employees. The contractor mandate was originally scheduled to
go into effect on January 10, 2022. However, two federal appeals courts have ruled that the contractor mandate exceeded the President’s
authority. Additionally, two other federal appellate courts covering different states have pending cases in which the mandate is also
challenged. The Biden Administration has indicated that it does not plan to enforce the mandate with these adverse rulings in place.
For private sector employers, the Occupational Safety and Health Administration (OSHA) issued an emergency temporary standard (ETS) requiring
2022 Annual Information Form
employers with 100 or more employees to mandate vaccination. After a decision by the United States Supreme Court, OSHA withdrew the ETS.
On
June 13, 2022, the FRA issued a final rule requiring Class I and other railroads to submit fatigue risk management program plans by July
13, 2023 to the FRA for approval. Railroads have 36 months to implement their plans after the FRA approves the plans.
On
July 28, 2022, the FRA proposed a rule requiring two-person crew, except in certain circumstances. The FRA held a public hearing on the
proposed rule on December 14, 2022. The Association of American Railroads, the Company, and other railroads submitted comments on December
21, 2022.
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:
| • | border
security arrangements, pursuant to an agreement the Company and CP entered into with the
CBP and the CBSA; |
| • | 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; |
| • | 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; |
| • | 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 |
| • | gamma
ray screening of cargo entering the U.S. from Canada, and potential security and agricultural
inspections at the Canada/U.S. border. |
The
Company has worked with the AAR to develop and put in place an extensive industry-wide security plan to address terrorism and security-driven
efforts by state and local governments seeking to restrict the routings of certain hazardous materials. If such state and local routing
restrictions were to go into force, they would be likely to add to security concerns by foreclosing the Company's most optimal and secure
transportation routes, leading to increased yard handling, longer hauls, and the transfer of traffic to lines less suitable for moving
hazardous materials, while also infringing upon the exclusive and uniform federal oversight over railroad security matters.
2022 Annual Information Form
Reliance
on technology and related cybersecurity risk
The
Company relies on information technology in all aspects of its business. The Company depends on the proper functioning and availability
of its information technology, including communications systems and data processing systems designed to operate safely and effectively
and to compete within the transportation industry. The Company’s information technology systems are critical in meeting customer
expectations, tracking, maintaining, and operating trains and related vehicles, managing employees, and interfacing with customers, suppliers,
vendors, and other third parties.
Security
threats continue to grow and can come from nation states, organized criminals, hacktivists and others, and the Company is at heightened
risk, due to its position as a critical component of both the Canadian and U.S. infrastructure, and may be impacted by cyber attacks
or security incidents, whether accidental or malicious. While the Company has business continuity and disaster recovery plans, other
security and mitigation programs in place to protect its operations, as well as information and technology assets, a cybersecurity attack,
significant disruption or failure of its information technology and communications systems or those of its vendors or service providers,
including system failure, security breach, disruption by malware or other damage could interrupt or delay the Company’s operations,
result in service interruptions, safety failures, security violations, regulatory compliance failures or other operational difficulties,
damage its reputation, cause a loss of customers, vendors, suppliers, agents, or third-party capacity providers and lead to misappropriation
of assets, data corruption, unauthorized system and data access or disclosures. The Company may experience security breaches that could
remain undetected for an extended period and, therefore, have a greater impact on the services provided. A cyber incident or interruption
of information technology systems could expose the Company to a risk of loss, litigation, regulatory oversight, enforcement actions or
cause it to incur significant time and expense to remedy such an event, any of which could have a material adverse impact on its operational
and financial position.
The
Company is investing to meet evolving network and data security expectations and regulations in an effort to mitigate the impact a security
incident might have on the Company, including its results of operations, financial position or liquidity. The final outcome of a potential
security incident, however, cannot be predicted with certainty. Therefore, there can be no assurance that its resolution will not have
a material adverse effect on the Company's reputation, goodwill, results of operations, financial position or liquidity, in any particular
quarter or fiscal year.
New
regulatory obligations related to cybersecurity and technology risk may impose additional costs and obligations on the Company and may
lead to government inquiries or requests for information. This includes, but is not limited to, Security Directives from the DHS and
TSA requiring rail operators to take several actions in 2022 and in 2023 to enhance rail cybersecurity.
On
October 18, 2022, the TSA issued the second Security Directive titled Rail Cybersecurity Mitigation Actions that applies to Class I railroads
effective October 24, 2022. This security directive applies to critical cyber systems, which if compromised could result in an operational
disruption, and requires railroads to submit a cybersecurity implementation plan by February 21, 2023 to the TSA for approval and develop
a cybersecurity assessment program plan, which must be updated annually.
On
November 30, 2022, TSA also issued an Advance Notice of Proposed Rulemaking for enhancing surface cyber risk management to seek input
on ways to strengthen cybersecurity and resiliency in the rail sectors.
Additionally,
pursuant to the Cyber Incident Reporting for Critical Infrastructure Act of 2022, the DHS Cybersecurity & Infrastructure Security
Agency (CISA) is developing mandatory cyber incident reporting requirements for U.S. critical infrastructure which includes the transportation
sector and Class I railroads.
2022 Annual Information Form
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.
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 22 - Major commitments and contingencies, to CN’s 2022 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 55 to 56 of the MD&A, and the section entitled “Environmental matters”
in the Business risks discussion located on page 58 of the MD&A, which are incorporated by reference herein.
Environmental
Policy
CN
is committed to supporting the delivery of sustainable transportation services while seeking to mitigate our collective environmental
impact and ensuring compliance with applicable regulatory requirements. 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 has the responsibility of overseeing the Company's environmental programs.
The Governance, Sustainability and Safety Committee is
2022 Annual Information Form
composed of CN directors and its mandate is 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 22 - Major commitments and contingencies to the Financial Statements, for further discussion of legal actions, if any, as well as
pages 53 to 55 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.
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.
2022 Annual Information Form
A
description of risks affecting CN and its business appears under the heading “Business risks” located on pages 57 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 44 to 46 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.
Ms. dePass Olsovsky was most recently the Executive
Vice-President and Chief Information Officer at Salesforce.com, Inc., a cloud-based software company, from February 2018 to August 1,
2022 when she retired. At Salesforce.com, she oversaw a global information technology organization responsible for all internal back office
systems, global network infrastructure and connectivity, cyber security and M&A. Prior to Salesforce.com, Ms. dePass Olsovsky was
on the executive team at BNSF Railway for approximately 12 years, including as their Senior Vice-President and Chief Information Officer.
Ms. dePass Olsovsky is a member of the board of directors and the Finance and Audit Committee for Reltio Corp, a high-tech cloud native
data management industry leader in master data. From 2007 to 2018, she was a member of the Finance & Audit and HR committees for Railinc
Corp as well as served close to four years as Chairman of the board. She previously acted as a member of TCU Neeley School of Business
Information Technology Advisory Board and the Fort Worth Hispanic Chamber of Commerce. Ms. dePass Olsovsky holds a bachelor’s degree
in Business Management and a Master in Business Administration degree from Nova Southeastern University, as well as a master’s degree
in Project Management from George Washington University.