POWERING
SUSTAINABLE
GROWTH
2 0 2 1 a n n u a l r e p o r t
Except where otherwise indicated, all financial information reflected in this document is expressed in Canadian dollars and determined on the basis of United States
generally accepted accounting principles (GAAP).
Certain statements included in this annual report constitute “forward‑looking statements” within the meaning of the United States Private Securities
Litigation Reform Act of 1995 and under Canadian securities laws, including statements based on management’s assessment and assumptions and publicly
available information with respect to CN. By their nature, forward‑looking statements involve risks, uncertainties and assumptions. The Company
cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the time
they were made, subject to greater uncertainty. Forward‑looking statements may be identified by the use of terminology such as “believes,” “expects,”
“anticipates,” “assumes,” “outlook,” “plans,” “targets” or other similar words.
Forward‑looking statements are not guarantees of future performance and involve risks, uncertainties and other factors, which may cause actual
results, performance or achievements of CN to be materially different from the outlook or any future results, performance or achievements implied by
such statements. Accordingly, readers are advised not to place undue reliance on forward‑looking statements. Important risk factors that could affect
the forward‑looking statements include, but are not limited to, the duration and effects of the COVID‑19 pandemic; general economic and business
conditions, particularly in the context of the COVID‑19 pandemic; industry competition; inflation, currency and interest rate fluctuations; changes in fuel
prices; legislative and/or regulatory developments; compliance with environmental laws and regulations; actions by regulators; increases in maintenance
and operating costs; security threats; reliance on technology and related cybersecurity risk; trade restrictions or other changes to international trade
arrangements; transportation of hazardous materials; various events which could disrupt operations, including illegal blockades of rail networks and
natural events such as severe weather, droughts, fires, floods and earthquakes; climate change; labor negotiations and disruptions; environmental claims;
uncertainties of investigations, proceedings or other types of claims and litigation; risks and liabilities arising from derailments; timing and completion of
capital programs; and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference
should be made to “Management’s Discussion and Analysis” in this annual report as well as the Annual Information Form and Form 40‑F filed with
Canadian and U.S. securities regulators and available on CN’s website (www.cn.ca) for a description of major risk factors.
Forward‑looking statements reflect information as of the date on which they are made. CN assumes no obligation to update or revise forward‑looking
statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable securities laws. In the event CN does
update any forward‑looking statement, no inference should be made that CN will make additional updates with respect to that statement, related
matters, or any other forward‑looking statement.
As used herein, “Company” or “CN” refers to Canadian National Railway Company and, as the context requires, its wholly owned subsidiaries.
TABLE OF
CONTENTS
I I About CN
IV Message from Robert Pace
V I Message from Tracy Robinson
V I I I The CN Way
XI Powering Sustainable Growth
XI I Operational Excellence
Every Day
X V I
Industry‑leading Innovation
X X Strong Customer Partnerships
X XIV Growing Our Reach
X X V I I I Board of Directors
X X X Select Senior Officers
X X XI Shareholder and
Investor Information
F I N A N C I A L S E C T I O N
1 Selected Railroad
Statistics – unaudited
2 Management’s Discussion
and Analysis
68 Management’s Report
on Internal Control over
Financial Reporting
69 Report of Independent
Registered Public
Accounting Firm
72 Consolidated Financial
Statements
76 Notes to the Consolidated
Financial Statements
c n 2 0 2 1 a n n u a l r e p o r t i
f r o n t c ov e r p h o t o (c l o c k w i s e f r o m t o p) :
Cory Klashinsky, Watchman Engine/Hostler
Alyssa Harder, Manager Bulk
Amin Abdulle, Assistant Supervisor
Deanne Haldane, Maintainer Inventory
p h o t o b e l o w :
Jasper, AB
Fort Nelson
Hay River
Prince Rupert
Prince George
Fort McMurray
Edmonton
Kamloops
Calgary
Vancouver
Saskatoon
Regina
Winnipeg
Thunder Bay
Sept-Îles
Baie-Comeau
Matane
Moncton
Saint John
Auburn
Quebec
Halifax
Sault
Ste. Marie
Montreal
Duluth
Chippewa Falls
Minneapolis/St. Paul
Stevens
Point
Arcadia
Fond
du Lac
Sioux City
Omaha
Detroit
Joliet
Chicago
Toledo
Indianapolis
Decatur
East Peoria
Springfield
East St. Louis
Green
Bay
Toronto
Sarnia
Syracuse
Worcester
New London
Buffalo
Conneaut
Pittsburgh
ABOUT
CN
CN is a world‑class transportation leader and trade enabler. Essential
to the economy, to the customers, and to the communities it serves,
CN safely transports about 300 million tonnes of natural resources,
manufactured products, and finished goods throughout North America
every year. As the only railroad connecting Canada’s eastern and
western coasts with the southern tip of the U.S. through a 19,500‑mile
rail network, 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.
2021 highlights
22,600
employees3
$2.9 billion
capital investments
$14.5 billion
revenues (up 5%1)
$6.89
diluted EPS (up 38%1)
61.2%
operating ratio
(improvement of 4.2 points1)
2021 record performances
Lowest injury frequency rate2
1.33
(down 19%1)
Highest adjusted diluted EPS4
Highest free cash flow4
$3.3 billion
$5.94
(up 12%1)
1 Vs. 2020.
2 Per 200,000 person hours, based on Federal Railroad Administration (FRA) reporting criteria.
3 As at December 31, 2021.
4 This non‑GAAP measure does not have any standardized meaning prescribed by GAAP and, therefore,
may not be comparable to similar measures presented by other companies. See the section in the MD&A
titled Adjusted performance measures for an explanation of this non‑GAAP measure.
i i c n 2 0 2 1 a n n u a l r e p o r t
Memphis
Jackson
Mobile
Pascagoula
Gulfport
Baton Rouge
New Orleans
Fort Nelson
Hay River
Prince Rupert
Prince George
Kamloops
Calgary
Vancouver
Fort McMurray
Edmonton
Saskatoon
Regina
Winnipeg
Thunder Bay
Sept-Îles
Baie-Comeau
Matane
Moncton
Quebec
Halifax
Sault
Ste. Marie
Montreal
Saint John
Auburn
Duluth
Chippewa Falls
Minneapolis/St. Paul
Stevens
Point
Sioux City
Omaha
Arcadia
Fond
du Lac
Joliet
East Peoria
Springfield
East St. Louis
Green
Bay
Toronto
Sarnia
Detroit
Toledo
Chicago
Indianapolis
Decatur
Syracuse
Worcester
Buffalo
Conneaut
Pittsburgh
New London
Memphis
Jackson
Mobile
Pascagoula
Gulfport
Baton Rouge
New Orleans
CN main lines
Secondary and feeder lines
Shortline partners
Ports served by CN
c n 2 0 2 1 a n n u a l r e p o r t i i i
MESSAGE FROM
ROBERT PACE
a quarter century of growth
2021: a year of resiliency
There is one emotion I take with me as I look back on
my tenure at CN — pride. It begins with the pride I
feel as the first Atlantic Canadian to chair the Board
of this 103‑year‑old iconic Company. No matter the
measurement, it has been a truly remarkable era, one
defined by growth, profitability, and unfailing commitment
to our core corporate values of sustainability, community
and governance. Our geographic reach has grown
exponentially, making CN truly North America’s railway.
From what was our east‑west network stretching across
the breadth of Canada from Atlantic to Pacific, CN now
reaches into the U.S. heartland at Chicago and beyond,
extending into the deep south to the Gulf of Mexico. Today,
CN's three‑coast network spans from Prince Rupert on the
Pacific northwest coast of British Columbia, Halifax on the
Atlantic, and New Orleans on the Gulf coast.
The growth of our geographic footprint of the past quarter
century has translated into a consistent record of growth
in profitability. Since our IPO in 1995, CN’s dividend has
increased by an average of 16% a year. Moreover, CN's
market capitalization is more than 53 times higher than
when we issued our IPO, and we are now the third‑largest
company on the Toronto Stock Exchange based on our
market cap. Facing multiple industry‑wide challenges in
2021, CN’s solid financial performance continued, with our
operating income rising 18% and adjusted diluted earnings
per share1 climbing 12%. As a result, the Board recently
approved a 19% increase in our annual dividend for 2022,
the 26th consecutive increase.
A key dimension of our financial record has been our
unstinting corporate commitment to efficiency. We
were the leader in implementing Precision Scheduled
Railroading, a tight and efficient operating system that
has become the model for the industry; and we will
be the leader in implementing the next generation of
digital railroading.
I have always believed the true measure of a corporation is
how it, and its people, deal with adversity. I take great pride in
how we met and overcame the daunting challenges of 2021.
It was a year that severely tested both CN and the industry.
The scale of the challenges cannot be overstated. There were
devastating wildfires and floods in British Columbia, droughts
across the Prairies and Hurricane Ida in the United States. At
the same time, there were major supply chain challenges in
a global economy going through wrenching change. They
all came in the midst of the COVID pandemic, while we
managed the escalation of economic activity as the public
health crisis receded. Undaunted by these and countless
other everyday challenges, CN’s dedicated railroaders
worked tirelessly to keep our customers' goods and the
broader economy moving.
My pride in the CN family, and how every one of them
responded to the catastrophic natural disasters of 2021,
will stay with me forever. CNers stepped up to help their
neighbours any way they could, providing much‑needed
supplies and access into isolated regions. I am proud to say
our teams quickly restored the mainline to service and CN
donated more than $1.6 million to assist the recovery of
those who were hit the hardest.
a leader in esg in the north
american transportation sector
At the core of CN’s corporate identity is its commitment
to environmental, social and governance (ESG) principles.
They serve as the framework to shape our decisions
and guide our actions. I take pride in knowing that over
the last 26 years CN has made significant progress
implementing our ESG initiatives to become a leader in the
North American transportation sector. In the past year, we
have taken steps to reinforce CN’s status as a leader in ESG
among North American Class I railroads and across the
transportation sector.
1 This non‑GAAP measure does not have any standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures
presented by other companies. See the section in the MD&A titled Adjusted performance measures for an explanation of this non‑GAAP measure.
With tight cost control and a large fee received for the cancellation of the KCS transaction, diluted earnings per share (EPS) increased 38% to $6.89.
i v c n 2 0 2 1 a n n u a l r e p o r t
As such, the Board made a commitment that, by the end of
2022, at least half of the independent directors will come from
diverse groups, including gender parity. Other new governance
policies encompass lowering the retirement age for directors,
confirming the tenure limit at 14 years for all directors, and
setting a lower maximum number of public boards on which
directors can serve. We also created a new Governance,
Sustainability and Safety Committee to laser focus the Board on
fulfilling its oversight responsibilities with respect to governance,
safety and sustainability of the Company’s operations. These
new governance practices are in keeping with our responsibility
to all stakeholders, who rely on us to continue to evolve,
modernize and lead over the next 25 years and beyond.
Our focus on sustainability is long‑standing. CN is pleased to
have been listed on the Dow Jones Sustainability World Index
for 10 straight years. We have also earned a spot for the
sixth time on CDP’s prestigious ‘A List’ for our actions to cut
emissions, mitigate climate risks and develop the low‑carbon
economy. In 2021, to underscore our ongoing dedication to
sustainability, CN has also announced its commitment to
setting an emissions target in line with a 1.5°C scenario and
to achieving net zero carbon emissions by 2050.
A crucial priority for CN has been to strengthen our relations
with Indigenous communities. In 2021, we took another step
in this regard with the creation of a CN Indigenous Advisory
Council (IAC), a new independent body co‑chaired by
Ms. Roberta Louise Jamieson, OC, Kanyen'kehà:ka and the
Hon. Murray Sinclair, C.C., M.S.M., Mizhana Gheezhik. The
IAC’s mandate is to advise CN’s Board and CEO on issues
that are relevant to our relationship with the more than
200 Indigenous communities across our network.
the highest standards
of governance
Governance is at the heart of corporate success. Because
of that, all of us at CN take great pride that The Globe and
Mail’s Report on Business Magazine in 2021 ranked CN No. 1
in corporate board governance among all 220 companies
listed on the S&P/TSX composite index. It is a reflection
of CN’s commitment since our IPO over 25 years ago to
ongoing governance excellence and renewal.
cn’s new chief executive
As I step down from the CN Board, I leave knowing that the
future is bright. We are thrilled to have Ms. Tracy Robinson join
CN as our new President and CEO and are confident that CN
has the right leader to take us to the next phase of sustainable
growth. Currently, Tracy is the only female CEO among the
top 50 Canadian companies by market cap as listed on the TSX.
She brings more than 35 years of operational management,
strategy development, and project execution experience to drive
growth and profitability at CN. She has a proven track record
as a corporate visionary and an extraordinary high‑performing
leader, including almost three decades as a railroader.
At the same time, on behalf of the Board and the entire CN
family, we would like to thank Mr. JJ Ruest for his dedicated
service to CN for over 25 years and as CEO since 2018. We
want to wish him all the best in his well‑earned retirement.
board renewal
Allow me to say what an honour it has been to have served
on the CN Board for more than 25 years. The directors
I have worked with during my time with CN have unfailingly
impressed me with their dedication to serve the best interests
of CN and its stakeholders, and I have personally learned a
great deal from their vast experience and knowledge.
The CN Board is in very good hands going forward. I want
to congratulate Shauneen Bruder on her appointment as
Vice‑Chair and nomination to be next Chair of the Board.
She is someone who will work tirelessly to ensure CN has the
finest in Board governance and oversight. As well, Shauneen
led the CEO Search Committee through a robust process
that identified the right leader to drive continued growth,
operational improvement, technological advancement,
employee engagement, and shareholder value.
I would like to welcome our new Board nominees:
Mr. Dave Freeman, Mr. Rob Knight, and Ms. Susan C. Jones,
as well as Ms. Jo‑ann dePass Olsovsky who joined the
Board in late 2021. These new directors bring extensive
business, technology, operations, strategic planning and
railroad experience to the CN Board.
The Board wishes to thank our distinguished directors who are not
standing for re‑election: Mr. Jim O'Connor and Ms. Laura Stein,
as well as Ms. Julie Godin who stepped down earlier to focus
on her executive role, for their many years of exemplary service
to CN. The Board also thanks the Hon. Jean Charest, who
recently stepped down from the Board to pursue public office.
Finally, allow me to conclude by thanking all the CNers,
Board members, customers, partners and shareholders I have
had the pleasure to meet over the past quarter century.
Each of you has been integral to CN’s remarkable success.
I leave with confidence in the future of CN, knowing our
strategy will continue to unfold as we progress down the
path of constant improvement, innovation and growth that
has made CN a leader among North American railroads.
Robert Pace, d.comm., c.m.
Chair of the Board
c n 2 0 2 1 a n n u a l r e p o r t v
MESSAGE FROM
TRACY ROBINSON
This is an exciting time for CN, and I am honoured to
step into the role of President and CEO. I am delighted to
be back in the industry. It truly feels like coming home.
Leading CN, one of North America’s iconic companies,
comes with both the privilege and responsibility
of ensuring the continent’s supply chains deliver
consistently, safely and responsibly. CN’s focus on our
customers, the communities in which we operate, our
partners and our shareholders will remain our priority
over the long term. We succeed together.
This is a transformational period at CN. Our goal — to
build the railway of the future — is an expression of our
intent to continuously innovate — in safety, in efficiency,
in sustainability, in engagement. This is how we will
deliver for the future.
powering sustainable growth
The past two years have presented some significant
challenges in North America and around the globe. The
impact of the pandemic, the effects of climate change,
and the uncertainty of global security have challenged our
sense of safety and order and impacted the reliability of
our supply chains.
As an important enabler of domestic freight movement
and global trade links, it has never been more important
for CN to deliver. We are uniquely positioned to power
sustainable growth. We have North America’s best
network, spanning Canada from the Atlantic to the Pacific
and through the American heartland to the Gulf of Mexico.
We also have a team of experienced and motivated
railroaders to propel operational excellence, every day.
North America’s economy relies on our ability to safely
deliver the essential products our customers need.
More than ever, our continent’s resources, agricultural
products and manufactured goods are needed around
the world. CN has the connections and know‑how to
drive the continued growth of our customers and success
of our team. And we can do it in a manner that continues
to advance the efficiency of our operations.
delivering responsibly
CN believes in Delivering Responsibly. This means
moving our customers’ goods safely and efficiently,
and ensuring we deliver in an environmentally
responsible manner; attracting, developing, and
retaining top diverse talent; helping to make the
communities we serve safer and stronger; and
adhering to the highest ethical standards. This is what
we believe, and it is the way we approach our work
every day.
The heart of CN is the more than 22,000 skilled and
dedicated railroaders who come to work to deliver for
our customers. I am proud of the perseverance and
resilience of our team, who power our performance and
growth, and who increasingly represent the diversity
of the communities we serve. We are welcoming the
next generation of railroaders to our Company. They
are helping us in our efforts to innovate, to continuously
improve the safety of our employees and communities,
to lighten our environmental footprint, to further
engage with our Indigenous and community partners,
and to develop the capabilities of our team. The future
of railroading at CN is very bright.
v i c n 2 0 2 1 a n n u a l r e p o r t
I am
delighted to
be back in
the industry.
It truly feels
like coming
home.”
thank you
I wish to acknowledge JJ Ruest as he moves into his retirement. I am grateful
for the legacy he leaves in the strength of our network and our ability to deliver.
I want to express my appreciation for his guidance and support during our
transition. I join all of CN in wishing JJ the very best in the future.
Over the past few weeks, I have had the pleasure of meeting hundreds of
CN railroaders from across our network. I want to thank every CN team member
for their contribution to our success. By pulling in the same direction each day, our
employees are demonstrating the foresight, flexibility and resilience necessary
to continue creating value for our customers, improving safety, and delivering
sustainable growth.
let’s go!
This team, operating on the best rail network in North America and powered by
innovation and diversity of thought, is positioned to deliver strong and sustainable
value for our customers, our partners, our communities and our shareholders,
now and over the long term. We will make CN the safest and the best railroad in
North America, and we will continue to build the railway of the future.
Let’s go get it!
Tracy Robinson
President and Chief Executive Officer
c n 2 0 2 1 a n n u a l r e p o r t v i i
Charles Brown
Car Mechanic
Prince Rupert, BC
Anwar Azzah
Conductor
Toronto, ON
Stéphanie Proulx
Conductor
Montreal, QC
THE CN WAY
Part of powering sustainable growth
is nurturing a corporate culture that
enables it. That is why we focus
on the “CN Way,” an evolution of
our culture that articulates and
reinforces the behaviours required
to help deliver on our strategy.
Tyesha Gibson
Transportation Clerk
Gary, IN
Marlou Rojas
Store Attendant
Edmonton, AB
E
H
E
N T
R
U
T
U
F
W
O
G
T
O
O
G
A
E
L
L
T
H
I
N
E
,
R
THE
CN
WAY
CREATE VALUE,
DELIVER SUSTAINABLY
Mélanie Pouliot
Car Mechanic Lead Hand
Montreal, QC
Wilfredo Villavicencio
Heavy Duty Mechanic
Winnipeg, MB
Jeremiah Thomas
Assistant Chief Mechanical
Officer and Veteran
Homewood, IL
x c n 2 0 2 1 a n n u a l r e p o r t
Edmundston, NB
POWERING
SUSTAINABLE GROWTH
for our customers, people and communities
CN is the premier railway of the 21st century.
An operational and sustainability leader, we are an
engine of North American economic growth and
prosperity. The Company’s strengths are many:
a tri‑coastal network, a highly diverse customer base,
superior fuel and carbon efficiency, a proven ability to
innovate, and a core value of safety.
At CN, we are proud of our team’s efforts and
dedication, as well as the progress we are making in
redefining railroading. Our objectives are clear: to
grow faster than the markets we participate in and
continuously improve our operating efficiency, all while
maintaining our long‑term commitment to safety,
customer service and sustainable value creation,
including decarbonization of the economy.
CN aims to lead the industry toward a more
customer‑centric model of railroading, just as we
pioneered Precision Scheduled Railroading (PSR)
when the industry needed to become more efficient.
By embracing innovation, CN is building the Digital
Scheduled Railroad (DSR) of the future. Improving the
reliability of our service, investing capital to support
the growth of our customers as well as digitizing and
automating our processes will enable the rail industry
to continue to compete favourably against other modes
of transportation. At CN, we embrace disruption to
drive value.
Our business strategy informs us on where we are
going and how we will get there. It rests on a strong,
sustainable foundation of moving our customers’ goods
safely, having the most talented and engaged people,
being environmentally responsible, helping build stronger
communities, all while adhering to the highest standards
of governance. We call this Delivering Responsibly. Upon
this solid strategic foundation rest four pillars: operational
excellence every day, strong customer partnerships,
growing our reach, and industry‑leading innovation.
c n 2 0 2 1 a n n u a l r e p o r t x i
OPERATIONAL EXCELLENCE
EVERY DAY
At CN, our goal is to deliver reliable, efficient and cost‑effective transportation
services for our customers by leveraging technological innovation. That is why we
continue to improve our service productivity and safety, with a focus on effective
planning and significant investments in network fluidity, automation, big data
analytics and the digital customer experience.
x i i c n 2 0 2 1 a n n u a l r e p o r t
Prince Rupert, BC
Aberdeen, SK
DSR represents the evolution of PSR with a bold new vision
for today’s reality in global supply chains. DSR relies on
advanced technology to unlock new growth opportunities
and aligns our focus toward a balanced approach that
includes safety, sustainability and better customer
experiences, while driving innovation and engagement
within our workforce. With DSR, we are finding new ways
to solve problems and lead the next wave of change in the
rail industry.
resilience and dedication
CN’s dedicated team of railroaders produced strong
financial and operating results in 2021, despite the
challenges imposed by the ongoing COVID‑19 pandemic,
Hurricane Ida in the southern U.S. in late August, as well as
severe wildfires and devastating flooding in British Columbia
that caused prolonged disruptions to CN’s mainline (our
route to Vancouver was out for a total of five weeks in July
and November).
2021 revenues were up 5% to $14.5 billion due mainly
to the ramp‑up of economic activity following the 2020
pandemic lockdowns despite reduced volumes of Canadian
grain compared to the record volumes delivered in 2020.
With tight cost control and a large fee received for the
cancellation of the KCS transaction, diluted Earnings Per
Share (EPS) increased 38% to $6.89. When adjusted to
exclude certain significant items that are not reflective of
CN’s underlying business operations, diluted EPS were up
12% to a record $5.94.1 CN's operating ratio, on both an
unadjusted and adjusted basis, was 61.2%, an improvement
of 4.2 points and 0.7 points, respectively.1 The CN team
continued to focus on efficiency and network fluidity,
resulting in significant improvements in through network
train speed (up 4%), through dwell (down 8%) and car
velocity (up 5%).
leading fuel and
carbon efficiency
Over the years, CN has made significant progress in
decoupling volume growth from carbon emissions.
Since 1993, we have reduced our locomotive emission
intensity by 43%, avoiding 48 million tonnes of greenhouse
gas (GHG) emissions. We continue to maintain our
leadership position among Class I railways, consuming
approximately 15% less locomotive fuel per gross ton mile
than the industry average.
1 This non‑GAAP measure does not have any standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures
presented by other companies. See the section in the MD&A titled Adjusted performance measures for an explanation of this non‑GAAP measure.
c n 2 0 2 1 a n n u a l r e p o r t x i i i
priority trains offer
fastest service
CN is offering much‑needed relief to pandemic‑induced
supply chain disruptions with our new Priority Train service
through the Port of Prince Rupert, where the fluidity
and velocity of CN’s network allow shipments to be at
destination weeks earlier than via Southern California ports.
In partnership with COSCO Shipping Line’s new
CEN‑EXPRESS service from Shanghai to Prince Rupert,
CN is, for the first time, offering expedited train service
to Chicago and Toronto. With the Port of Prince Rupert’s
advantages — 575 miles closer to Asia, deep water, ice‑free
year‑round, no congestion and much shorter terminal dwell
— and CN’s fluid rail network, the Priority Train has been a
big success.
Halifax, NS
x i v c n 2 0 2 1 a n n u a l r e p o r t
With the support of our partner gateway workers at the
Prince Rupert Port Authority and DP World’s Fairview
Terminal, containers can be transferred from ship to train
in only 12 hours. As the name implies, with priority routing
the train can arrive in Chicago or Toronto in only four days,
that is five days sooner than with CN’s regular service and at
least 12 days sooner than from Southern California ports. CN
operates an average of about one Priority Train per week,
offering shippers an unmatched mix of speed, reliability and
reach connecting Asian and North American markets.
On December 29, 2021, Becton Dickinson, a global medical
technology company, contacted the White House to help
them quickly deliver 21 containers of blood collection and
COVID‑19 testing supplies to hospitals across the U.S. The
essential shipment was originally destined for the Port of
Long Beach, CA, but could not dock due to the port’s huge
backlog. The White House turned to CN for a solution. The
MSC Vega was diverted to the Port of Prince Rupert where it
was offloaded directly onto a CN Priority Train. With urgent
routing, the critical goods arrived in Chicago on January 10,
proving that Canadian ports provide speedy and reliable
service into the U.S.
supply chain salutes
CN’s strategic partnerships with nine ports on three coasts
yielded many significant milestones in 2021. Notably, CN
congratulates DP World’s Fraser Surrey team on achieving
a record 11,000 feet of railcars loaded in a single day.
Achieving this milestone enables our customers to better
manage strong demand.
CN’s strategic connections to the Port of New Orleans and the
Port of Mobile on the Gulf Coast provide capacity and fluidity
in connecting the U.S. Midwest with markets overseas. Our
daily trains between key markets such as Chicago, Detroit and
Memphis provide viable options for congested supply chains.
CN congratulates MSC Canada, PSA Halifax and the Port
of Halifax on their new direct call from the west coast of
India. MSC’s new Indus 2 service, combined with CN’s fluid
East Coast capacity, offer very competitive transit times
to Toronto, Detroit and Chicago. CN is proud to help bring
Indian goods to market.
Across the Company, our Health and Safety
committees are focused on engaging
employees, addressing safety issues and
making concrete improvements.
Taschereau Yard, QC
Safety is our core value
At CN, we are intensely focused on our uncompromising commitment to the health and
safety of our employees, the customers we serve, and the communities and ecosystems in
which we operate. We take nothing more seriously and do everything in our power to keep
safe in all that we do and help ensure everyone goes home safely at the end of the day.
Our safety performance aspirations are anchored on the fundamental belief that all
injuries and accidents are preventable. Our objectives are simple: eliminate on‑the‑job
fatalities and reduce serious injuries to become the safest railroad in North America
by investing in leadership, training, technology and infrastructure, and by fostering an
unwavering values‑based safety culture.
Our safety culture is embedded across our organization through ongoing safety
training, coaching, leadership, and employee engagement initiatives. Our long‑standing
Looking Out for Each Other program urges team members to work together, be vigilant
about safety and speak up if they spot an unsafe situation. We are also focusing on
strict adherence to Life Critical Rules, which address the day‑to‑day activities that have
the potential to cause serious harm or even loss of life.
We continue to build our infrastructure and renew our technology to drive safety
performance. The past four years especially have seen significant investments in
track and other railway infrastructure to ensure a safe and reliable network. New
technologies such as autonomous track inspection railcars and automated train
inspection portals are increasing inspection frequency and quality.
2021 safety results show excellent promise. The FRA injury frequency rate was down
19% to its lowest level ever, evidence that Looking Out for Each Other and Life Critical Rules,
among other initiatives, are having positive effects. Innovative technologies are increasing
the frequency and quality of track and railcar inspections and, combined with effective
training, helped to reduce FRA accidents by 3% to their second‑lowest level ever.
award
CN received a 2021
Railway Association of
Canada Safety Award
for our Autonomous
Track Inspection
Program where railcars
are equipped with
powerful sensors and
AI technology and
run on our regularly
scheduled trains.
In 2021, we were able to
inspect up to 20 times
more track than with
previous slow‑moving
methods (see p. XVIII for
more details).
c n 2 0 2 1 a n n u a l r e p o r t x v
INDUSTRY‑LEADING
INNOVATION
With our move toward DSR, CN is proactively pursuing an ambitious innovation
strategy using technology, big data analytics and automation to further increase
the safety and efficiency of our operations as well as deliver a reliable, low‑carbon,
seamless service to our customers.
x v i c n 2 0 2 1 a n n u a l r e p o r t
Oshkosh, WI
dsr: creating value for
our customers, employees
and communities
At CN, we are not only focused on the efficiency of our
operations, but also on the engagement and safety of
our employees, the experience of our customers, and the
impact we have on our communities and the environment.
With PSR, we tame the complexity of the network, bringing
precise planning and execution to ever‑shifting operating
conditions. Now, we are boosting PSR to the next level
with DSR.
New advanced digital technologies, big data and artificial
intelligence (AI) offer exciting opportunities to improve the
safety and sustainability of our operations with improved
simplicity, reliability and predictive analytics leading to
better planning, efficiency and decision‑making. DSR offers
robust communication and visibility tools that demonstrate
our commitment to managing customer supply chains with
system integration as well as accurate and consistent data.
We are also automating manual processes and related
rework to free up time for more value‑added tasks. Using
technology to its full potential will continue to propel CN
forward as we build the premier railway of the 21st century.
Brampton Yard, ON
transitioning to the cloud
As part of our move to DSR, CN has entered into a
seven‑year strategic partnership with Google Cloud
to transform how we do business with our supply
chain partners, deliver new customer experiences and
modernize our IT infrastructure. Our partnership with
Google Cloud reinforces our commitment to DSR by
investing in technologies that deliver high‑quality service
to customers through an intuitive digital platform, powered
by Google Cloud’s AI and machine‑learning tools, that will
enable better connectivity and collaboration with customers
and supply chain partners.
Together, CN and Google Cloud will modernize CN’s
multi‑cloud infrastructure, data analytics and AI to deliver
next‑generation experiences for CN’s employees, customers
and partners to improve safety and sustainability,
create capacity, and reduce costs. We are working with
Google Cloud to drive further innovation across our
Company to build more resilient, responsive supply chains
and provide industry‑leading intelligent platforms.
c n 2 0 2 1 a n n u a l r e p o r t x v i i
Handheld devices and process automation
CN is also digitizing processes aimed at improving
productivity, reducing costs and more accurately
capturing revenues. To date, we have deployed over
10,000 handheld devices to train crews and 850 more to
car and locomotive mechanics. In 2021, we continued to
focus on digitizing reports and documentation for crews,
customers, and mechanical work and ended the year with
more than 90 process automations to eliminate repetitive
tasks across all lines of business. In addition to increased
efficiencies, these digitized processes enhanced safety by
allowing us to deploy applications early in the pandemic,
communicate information virtually, and keep frontline
workers out of shared spaces. On the environmental
front, digitizing and automating processes is saving over
one million pages of paper each month.
Smart Network
CN is using an integrated digital scenario analysis and
simulation tool to improve insight and enhance capacity
planning relative to changing demand. Smart Network
simulates train movements on the network to gain insight
on capacity, cost and operational fluidity. The tool can
also stress‑test scenarios to identify options to handle
forecast volumes, including identification of specific pinch
points on a timelier basis. The result is improved speed and
accuracy of demand analysis for long‑lead‑time assets like
locomotives, infrastructure and crews.
Smart Terminal
We are also investing in the intermodal supply chain of
the future by using advanced technologies to improve
decision‑making, capacity, productivity and service levels,
including new container slot locations, storage methods and
traffic flows. We are using telematic sensors on cranes and
shunt trucks to better locate containers within the yard. Smart
screens and maps help visualize the inventory and equipment
movements to reduce the number of lifts per container.
Finally, a new mobile app for truck drivers provides seamless
end‑to‑end visit details via a simple, intuitive experience. The
result is speed — faster turnaround times for truck drivers to
receive their container, more efficient operations, and increased
terminal capacity and fluidity. Our first smart terminal is
Brampton, the largest intermodal terminal on CN’s system.
advancing technology
deployment as a strategic
driver of value
Our strategic deployment of capital is improving safety
and sustainability, creating capacity, reducing costs,
driving operational excellence, increasing speed to market,
cultivating stronger customer partnerships, and ultimately
reimagining the future of railroading.
Autonomous Track Inspection Program
CN is installing powerful sensor and AI tech into autonomous
track inspection railcars positioned in regularly scheduled
trains, enabling track inspections at normal track speeds.
CN now has 10 fully autonomous railcars that are inspecting
100% of our mainline and 45% of the entire network on
a consistent basis. Since the program launched in 2020,
ATIP cars have inspected over 1.5 million miles of track.
In 2021, some of our key corridors received up to 20 times
more inspections than with previous methodologies.
Automated inspection portals
AI technology is also changing how we inspect our railcar
fleet. Ultra‑high‑definition cameras in our seven automated
inspection portals capture a 360° view of a train as it travels
through at normal track speed. This method of railcar
inspection, using machine‑learning algorithms, improves
inspection quality, frequency and railcar reliability. Once
completed, the algorithms will locate defects with zero
human interaction and produce automatically generated
work orders for car repair. Through use of the inspection
portals in 2021, many critical defects, which could have
resulted in significant operational disruption or personal
injury, were identified.
x v i i i c n 2 0 2 1 a n n u a l r e p o r t
Tackling the impact of climate change
At CN, our goal is to conduct our operations with minimal environmental impact, while
offering a carbon‑efficient and sustainable way to move goods. By leveraging rail for the
long haul, CN can help our customers reduce their overall transportation supply chain
GHG emissions. As a result, CN is making a positive contribution in the urgent fight against
climate change and playing a key role in the transition to a lower‑carbon economy.
CN was the first North American railway, and among the first 100 companies globally,
to announce an approved science‑based target. Our new 2030 science‑based targets
reflect a well‑below 2°C scenario and were approved by the Science Based Targets
initiative (SBTi) in April 2021. CN also recently signed the “Business Ambition for 1.5°C”
and joined the “Race to Zero” campaign, committing to setting targets in line with a
1.5°C scenario and achieving net‑zero carbon emissions by 2050.
CN recognizes the importance of collaborating with customers, supply chain partners,
suppliers, researchers, clean tech innovators and governments to accelerate the fight
against climate change. Through the Railway Association of Canada, we have been
actively working with our industry peers and the Government of Canada since 1995
to address the impacts of rail activities on the environment. In 2021, we announced
important partnerships with our suppliers regarding renewable fuels testing and the
purchase of a battery‑electric locomotive for joint pilot projects.
We are reducing our non‑rail carbon footprint by upgrading our ground fleet, as well
as retrofitting yards and buildings. Our EcoConnexions Employee Engagement program
focuses on embedding environmental sustainability into our corporate culture through
targeted initiatives to reduce energy consumption, minimize waste and improve
housekeeping practices at our yards and offices. Since 2011, we have reduced energy
consumption by 30% and avoided 171,000 tonnes of CO2 emissions at key yards and
facilities, diverted 200,000 tonnes of operational waste from municipal landfills, and
completed over 1,500 projects to improve housekeeping and create cleaner, more
efficient and safer workplaces.
Another example is our EcoConnexions Partnership Program, which has planted hundreds
of thousands of trees to recognize our customers and supply chain partners for their
sustainability efforts.
award
In 2021, for the
sixth time, CN was
recognized for climate
leadership by global
environmental
non‑profit CDP,
securing a place
on its prestigious
‘A List’ for our actions
to cut emissions,
mitigate climate
risks and develop the
low‑carbon economy.
CN is one of only
200 high‑performing
companies to make
the ‘A List’ out of nearly
12,000 companies that
were scored.
c n 2 0 2 1 a n n u a l r e p o r t x i x
STRONG CUSTOMER
PARTNERSHIPS
CN aspires to be a customer‑centric organization. We work with all our supply
chain partners to deliver sustainable top‑tier transportation services for our
customers by anticipating their needs, understanding their growth plans, earning
their trust, and being agile. Our business model is anchored on end‑to‑end
collaboration with our customers and supply chain partners from true origin
to ultimate destination. We add value to this model by leveraging our expertise
and technological innovation to advise our customers and help them win in their
markets, because when our customers grow, CN grows along with them.
x x c n 2 0 2 1 a n n u a l r e p o r t
XTL Warehouse
Montreal East, QC
digitizing our
customers’
experience with apis
Using DSR, CN aims to provide an
optimal digital experience for our
customers and supply chain partners
regardless of how they connect to
and consume data. We will lead the
way with a multi‑faceted, modern
approach that uses a cloud‑ and
platform‑based IT architecture.
For example, our Application
Programming Interfaces (APIs) offer
robust supply chain visibility tools
that demonstrate our commitment
to managing customer supply chains
through system integration and
innovative data.
A rail industry first, CN’s API
development platform offers
customers data that was not
previously available, such as GPS
location of our customers’ railcars
and containers. CN APIs also provide
key data such as Bill of Lading (BOL)
information and shipment status to
make it easy to query data from a wide
variety of customer inputs, including
equipment, BOL, vehicle ID number,
reservation number, and more.
For example, Conuma, a leading
Canadian producer and exporter
of premium steelmaking coal,
employs CN to deliver their product
to Asian customers via the Port of
Prince Rupert. Our tailor‑made GPS
API provides Conuma with very
granular views of the location, speed
and direction of movement of CN unit
trains — with data that is refreshed
every five minutes. Conuma’s
employees can see exactly where their
railcars are via a digital screen at the
loading area, which helps Conuma
with their mine production schedules
and workforce planning — two key
metrics that help them drive efficiency
and improve their bottom line.
CN APIs are also helping our
customers automate routine manual
tasks. Our customers no longer
have to spend time pulling data into
spreadsheets, enabling their teams
to focus on higher‑value work. One
such customer is MSC. CN and MSC
worked together to identify processes
that could be digitized to help drive
faster terminal operations. For
example, CN quickly developed an
API that allows short‑haul drivers to
identify their container directly from
their own company’s system.
simplification
through information
CN is building a digital ecosystem that
is signaling a new era of innovation,
business transparency and seamless
integration to help our customers
succeed in their local and global
markets. Our new Digital Customer
Experience platform will allow our
customers to seamlessly visualize
shipments using maps, status‑based
graphics and KPIs via a mobile
device or web to query information or
execute a transaction with ease. This
new platform integrates information
from multiple providers to offer
end‑to‑end visibility that optimizes
the logistics journey of plan, ship, track
and pay, and evolves to our customers’
changing needs.
c n 2 0 2 1 a n n u a l r e p o r t x x i
nurturing close relationships
with our customers
A critical element of our supply chain collaboration model is
open communication with all our stakeholders. Supply chain
collaboration agreements with ports, terminal operators
and customers help to drive down costs, improve visibility
of the entire move with common metrics, and seamlessly
integrate our services into their operations. All parties
continually share information to understand and optimize
supply chain performance, including scheduling railcar and
container supply, planning loading and unloading, as well as
managing the pipeline to avoid pinch points. Additionally,
we are adjusting our service performance metrics to better
reflect our customers’ changing requirements. We are also
taking an industry‑leading focus on measuring customer
satisfaction to consistently align to customer needs and
maintain our everyday operational excellence.
Watson Island, BC
x x i i c n 2 0 2 1 a n n u a l r e p o r t
A fine example of CN’s supply chain mindset is our
close relationship with Pembina, a leading Canadian
transportation and midstream oil and gas service provider.
As an integral part of Pembina’s global supply chain, CN
worked with them to develop the Port of Prince Rupert
(Watson Island) as a 25,000‑barrel‑per‑day export terminal
for propane. Opened in April 2021, the new terminal
provides Pembina with the option to access export markets
in addition to domestic markets. Our investments in
long‑train operations — doubling the length of sidings to
12,000 feet, acquiring new high‑horsepower locomotives
and expanding the use of distributed power — enable
a balanced flow of loads and empties in unit trains to/
from Pembina’s Redwater fractionation facility north
of Edmonton.
Another example: in 2021, CN introduced our Domestic
Guaranteed Equipment Program, whereby customers can
reserve intermodal equipment (including 53’ intermodal
containers — dry, heater or reefer) for guaranteed next‑day
service and same‑day service, when available. The program
enables customers with urgent shipping needs to secure
service in high‑demand markets.
safety is important for
our customers, too
With a hands‑on approach, CN shares practical knowledge
at the ground level with our customers, helping them
manage their rail operations more efficiently and safely.
Our safety experts work directly with our customers to train
their personnel in safe railroading practices and audit the
safety of their operations on site to eliminate derailment
and injury hazards. Customers can also enhance their safe
railroading skills at one of our two CN Campus locations
in Winnipeg, MB, and Homewood, IL. CN’s annual Safe
Handling Awards recognize our customers for achievements
in meeting the challenges of maintaining safe operations.
f r o m l e f t :
Amin Abdulle, Autumn Lane
and Chris Silzer are all
part of our solid team of
railroaders at Chappell Yard,
Saskatoon, SK.
Building the talent and culture for the railroad of the future
awards
For 2022, CN is
proud to once again
be named one of
Canada’s Top 100
Employers and a Top
Montreal Employer.
CN’s people have always been our most important differentiator. They power
our success by caring passionately about railroading and bringing a high level of
commitment and resilience to their daily tasks, even in challenging times. CN continues
to attract, train and motivate top talent, with a renewed focus on a diverse, inclusive
and winning culture. We also develop our employees with the necessary skills for an
increasingly automated and data‑driven work environment.
At CN, we are committed to developing the workplace of the future by being an employer
of choice, ensuring our workforce reflects the diversity of the communities where we
operate, and empowering all employees to embrace their full potential. CN welcomes
and celebrates diversity in all its forms and fosters a culture of belonging where everyone
feels included and valued without discrimination across race, gender, religion and identity.
We are nurturing a culture where difference is valued by taking concrete action to increase
outreach to employees through Employee Resource Groups (ERGs) where employees
with common identities, backgrounds and/or interests can gather to share ideas. Our
employee‑run, executive‑sponsored ERGs create a culture of inclusion by providing
open forums and safe spaces for employees to meet, advise on opportunities, reach
out to communities, and be their authentic selves. Our ERGs embrace the diversity and
individuality of CN employees and provide opportunities to propel innovation by bringing
together different perspectives, experiences and ideas from CN employees at all levels.
CN’s Talent Acquisition team embeds our policies of inclusion and diversity into its
recruitment practices. Through focus areas like targeted recruitment campaigns,
strategic partnerships with diversity‑focused agencies, and participation in key events,
CN continues to present an increasingly representative and diverse pool of candidates
to hiring managers.
The Company has set a target to attain, by 2022, and thereafter maintain, an executive
management team comprised of at least 30% women. This target aligns with our pledge to
accelerate the advancement of women in business, as set out in the Catalyst Accord 2022.
c n 2 0 2 1 a n n u a l r e p o r t x x i i i
GROWING
OUR REACH
CN facilitates end‑to‑end supply chains to unlock long‑term, profitable growth.
With our tri‑coastal network that spans North America, CN reaches farther, both
physically and commercially, for our existing customers and to find new ones, by
playing a lead role in connecting North America to the world. Having the capacity
to move large volumes of goods is the result of the can‑do attitude of our people
supported by the investment of over $13 billion in capital between 2018 and 2021,
which also kept our network well maintained, safe and robust.
x x i v c n 2 0 2 1 a n n u a l r e p o r t
Entrance, AB
In Western Canada, CN invests in infrastructure and
equipment to grow our capacity and increase our share
of new industrial production, while also responding to
shifting demands in commodities (e.g., transition to green
energy). In Eastern Canada, we aim to further densify
our network by developing port and inland terminals to
promote gateway growth and provide customers with
a cost‑advantageous intermodal route to Toronto and
the American Midwest (e.g., Milton Logistics Hub). In
the U.S., we intend to boost our competitive presence
and capabilities in the Gulf region by partnering with
non‑rail technology companies specializing in hub‑to‑hub
freight transport.
building reliable supply chains
After several years of record capital investments to build
the infrastructure and acquire the equipment needed to
improve the safety and fluidity of our network to meet
the growing demands of the North American economy,
our investments have returned to a more traditional level.
In 2021, we invested $2.9 billion (20% of revenues) to
ensure the safety of the network, expand yards, lengthen
sidings and twin sections of track, especially in our busy
Edmonton/Winnipeg/Chicago, Edmonton/Vancouver and
Edmonton/Prince Rupert corridors. We are also renewing
our locomotive and railcar fleet and deploying advanced
technologies to enhance safety, drive down costs and
improve productivity.
New Richmond, WI
inland terminal expansions
In 2021, we opened a new distribution terminal in
New Richmond, WI. The multipurpose facility includes an
automotive compound for finished vehicles and an intermodal
terminal to serve the growing needs of our customers in
Minneapolis–Saint Paul, MN, and the Upper Midwest.
We are also breaking ground on our new logistics hub in
Milton, ON, which recently received all required federal
regulatory approvals. CN continues to work diligently
with regulators to ensure the project meets all conditions
of approval. The facility will benefit our customers and
the regional economy by providing much‑needed inland
terminal capacity, thereby improving Central Canada’s
access to key transborder markets and the coastal gateways
we serve. The facility will also benefit the environment
by converting truck traffic to more carbon‑efficient rail.
Construction began in January 2022 and the hub is
expected to be operational in the first quarter of 2025.
massive investments in the
canadian grain supply chain
Investments by CN and our customers are achieving
synergies across the entire grain supply chain. Grain
handling capacity in Western Canada is increasing rapidly
to meet positive trends in grain production and demand.
Our direct‑served customers at the Port of Vancouver,
including G3, Fraser, Richardson, Cargill and Fibreco,
have significantly increased nameplate grain‑handling
capacity through the construction or expansion of grain
export terminals. Of the 42 new high‑throughput elevators
on the Prairies, many with loop tracks enabling faster
grain loading, 30 have been or are being built on CN lines
(29 exclusively). Our investments in long sidings, double track
and tunnel ventilation will help serve this increased capacity.
c n 2 0 2 1 a n n u a l r e p o r t x x v
flooding in british columbia
During the three weeks between November 14 and
December 4, 2021, CN’s network in southern B.C. was
shut down when we experienced 58 washouts over a
150‑mile stretch following record rainfall. The railroad
mobilized more than 400 employees and contractors as
well as over 110 pieces of heavy equipment, operating
24 hours a day, 7 days a week, to get the rail line back into
service. 282,000 cubic yards of rock and soil were moved
to rebuild damaged locations, the equivalent of over
25,000 truckloads. Operating metrics returned to normal
only two weeks after the network reopened.
During the outage, CN was able to use our exclusive access
to the Port of Prince Rupert to move goods. Equipment and
staffing levels were increased to keep Canadian natural
resources moving to markets and consumer goods from
overseas flowing to communities across North America.
CN employees also worked closely with emergency
management officials to aid British Columbians impacted
by the weather. Working with partners, CN helped evacuate
hundreds of stranded residents and brought urgent medical
care and equipment to areas cut off by high water. CN also
donated $100,000 to the Canadian Red Cross. This is in
addition to the $1.5 million CN contributed following the B.C.
wildfires last summer.
Track Supervisor Haydn Marsh and his team pitched in to
help the Fraser Canyon Hospital in Hope, BC, when critical
medical supplies were needed during the historic floods.
developing new end markets
for energy products
Alberta is Canada's largest hub for petrochemical
production and refining. There are 36 petrochemical
manufacturers currently operating in central Alberta,
85% of which are located on CN’s rail lines. Methane,
ethane, ethylene and propane are some of the
petrochemicals produced in Alberta that are used
as building blocks for manufacturing. Our capital
investments in key natural gas liquids corridors coupled
with customer investment in their facilities allow CN
to provide a balanced flow of loads and empties for
our customers.
The two new propane export terminals at the Port of
Prince Rupert are exclusively served by CN. The successful
opening of these export facilities, which are already
exceeding targets, provides our customers with the option of
serving the domestic or export market.
Other less carbon‑intensive products are also being
developed in the Alberta Heartland, such as biodiesel
and other renewable fuels, glycol, blue methanol and
blue ammonia (used in Asia for decarbonization of
power generation).
x x v i c n 2 0 2 1 a n n u a l r e p o r t
Belleville, ON
Stakeholder engagement
CN plays an essential role and contributes to the economic prosperity of more
than 2,000 cities, towns and Indigenous communities throughout North America.
In 2021 alone, CN moved over 300 million tonnes of cargo, spent $10.9 billion
in local communities, paid $2.9 billion in wages and benefits to our more than
22,000 employees, invested $2.9 billion in capital projects and paid $1.4 billion in taxes.
CN engages openly and proactively with communities to help drive progress and foster
mutual respect. For example, under CN's Community Engagement program, we meet with
municipal officers and their first responders to assist them in their emergency planning.
All Aboard for Safety is CN’s flagship community education program. Every year, CN
employees make hundreds of presentations and talk to thousands of children and
adults at schools and community events in Canada and the U.S. about the importance
of rail safety and the dangers of walking or playing on or near railway tracks.
The CN Police Service continues to be active in communities across our network to
promote safe behaviour around railway property by conducting enforcement activities and
delivering safety presentations. During the industry’s annual Rail Safety Week campaign,
CN police officers and other employees, in partnership with Operation Lifesaver®,
participate in many safety initiatives to raise awareness about preventing accidents.
We believe another way to help build more sustainable communities is to actively
contribute millions of dollars each year through our CN Stronger Communities Fund to
organizations, programs and initiatives that promote the health and safety of young
people, transportation research and education, environmental sustainability, and diversity.
We are proud of our employees, retirees and their families who volunteer to make their
communities better places to live, work and play. The CN Railroaders in the Community
program recognizes these acts of kindness by providing grants to the community‑based
not‑for‑profit organizations our employees choose to support through their volunteer efforts.
The CN Employees’ and Pensioners’ Community Fund, which has been in existence for
more than 50 years, organizes fundraising activities in support of many Canadian
charities. Despite the pandemic, the most recent campaign met with excellent success,
raising over $1.5 million. During the past 10 years, the Fund has raised $18.3 million
in donations to assist more than 500 charities specializing in health and research,
community well‑being, child support and humanitarian aid. The Fund directs every
dollar donated directly to the designated organizations.
award
CN partners with
Transportation
Community
Awareness and
Emergency Response
(TRANSCAER®),
through which we help
communities in Canada
and the U.S. understand
the movement of
hazardous materials
and what is required in
the event of an incident.
CN earned the
prestigious TRANSCAER
National Achievement
Award from the
American Chemistry
Council for the 12th
consecutive year.
c n 2 0 2 1 a n n u a l r e p o r t x x v i i
BOARD OF
DIRECTORS
As at April 5, 2022
Robert Pace,
d. comm., c.m.
Chair of the Board
Canadian National
Railway Company
President and Chief
Executive Officer
The Pace Group
committees: 2, 3
Tracy Robinson
President and Chief
Executive Officer
Canadian National
Railway Company
committee: 4
Shauneen Bruder
Vice‑Chair of the Board
Canadian National
Railway Company
Retired Executive
Vice‑President, Operations
Royal Bank of Canada
committees: 1, 2*, 3
awards
Denise Gray
Director, External Affairs
& Government Relations,
North America, LG Energy
Solution Michigan Inc.
committees: 1, 2, 3
Justin M. Howell
Senior Investment Manager
Cascade Asset
Management Co.
committees: 2, 3, 4
The Honourable
Kevin G. Lynch,
p.c., o.c., ph.d, ll.d.
Retired Vice‑Chair
BMO Financial Group
committees: 1, 2, 3*
James E. O’Connor
Retired Chairman and CEO
Republic Services, Inc.
committees: 1, 4
Jo‑ann dePass
Olsovsky
Retired Executive
Vice‑President and Chief
Information Officer
Salesforce.com, Inc.
Robert L. Phillips
President
R.L. Phillips Investments Inc.
committees: 1*, 3
Margaret A. McKenzie
Founder and former
Chief Financial Officer
Range Royalty
Management Ltd.
committees: 1, 4
Laura Stein
Executive Vice‑President –
Corporate & Legal Affairs
and General Counsel
Mondelēz International
committees: 2, 4*
C O M M I T T E E S :
1 Audit, Finance
and Risk
2 Governance,
Sustainability
and Safety
3 Human Resources
and Compensation
4 Pension and Investment
* Denotes chair of
the committee
The Board wishes to thank
Robert Pace (Chair),
Jim O’Connor and Laura Stein
for their many years of
exemplary service to CN. Each
of them has contributed their
insight and expertise to our
work — and the entire CN
community has been enriched
by their efforts.
DJSI again recognized CN as
a sustainability leader in 2021.
This marks the 10th consecutive
year that CN is listed on the
prestigious DJSI World Index
and the 13th consecutive year
that CN is listed on the DJSI
North America Index.
CN is proud to have been
included in S&P Global's
Sustainability Yearbook 2021
as one of the top 15%
sustainability performers in the
transportation industry.
CN’s Board of Directors has been
recognized for adhering to the
highest standards of corporate
governance, earning a first‑place
ranking in The Globe and Mail
Report on Business annual
comprehensive assessment of
220 S&P/TSX composite index
members with a score of 98%.
x x v i i i c n 2 0 2 1 a n n u a l r e p o r t
Montreal, QC
governance
CN is committed to the highest
standards of corporate governance,
with an emphasis on shareholder
engagement and transparency. How
we deliver success is just as important
as what we achieve. Therefore, we
work diligently to bring integrity and
excellence into everything we do.
As a Canadian reporting issuer with
securities listed on the Toronto Stock
Exchange (TSX) and the New York
Stock Exchange (NYSE), CN ensures
its corporate governance practices
comply with the highest standards
and rules adopted by the Canadian
Securities Administrators, applicable
provisions of the U.S. Sarbanes Oxley
Act of 2002 and related rules of
the U.S. Securities and Exchange
Commission. CN is exempted
from complying with many of the
NYSE corporate governance rules,
provided it complies with Canadian
governance requirements. Except
as summarized on our website
at www.cn.ca/governance, CN’s
governance practices comply with
the NYSE corporate governance rules
in all significant respects.
Consistent with the belief that
ethical conduct goes beyond
compliance and resides in a
comprehensive governance culture,
CN publishes and enforces its
Corporate Governance Manual,
Code of Business Conduct, Anti
Corruption Policy, Supplier Code of
Conduct and Human Rights Policy.
We also maintain several methods
for employees and third parties to
anonymously report accounting,
auditing and other concerns.
CN is proud of the leadership
demonstrated by its Board of
Directors with respect to diversity and
is a proud signatory to the Catalyst
Accord 2022. In 2021, the Board set
a new target that at least 50% of
the independent directors will come
from diverse groups, including gender
parity by the end of 2022.
Reflecting evolving best practice
trends in Canada and the U.S.,
CN’s Board of Directors updated its
corporate governance policies in
2021 to:
• Confirm that all directors are
subject to a 14‑year tenure limit.
• Lower the retirement age for
directors from 75 to 72.
• Permit directors to serve on a
maximum of three public boards,
including CN.
In 2021, CN also created a new
Governance, Sustainability and
Safety Committee, chaired by
Shauneen Bruder, to assist the Board
in overseeing policies and practices
relating to ESG matters.
CN is in daily contact with Indigenous
communities across our network,
identifying and fostering business
opportunities, increasing employee
awareness, and promoting employment
opportunities within these communities.
In February 2021, CN announced the
creation of an Indigenous Advisory
Council (IAC), an independent body
comprised of Indigenous leaders from
across Canada. The IAC’s mandate
is to provide advice to CN's Board
and CEO on relevant issues such as
reinforcing diversity and inclusion
through policies and procedures that
reflect these principles.
Our approach to sustainability is
aligned with international standards,
including the United Nations
Global Compact and Sustainable
Development Goals, the Global
Reporting Initiative, the Sustainability
Accounting Standards Board, the
World Bank Mobility Goals, and the
Task Force on Climate related Financial
Disclosures. These expectations are
integrated into our five sustainability
pillars: Environment, Safety, People,
Communities, and Governance.
c n 2 0 2 1 a n n u a l r e p o r t x x i x
SELECT SENIOR
OFFICERS
As at April 5, 2022
Tracy Robinson
President and
Chief Executive Officer
Sean Finn
Executive Vice‑President,
Corporate Services and
Chief Legal Officer
Ghislain Houle
Executive Vice‑President
and Chief Financial Officer
Dominique Malenfant
Executive Vice‑President
and Chief Information
and Technology Officer
Robert Reilly
Executive Vice‑President
and Chief Operating Officer
James Cairns
Senior Vice‑President,
Rail Centric Supply Chain
Dorothea Klein
Senior Vice‑President
and Chief Human
Resources Officer
Doug MacDonald
Interim Chief
Marketing Officer
Helen Quirke
Senior Vice‑President and
Chief Strategy Officer
Rance Randle
Senior Vice‑President,
Network Operations
and Transportation
Keith Reardon
Senior Vice‑President,
Consumer Product
Supply Chain
Paul Butcher
Vice‑President,
Investor Relations
Marlene Puffer
President and Chief
Executive Officer,
CN Investment Division
x x x c n 2 0 2 1 a n n u a l r e p o r t
SHAREHOLDER AND
INVESTOR INFORMATION
Annual meeting
Shareholder services
The annual meeting of shareholders will be held online via
webcast at 10:00 a.m. (EDT) on May 20, 2022.
Please refer to www.cn.ca for meeting details.
Shareholders having inquiries concerning their shares,
wishing to obtain information about CN, or to receive
dividends by direct deposit or in U.S. dollars may obtain
detailed information by communicating with:
Annual information form
The annual information form
may be obtained by writing to:
The Corporate Secretary
Canadian National Railway Company
935 de La Gauchetière Street West
Montreal, QC, Canada H3B 2M9
It is also available on CN’s website (www.cn.ca).
Transfer agent and registrar
Computershare Trust Company of Canada
Offices in Canada:
Montreal, Quebec
Toronto, Ontario
Calgary, Alberta
Vancouver, British Columbia
Telephone: 1‑800‑564‑6253
www.investorcentre.com
Co‑transfer agent and co‑registrar
Computershare Trust Company N.A.
Att: Stock Transfer Department
Computershare Trust Company of Canada
Shareholder Services
100 University Avenue, 8th Floor
Toronto, ON, Canada M5J 2Y1
Telephone: 1‑800‑564‑6253
www.investorcentre.com
Stock exchanges
CN common shares are listed on the
Toronto and New York stock exchanges.
Ticker symbols:
CNR Toronto Stock Exchange
CNI New York Stock Exchange
Investor relations
Paul Butcher
Vice‑President, Investor Relations
Telephone: 514‑399‑0052
Head office
Canadian National Railway Company
935 de La Gauchetière Street West
Montreal, QC, Canada H3B 2M9
Overnight Mail Delivery:
462 South 4th Street, Louisville, KY, United States 40202
P.O. Box 8100
Montreal, QC, Canada H3C 3N4
Regular Mail Delivery: P.O. Box 505000,
Louisville, KY, United States 40233‑5000
Telephone: 1‑800‑962‑4284
c n 2 0 2 1 a n n u a l r e p o r t x x x i
McLure, BC
:
n
g
i
s
e
d
i
n
h
C
a
c
n
o
r
e
V
i
Selected Railroad Statistics - unaudited
Financial measures
Key financial performance indicators (1)
Total revenues ($ millions)
Freight revenues ($ millions)
Operating income ($ millions)
Adjusted operating income ($ millions) (2)(3)
Net income ($ millions)
Adjusted net income ($ millions) (2)(3)
Diluted earnings per share ($)
Adjusted diluted earnings per share ($) (2)(3)
Free cash flow ($ millions) (2)(4)
Gross property additions ($ millions)
Share repurchases ($ millions)
Dividends per share ($)
Financial ratios
Operating ratio (%) (5)
Adjusted operating ratio (%) (2)(3)
Adjusted debt-to-adjusted EBITDA (times) (2)(6)
Return on invested capital (ROIC) (%) (2)(7)
Adjusted ROIC (%) (2)(7)
Operational measures (8)
Statistical operating data
Gross ton miles (GTMs) (millions)
Revenue ton miles (RTMs) (millions)
Carloads (thousands)
Route miles (includes Canada and the U.S.)
Employees (end of year)
Employees (average for the year)
Key operating measures
Freight revenue per RTM (cents)
Freight revenue per carload ($)
GTMs per average number of employees (thousands)
Operating expenses per GTM (cents)
Labor and fringe benefits expense per GTM (cents)
Diesel fuel consumed (US gallons in millions)
Average fuel price ($/US gallon)
Fuel efficiency (US gallons of locomotive fuel consumed per 1,000 GTMs)
Train weight (tons)
Train length (feet)
Car velocity (car miles per day)
Through dwell (entire railroad, hours)
Through network train speed (miles per hour)
Locomotive utilization (trailing GTMs per total horsepower)
Safety indicators (9)
Injury frequency rate (per 200,000 person hours)
Accident rate (per million train miles)
2021
2020
2019
14,477
13,888
5,616
5,622
4,892
4,218
6.89
5.94
3,296
2,897
1,582
2.46
61.2
61.2
1.82
16.4
14.1
458,401
233,138
5,701
19,500
22,604
24,084
5.96
2,436
19,033
1.93
0.63
397.6
3.28
0.867
9,658
8,559
195
7.9
19.2
198
1.33
1.82
13,819
13,218
4,777
5,263
3,562
3,784
5.00
5.31
3,227
2,863
379
2.30
65.4
61.9
1.98
12.7
13.4
455,368
230,390
5,595
19,500
24,381
23,786
5.74
2,362
19,144
1.99
0.60
407.2
2.42
0.894
9,501
8,572
185
8.6
18.5
196
1.64
1.87
14,917
14,198
5,593
5,708
4,216
4,189
5.83
5.80
1,992
4,079
1,700
2.15
62.5
61.7
2.01
15.3
15.1
482,890
241,954
5,912
19,500
25,975
26,733
5.87
2,402
18,063
1.93
0.61
451.4
3.17
0.935
9,125
8,232
194
7.9
18.5
198
1.97
2.23
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Amounts expressed in Canadian dollars and prepared in accordance with United States generally accepted accounting principles (GAAP), unless otherwise noted.
These Non-GAAP measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other
companies.
See the section entitled Adjusted performance measures in the MD&A for an explanation of these non-GAAP measures.
See the section entitled Liquidity and capital resources – Free cash flow in the MD&A for an explanation of this non-GAAP measure.
Operating ratio is defined as operating expenses as a percentage of revenues.
Adjusted EBITDA for 2019 has been restated to include the workforce reduction program adjustment in order to conform with the current definition and be comparable with
the current year. See the section entitled Liquidity and capital resources – Adjusted debt-to-adjusted EBITDA multiple in the MD&A for an explanation of this non-GAAP
measure.
See the section entitled ROIC and adjusted ROIC in the MD&A for an explanation of these non-GAAP measures.
Statistical operating data, key operating measures and safety indicators are unaudited and based on estimated data available at such time and are subject to change as
more complete information becomes available. Definitions of gross ton miles, fuel efficiency, train weight, train length, car velocity, through dwell and through network train
speed are included within the Company’s Management’s Discussion and Analysis. Definitions of all other indicators are provided on CN's website, www.cn.ca/glossary.
(9)
Based on Federal Railroad Administration (FRA) reporting criteria.
CN | 2021 Annual Report 1
3
3
3
11
14
15
15
15
16
17
17
20
21
22
27
28
29
36
36
37
38
46
46
46
48
48
58
67
Management's Discussion and Analysis
Contents
Business profile
Corporate organization
Strategy overview
Human capital management
Forward-looking statements
2021 Financial outlook
Financial highlights
2021 compared to 2020
Operating highlights
Non-GAAP measures
Adjusted performance measures
ROIC and adjusted ROIC
Constant currency
Revenues
Operating expenses
Other income and expenses
2020 compared to 2019
Summary of quarterly financial data
Summary of fourth quarter 2021
Financial position
Liquidity and capital resources
Off balance sheet arrangements
Outstanding share data
Financial instruments
Recent accounting pronouncements
Critical accounting estimates
Business risks
Controls and procedures
2 CN | 2021 Annual Report
Management's Discussion and Analysis
This Management's Discussion and Analysis (MD&A) dated February 1, 2022, relates to the consolidated financial position and results of
operations of Canadian National Railway Company, together with its wholly-owned subsidiaries, collectively "CN" or the "Company," and should
be read in conjunction with the Company's 2021 Annual Consolidated Financial Statements and Notes thereto. All financial information
reflected herein is expressed in Canadian dollars and prepared in accordance with United States generally accepted accounting principles
(GAAP), unless otherwise noted.
CN's common shares are listed on the Toronto and New York stock exchanges. Additional information about CN filed with Canadian
securities regulatory authorities and the United States Securities and Exchange Commission (SEC), including the Company's 2021 Annual
Information Form and Form 40-F, 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. Printed copies of such documents may be obtained by contacting CN's
Corporate Secretary's Office.
Business profile
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 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.
Corporate organization
The Company manages its rail operations in Canada and the U.S. as one business segment. Financial information reported at this level, such as
revenues, operating income and cash flow from operations, is used by the Company's corporate management in evaluating financial and
operational performance and allocating resources across CN's network. The Company's strategic initiatives are developed and managed
centrally by corporate management and are communicated to its regional activity centers (the Western Region and Eastern Region), whose role
is to manage the day-to-day service requirements of their respective territories, control direct costs incurred locally, and execute the strategy
and operating plan established by corporate management.
See Note 23 – Segmented information to the Company's 2021 Annual Consolidated Financial Statements for additional information on the
Company's corporate organization, as well as selected financial information by geographic area.
Strategy overview
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
CN | 2021 Annual Report 3
Management's Discussion and Analysis
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.
•
•
•
•
•
CN is going digital as the digital revolution transforms North American business.
CN is using data as an asset for better operational efficiency.
CN is focused on being part of the climate change solution.
CN is creating new relationships with customers and new customer service models.
CN is building a diverse and talented North American workforce of committed railroaders.
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:
•
•
Improved simplicity, reliability and predictability: Use advanced digital technologies, big data, artificial intelligence (AI) and predictive
analytics for better planning, efficiency, and safety.
Better decision-making: Improved real-time data and analytical support tools available 24/7.
4 CN | 2021 Annual Report
Management's Discussion and Analysis
•
•
•
•
Enhanced visibility: More accurate, consistent and relevant information provided to all stakeholders (e.g., customers, employees,
communities).
Digitized work: Automate manual processes to improve efficiency and safety.
Enhanced cybersecurity protections: Protect the Company’s physical assets and data to keep its network safe.
Improved analytics with a focus on sustainability (e.g., safety, environment, people, communities).
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:
•
•
•
•
•
•
Fostering an engaged workforce that 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.
See the section entitled Human capital management - Health and safety of this MD&A for additional information regarding CN's safety
initiatives.
Building the talent and culture to drive CN performance in a DSR world
CN people have always been the Company's most important differentiator, caring passionately about railroading and bringing optimism,
commitment and resilience to daily tasks. CN aims to attract, retain and train the very best talent, with a renewed focus on a diverse, inclusive
and winning culture to enhance employee engagement. The Company aspires to have workforce diversity that reflects the communities in
which it operates. CN develops its employees with the necessary skills for an increasingly automated and data-driven work environment.
See the section entitled Human capital management of this MD&A for additional information regarding CN's human capital initiatives.
Tackling the impact of climate change
The Company's goal is to conduct its operations with minimal environmental impact, while offering a carbon-efficient and sustainable way to
move goods. CN is making a positive contribution in the fight against climate change and playing a key role in the transition to a lower-carbon
economy.
With approximately 85% of its direct greenhouse gas (GHG) emissions generated from rail operations, CN believes the best way to reduce
its carbon footprint is by continuously improving fuel efficiency. Over the years, this focus has resulted in significant progress in decoupling
volume growth from carbon emissions. CN continues to maintain its leadership position among Class I North American railways, consuming
approximately 15% less locomotive fuel per gross ton mile than the industry average. CN was also the first North American railway, and among
the first 100 companies globally, to announce an approved science-based carbon reduction plan. CN will continue to raise the bar for climate
leadership and intends to reduce its carbon footprint in line with the Paris Agreement and by continuing to drive fuel and carbon efficiency in its
own fleets, and across the supply chain on a path toward net-zero by 2050.
CN is building decarbonization partnerships with customers, locomotive manufacturers, supply chain partners, researchers, clean-tech
innovators and government regulators to deliver on its climate vision and help drive economic prosperity in a low-carbon environment. To
achieve its decarbonization targets, CN will need to continue to improve the fuel efficiency of its fleets, increase its use of sustainable
renewable fuels and test innovative propulsion technologies while working collaboratively to bring low-carbon alternatives to market.
CN | 2021 Annual Report 5
Management's Discussion and Analysis
•
•
•
•
•
•
•
As part of CN's comprehensive Climate Action Plan, the Company engages in several best-practice initiatives, including:
Using cleaner, more fuel-efficient locomotives that emit less GHG.
Exploring and investing in innovative technologies, such as locomotive energy management and data telemetry systems as well as
distributed power functionality.
Leveraging the principles of PSR to use fewer railcars and locomotives to ship more freight in a tight, reliable and efficient operation.
Layering advanced technology and automation onto every aspect of its operation, such as DSR.
Increasing its use of sustainable renewable fuel blends in its fleets.
Reducing CN’s non-rail carbon footprint by upgrading its ground fleet, retrofitting yards and buildings, and meeting strict requirements for
its vessel fleet.
Working with its customers to help them reduce their transportation supply chain GHG emissions by leveraging rail for the long haul and
trucking over shorter distances.
The Company combines its expert resources, environmental management procedures, as well as training and audits for employees and
contractors to help ensure it conducts its operations while protecting the natural environment and biodiversity. The Company's environmental
activities include:
•
•
•
•
•
Monitoring and reporting on its environmental impact in Canada and the U.S.
Identifying and managing environmental issues in accordance with its environmental policy, which is overseen by the Governance,
Sustainability and Safety Committee of the Board of Directors.
Putting in place risk mitigation strategies to minimize environmental risks to the Company.
Engaging openly and proactively with customers, supply chain partners, communities and governments to deliver on its target and help
drive economic prosperity in a low-carbon environment.
Protecting biodiversity and managing the land in the various habitats through which its network runs are important aspects of CN’s
corporate culture and are aligned with its community efforts to protect the environment.
The Company's CDP Report, Task Force on Climate-related Financial Disclosures report, sustainability report entitled "Delivering
Responsibly" and the Company's Corporate Governance Manual, which outlines the role and responsibilities of the Governance, Sustainability
and Safety Committee of the Board of Directors, are available on CN's website in the Delivering Responsibly section.
Stakeholder engagement and regulatory
CN does not operate in isolation. It is tightly integrated with the rest of society, providing vital links spanning eight provinces, 16 states, 200
First Nation and Métis communities, and more than 2,000 towns and cities across its network. As such, CN continues to play an essential role
and contributes to economic prosperity through job creation, investments and freight transportation services. However, CN believes it is not just
what it does but how it does it that matters for its long-term success. The Company seeks to enhance its reputation through open and proactive
engagement to ensure its stakeholders are aware of its strategy. CN engages externally across a wide spectrum of initiatives and fosters
effective two-way communications that ensure a respectful and beneficial exchange.
CN believes the rail industry can enhance safety by working closely with communities. Under CN's structured Community Engagement
program, the Company engages with municipal officers and their emergency responders to assist them in their emergency response planning.
During this frequent outreach, CN discusses:
•
•
•
Its comprehensive safety programs and performance.
The nature, volume and economic importance of dangerous goods it transports through their communities.
Emergency response planning.
•
Training sessions for emergency responders.
The outreach builds on CN's involvement in Transportation Community Awareness and Emergency Response (TRANSCAER®), through
which the Company has been working for many years to help communities in Canada and the U.S. understand the movement of hazardous
materials and what is required in the event of transportation incidents. All Aboard for Safety is CN’s flagship community education program.
Every year, CN employees make hundreds of presentations and talk to thousands of children and adults at schools and community events in
Canada and the U.S. about the importance of rail safety and the dangers of walking or playing on or near railway tracks.
As part of CN’s year‑round outreach effort, the CN Police Service continues to be active in communities across the CN network to promote
safe behavior around railroad infrastructure. Activities include conducting enforcement initiatives with external agencies and delivering safety
presentations to high‑risk groups. During the industry’s annual Rail Safety Week campaign, CN police officers and other employees, in
partnership with Operation Lifesaver®, participate in numerous safety initiatives to raise awareness about preventing accidents and injuries
around railway property.
CN believes another way to help build more sustainable communities is to actively contribute millions of dollars each year through its CN
Stronger Communities Fund to organizations, programs and initiatives that promote diversity and inclusion, innovation and safety, education,
6 CN | 2021 Annual Report
Management's Discussion and Analysis
environmental protection, and many other causes such as food banks, homeless shelters, domestic violence shelters, healthcare centers, and
anti-poverty organizations.
CN is proud of its employees, retirees and their families who volunteer to make their communities better places to live, work and play. The
CN Railroaders in the Community program recognizes these acts of kindness by providing grants to the community‑based not‑for‑profit
organizations employees (current, retired or family) choose to support through their volunteer efforts. CN also encourages employee
community involvement through its annual volunteer CN In Your Community Day.
Operating within or adjacent to the reserve lands of 110 First Nations and Métis peoples, CN is in daily contact with Indigenous
communities across its network, identifying and fostering business opportunities, increasing employee awareness, and promoting employment
opportunities within these communities. In February 2021, CN announced the creation of an Indigenous Advisory Council (IAC), an independent
body comprised of Indigenous leaders from across Canada. The IAC’s mandate is to provide advice to CN's Board and to the company's CEO on
relevant issues such as reinforcing diversity and inclusion through policies and procedures that reflect these principles.
Disciplined capital allocation and execution
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 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 allocation. Talent,
technology and capital all need to be fully aligned. The Company’s capital allocation roadmap includes several core elements:
•
•
•
•
•
•
•
Investing in the maintenance of a safe and reliable network, enabled by technologies such as the Autonomous Track Inspection Program
and Automated Inspection Portals.
Investing in asset infrastructure to strengthen its tri-coastal network.
Growing its physical and commercial reach through strategic partnerships and acquisitions.
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.
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.
In 2022, CN’s performance improvement plan is committed to operational excellence and delivering value for its shareholders by:
•
•
•
Prioritizing rail operations, including car velocity, train speed and train length;
Rationalizing its cost structure by streamlining the management hierarchy, particularly within support functions, to improve labor
productivity by accelerating speed and quality of decision making; and
Producing compelling financial return through organic revenue growth driven by CN’s intermodal business and continuous improvement on
its operating margins.
CN’s performance in the fourth quarter of 2021 demonstrated solid progress towards this plan, despite the washouts in British Columbia
caused by severe rain and flooding, resulting in a network shutdown in the region for three weeks in the fourth quarter ("B.C. washouts"). The
performance in the fourth quarter was mainly due to pricing and yield optimization as well as cost reduction efforts largely driven by a
headcount reduction of approximately 1,150 employees from the end of the third quarter as well as cost containment efforts in Purchased
services and materials.
CN has also demonstrated a commitment to shareholder returns through completion of the 2021 share buyback program, announcing a
new share buyback program for 2022 of approximately $5 billion and a 19% dividend increase for 2022.
CN | 2021 Annual Report 7
Management's Discussion and Analysis
2021 Highlights
CN's previous strategic investments in its infrastructure's resiliency enabled the Company to continue delivering high-quality service to
customers while generating profitable growth and enhancing returns to shareholders. Financial performance improved across most measures,
despite negative impacts from the polar vortex in February, the forest fires in Western Canada over the summer, washouts in British Columbia
caused by severe rain and flooding, resulting in a network shutdown in the region for three weeks in the fourth quarter ("B.C. washouts") and
ongoing supply chain issues.
Financial highlights - 2021 compared to 2020
•
•
•
•
•
•
•
•
•
•
•
Revenues increased by $658 million, or 5%, to $14,477 million.
Operating expenses decreased by $181 million, or 2%, to $8,861 million.
Operating income increased by $839 million, or 18%, to $5,616 million and adjusted operating income increased by $359 million, or 7%, to
$5,622 million. (1)(2)
Operating ratio (3) and adjusted operating ratio of 61.2%, an improvement of 4.2 points and 0.7 points respectively. (1)(2)
Net income increased by $1,330 million, or 37%, to $4,892 million and diluted earnings per share increased by 38% to $6.89.
Adjusted net income increased by $434 million, or 11%, to a record $4,218 million and adjusted diluted earnings per share increased by
12% to a record $5.94. (1)(2)
The Company generated record free cash flow of $3,296 million, a 2% increase. (1)(4)
On a constant currency basis, diluted earnings per share would have been higher by $0.23. (1)(5)
ROIC of 16.4%, an increase of 3.7 points and adjusted ROIC of 14.1%, an increase of 0.7 points. (1)(6)
An all-time record fuel efficiency of 0.867 US gallons of locomotive fuel consumed per 1,000 gross ton miles.
An all-time record injury frequency rate of 1.33 per 200,000 person hours. (7)
(1) These Non-GAAP measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other
companies.
(2) See the section of this MD&A entitled Adjusted performance measures for an explanation of these non-GAAP measures.
(3) Operating ratio is defined as operating expenses as a percentage of revenues.
(4) See the section of this MD&A entitled Liquidity and capital resources – Free cash flow for an explanation of this non-GAAP measure.
(5) See the section of this MD&A entitled Constant Currency for an explanation of this non-GAAP measure.
(6) See the section of this MD&A entitled ROIC and adjusted ROIC for an explanation of these non-GAAP measures.
(7) Based on Federal Railroad Administration (FRA) reporting criteria.
Leadership change
On October 19, 2021, CN announced that Jean-Jacques Ruest will retire as President and Chief Executive Officer (CEO) and as a member of the
Board of Directors of the Company and on January 25, 2022, Tracy Robinson was appointed as CN's President and CEO effective February 28,
2022. Tracy was identified as the right leader to drive sustainable growth, continued operational improvement, technological advancement and
shareholder value, and retain and attract a world-class workforce. Jean-Jacques Ruest will remain at CN in an advisory role until March 31, 2022
to ensure a seamless transition.
Acquisitions
Terminated CN KCS merger agreement
On September 15, 2021, Kansas City Southern (“KCS”) notified CN that it terminated the previously announced May 21, 2021 definitive merger
agreement (the “CN Merger Agreement") under which CN would have acquired KCS for an implied total transaction value of US$33.6 billion,
including the assumption of US$3.8 billion of debt.
On August 31, 2021, the Surface Transportation Board ("STB") rejected the joint motion by CN and KCS to approve a proposed voting trust
agreement. On September 15, 2021, KCS and its Board of Directors announced that the revised acquisition proposal of September 12, 2021
from Canadian Pacific Railway Limited (“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 in order to
enter into a merger agreement with CP. As a result, CN received from KCS a merger termination fee of US$700 million ($886 million), recorded
in Merger termination fee within the Company’s Consolidated Statements of Income and reflected in Operating activities within the
Consolidated Statements of Cash Flows. In addition, KCS also refunded Brooklyn US Holdings, Inc. ("Holdco"), a wholly owned subsidiary of the
Company, US$700 million ($886 million) that CN had previously paid as an advance to KCS of US$700 million ($845 million) in connection with
KCS’s payment of the termination fee to CP under KCS’s original merger agreement with CP that was terminated on May 21, 2021. The refund
received in the third quarter was recorded in Transaction-related costs within the Consolidated Statements of Income and reflected in Investing
activities within the Consolidated Statements of Cash flows. The US$700 million ($845 million) advance had been recorded in Advance to KCS
8 CN | 2021 Annual Report
Management's Discussion and Analysis
and other transaction costs within the Consolidated Balance Sheets in the second quarter of 2021 and has been expensed to Transaction-
related costs within the Consolidated Statements of Income in the third quarter. This advance, along with $63 million of transaction-related
costs paid in the second quarter, have been reflected in Investing activities within the Consolidated Statements of Cash flows.
The Company incurred $84 million of transaction-related costs for the year ended December 31, 2021 recorded in Transaction-related
costs within the Consolidated Statements of Income. This included $125 million of transaction-related costs, consisting of a $76 million
expense for costs previously capitalized to Advance to KCS and other transaction costs within the Consolidated Balance Sheets in the second
quarter of 2021 in accordance with the expected application of equity method accounting and $49 million of additional transaction-related
costs incurred in the third quarter of 2021; partially offset by $41 million of income generated as a result of the applicable foreign exchange
rates prevailing at the time of payment of the US dollar denominated advance to KCS and receipt of the related refund.
The Company also paid $97 million of bridge financing and other fees (See Note 15 - Debt, Credit facilities to the Company's 2021 Annual
Consolidated Financial Statements) which were recorded in Interest expense within the Consolidated Statements of Income for the year ended
December 31, 2021.
For the year ended December 31, 2021, after accounting for all direct and incremental expenses as well as income generated from the
merger termination fee, CN recorded additional income of $705 million ($616 million after-tax), as a result of its strategic decision to bid for
KCS.
Massena rail line
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.
COVID-19 pandemic
The COVID-19 pandemic necessitated governments, institutions and communities to take extraordinary actions, resulting in a partial economic
shutdown and severe contraction in the global economy through 2020 and into 2021. By December 2020, vaccines began to be approved for
use in North America and around the world, with vaccination programs accelerating in the first half of 2021 in many countries.
Transport Canada’s Ministerial Order published on October 29, 2021 mandated that employers in the federally regulated air, rail, and
marine transportation sectors would be required to establish vaccination policies for their employees. In compliance with this directive, CN
required all Canadian employees to have received their first dose by November 15, 2021 and be fully vaccinated by January 24, 2022.
New variants of the virus, including the Omicron variant which was first reported in late 2021, have led to the re-imposition of restrictive
measures across North America and in other parts of the world.
The long-term implications of the COVID-19 pandemic, including the extent of the impact on the business, financial position, results of
operations and liquidity of the Company, remain unknown and will depend on future developments, which are highly uncertain and cannot be
predicted, including the scope and duration of the pandemic as well as additional actions taken by governmental authorities and other parties in
response to the pandemic.
Assets held for sale
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 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. See Note 10 - Other current assets to the Company's 2021 Annual Consolidated Financial Statements for
additional information. 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.
CN | 2021 Annual Report 9
Management's Discussion and Analysis
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.
Reinvestment in the business
In 2021, CN spent approximately $2.9 billion in its capital program, 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.
Shareholder returns
CN increased its quarterly dividend per share by 7% to $0.6150 from $0.5750 in 2020, effective for the first quarter of 2021, and paid $1.7 billion
in dividends in 2021.
The Company repurchased 10.3 million of its common shares during the year, returning $1.6 billion to its shareholders. 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.
Sustainability recognition
The Company's sustainability practices earned it a place on the Dow Jones Sustainability World and North American Indices, for the 10th and
13th consecutive year, respectively. CN is the only Canadian company and the only North American railroad, listed in the DJSI Transportation
and Transportation Infrastructure sector World Index. CN was also recognized for its actions to cut emissions, mitigate climate risks and
develop the low carbon economy, earning a spot on the CDP 'A' List for sixth time, as well as being recognized for the 12th time. CN was one of
only three Canadian companies to earn a spot on the prestigious 'A' List in 2021. In addition, CN earned a #1 position in the Globe and Mail’s
comprehensive 2021 ranking of Canada’s corporate boards.
2022 Business outlook and assumptions
For 2022, the Company expects volume growth in terms of Revenue ton miles (RTMs) in the low single-digit range. The Company expects
growth across a range of commodities, particularly in Canadian coal exports, intermodal traffic, lumber and panels, refined petroleum products,
crude oil, plastics and chemicals, as well as significantly lower volumes of Canadian grain and lower volumes of potash.
Underpinning the 2022 business outlook, the Company assumes that North American industrial production will increase in the mid single-
digit range. For the 2021/2022 crop year, the grain crop in Canada was below its three-year average and the U.S. grain crop was in line with its
three-year average. The Company assumes that the 2022/2023 grain crops in both Canada and the U.S. will be in line with their respective
three-year averages.
In 2022, the Company expects to invest approximately 17% of revenues in its capital program.
Future value creation
Shareholder returns
On January 25, 2022, the Company's Board of Directors approved a new Normal Course Issuer Bid (NCIB) that allows for the repurchase of up
to 42.0 million common shares between February 1, 2022 and January 31, 2023. In addition, on that same day, the Company's Board of
Directors approved an increase of 19% to the quarterly dividend to common shareholders, from $0.6150 per share in 2021 to $0.7325 per share
in 2022, effective for the first quarter.
The forward-looking statements discussed in this section are subject to risks and uncertainties that could cause actual results or performance
to differ materially from those expressed or implied in such statements and are based on certain factors and assumptions which the Company
considers reasonable about events, developments, prospects and opportunities that may not materialize or that may be offset entirely or
partially by other events and developments. In addition to the assumptions and expectations discussed in this section, reference should be
made to the section of this MD&A entitled Forward-looking statements for assumptions and risk factors affecting such statements.
10 CN | 2021 Annual Report
Management's Discussion and Analysis
Human capital management
CN's ability to develop the best railroaders in the industry has been a key contributor to the Company's success. CN recognizes that without the
right people, no matter how good a service plan or business model a company may have, it will not be able to fully execute. The Company
continues to focus on hiring the right people, onboarding them successfully, helping them build positive relationships with their colleagues and
supporting all employees to grow and develop, while deepening its commitment to develop talent and plan for the future.
Governance
CN’s Senior Vice President and Chief Human Resources Officer has leadership accountability for the Company’s workforce policies and
programs and reports directly to the CEO. CN’s Board and its committees, including the Governance, Sustainability and Safety Committee and
Human Resources and Compensation Committee (HRCC) provide oversight of the Company's human capital management strategies,
programs, practices and performance. The HRCC is responsible for monitoring executive management’s performance assessment,
compensation and succession planning as well as ensuring effective talent management through engagement surveys and monitoring union
relations and strategy for consistency with CN’s strategic direction. The HRCC also has the mandate to review human resources practices and
policies by ensuring, amongst other things, that appropriate human resources systems are in place so that the Company can attract, motivate
and retain the quality and diversity of personnel required to meet its business objectives. The Company’s senior management provides regular
briefings on human capital matters to the Board and its Committees to facilitate oversight.
The Board of Directors and management are committed to maintaining and instilling a strong ethical culture at CN, and as such, have
developed a solid ethics program based on CN’s core values of integrity and respect. Each director, executive officer and management
employee must certify annually his or her compliance with the Code of Business Conduct and employees are required to complete an on-line
training course on the Code of Business Conduct. Integrity training is also part of every new employee’s onboarding program. In addition, Anti-
Fraud Policy and Guidelines apply to all employees of CN and its wholly owned subsidiaries and set out steps to be taken in response to
reported or suspected fraud in all its forms, as well as measures that are taken to identify, prevent and manage fraud-related risks.
Total employees
As at December 31, 2021, CN employed a total of 16,314 employees in Canada (2020 – 17,645), of which 11,878, or 73%, were unionized
employees (2020 – 12,585, or 71%) and 6,290 employees in the U.S. (2020 – 6,736) of which 5,289, or 84%, were unionized employees (2020 –
5,624, or 83%). Within Canada, there are 26 bargaining units and in the U.S., there are currently 43 active bargaining units. See the section
entitled Business risks of this MD&A for additional information regarding labor negotiations.
Health and safety
CN has an uncompromising commitment to the health and safety of its employees, the customers it serves, and the communities and
environments in which it operates. The Company's long-term safety improvement is driven by continued investments in infrastructure, rigorous
safety processes and exposure reduction efforts, as well as efforts to continue deepening the Company’s safety culture. The attainment of
annual accident and injury targets is a component of management’s annual incentive bonus plan. The Company’s injury frequency rate and
accident rate, defined according to the criteria of the Federal Railroad Administration (FRA), are provided for the entire company’s operations
and are publicly disclosed on a quarterly basis. See the section entitled Selected railroad statistics for additional information on CN’s safety
measures.
CN’s culture and commitment to safety is supported by its focus on training, leadership, and technology. The Looking Out For Each Other
peer-to-peer engagement program focuses on raising awareness among all employees of the top causes of incidents and injuries, identifying
and reviewing safe work procedures, training employees to be aware of their surroundings and recognize potential at-risk work practices,
teaching employees how to provide constructive feedback to their peers and learning from past incidents. The Company's Life Critical Rules
address the day-to-day activities that have the potential to cause serious harm or even loss of life. They are based on past incidents and are
designed to help ensure they do not happen again. CN's safety leadership training program is heavily focused on teaching employees the
importance of controlling exposures to risk and on developing the attitudes and behaviors required for a values-driven safety culture.
CN is also leveraging new technology to drive improved safety performance including installing powerful sensor and Artificial Intelligence
("AI") technology into specially equipped automated track inspection cars positioned in existing train service, enabling track inspections at
normal track speed. AI technology is also changing how CN inspects its railcar fleet. The new automated inspection portals feature ultra-high-
definition cameras that capture a 360° view of a train as it travels through at full track speed. Both these innovations in automation, the track
inspection railcars and train inspection portals, increase inspection frequency and quality and play an essential role in preventing incidents.
CN's Safety Management System is the framework for putting safety at the center of its day-to-day operations. This proactive plan is
designed to minimize risk, drive continuous improvement in the reduction of injuries and accidents, and engage employees at all levels of the
CN | 2021 Annual Report 11
Management's Discussion and Analysis
organization. CN works closely with its customers and suppliers to ensure adherence to Life Critical Rules where applicable, and to encourage a
shared commitment to a values-based safety culture.
CN believes that the rail industry can also enhance safety by working more closely with communities. Under CN's structured Community
Engagement program, the Company engages with municipal officers and their emergency responders in an effort to assist them in their
emergency response planning. In many cases, this outreach includes meetings, during which CN discusses its comprehensive safety programs,
its safety performance, the nature, volume and economic importance of dangerous commodities it transports through their communities, a
review of emergency response planning and arranging for training sessions for emergency responders. The outreach builds on CN's
involvement in the Transportation Community Awareness and Emergency Response (TRANSCAER®) initiative, through which the Company has
been working for many years to help communities in Canada and the U.S. understand the movement of hazardous materials and what is
required in the event of transportation incidents.
Pandemic Plan
In response to the COVID-19 pandemic, CN deployed its multi-phase Pandemic Plan in March of 2020 and continues to institute various
measures to protect its employees, customers, and the communities in which CN operates:
•
•
•
CN's medical team and occupational health department, who are members of the Association of American Railroads Health Committee,
have played a pivotal role in CN's pandemic planning, taking direction from the World Health Organization, as well as federal, provincial and
state authorities, as required, and offering best practices shared amongst North American railroads.
CN implemented preventative measures to ensure the safety of its employees and by extension, of its customers and communities. These
measures included a work from home policy for employees not required on site, restriction of employee travel, social distancing measures
at CN locations, segregating mission critical rail traffic control employees, and amplifying cleaning regimens on trains, in terminals, in crew
accommodation facilities, and in offices.
In line with Transport Canada’s Ministerial Order published on October 29, 2021 mandating vaccinations for employees of federally
regulated railways in Canada to enhance the safety and reliability of Canada’s transportation system, CN has put in place a mandatory
vaccination policy for all employees in Canada and those required to travel to Canada. The Ministerial Order requires CN to have a
company-wide vaccination policy that requires all persons employed by the Company to have received their first dosage of an approved
COVID-19 vaccine by no later than November 15, 2021, unless they fall within an exception. The Order also requires all employees to be
fully vaccinated by no later than January 24, 2022. Effectively, the Ministerial Order applies to all CN employees working in Canada. CN’s
policy also extends to employees of its wholly owned subsidiaries who perform work in Canada including US-based crews who work in
Canada, as well as CN’s contractors, consultants, agents and suppliers and anyone who accesses CN properties in Canada.
•
In the U.S., OSHA’s emergency temporary standard requiring all employers with 100 or more employees to ensure their workforce is fully
vaccinated or require any workers who remain unvaccinated to produce a negative test result on at least a weekly basis before coming to
work was stayed by a court. The Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors requiring
mandatory vaccination policies for all parties that contract with the Federal Government was also stayed by a court. CN continues to
monitor the situation.
•
•
•
At different moments during the year, certain provinces mandated work from home and CN complied with these mandates. For the office-
based employees returning to the office when allowed, safety measures are in place and aligned with the recommendations of the relevant
Public Health authorities.
CN has deployed a dedicated team to manage employees showing COVID-19 symptoms or in close contact with COVID-19 positive cases.
This includes nurses who assess employees and proactively request contact tracing, a contact tracing team to ensure timely isolation of
any potential close contacts and targeted disinfection on top of the regular enhanced cleaning, as well as a team to answer all COVID-19
related questions from employees, management or Public Health authorities.
Understanding the importance of timely and reliable information, CN increased employee communications by providing frequent updates
on the state of the Company’s operations, as well as employee support for any questions or concerns.
Talent management
Attraction and recruitment
CN is taking steps to further align its business and talent strategies by placing a greater emphasis on skills required to deliver on business
strategies, and focusing on continued leadership development. CN recruits and hires leading talent with a broad range of strengths,
perspectives and experiences, leveraging a wide array of partners to ensure diverse populations are aware of and attracted to the opportunities
that the Company offers.
For the year 2021, CN was recognized as one of Canada’s Top 100 Employers and Montreal’s Top Employers, for the fourth consecutive
year. In addition, CN was also listed as one of Canada’s Best Employers for Recent Graduates by the Career Directory.
12 CN | 2021 Annual Report
Management's Discussion and Analysis
Training and development
CN offers a variety of training courses, including mandatory and voluntary courses in order for employees to succeed in their current role and
prepare for career advancement opportunities.
The Company offers trainings in technical, business and leadership programs, mostly focusing on using online virtually facilitated sessions
and e-Learning courses, or, when possible or necessary, through in-person sessions. A revised leadership curriculum was launched in 2021 to
support people leaders in building the skills and knowledge needed to successfully perform at each level, while in their current role as well as
preparing for career advancement opportunities. The focus of our leadership development program is anchored on ensuring solid
communication capabilities, increased collaboration across teams and creating a strong base of inclusive leadership throughout our workforce,
which also incorporates training on unconscious bias and inclusion to address potential gaps. The Company is also expanding its online and
curated playlists/curricula for more self-guided and self-paced learning, so development is a more holistic journey over an employee’s lifecycle
and tenure at CN. For the Operations group, CN has various leadership programs for front line management that focus on providing those
leaders with a comprehensive understanding of railway operations, sales, and people leadership. The programs last between six to 12 months
and upon completion, these individuals are placed in front line positions across the network.
Furthermore, CN also supports its employees through a structured performance management process. At the beginning of each year, the
non-unionized employees set goals for the year that align to its business strategy and objectives. At the mid and year-end, there is a discussion
and review of progress against these goals as well as how they were achieved, so the focus is to continue to garner a performance-based
culture. In addition, there are also discussions related to development plans that help to enhance skills, capabilities and experience across the
talent pools.
Compensation
CN’s approach to compensation continues to be driven by our goal to deliver sustainable value creation, while ensuring that target
compensation supports the attraction and retention of talent. Compensation programs are designed to encourage appropriate behaviors and
include appropriate risk mitigation mechanisms. In addition, compensation best practices adopted by CN include industry benchmarking and
pay positioning as well as pay equity reviews.
CN offers a competitive compensation portfolio that consists of base salary, employee share investment plan, short-term and long-term
incentives (applicable to certain employees only), benefits, retirement plans and other non-monetary elements.
Diversity, Equity and Inclusion (DE&I)
At CN, employees are the Company's single greatest asset and the importance of creating a work environment that welcomes the contribution
and uniqueness of every employee is recognized. CN is committed to creating a workforce of top talent that reflects the diversity of the
population and stakeholders it serves. The Diversity and Inclusion Plan ("Diversity Plan") focuses on developing a more inclusive workplace by
increasing the representation of women, people of color, Indigenous peoples, persons with disabilities and veterans. The plan applies at all
levels within the organization and includes strategies on sourcing (among others, early career sourcing through internships, co-op and new
graduate programs), selection, hiring, training and development of diverse candidates, anchoring CN’s commitment to Diversity, Equity and
Inclusion.
The Company has embedded diversity in its policy regarding composition of the Board and executive management. The Diversity Policy,
which also applies to executive management, states that in fulfilling its oversight role, the HRCC regularly reviews CN’s integrated approach to
executive and high-potential talent management and succession planning, in order to ensure that CN has diverse candidate pools for potential
successors for executive roles.
CN is undertaking various initiatives aimed at better promoting and reinforcing diversity, equity and inclusion which are strongly supported
through active involvement by management and the Board. Some examples include:
•
•
•
•
•
•
•
executing on a renewed DE&I vision whereby CN is determined to reflect the communities in which it operates;
conducting regular reviews of pay equity and defining a roadmap to address identified gaps;
refocusing our sponsorships and donations budget to better align with our strategic DE&I vision;
assessing hiring practices to leverage diversity focused recruitment agencies and requiring diverse candidate slates for all recruitment
mandates;
developing inclusive leaders through targeted training and education, including unconscious bias and inclusive leadership training, as
leaders will be critical in creating and sustaining an inclusive environment;
continuing to support and leverage the Employee Resource Groups (ERGs) that have been initiated and are backed by executive sponsors
(currently seven ERGs); and
having dedicated resources to support our DE&I vision.
CN | 2021 Annual Report 13
Management's Discussion and Analysis
Currently, five out of 11, or 45% of independent Board members are women. CN has set a target that by the end of 2022, it would achieve
and thereafter maintain, a Board composition in which at least 50% of the independent Board members are to come from diverse groups,
including gender parity. In addition, presently 18% of independent Board members are from underrepresented groups. CN has also elected to
set a gender diversity target for executive management (comprising all Vice-Presidents and more senior positions), whereby at the end of 2022,
at least 30% of this group will be women. This aligns to the targets as set out in the Catalyst Accord 2022, to which CN is a signatory. At
present, of the 34 current executive management roles, six, or 18% are held by women. Additionally, on January 25, 2022, CN announced the
appointment of a female CEO effective on February 28, 2022.
Forward-looking statements
Certain statements included in this MD&A are "forward-looking statements" within the meaning of the United States Private Securities Litigation
Reform Act of 1995 and under Canadian securities laws, including statements based on management’s assessment and assumptions and
publicly available information with respect to CN. By their nature, forward-looking statements involve risks, uncertainties and assumptions. CN
cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the
time they were made, subject to greater uncertainty. Forward-looking statements may be identified by the use of terminology such as "believes",
"expects", "anticipates", "assumes", "outlook", "plans", "targets" or other similar words.
Forward-looking statements include, but are not limited to, those set forth in the table below, which also presents key assumptions used in
determining the forward-looking statements. See also the section of this MD&A entitled Strategy overview - 2022 Business outlook and
assumptions.
Forward-looking statements
Key assumptions
Statements relating to revenue growth opportunities, including
those referring to general economic and business conditions
Statements relating to the Company's ability to meet debt
repayments and future obligations in the foreseeable future,
including income tax payments, and capital spending
Statements relating to pension contributions
•
•
•
•
•
•
•
•
•
•
•
North American and global economic growth
Long-term growth opportunities being less affected by current economic
conditions
The COVID-19 pandemic gradually diminishing in intensity over the course of
2022
No material increase in disruption of CN’s operations or of the economy’s
supply chains as a result of the COVID-19 pandemic in the shorter term
Adequate credit ratios
Investment-grade credit ratings
Access to capital markets
Adequate cash generated from operations and other sources of financing
Adequate cash generated from operations and other sources of financing
Adequate long-term return on investment on pension plan assets
Level of funding as determined by actuarial valuations, particularly influenced
by discount rates for funding purposes
Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause
actual results, performance or achievements of CN to be materially different from the outlook or any future results, performance or
achievements implied by such statements. Accordingly, readers are advised not to place undue reliance on forward-looking statements.
Important risk factors that could affect the forward-looking statements include, but are not limited to, the duration and effects of the COVID-19
pandemic; general economic and business conditions, particularly in the context of the COVID-19 pandemic; industry competition; inflation,
currency and interest rate fluctuations; changes in fuel prices; legislative and/or regulatory developments; compliance with environmental laws
and regulations; actions by regulators; increases in maintenance and operating costs; security threats; reliance on technology and related
cybersecurity risk; trade restrictions or other changes to international trade arrangements; transportation of hazardous materials; various
events which could disrupt operations, including illegal blockades of rail networks and natural events such as severe weather, droughts, fires,
floods and earthquakes; climate change; labor negotiations and disruptions; environmental claims; uncertainties of investigations, proceedings
or other types of claims and litigation; risks and liabilities arising from derailments; timing and completion of capital programs; and other risks
detailed from time to time in reports filed by CN with securities regulators in Canada and the U.S., including its Annual Information Form and
Form 40-F. See the section entitled Business risks of this MD&A for a description of major risk factors relating to CN.
Forward-looking statements reflect information as of the date on which they are made. CN assumes no obligation to update or revise
forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable securities
laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with
respect to that statement, related matters, or any other forward-looking statement.
14 CN | 2021 Annual Report
Management's Discussion and Analysis
2021 Financial outlook
During the year, the Company issued and updated its 2021 financial outlook. The 2021 actual results were higher than the Company's last 2021
outlook that was issued on October 19, 2021, mainly driven by strong pricing and yield and cost reduction efforts; partly offset by lower volumes
as a result of the B.C. washouts.
Financial highlights
The following table lists key measures of the Company's financial performance for the year ended December 31, 2021, 2020 and 2019:
In millions, except percentage and per share data
Revenues
Operating income
Adjusted operating income (1)(2)
Net income
Adjusted net income (1)(2)
Basic earnings per share
Diluted earnings per share
Adjusted diluted earnings per share (1)(2)
Dividends declared per share
Operating ratio (3)
Adjusted operating ratio (1)(2)
Total assets
Total long-term financial liabilities (4)
Net cash provided by operating activities
Net cash used in investing activities
Free cash flow (1)(5)
2021
14,477
5,616
5,622
4,892
4,218
6.90
6.89
5.94
2.46
61.2%
61.2%
48,538
22,674
6,971
2,873
3,296
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2020
13,819
4,777
5,263
3,562
3,784
5.01
5.00
5.31
2.30
65.4%
61.9%
44,804
21,879
6,165
2,946
3,227
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Change
Favorable/(Unfavorable)
2019
2021 vs 2020
2020 vs 2019
14,917
5,593
5,708
4,216
4,189
5.85
5.83
5.80
2.15
62.5%
61.7%
43,784
21,456
5,923
4,190
1,992
5%
18%
7%
37%
11%
38%
38%
12%
7%
(7%)
(15%)
(8%)
(16%)
(10%)
(14%)
(14%)
(8%)
7%
4.2 -pts
0.7 -pts
(2.9) -pts
(0.2) -pts
8%
(4%)
13%
2%
2%
2%
(2%)
4%
30%
62%
(1)
(2)
(3)
(4)
These Non-GAAP measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other
companies.
See the section of this MD&A entitled Adjusted performance measures for an explanation of these non-GAAP measures.
Operating ratio is defined as operating expenses as a percentage of revenues.
Total long-term financial liabilities is the sum of deferred income taxes, other liabilities and deferred credits, pension and other postretirement benefits, long-term debt
(excluding the current portion) and operating lease liabilities.
(5)
See the section of this MD&A entitled Liquidity and capital resources – Free cash flow for an explanation of this non-GAAP measure.
2021 compared to 2020
Revenues for the year ended December 31, 2021 were $14,477 million compared to $13,819 million in 2020. The increase of $658 million, or 5%,
was mainly attributable to freight rate increases, higher applicable fuel surcharge rates and an increase in intermodal ancillary services; partly
offset by the negative translation impact of a stronger Canadian dollar and lower volumes of Canadian grain in terms of RTMs compared to
record volumes in 2020.
Operating expenses for the year ended December 31, 2021 were $8,861 million compared to $9,042 million in 2020. The decrease of $181
million, or 2%, was mainly due to the $137 million recovery recorded in the first quarter of 2021 related to the $486 million loss on assets held
for sale recorded in the second quarter of 2020, as well as the positive translation impact of a stronger Canadian dollar; partly offset by higher
fuel costs due to rising fuel prices, higher incentive compensation and $84 million of transaction-related costs resulting from the terminated CN
Merger Agreement with KCS.
Operating income for the year ended December 31, 2021 increased by $839 million, or 18%, to $5,616 million, an all-time record. Adjusted
operating income for the year ended December 31, 2021 was $5,622 million, an increase of $359 million, or 7%, when compared to 2020. (1)
The operating ratio was 61.2% in 2021, compared to 65.4% in 2020, a 4.2-point improvement. The adjusted operating ratio was 61.2% in
2021 compared to 61.9% in 2020, a 0.7-point improvement. (1)
Net income for the year ended December 31, 2021 was $4,892 million, an increase of $1,330 million, or 37%, when compared to 2020, and
diluted earnings per share increased by 38% to $6.89. The increase was mainly driven by a merger termination fee of $886 million ($770 million
CN | 2021 Annual Report 15
Management's Discussion and Analysis
after-tax) received from KCS. Adjusted net income for the year ended December 31, 2021 was $4,218 million, an increase of $434 million, or
11%, and adjusted diluted earnings per share increased by 12% to $5.94, when compared to 2020. (1)
The Company generated record free cash flow for the year ended December 31, 2021 of $3,296 million compared to $3,227 million in 2020,
an increase of $69 million, or 2%. (1)
(1)
These Non-GAAP measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other
companies. See the section of this MD&A entitled Adjusted performance measures for an explanation of these non-GAAP measures.
Operating highlights
The following table lists key measures of the Company's operating performance, for the purpose of measuring the efficiency and effectiveness
of train operations:
Gross ton miles (GTMs) (millions) (1)
Train weight (tons) (2)
Train length (feet) (3)
Through network train speed (miles per hour) (4)
Fuel efficiency (US gallons of locomotive fuel
consumed per 1,000 GTMs) (5)
Through dwell (entire railroad, hours) (6)
Car velocity (car miles per day) (7)
2021
458,401
9,658
8,559
19.2
0.867
7.9
195
2020
455,368
9,501
8,572
18.5
0.894
8.6
185
Change
Favorable/(Unfavorable)
2019
2021 vs 2020
2020 vs 2019
482,890
9,125
8,232
18.5
0.935
7.9
194
1%
2%
—%
4%
3%
8%
5%
(6%)
4%
4%
—%
4%
(9%)
(5%)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
GTMs: The workload performed by system trains in hauling freight or equipment. GTMs are calculated by multiplying the trailing weight by the distance the train moved. A
larger number is an indicator of more traffic (and thus more revenue) being moved.
Train weight: An efficiency measurement on how much tonnage each mainline train handles on average as it crosses the network. Calculated as the total of GTMs and
divided by total train miles, this measure provides insight on how well each train was maximized in terms of its capacity to move traffic. This operating measure was
formerly named Train productivity.
Train length: An efficiency measurement on average trailing length of each mainline train on the network. Calculated as the total of car foot miles (the sum of car length
multiplied by miles travelled for each trailing car) divided by total train miles, this measure provides insight on how well each train was maximized in terms of its capacity to
move traffic.
Through network train speed: A measure of the line-haul movement from origin to destination, including time at terminals. The average speed is calculated by dividing train
miles by total hours operated, excluding yard and local trains, passenger trains, maintenance of way trains, and foreign trains. This measure represents the fluidity of trains
on the network, with a higher value also indicating a more fluid network.
Fuel efficiency: This measure represents how efficient the Company is in the generation and utilization of locomotive horsepower in freight train operations, with a lower
number indicating improved performance. Fuel efficiency is defined as US gallons of locomotive fuel consumed per 1,000 GTMs.
Through dwell: The average time a car resides within terminal boundaries expressed in hours. The measurement begins with a customer release, received interchange, or
train arrival event and ends with a customer placement (actual or constructive), delivered or offered in interchange, or train departure event. This excludes stored, bad
ordered, maintenance of way cars, or cars with dwell greater than 10 days. This measure represents the efficiency of handling cars within the terminal, with a lower value
indicating higher performance.
Car velocity: The average miles per day traveled by loaded and empty cars (including all active cars whether private, foreign or CN owned) on company lines. This measure
represents the fluidity of cars on the network, calculated by the sum of miles each car traveled divided by the sum of all of the cars’ active time, with a higher value
indicating a smoother and more fluid operation. The methodology for calculating car velocity was updated in 2021 to reflect more complete information. The prior year
figures have been adjusted to conform to the current methodology.
For the year ended December 31, 2021, when compared to 2020, operating performance improved across most measures, specifically through
network train speed, through dwell and car velocity, despite negative impacts from the polar vortex in February, the forest fires in Western
Canada over the summer and the B.C. washouts in the fourth quarter. The Company capitalized on its prior year's strategic investments in its
infrastructure and its continued focus on efficiency and network fluidity. In addition, the Company's fuel initiatives allowed it to achieve an all-
time record fuel efficiency of 0.867.
For the year ended December 31, 2020, when compared to 2019, GTMs were negatively impacted by the COVID-19 pandemic. In response
to the reduction in volumes, the Company increased efficiencies with increased train weight and train length, which negatively impacted through
dwell, car velocity, and through network train speed. However, this allowed the Company to achieve an all-time record fuel efficiency of 0.894.
16 CN | 2021 Annual Report
Management's Discussion and Analysis
Non-GAAP measures
This MD&A makes reference to non-GAAP measures including adjusted performance measures, constant currency, return on invested capital
(ROIC) and adjusted ROIC, free cash flow, and adjusted debt-to-adjusted EBITDA multiple that do not have any standardized meaning prescribed
by GAAP and therefore, may not be comparable to similar measures presented by other companies. From management's perspective, these
non-GAAP measures are useful measures of performance and provide investors with supplementary information to assess the Company's
results of operations and liquidity. These non-GAAP measures should not be considered in isolation or as a substitute for financial measures
prepared in accordance with GAAP.
For further details of these non-GAAP measures, including a reconciliation to the most directly comparable GAAP financial measures, refer
to the sections entitled Adjusted performance measures, Constant currency, ROIC and adjusted ROIC, and Liquidity and capital resources.
Adjusted performance measures
Adjusted net income, adjusted earnings per share, adjusted operating income, adjusted operating expenses and adjusted operating ratio are
non-GAAP measures that are used to set performance goals and to measure CN's performance. Management believes that these adjusted
performance measures provide additional insight to management and investors into the Company's operations and underlying business trends
as well as facilitate period-to-period comparisons, as they exclude certain significant items that are not reflective of CN's underlying business
operations and could distort the analysis of trends in business performance. These items may include:
i.
operating expense adjustments: workforce reduction program, depreciation expense on the deployment of replacement system, advisory
fees related to shareholder matters, losses and recoveries from assets held for sale, business acquisition-related costs;
ii.
non-operating expense adjustments: business acquisition-related financing fees, merger termination income, gains and losses on disposal
of property; and
iii.
the effect of tax law changes and rate enactments.
These measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures
presented by other companies.
For the year ended December 31, 2021, the Company reported adjusted net income of $4,218 million, or $5.94 per diluted share, which
excludes:
•
•
•
•
•
•
employee termination benefits and severance costs related to a workforce reduction program of $39 million, or $29 million after-tax ($0.04
per diluted share) recorded in the third quarter in Labor and fringe benefits within the Consolidated Statements of Income;
advisory fees related to shareholder matters of $20 million, or $15 million after-tax ($0.02 per diluted share) of which $13 million, or $10
million after-tax ($0.02 per diluted share) was recorded in the fourth quarter and $7 million, or $5 million after-tax ($0.01 per diluted share)
was recorded in the third quarter in Casualty and other within the Consolidated Statements of Income;
the recovery of $137 million, or $102 million after-tax ($0.14 per diluted share) recorded in the first quarter related to the loss on assets
held for sale in the second quarter of 2020, to reflect an agreement for the sale for on-going rail operations, certain non-core rail lines in
Wisconsin, Michigan and Ontario to a short line operator;
transaction-related costs, consisting of an advance to Kansas City Southern (KCS) and a related refund, net of transaction costs, of $84
million, or $70 million after-tax ($0.10 per diluted share), recorded in the third quarter resulting from the terminated CN Merger Agreement
with KCS;
amortization of bridge financing and other fees of $65 million, or $60 million after-tax ($0.08 per diluted share) recorded in the third quarter
and $32 million, or $24 million after-tax ($0.03 per diluted share) recorded in the second quarter, resulting from the KCS transaction,
recorded in Interest expense within the Consolidated Statements of Income; and
merger termination fee paid by KCS to CN of $886 million, or $770 million after-tax ($1.08 per diluted share), recorded in the third quarter
resulting from KCS' notice of termination of the CN Merger Agreement with KCS.
For the year ended December 31, 2020, the Company reported adjusted net income of $3,784 million, or $5.31 per diluted share, which
excludes a loss of $486 million, or $363 million after-tax ($0.51 per diluted share) in the second quarter, resulting from the Company's decision
to market for sale for on-going rail operations, certain non-core lines in Wisconsin, Michigan and Ontario, and a current income tax recovery of
$141 million ($0.20 per diluted share) in the first quarter resulting from the enactment of the Coronavirus Aid, Relief, and Economic Security
(CARES) Act, a U.S. tax-and-spending package aimed at providing additional stimulus to address the economic impact of the COVID-19
pandemic.
CN | 2021 Annual Report 17
Management's Discussion and Analysis
For the year ended December 31, 2019, the Company reported adjusted net income of $4,189 million, or $5.80 per diluted share, which
excludes employee termination benefits and severance costs related to a workforce reduction program of $31 million, or $23 million after-tax
($0.03 per diluted share) in the fourth quarter; a deferred income tax recovery of $112 million ($0.15 per diluted share) in the second quarter,
resulting from the enactment of a lower provincial corporate income tax rate; and a depreciation expense of $84 million, or $62 million after-tax
($0.09 per diluted share) in the first quarter, related to costs previously capitalized for a PTC back office system following the deployment of a
replacement system.
Adjusted net income is defined as Net income in accordance with GAAP adjusted for certain significant items. Adjusted diluted earnings
per share is defined as adjusted net income divided by the weighted-average diluted shares outstanding. The following table provides a
reconciliation of Net income and Earnings per share in accordance with GAAP, as reported for the years ended December 31, 2021, 2020 and
2019, to the non-GAAP adjusted performance measures presented herein:
In millions, except per share data
Year ended December 31,
2021
2020
Net income
Adjustments:
Operating expense adjustments:
Workforce reduction program
Depreciation expense on the deployment of replacement system
Advisory fees related to shareholder matters
Loss (recovery) on assets held for sale
Transaction-related costs
Non-operating expense adjustments:
Amortization of bridge financing and other fees
Merger termination fee
Tax adjustments:
Tax effect of adjustments (1)
Tax law changes and rate enactments
Total adjustments
Adjusted net income
Diluted earnings per share
Impact of adjustments, per share
Adjusted diluted earnings per share
$
4,892
$
3,562
$
39
—
20
(137)
84
97
(886)
109
—
(674)
4,218
6.89
(0.95)
5.94
$
$
$
—
—
—
486
—
—
—
(123)
(141)
222
3,784
5.00
0.31
5.31
$
$
$
$
$
$
(1)
The tax impact of adjustments is based on the nature of the item for tax purposes and related tax rates in the applicable jurisdiction.
2019
4,216
31
84
—
—
—
—
—
(30)
(112)
(27)
4,189
5.83
(0.03)
5.80
18 CN | 2021 Annual Report
Management's Discussion and Analysis
Adjusted operating income is defined as Operating income in accordance with GAAP adjusted for certain significant operating expense
items. Adjusted operating expenses is defined as Operating expenses in accordance with GAAP adjusted for certain significant operating
expense items. Adjusted operating ratio is defined as adjusted operating expenses as a percentage of revenues. The following table provides a
reconciliation of Operating income, Operating expenses and operating ratio, as reported for the years ended December 31, 2021, 2020 and
2019, to the non-GAAP adjusted performance measures presented herein:
In millions, except percentages
Operating income
Operating expense adjustments:
Workforce reduction program
Depreciation expense on the deployment of replacement system
Advisory fees related to shareholder matters
Loss (recovery) on assets held for sale
Transaction-related costs
Total operating expense adjustments
Adjusted operating income
Operating expenses
Total operating expense adjustments
Adjusted operating expenses
Operating ratio
Impact of adjustments
Adjusted operating ratio
Year ended December 31,
2021
2020
$
5,616
$
4,777
$
39
—
20
(137)
84
6
—
—
—
486
—
486
$
$
5,622
$
5,263
$
8,861
(6)
9,042
(486)
8,855
$
8,556
$
61.2 %
— %
61.2 %
65.4 %
(3.5) %
61.9 %
2019
5,593
31
84
—
—
—
115
5,708
9,324
(115)
9,209
62.5 %
(0.8) %
61.7 %
CN | 2021 Annual Report 19
Management's Discussion and Analysis
ROIC and adjusted ROIC
ROIC and adjusted ROIC are useful measures for management and investors to evaluate the efficiency of the Company's use of capital funds
and allow investors to assess the operating and investment decisions made by management. The Company calculates ROIC as return divided
by average invested capital, both of which are non-GAAP measures. Return is defined as Net income plus interest expense after-tax, calculated
using the Company's effective tax rate. Average invested capital is defined as the sum of Total shareholders' equity, Long-term debt and Current
portion of long-term debt less Cash and cash equivalents, and Restricted cash and cash equivalents, averaged between the beginning and
ending balance over the last twelve-month period. The Company calculates adjusted ROIC as adjusted return divided by average invested
capital, both of which are non-GAAP measures. Adjusted return is defined as adjusted net income plus interest expense after-tax, calculated
using the Company's adjusted effective tax rate. Return, average invested capital, ROIC, adjusted return and adjusted ROIC do not have any
standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies.
The following table provides a reconciliation of Net income and adjusted net income to return and adjusted return, respectively, as well as
the calculation of average invested capital, which have been used to calculate ROIC and adjusted ROIC:
As at and for the year ended December 31,
In millions, except percentage
Net income
Interest expense
Tax on interest expense (1)
Return
Average total shareholders' equity
Average long-term debt
Average current portion of long-term debt
Less: Average cash, cash equivalents, restricted cash and restricted cash equivalents
Average invested capital
ROIC
Adjusted net income (2)
Interest expense
Less: Amortization of bridge financing and other fees (3)
Tax on interest expense less amortization of bridge financing and other fees (4)
Adjusted return
Average invested capital
Adjusted ROIC
$
$
$
$
$
$
$
2021
4,892
610
(139)
5,363
21,198
11,987
709
(1,221)
32,673
16.4%
4,218
610
(97)
(123)
4,608
32,673
14.1%
$
$
$
$
$
$
$
2020
3,562
554
(120)
3,996
18,846
11,931
1,420
(844)
31,353
12.7%
3,784
554
—
(137)
4,201
31,353
13.4%
$
$
$
$
$
$
$
2019
4,216
538
(120)
4,634
17,841
11,626
1,557
(674)
30,350
15.3%
4,189
538
—
(131)
4,596
30,350
15.1%
(1)
(2)
(3)
(4)
The effective tax rate, defined as Income tax expense as a percentage of Income before income taxes, used to calculate the tax on Interest expense for 2021 was 22.8%
(2020 - 21.6%; 2019 - 22.3%).
This Non-GAAP measure does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other
companies. See the section of this MD&A entitled Adjusted performance measures for an explanation of this non-GAAP measure.
Relates to amortization of bridge financing and other fees resulting from the KCS transaction, recorded in Interest expense within the Consolidated Statements of Income.
The adjusted effective tax rate is a Non-GAAP measure, defined as Income tax expense, net of tax adjustments as presented in Adjusted performance measures as a
percentage of Income before taxes, net of pre-tax adjustments as presented in Adjusted performance measures. This measure does not have any standardized meaning
prescribed by GAAP and therefore, may not be comparable to a similar measure presented by other companies. The adjusted effective tax rate used to calculate the
adjusted tax on interest expense less amortization of bridge financing and other fees for 2021 was 24.0% (2020 - 24.8%; 2019 - 24.4%).
20 CN | 2021 Annual Report
Management's Discussion and Analysis
Constant currency
Financial results at constant currency allow results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby
facilitating period-to-period comparisons in the analysis of trends in business performance. Measures at constant currency are considered non-
GAAP measures and do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures
presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US
dollars at the weighted average foreign exchange rates used to translate transactions denominated in US dollars of the comparable period of
the prior year.
The average foreign exchange rates were $1.25 and $1.34 per US$1.00, for the years ended December 31, 2021 and 2020, respectively.
On a constant currency basis, the Company's Net income for the year ended December 31, 2021 would have been higher by $166 million
($0.23 per diluted share).
The following table provides a reconciliation of the impact of constant currency and related percentage change at constant currency on the
financial results, as reported for the year ended December 31, 2021:
In millions, except per share data
Year ended December 31,
2021
Constant
currency impact
Revenues
Petroleum and chemicals
Metals and minerals
Forest products
Coal
Grain and fertilizers
Intermodal
Automotive
Total freight revenues
Other revenues
Total revenues
Operating expenses
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Loss (recovery) on assets held for sale
Transaction-related costs
Total operating expenses
Operating income
Interest expense
Other components of net periodic benefit income
Merger termination fee
Other income
Income before income taxes
Income tax expense
Net income
Diluted earnings per share
$
2,816 $
128 $
1,548
1,740
618
2,475
4,115
576
13,888
589
14,477
2,879
2,082
1,513
1,598
336
506
(137)
84
8,861
5,616
(610)
398
886
43
6,333
(1,441)
$
$
4,892 $
6.89 $
83
93
17
80
95
32
528
29
557
65
60
94
44
19
27
(12)
47
344
213
(35)
—
39
4
221
(55)
166 $
0.23 $
% Change at
constant
currency
Fav (Unfav)
12%
16%
8%
20%
(2%)
12%
3%
9%
3%
9%
(8%)
—%
(39%)
(3%)
18%
(5%)
131%
N/A
(2%)
22%
(16%)
26%
N/A
683%
44%
(52%)
42%
42%
2020
2,631
1,409
1,700
527
2,609
3,751
591
13,218
601
13,819
2,723
2,152
1,152
1,589
432
508
486
—
9,042
4,777
(554)
315
—
6
4,544
(982)
3,562
5.00
CN | 2021 Annual Report 21
Management's Discussion and Analysis
Revenues
The following table provides the components of total revenues and freight revenues, as well as other key operating measures, for the years
ended December 31, 2021 and 2020:
In millions, unless otherwise indicated
Year ended December 31,
Freight revenues
Other revenues
Total revenues
Freight revenues
Petroleum and chemicals
Metals and minerals
Forest products
Coal
Grain and fertilizers
Intermodal
Automotive
Total freight revenues
$
$
$
$
$
$
2021
13,888
589
14,477
2,816
1,548
1,740
618
2,475
4,115
576
2020
13,218
601
13,819
2,631
1,409
1,700
527
2,609
3,751
591
$
13,888
$
13,218
Revenue ton miles (RTMs) (millions)
233,138
230,390
Freight revenue/RTM (cents)
Carloads (thousands)
Freight revenue/carload ($)
5.96
5,701
2,436
5.74
5,595
2,362
% Change
% Change
at constant
currency (1)
5%
(2%)
5%
7%
10%
2%
17%
(5%)
10%
(3%)
5%
1%
4%
2%
3%
9%
3%
9%
12%
16%
8%
20%
(2%)
12%
3%
9%
1%
8%
2%
7%
(1)
This Non-GAAP measure does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to a similar measure presented by other
companies. See the section of this MD&A entitled Constant Currency for an explanation of this non-GAAP measure.
Revenues for the year ended December 31, 2021 totaled $14,477 million compared to $13,819 million in 2020. The increase of $658 million, or
5%, was mainly attributable to freight rate increases, higher applicable fuel surcharge rates and an increase in intermodal ancillary services;
partly offset by the negative translation impact of a stronger Canadian dollar and lower volumes of Canadian grain in terms of RTMs compared
to record volumes in 2020. Fuel surcharge revenues increased by $301 million in 2021, mainly due to higher applicable fuel surcharge rates.
In 2021, RTMs, measuring the weight and distance of freight transported by the Company, increased by 1% relative to 2020, despite the
unfavorable impact of the ongoing supply chain challenges, the polar vortex in February, the forest fires and drought in Western Canada over
the summer and the B.C. washouts in the fourth quarter of 2021. Freight revenue per RTM increased by 4% in 2021 when compared to 2020,
mainly driven by a decrease in the average length of haul, freight rate increases and higher applicable fuel surcharge rates; partly offset by the
negative translation impact of a stronger Canadian dollar.
Petroleum and chemicals
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2021
$
2,816
$
42,436
6.64
596
2020
2,631
43,556
6.04
597
% Change
7%
(3%)
10%
—%
% Change
at constant
currency
12%
(3%)
15%
—%
The petroleum and chemicals commodity group comprises a wide range of commodities, including chemicals and plastics, refined petroleum
products, natural gas liquids, crude oil and sulfur. The primary markets for these commodities are within North America, and as such, the
performance of this commodity group is closely correlated with the North American economy as well as oil and gas production. Most of the
Company's petroleum and chemicals shipments originate in Western Canada, a key oil and gas development area and a major center for natural
gas feedstock and world-scale petrochemicals and plastics; in eastern Canadian regional plants; and in the Louisiana petrochemical corridor
between New Orleans and Baton Rouge.
22 CN | 2021 Annual Report
Management's Discussion and Analysis
For the year ended December 31, 2021, revenues for this commodity group increased by $185 million, or 7%, when compared to 2020,
mainly due to freight rate increases, increased volumes of natural gas liquids (principally propane) and higher applicable fuel surcharge rates;
partly offset by the negative translation impact of a stronger Canadian dollar and lower volumes of petroleum crude.
Revenue per RTM increased by 10% in 2021 when compared to 2020, mainly due to freight rate increases, including volume commitment
amounts under customer contracts and higher applicable fuel surcharge rates; partly offset by negative translation impact of stronger Canadian
dollar.
Percentage of commodity group revenues
Refined petroleum products
Chemicals and plastics
Crude and condensate
Sulfur
Metals and minerals
2021
44 %
40 %
11 %
5 %
2020
40 %
41 %
15 %
4 %
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2021
$
1,548
$
26,743
5.79
969
2020
1,409
21,561
6.53
935
% Change
10%
24%
(11%)
4%
% Change
at constant
currency
16%
24%
(7%)
4%
The metals and minerals commodity group consists primarily of materials related to oil and gas development such as frac sand, drilling pipe
and large diameter pipe, steel, iron ore, non-ferrous base metals and ores, raw materials including scrap metal, industrial materials including
aggregates, construction materials such as roofing and railway equipment, machinery and dimensional (large) loads. The Company provides
unique rail access to base metals, iron ore and frac sand mining as well as aluminum and steel producing regions, which are among the most
important in North America. This strong origin franchise, coupled with the Company's access to port facilities and the end markets for these
commodities, has made CN a leader in the transportation of metals and minerals products. The key drivers for this market segment are oil and
gas development, automotive production, and non-residential construction.
For the year ended December 31, 2021, revenues for this commodity group increased by $139 million, or 10%, when compared to 2020,
mainly due to increased export volumes of iron ore via the Gulf Coast, higher volumes of frac sand, higher shipments of semi-finished steel
products, higher applicable fuel surcharge rates and freight rate increases; partly offset by the negative translation impact of a stronger
Canadian dollar.
Revenue per RTM decreased by 11% in 2021 when compared to 2020, mainly due to a significant increase in the average length of haul and
the negative translation impact of a stronger Canadian dollar; partly offset by higher applicable fuel surcharge rates and freight rate increases.
Percentage of commodity group revenues
Metals
Minerals
Energy materials
Iron ore
Forest products
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
2021
31 %
26 %
22 %
21 %
Year ended December 31,
2021
$
1,740
$
25,948
6.71
339
2020
1,700
25,602
6.64
342
% Change
2%
1%
1%
(1%)
2020
31 %
28 %
21 %
20 %
% Change
at constant
currency
8%
1%
6%
(1%)
The forest products commodity group includes various types of lumber, panels, paper, board and wrapping paper, wood pulp and other fibers
such as logs, recycled paper, wood chips, and wood pellets. The Company has extensive rail access to the western and eastern Canadian fiber-
CN | 2021 Annual Report 23
Management's Discussion and Analysis
producing regions, which are among the largest fiber source areas in North America. In the U.S., the Company is strategically located to serve
both the Midwest and southern U.S. corridors with interline connections to other Class I railroads. The key drivers for the various commodities
are: for lumber and panels, housing starts and renovation activities primarily in the U.S.; for fibers (mainly wood pulp), the consumption of
paper, pulpboard and tissue in North American and offshore markets; and for newsprint, advertising lineage, non-print media and overall
economic conditions, primarily in the U.S.
For the year ended December 31, 2021, revenues for this commodity group increased by $40 million, or 2%, when compared to 2020,
mainly due to freight rate increases, higher volumes of lumber and panels and higher applicable fuel surcharge rates; partly offset by the
negative translation impact of a stronger Canadian dollar and lower volumes of woodpulp.
Revenue per RTM increased by 1% in 2021 when compared to 2020, mainly due to freight rate increases and higher applicable fuel
surcharge rates; partly offset by the negative translation impact of a stronger Canadian dollar.
Percentage of commodity group revenues
Lumber
Pulp
Paper
Panels
Coal
2021
40 %
29 %
16 %
15 %
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2021
$
618
$
18,471
3.35
379
2020
527
16,173
3.26
289
% Change
17%
14%
3%
31%
2020
39 %
30 %
17 %
14 %
% Change
at constant
currency
20%
14%
6%
31%
The coal commodity group consists of thermal grades of bituminous coal, metallurgical coal and petroleum coke. Canadian thermal and
metallurgical coal are largely exported via terminals on the west coast of Canada to offshore markets. In the U.S., thermal coal is transported
from mines served in southern Illinois, or from western U.S. mines via interchange with other railroads, to major utilities in the Midwest and
Southeast U.S., as well as offshore markets via terminals on the U.S. Gulf Coast. Petroleum coke, a by-product of the oil refining process, is
exported to offshore markets via terminals on the west coast of Canada and the U.S. Gulf Coast, as well as shipped to industrial users in
domestic markets. The key drivers for this market segment are weather conditions, environmental regulations, global energy, coal and steel
supply and demand conditions, and for U.S. domestic utility coal, the price of natural gas.
For the year ended December 31, 2021, revenues for this commodity group increased by $91 million, or 17%, when compared to 2020,
mainly due to increased exports of U.S. thermal coal via the Gulf Coast, higher applicable fuel surcharge rates and freight rate increases; partly
offset by the negative translation impact of a stronger Canadian dollar.
Revenue per RTM increased by 3% in 2021 when compared to 2020, mainly due to a significant decrease in the average length of haul,
higher applicable fuel surcharge rates and freight rate increases; partly offset by the negative translation impact of a stronger Canadian dollar.
Percentage of commodity group revenues
Canadian coal - export
Petroleum coke
U.S. coal - domestic
U.S. coal - export
2021
45 %
25 %
14 %
16 %
2020
49 %
25 %
17 %
9 %
24 CN | 2021 Annual Report
Management's Discussion and Analysis
Grains and fertilizers
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2021
$
2,475
$
58,733
4.21
628
2020
2,609
61,736
4.23
663
% Change
(5%)
(5%)
—%
(5%)
% Change
at constant
currency
(2%)
(5%)
3%
(5%)
The grain and fertilizers commodity group depends primarily on crops grown and fertilizers processed in Western Canada and the U.S. Midwest.
The grain segment consists of wheat, oats, barley, flaxseed, rye, peas, lentils, corn, corn meal, ethanol, dried distillers grain, canola seed and
canola products, soybeans, soybean products, sweeteners and animal fat. Production of grain varies considerably from year to year, affected
primarily by weather conditions, seeded and harvested acreage, the mix of grains produced and crop yields. Grain exports are sensitive to the
size and quality of the crop produced, international market conditions and foreign government policy. The majority of grain produced in Western
Canada and moved by CN is exported via the ports of Vancouver, Prince Rupert and Thunder Bay. These rail movements are subject to
government regulation that establishes a maximum revenue entitlement that railways can earn. Although railway companies are free to set
freight rates for western grain shipments, total revenue is limited based on a formula that takes into account tonnage, length of haul, and a
specified price index. Shipments of grain that are exported to the U.S. are not regulated. Grain grown in the U.S. Midwest is exported as well as
transported to domestic processing facilities and feed markets. The Company also serves major producers of potash in Canada, as well as
producers of ammonium nitrate, anhydrous ammonia, urea and other fertilizers across Canada and the U.S. The key drivers for fertilizers are
input prices, demand, government policies, and international competition.
For the year ended December 31, 2021, revenues for this commodity group decreased by $134 million, or 5%, when compared to 2020,
mainly due to lower export volumes of Canadian grain compared to prior period record volumes and the negative translation impact of a
stronger Canadian dollar; partly offset by higher potash volumes, higher export volumes of U.S. grain, freight rate increases and higher
applicable fuel surcharge rates.
Revenue per RTM remained flat in 2021 when compared to 2020.
Percentage of commodity group revenues
Canadian grain - regulated
U.S. grain - domestic
Fertilizers - potash
Canadian grain - commercial
Fertilizers - other
U.S. grain - exports
Intermodal
2021
39 %
19 %
14 %
12 %
9 %
7 %
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2021
$
4,115
$
58,412
7.04
2,611
2020
3,751
59,165
6.34
2,582
% Change
10%
(1%)
11%
1%
2020
47 %
18 %
10 %
11 %
9 %
5 %
% Change
at constant
currency
12%
(1%)
14%
1%
The intermodal commodity group includes rail and trucking services and is comprised of two markets: domestic intermodal and international
intermodal. Domestic intermodal transports consumer products and manufactured goods, serving retail, wholesale and logistics provider
channels, within domestic Canada, domestic U.S., Mexico and transborder, while international intermodal handles import and export container
traffic, serving the major ports of Vancouver, Prince Rupert, Montreal, Halifax, New Orleans and Mobile. CN's network of inland intermodal
terminals, located near ports and large urban centers, connects customers to major markets in North America and overseas. Domestic
intermodal is driven by consumer markets, with growth generally tied to the economy. International intermodal is driven by North American
economic and trade conditions as well as global trade patterns. Revenues for CN owned trucking companies TransX and H&R are included in
this commodity group within the domestic market.
CN | 2021 Annual Report 25
Management's Discussion and Analysis
For the year ended December 31, 2021, revenues for this commodity group increased by $364 million, or 10%, when compared to 2020,
mainly due to an increase in ancillary services including container storage, more revenue generating moves of empty customer-owned
containers, higher applicable fuel surcharge rates, freight rate increases, increased international container traffic via the port of Halifax and
increased domestic intermodal wholesale volumes; partly offset by the negative translation impact of a stronger Canadian dollar and decreased
international container traffic volumes via the port of Prince Rupert.
Revenue per RTM increased by 11% in 2021 when compared to 2020, mainly due to an increase in ancillary services including container
storage, more revenue generating moves of empty customer-owned containers, higher applicable fuel surcharge rates and freight rate
increases; partly offset by the negative translation impact of a stronger Canadian dollar.
Percentage of commodity group revenues
International
Domestic
Automotive
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
2021
65 %
35 %
2020
67 %
33 %
Year ended December 31,
2021
$
576
$
2,395
24.05
179
2020
591
2,597
22.76
187
% Change
(3%)
(8%)
6%
(4%)
% Change
at constant
currency
3%
(8%)
12%
(4%)
The automotive commodity group moves both domestic finished vehicles and parts throughout North America, providing service to certain
vehicle assembly plants in Ontario, Michigan and Mississippi. The Company also serves vehicle distribution facilities in Canada and the U.S., as
well as parts production facilities in Michigan and Ontario. The Company serves shippers of finished vehicle imports via the ports of Halifax and
Vancouver, and through interchange with other railroads. CN's broad network of auto compounds is used to facilitate distribution of vehicles
throughout Canada and the U.S. Midwest. The primary drivers for this market are automotive production and sales in North America, which are
driven by the average age of vehicles in North America and the price of fuel.
For the year ended December 31, 2021, revenues for this commodity group decreased by $15 million, or 3%, when compared to 2020,
mainly due to lower volumes of finished vehicles shipped primarily due to a semiconductor chip shortage impacting the automotive industry
production and lower volumes of Vancouver imports and the negative translation impact of a stronger Canadian dollar; partly offset by higher
applicable fuel surcharge rates and freight rate increases.
Revenue per RTM increased by 6% in 2021 when compared to 2020, mainly due to a decrease in the average length of haul, higher
applicable fuel surcharge rates and freight rate increases; partly offset by the negative translation impact of a stronger Canadian dollar.
Percentage of commodity group revenues
Finished vehicles
Auto parts
Other revenues
2021
91 %
9 %
2020
92 %
8 %
Revenues (millions)
$
589
$
Year ended December 31,
2021
2020
601
% Change
(2%)
% Change
at constant
currency
3%
Other revenues are derived from non-rail logistics services that support the Company's rail business including vessels and docks, transloading
and distribution, automotive logistics, and freight forwarding and transportation management.
For the year ended December 31, 2021, Other revenues decreased by $12 million, or 2%, when compared to 2020, mainly due to lower
revenues for automotive logistics primarily due to a semiconductor chip shortage impacting the automotive industry production and the
negative translation impact of a stronger Canadian dollar; partly offset by higher revenues from international freight forwarding and vessels.
26 CN | 2021 Annual Report
Management's Discussion and Analysis
Percentage of other revenues
Vessels and docks
Other non-rail services
Other revenues
Operating expenses
2021
45 %
47 %
8 %
2020
45 %
46 %
9 %
Operating expenses for the year ended December 31, 2021, amounted to $8,861 million compared to $9,042 million in 2020. The decrease of
$181 million, or 2%, was mainly driven by the $137 million recovery recorded in the first quarter of 2021 related to the $486 million loss on
assets held for sale recorded in the second quarter of 2020, as well as the positive translation impact of a stronger Canadian dollar; partly
offset by higher fuel costs due to rising fuel prices, higher incentive compensation and $84 million of transaction-related costs resulting from
the terminated CN Merger Agreement with KCS.
The following table provides the components of total operating expenses for the years ended December 31, 2021 and 2020:
In millions
Year ended December 31,
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Loss (recovery) on assets held for sale
Transaction-related costs
Total operating expenses
$
$
2021
2,879
2,082
1,513
1,598
336
506
(137)
84
2020
2,723
2,152
1,152
1,589
432
508
486
—
$
8,861
$
9,042
% Change
% Change
at constant
currency (1)
(6%)
3%
(31%)
(1%)
22%
—%
128%
N/A
2%
(8%)
—%
(39%)
(3%)
18%
(5%)
131%
N/A
(2%)
(1)
This Non-GAAP measure does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to a similar measure presented by other
companies. See the section of this MD&A entitled Constant Currency for an explanation of this non-GAAP measure.
Labor and fringe benefits
Labor and fringe benefits expense includes wages, payroll taxes and employee benefits such as incentive compensation, including stock-based
compensation, health and welfare, current service cost for pensions and postretirement benefits. Certain incentive compensation plans are
based mainly on financial performance targets and the related expense is recorded in relation to the attainment of such targets.
Labor and fringe benefits expense increased by $156 million, or 6%, in 2021 when compared to 2020. The increase was mainly due to
higher incentive compensation, general wage increases, as well as $39 million of employee termination benefits and severance costs related to
a workforce reduction program in the third quarter; partly offset by the positive translation impact of a stronger Canadian dollar.
Purchased services and material
Purchased services and material expense includes the cost of services purchased from outside contractors; materials used in the maintenance
of the Company's track, facilities and equipment; transportation and lodging for train crew employees; utility costs; and the net costs of
operating facilities jointly used by the Company and other railroads.
Purchased services and material expense decreased by $70 million, or 3%, in 2021 when compared to 2020. The decrease was mainly due
to the positive translation impact of a stronger Canadian dollar and lower material costs as a result of cost reduction efforts.
Fuel
Fuel expense includes fuel consumed by assets, including locomotives, vessels, vehicles and other equipment as well as federal, provincial and
state fuel taxes.
Fuel expense increased by $361 million, or 31%, in 2021 when compared to 2020. The increase was mainly due to higher fuel prices; partly
offset by the positive translation impact of a stronger Canadian dollar and fuel efficiency gains resulting in an all-time record fuel efficiency.
CN | 2021 Annual Report 27
Management's Discussion and Analysis
Depreciation and amortization
Depreciation and amortization expense includes the costs associated with the use of properties and intangible assets over their estimated
service lives. Depreciation expense is affected by capital additions, railroad property retirements from disposal, sale and/or abandonment and
other adjustments including asset impairments.
Depreciation and amortization expense increased by $9 million, or 1%, in 2021 when compared to 2020. The increase was mainly due to a
higher depreciable asset base; partly offset by the positive translation impact of a stronger Canadian dollar.
Equipment rents
Equipment rents expense includes rental expense for the use of freight cars owned by other railroads (car hire) or private companies and for the
lease of freight cars, locomotives and intermodal equipment, net of rental income from other railroads for the use of the Company's freight cars
(car hire) and locomotives.
Equipment rents expense decreased by $96 million, or 22%, in 2021 when compared to 2020. The decrease was mainly due to lower car
hire expense as a result of price incentives on railcars and the positive translation impact of a stronger Canadian dollar.
Casualty and other
Casualty and other expense includes expenses for personal injuries, environmental, freight and property damage, insurance, bad debt, operating
taxes, computer software and support costs, advisory fees related to shareholder matters as well as travel expenses.
Casualty and other expense remained flat in 2021 when compared to 2020. Lower incident costs and the positive translation impact of a
stronger Canadian dollar were offset by an increase in insurance premiums and $20 million of advisory fees related to shareholder matters.
Loss (recovery) on assets held for sale
In the first quarter of 2021, the Company recovered $137 million of the $486 million loss on assets held for sale recorded in the second quarter
of 2020, resulting from the Company entering into an agreement for the sale of non-core lines. See Note 5 - Assets held for sale to the
Company's 2021 Annual Consolidated Financial Statements for additional information.
Transaction-related costs
For the year ended December 31, 2021, the Company incurred transaction costs related to the terminated CN Merger Agreement of $84 million,
consisting of $125 million of transaction-related costs; US$700 million ($845 million) paid to KCS; and the related refund received of US$700
million ($886 million) in the third quarter. See Note 3 – Acquisitions to the Company's 2021 Annual Consolidated Financial Statements for
additional information.
Other income and expenses
Interest expense
In 2021, Interest expense was $610 million compared to $554 million in 2020. The increase was mainly due to amortization of bridge financing
and other fees of $97 million; partly offset by a lower average level of debt and a positive translation impact of a stronger Canadian dollar.
Other components of net periodic benefit income
In 2021, Other components of net periodic benefit income was $398 million compared to $315 million in 2020. The increase was mainly due to
lower interest cost, partly offset by higher amortization of net actuarial loss and lower expected return on plan assets.
Merger termination fee
In 2021, the Company received a US$700 million ($886 million) termination fee resulting from KCS terminating the CN Merger Agreement and
entering into a merger agreement with CP. See Note 3 – Acquisitions to the Company's 2021 Annual Consolidated Financial Statements for
additional information.
Other income
In 2021, Other income was $43 million compared to $6 million in 2020. The increase was mainly due to fluctuations in the fair value of the
equity investment in autonomous driving technology and higher gains on disposal of land.
28 CN | 2021 Annual Report
Management's Discussion and Analysis
Income tax expense
In 2021, the Company recorded an income tax expense of $1,441 million compared to an income tax expense of $982 million in 2020. Included
in the 2020 figure was a current income tax recovery of $141 million recorded in the first quarter, resulting from the enactment of the CARES
Act.
On March 27, 2020, the U.S. government enacted the CARES Act, which included corporate income tax measures allowing U.S. federal net
operating losses (NOLs) arising in tax years 2018, 2019, and 2020 to be fully carried back to each of the five tax years preceding the tax year of
the NOL. As a result of the CARES Act, the Company reclassified its 2019 deferred income tax asset of $213 million on the NOL that arose in
2019, to a current income tax receivable and recorded a current income tax recovery of $141 million in 2020 to reflect an amount recoverable at
the higher U.S. federal corporate income tax rate of 35% applicable to pre-2018 tax years.
The effective tax rate for 2021 was 22.8% compared to 21.6% in 2020. Excluding the aforementioned income tax recovery, the adjusted
effective tax rate for 2020 was 24.7%. (1) The decrease in the effective tax rate was mainly attributable to the merger termination fee,
transaction-related costs, and bridge financing and other fees resulting from the KCS transaction recorded in the Consolidated Statements of
Income, taxed at a lower inclusion rate.
For 2022, the Company anticipates the estimated annual effective tax rate to be in the range of 24.0% to 25.0%.
(1)
The adjusted effective tax rate is a Non-GAAP measure, defined as the effective tax rate adjusted to exclude the effect of the 2020 income tax recovery as it is not reflective
of CN's underlying business operations. This measure does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to a similar
measure presented by other companies.
2020 compared to 2019
Revenues for the year ended December 31, 2020 were $13,819 million compared to $14,917 million in 2019. The decrease of $1,098 million, or
7%, was mainly attributable to lower volumes across most commodity groups, primarily in the second and third quarter, caused by the ongoing
effects of the COVID-19 pandemic and lower applicable fuel surcharge rates, partly offset by freight rate increases as well as record shipments
of Canadian grain.
Operating expenses for the year ended December 31, 2020 were $9,042 million compared to $9,324 million in 2019. The decrease of $282
million, or 3%, was mainly due to lower fuel and labor costs and decreased purchased services and material expense; partly offset by a loss on
assets held for sale, resulting from the Company's decision to market for sale for on-going rail operations, certain non-core lines.
Operating income for the year ended December 31, 2020 decreased by $816 million, or 15%, to $4,777 million. The decrease mainly reflects
lower volumes across most commodity groups and a loss on assets held for sale, partly offset by freight rate increases and lower fuel prices.
The operating ratio was 65.4% in 2020, compared to 62.5% in 2019.
Net income for the year ended December 31, 2020 was $3,562 million, a decrease of $654 million, or 16%, when compared to 2019, and
diluted earnings per share decreased by 14% to $5.00.
The Company generated record free cash flow for the year ended December 31, 2020 of $3,227 million compared to $1,992 million in 2019.
The increase of $1,235 million, or 62%, was mainly due to lower property additions in 2020 compared to the record 2019 capital expenditure
program, lower income tax instalment payments and a U.S. tax refund received in 2020 as a result of the CARES Act, partly offset by lower
earnings excluding non-cash items.
CN | 2021 Annual Report 29
Management's Discussion and Analysis
Constant currency
Financial results at constant currency allow results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby
facilitating period-to-period comparisons in the analysis of trends in business performance. Measures at constant currency are considered non-
GAAP measures and do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures
presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US
dollars at the weighted average foreign exchange rates used to translate transactions denominated in US dollars of the comparable period of
the prior year.
The average foreign exchange rates were $1.34 and $1.33 per US$1.00, for the years ended December 31, 2020 and 2019, respectively.
On a constant currency basis, the Company's Net income for the year ended December 31, 2020 would have been lower by $13 million
($0.02 per diluted share).
The following table provides a reconciliation of the impact of constant currency and related percentage change at constant currency on the
financial results, as reported for the year ended December 31, 2020:
In millions, except per share data
Year ended December 31,
2020
Constant
currency impact
% Change at
constant
currency
Fav (Unfav)
(14%)
(15%)
(7%)
(20%)
9%
(1%)
(31%)
(7%)
(17%)
(8%)
7%
5%
30%
(1%)
4%
(2%)
N/A
4%
(15%)
(2%)
(2%)
(89%)
(17%)
19%
(16%)
(15%)
2019
3,052
1,643
1,808
658
2,392
3,787
858
14,198
719
14,917
2,922
2,267
1,637
1,562
444
492
—
9,324
5,593
(538)
321
53
5,429
(1,213)
4,216
5.83
(16) $
(9)
(12)
(1)
(11)
(11)
(2)
(62)
(5)
(67)
(9)
(8)
(7)
(7)
(4)
(4)
(6)
(45)
(22)
5
—
—
(17)
4
(13) $
$
2,631 $
1,409
1,700
527
2,609
3,751
591
13,218
601
13,819
2,723
2,152
1,152
1,589
432
508
486
9,042
4,777
(554)
315
6
4,544
(982)
3,562 $
$
$
5.00 $
(0.02) $
Revenues
Petroleum and chemicals
Metals and minerals
Forest products
Coal
Grain and fertilizers
Intermodal
Automotive
Total freight revenues
Other revenues
Total revenues
Operating expenses
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Loss (recovery) on assets held for sale
Total operating expenses
Operating income
Interest expense
Other components of net periodic benefit income
Other income
Income before income taxes
Income tax expense
Net income
Diluted earnings per share
30 CN | 2021 Annual Report
Management's Discussion and Analysis
Revenues
The following table provides the components of total revenues and freight revenues, as well as other key operating measures, for the years
ended December 31, 2020 and 2019:
In millions, unless otherwise indicated
Year ended December 31,
Freight revenues
Other revenues
Total revenues
Freight revenues
Petroleum and chemicals
Metals and minerals
Forest products
Coal
Grain and fertilizers
Intermodal
Automotive
Total freight revenues
$
$
$
$
$
$
2020
13,218
601
13,819
2,631
1,409
1,700
527
2,609
3,751
591
2019
14,198
719
14,917
3,052
1,643
1,808
658
2,392
3,787
858
$
13,218
$
14,198
Revenue ton miles (RTMs) (millions)
230,390
241,954
Freight revenue/RTM (cents)
Carloads (thousands)
Freight revenue/carload ($)
5.74
5,595
2,362
5.87
5,912
2,402
% Change
% Change
at constant
currency (1)
(7%)
(16%)
(7%)
(14%)
(14%)
(6%)
(20%)
9%
(1%)
(31%)
(7%)
(5%)
(2%)
(5%)
(2%)
(7%)
(17%)
(8%)
(14%)
(15%)
(7%)
(20%)
9%
(1%)
(31%)
(7%)
(5%)
(3%)
(5%)
(2%)
(1)
This Non-GAAP measure does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to a similar measure presented by other
companies. See the section of this MD&A entitled Constant Currency for an explanation of this non-GAAP measure.
Revenues for the year ended December 31, 2020, totaled $13,819 million compared to $14,917 million in 2019. The decrease of $1,098 million,
or 7%, was mainly attributable to lower volumes across most commodity groups, primarily in the second and third quarter, caused by the
ongoing effects of the COVID-19 pandemic and lower applicable fuel surcharge rates, partly offset by freight rate increases as well as record
shipments of Canadian grain. Fuel surcharge revenues decreased by $330 million in 2020, mainly as a result of lower applicable fuel surcharge
rates and lower volumes.
In 2020, RTMs declined by 5% relative to 2019. Freight revenue per RTM decreased by 2% in 2020 when compared to 2019, mainly driven
by lower applicable fuel surcharge rates, partly offset by freight rate increases.
Petroleum and chemicals
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2020
$
2,631
$
43,556
6.04
597
2019
3,052
53,989
5.65
688
% Change
(14%)
(19%)
7%
(13%)
% Change
at constant
currency
(14%)
(19%)
6%
(13%)
For the year ended December 31, 2020, revenues for this commodity group decreased by $421 million, or 14%, when compared to 2019, mainly
due to lower volumes of petroleum crude, chemicals and plastic products, refined petroleum products and natural gas liquids due to the
COVID-19 pandemic, partly offset by liquidated damages relating to volume commitments under customer contracts.
Revenue per RTM increased by 7% in 2020 when compared to 2019, mainly due to the decrease in the average length of haul and liquidated
damages relating to volume commitments under customer contracts.
CN | 2021 Annual Report 31
Management's Discussion and Analysis
Metals and minerals
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2020
$
1,409
$
21,561
6.53
935
2019
1,643
25,449
6.46
1,008
% Change
(14%)
(15%)
1%
(7%)
% Change
at constant
currency
(15%)
(15%)
—%
(7%)
For the year ended December 31, 2020, revenues for this commodity group decreased by $234 million, or 14%, when compared to 2019, mainly
due to reduced shipments of frac sand and semi-finished steel products due to the COVID-19 pandemic.
Revenue per RTM increased by 1% in 2020 when compared to 2019, mainly due to a decrease in the average length of haul.
Forest products
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2020
$
1,700
$
25,602
6.64
342
2019
1,808
27,187
6.65
375
% Change
(6%)
(6%)
—%
(9%)
% Change
at constant
currency
(7%)
(6%)
(1%)
(9%)
For the year ended December 31, 2020, revenues for this commodity group decreased by $108 million, or 6%, when compared to 2019, mainly
due to lower volumes across a broad range of forest products and lower applicable fuel surcharge rates, partly offset by freight rate increases.
Revenue per RTM remained flat in 2020 when compared to 2019.
Coal
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2020
$
527
$
16,173
3.26
289
2019
658
17,653
3.73
335
% Change
(20%)
(8%)
(13%)
(14%)
% Change
at constant
currency
(20%)
(8%)
(13%)
(14%)
For the year ended December 31, 2020, revenues for this commodity group decreased by $131 million, or 20%, when compared to 2019, mainly
due to lower volumes of U.S. thermal coal exports via the Gulf Coast due to competitive market pricing as well as reduced domestic shipments
to U.S. utilities and Canadian metallurgical coal via west coast ports due to the COVID-19 pandemic; partly offset by higher Canadian thermal
coal exports via west coast ports.
Revenue per RTM decreased by 13% in 2020 when compared to 2019, mainly due to an increase in the average length of haul.
Grain and fertilizers
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
32 CN | 2021 Annual Report
Year ended December 31,
2020
$
2,609
$
61,736
4.23
663
2019
2,392
55,597
4.30
619
% Change
9%
11%
(2%)
7%
% Change
at constant
currency
9%
11%
(2%)
7%
Management's Discussion and Analysis
For the year ended December 31, 2020, revenues for this commodity group increased by $217 million, or 9%, when compared to 2019, mainly
due to record Canadian grain volumes and freight rate increases, partly offset by lower applicable fuel surcharge rates.
Revenue per RTM decreased by 2% in 2020 when compared to 2019, mainly due to an increase in the average length of haul and lower
applicable fuel surcharge rates; partly offset by freight rate increases.
Intermodal
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2020
$
3,751
$
59,165
6.34
2,582
2019
3,787
58,344
6.49
2,618
% Change
(1%)
1%
(2%)
(1%)
% Change
at constant
currency
(1%)
1%
(3%)
(1%)
For the year ended December 31, 2020, revenues for this commodity group decreased by $36 million, or 1%, when compared to 2019, mainly
due to lower applicable fuel surcharge rates and lower international container volumes via the ports of Prince Rupert and Montreal, as well as
reduced shipments for domestic logistic providers; partly offset by higher international container traffic via the Ports of Vancouver and New
Orleans, as well as increased domestic retail shipments.
Revenue per RTM decreased by 2% in 2020 when compared to 2019, mainly due to lower applicable fuel surcharge rates.
Automotive
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2020
$
591
$
2,597
22.76
187
2019
858
3,735
22.97
269
% Change
(31%)
(30%)
(1%)
(30%)
% Change
at constant
currency
(31%)
(30%)
(1%)
(30%)
For the year ended December 31, 2020, revenues for this commodity group decreased by $267 million, or 31%, when compared to 2019, mainly
due to lower volumes of finished vehicles due to the COVID-19 pandemic, including the temporary shutdown of assembly plants and production
between April and June, as well as lower applicable fuel surcharge rates.
Revenue per RTM decreased by 1% in 2020 when compared to 2019, mainly due to lower applicable fuel surcharge rates.
Other revenues
Revenues (millions)
$
601
$
Year ended December 31,
2020
2019
719
% Change
(16%)
% Change
at constant
currency
(17%)
For the year ended December 31, 2020, Other revenues decreased by $118 million, or 16%, when compared to 2019, mainly due to lower
revenues from vessels and automotive logistics due to the COVID-19 pandemic.
CN | 2021 Annual Report 33
Management's Discussion and Analysis
Operating expenses
Operating expenses for the year ended December 31, 2020 amounted to $9,042 million compared to $9,324 million in 2019. The decrease of
$282 million, or 3%, was mainly due to lower fuel and labor costs and decreased purchased services and material expense; partly offset by a
loss on assets held for sale, resulting from the Company's decision to market for sale for on-going rail operations, certain non-core lines.
The following table provides the components of total operating expenses for the years ended December 31, 2020 and 2019:
In millions
Year ended December 31,
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Loss on assets held for sale
Total operating expenses
$
$
2020
2,723
2,152
1,152
1,589
432
508
486
2019
2,922
2,267
1,637
1,562
444
492
—
$
9,042
$
9,324
% Change
% Change
at constant
currency (1)
7%
5%
30%
(2%)
3%
(3%)
N/A
3%
7%
5%
30%
(1%)
4%
(2%)
N/A
4%
(1)
This Non-GAAP measure does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable a similar measure presented by other
companies. See the section of this MD&A entitled Constant Currency for an explanation of this non-GAAP measure.
Labor and fringe benefits
Labor and fringe benefits expense decreased by $199 million, or 7%, in 2020 when compared to 2019. The decrease was primarily due to lower
average headcount and the impact of the 2019 employee termination benefits and severance costs related to a workforce reduction program;
partly offset by general wage increases, higher incentive compensation, and higher pension expense.
Purchased services and material
Purchased services and material expense decreased by $115 million, or 5%, in 2020 when compared to 2019. The decrease was mainly due to
lower costs for services purchased from outside contractors and lower material costs, driven by lower volumes.
Fuel
Fuel expense decreased by $485 million, or 30%, in 2020 when compared to 2019. The decrease was primarily due to the favorable impact of
lower fuel prices, lower volumes due to decreased workload, as measured by GTMs, as well as fuel efficiency gains, achieving a new record fuel
efficiency.
Depreciation and amortization
Depreciation and amortization expense increased by $27 million, or 2%, in 2020 when compared to 2019. The increase was mainly due to a
higher depreciable asset base resulting from increased capital expenditures in recent years, partly offset by the impact of the 2019 expense of
$84 million related to costs previously capitalized for a PTC back office system following the deployment of a replacement system.
Equipment rents
Equipment rents expense decreased by $12 million, or 3%, in 2020 when compared to 2019. The decrease was primarily due to lower rail car
lease costs driven by lower volumes, as well as lower car hire expense; partly offset by higher locomotive horsepower-hour expense.
Casualty and other
Casualty and other expense increased by $16 million, or 3%, in 2020 when compared to 2019. The increase was mainly due to lower recoveries
of costs from passenger trains using CN's system and higher property taxes, partly offset by lower travel expenses and legal provisions.
Loss on assets held for sale
In the second quarter of 2020, the Company recorded a loss of $486 million on assets held for sale, resulting from the Company's decision to
market for sale for on-going rail operations, certain non-core lines in Wisconsin, Michigan and Ontario. See Note 5 - Assets held for sale to the
Company's 2020 Annual Consolidated Financial Statements for information on the valuation of assets held for sale.
34 CN | 2021 Annual Report
Management's Discussion and Analysis
Other income and expenses
Interest expense
In 2020, Interest expense was $554 million compared to $538 million in 2019. The increase was mainly due to a higher average level of debt,
partly offset by a lower weighted-average interest rate.
Other components of net periodic benefit income
In 2020, Other components of net periodic benefit income was $315 million compared to $321 million in 2019. The decrease was mainly due to
higher amortization of net actuarial loss, partly offset by lower interest cost.
Other income
In 2020, Other income was $6 million compared to $53 million in 2019, primarily due to lower gains on sale of land.
Income tax expense
The enactment of the Tax Cuts and Jobs Act ("U.S. Tax Reform") in 2017 brought about significant tax law changes, which included a reduction
to the U.S. federal corporate income tax rate from 35% to 21% and allowed the immediate capital expensing of new investments in certain
qualified depreciable assets which will be phased down starting in 2023. The U.S. Tax Reform also introduced the creation of a Base Erosion
Anti-abuse Tax (BEAT) that subjects certain payments from U.S. corporations to foreign related parties to additional taxes, and limitations to
the deduction for net interest expense incurred by U.S. corporations. Since the enactment of the U.S. Tax Reforms, U.S. authorities have issued
various proposed and finalized regulations and guidance interpreting its provisions. These interpretations have been taken into account in
calculating the Company's current year income tax provision and tax payments. The U.S. Tax Reform and these regulations are also expected to
impact the Company's income tax provisions and tax payments in future years.
On March 27, 2020, the U.S. government enacted the CARES Act, which included corporate income tax measures allowing U.S. federal net
operating losses (NOLs) arising in tax years 2018, 2019, and 2020 to be fully carried back to each of the five tax years preceding the tax year of
the NOL.
In 2020, the Company recorded an income tax expense of $982 million compared to an income tax expense of $1,213 million in 2019.
Included in the 2020 figure was a current income tax recovery of $141 million recorded in the first quarter, resulting from the enactment of the
CARES Act; the Company reclassified its 2019 deferred income tax asset of $213 million on the NOL that arose in 2019, to a current income tax
receivable and recorded a current income tax recovery of $141 million to reflect an amount recoverable at the higher U.S. federal corporate
income tax rate of 35% applicable to pre-2018 tax years. Included in the 2019 figure was a deferred income tax recovery of $112 million
recorded in the second quarter, resulting from the enactment of a lower provincial corporate income tax rate.
The effective tax rate for 2020 was 21.6% compared to 22.3% in 2019. Excluding the aforementioned income tax recoveries, the effective
tax rate for 2020 was 24.7% compared to 24.4% in 2019.
CN | 2021 Annual Report 35
Management's Discussion and Analysis
Summary of quarterly financial data
2021
Quarters
2020
Quarters
In millions, except per share data
Fourth
Third
Second
First
Fourth
Third
Second
First
Revenues
Operating income (1)
Net income (1)
Basic earnings per share
Diluted earnings per share (1)
Dividends per share
$ 3,753
$ 3,591
$ 1,566
$ 1,341
$ 1,199
$ 1,685
$
$
1.70
1.69
$
$
2.38
2.37
$ 0.615
$ 0.615
$
$
$
$
$
$
3,598
1,382
1,034
1.46
1.46
$ 3,535
$ 3,656
$ 3,409
$ 1,327
$ 1,411
$ 1,366
$
$
$
974
1.37
1.37
$ 1,021
$
$
1.44
1.43
$
$
$
985
1.39
1.38
0.615
$ 0.615
$ 0.575
$ 0.575
$
$
$
$
$
$
3,209
$ 3,545
785
545
0.77
0.77
$ 1,215
$ 1,011
$
$
1.42
1.42
0.575
$ 0.575
(1)
Certain quarters include items that management believes do not necessarily arise as part of CN's normal day-to-day operations and can distort the analysis of trends in
business performance. See the section of this MD&A entitled Adjusted performance measures for additional information on these items.
Revenues generated by the Company during the year are influenced by seasonal weather conditions, general economic conditions, cyclical
demand for rail transportation, competitive forces in the transportation marketplace and the effects of the COVID-19 pandemic beginning in the
second quarter of 2020 (see the section entitled Business risks of this MD&A). Operating expenses reflect the impact of freight volumes,
seasonal weather conditions, labor costs, fuel prices, and the Company's productivity initiatives. Fluctuations in the Canadian dollar relative to
the US dollar have also affected the conversion of the Company's US dollar-denominated revenues and expenses and resulted in fluctuations in
Net income in the rolling eight quarters presented above.
Summary of fourth quarter 2021
Revenues for the fourth quarter of 2021 increased by $97 million, or 3%, to $3,753 million, when compared to the same period in 2020. The
increase was mainly attributable to higher applicable fuel surcharge rates, freight rate increases and an increase in intermodal ancillary
services; partly offset by lower volumes of Canadian grain in terms of RTMs compared to record volumes in the fourth quarter of 2020, the
impact of the B.C. washouts and the negative translation impact of a stronger Canadian dollar. Fuel surcharge revenues increased by $177
million in the fourth quarter of 2021, mainly due to higher applicable fuel surcharge rates. RTMs in the fourth quarter of 2021 declined by 11%
when compared to the same period in 2020. Freight revenue per RTM increased by 14% in the fourth quarter of 2021 when compared to the
same period in 2020, mainly driven by a significant decrease in the average length of haul, higher applicable fuel surcharge rates and freight
rate increases; partly offset by the negative translation impact of a stronger Canadian dollar.
Operating expenses for the fourth quarter of 2021 decreased by $58 million, or 3%, to $2,187 million, when compared to the same period in
2020. The decrease was mainly due to lower average headcount due to cost reduction initiatives and lower volumes, as well as the positive
translation impact of a stronger Canadian dollar; partly offset by higher fuel costs.
Operating income for the fourth quarter of 2021 increased by $155 million, or 11%, to $1,566 million, when compared to the same period in
2020. The increase mainly reflects higher applicable fuel surcharge rates, freight rate increases; partly offset by higher fuel costs and the
negative translation impact of of a stronger Canadian dollar. Adjusted operating income for the fourth quarter of 2021 was $1,579 million, an
increase of $168 million, or 12%, when compared to the same period in 2020. (1)
The operating ratio was 58.3% in the fourth quarter of 2021 compared to 61.4% in the fourth quarter of 2020, a 3.1-point improvement. The
adjusted operating ratio was 57.9%, a fourth quarter record, compared to 61.4% in the fourth quarter of 2020, a 3.5-point improvement. (1)
Net income for the fourth quarter 2021 was $1,199 million, an increase of $178 million, or 17%, when compared to the same period in 2020,
and diluted earnings per share increased by 18% to $1.69. Adjusted net income for the fourth quarter of 2021 was $1,209 million, an increase of
$188 million, or 18%, and adjusted diluted earnings per share increased by 20% to $1.71, when compared to the same period in 2020. (1)
(1)
These Non-GAAP measures do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other
companies. See the section of this MD&A entitled Adjusted performance measures for an explanation of these non-GAAP measures.
36 CN | 2021 Annual Report
Management's Discussion and Analysis
Financial position
The following tables provide an analysis of the Company's balance sheet as at December 31, 2021 as compared to 2020. Assets and liabilities
denominated in US dollars have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date. As at
December 31, 2021 and 2020, the foreign exchange rates were $1.2637 and $1.2725 per US$1.00, respectively.
In millions
Total assets
December 31,
2021
2020
Variance Explanation of variance
$
48,538
$
44,804
$
3,734
Cash and cash equivalents and
restricted cash and cash
equivalents
Other current assets, excluding cash
and cash equivalents and restricted
cash and cash equivalents
1,341
1,100
241 Refer to the Consolidated Statements of Cash Flows of the
Company’s 2021 Annual Consolidated Financial Statements.
2,085
2,002
83 Increase primarily due to higher assets held for sale, partly
offset by a decrease in income tax receivable.
Properties
41,178
40,069
1,109 See the section of this MD&A entitled Liquidity and capital
Operating lease right-of-use-assets
445
Pension asset
3,050
435
777
resources - Investing activities, increase primarily due to gross
property additions of $2,897 million, partly offset by
depreciation of $1,593 million.
10 Increase primarily due to higher lease renewals as freight
volumes and traffic rebounded from pandemic levels.
2,273 Increase primarily due to actual returns of $1,591 million,
actuarial gains arising from the increase in the year-end
discount rate from 2.55% to 3.15% of $1,150 million, employer
contributions of $81 million and curtailment gains of $21
million, partly offset by interest cost of $377 million and current
service cost of $186 million.
Intangible assets, goodwill and other
439
421
18 Increase primarily due to the change in an equity investment
with a readily determinable fair value.
Total liabilities and shareholders'
equity
Accounts payable and other
excluding current portion of
operating lease liabilities
$
48,538
$
44,804
$
3,734
2,504
2,257
247 Increase mainly due to timing of payments related to trade
payables, as well as tax related accruals.
Deferred income taxes
9,303
8,271
Other liabilities and deferred credits
Pension and other postretirement
benefits
427
645
534
767
1,032 Increase primarily due to a deferred income tax expense of
$511 million recorded in Net income, a deferred income tax
expense of $546 million recorded in Other comprehensive
income, both of which were mostly attributable to new
temporary differences generated during the year.
(107) Decrease mainly due to a reduction in contract liabilities.
(122) Decrease primarily due to actuarial gains arising from the
increase in year-end discount rates of $63 million, curtailment
gains of $31 million, employer contributions of $23 million,
benefit payments of $14 million and actual returns of $14
million, partly offset by interest cost of $20 million and current
service cost of $13 million.
Total long-term debt, including the
12,485
12,906
(421) See the section of this MD&A entitled Liquidity and capital
current portion
resources - Financing activities, overall decrease primarily due
to higher debt repayments than issuances in 2021.
Operating lease liabilities including
430
418
the current portion
12 Increase primarily due to higher lease renewals as freight
volumes and traffic rebounded from pandemic levels.
Total shareholders' equity
22,744
19,651
3,093 Refer to the Consolidated Statements of Changes in
Shareholders’ Equity of the Company’s 2021 Annual
Consolidated Financial Statements.
CN | 2021 Annual Report 37
Management's Discussion and Analysis
Liquidity and capital resources
The Company's principal source of liquidity is cash generated from operations, which is supplemented by borrowings in the money markets and
capital markets. To meet its short-term liquidity needs, the Company has access to various financing sources, including unsecured revolving
credit facilities, equipment loans, commercial paper programs, and an accounts receivable securitization program. In addition to these sources,
the Company can issue debt securities to meet its longer-term liquidity needs. The strong focus on cash generation from all sources gives the
Company increased flexibility in terms of meeting its financing requirements.
The Company's primary short-term and long-term cash requirements are discussed below:
•
•
Short-term cash requirements: includes working capital requirements, such as labor and fringe benefits, fuel, income tax instalments,
pension contributions, and contractual obligations; interest and principal payments on current debt financing; dividends; and share
repurchases.
Long-term cash requirements: includes capital expenditures relating to track infrastructure and other, interest and principal repayments of
long-term debt financing, operating and finance lease obligations; business acquisitions and long-term contractual obligations.
The Company sets priorities on its uses of available funds based on short-term operational requirements, expenditures to continue to
operate a safe railway and pursue strategic initiatives, while also considering its long-term contractual obligations and returning value to its
shareholders; and as part of its financing strategy, the Company regularly reviews its capital structure, cost of capital, and the need for
additional debt financing. For a summary of short-term and long-term contractual obligations, including material cash requirements related to
such obligations, refer to the table within the section titled Contractual obligations.
Although the Company has a working capital surplus, a deficit is common in the capital-intensive rail industry, and is not an indication of a
lack of liquidity. The Company maintains adequate resources to meet daily cash requirements, and has sufficient financial capacity to manage
its day-to-day cash requirements and current obligations. As at December 31, 2021 and 2020, the Company had Cash and cash equivalents of
$838 million and $569 million, respectively; Restricted cash and cash equivalents of $503 million and $531 million, respectively; and a working
capital surplus of $306 million and a deficit $172 million, respectively (1). The cash and cash equivalents pledged as collateral for a minimum
term of one month pursuant to the Company's bilateral letter of credit facilities are recorded as Restricted cash and cash equivalents. There are
currently no specific requirements relating to working capital other than in the normal course of business as discussed herein.
The Company's U.S. and other foreign subsidiaries maintain sufficient cash to meet their respective operational requirements. If the
Company should require more liquidity in Canada than is generated by its domestic operations, the Company could decide to repatriate funds
associated with undistributed earnings of its foreign operations, including its U.S. and other foreign subsidiaries. The impact on liquidity
resulting from the repatriation of funds held outside Canada would not be significant as such repatriation of funds would not cause significant
tax implications to the Company under the tax laws of Canada and the U.S. and other foreign tax jurisdictions, and the tax treaties currently in
effect between them.
The Company expects cash from operations and its various sources of financing to be sufficient to meet its ongoing obligations. The
Company is not aware of any trends or expected fluctuations in its liquidity that would impact its ongoing operations or financial condition as of
the date of this MD&A.
(1) Working capital is a Non-GAAP measure which management believes is a useful measure of liquidity. The Company defines working capital as current assets of $3,426
million (2020 - $3,102 million) less current liabilities of $3,120 million (2020 - $3,274 million). Working capital does not have any standardized meaning prescribed by GAAP
and therefore, may not be comparable to a similar measure presented by other companies.
Available financing sources
Shelf prospectus and registration statement
Under its current shelf prospectus with Canadian securities regulators and registration statement with the SEC, the Company may issue up to
$6.0 billion of debt securities in the Canadian and U.S. capital markets over the 25 months from the filing date, February 11, 2020.
As at December 31, 2021, the remaining capacity of this shelf prospectus and registration statement was $5.2 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, 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.
38 CN | 2021 Annual Report
Management's Discussion and Analysis
Revolving credit facility
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. The credit facility provides for borrowings at various benchmark interest
rates, including the London Interbank Offered Rate (LIBOR), plus applicable margins, based on CN's credit ratings and sustainability targets.
As at December 31, 2021 and 2020, the Company had no outstanding borrowings under this revolving credit facility and there were no
draws in 2021 and 2020.
Credit facilities
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.
Equipment loans
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.
As at December 31, 2021, the Company had outstanding borrowings of US$572 million ($723 million) and had no further amount available
under this non-revolving term loan facility. As at December 31, 2020, the Company had outstanding borrowings of US$289 million ($368 million)
and had US$310 million 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 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 $2.5 billion revolving credit facility to meet its
short-term liquidity needs.
As at December 31, 2021 and 2020, the Company had total commercial paper borrowings of US$111 million ($140 million) and
US$44 million ($56 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 December 20, 2021, the Company extended the term of its agreement by one year to February 1,
2024. 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 or LIBOR rates then in effect. 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, 2021, and 2020 the Company had no borrowings under the accounts receivable securitization program and there were
no activities in 2021.
CN | 2021 Annual Report 39
Management's Discussion and Analysis
Bilateral letter of credit facilities
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 (2020 - $421 million) under the committed
facilities from a total available amount of $518 million (2020 - $492 million) and $158 million (2020 - $165 million) under the uncommitted
facilities.
As at December 31, 2021, included in Restricted cash and cash equivalents was $396 million (2020 - $424 million) and $100 million (2020 -
$100 million) pledged as collateral under the committed and uncommitted bilateral letter of credit facilities, respectively.
Additional information relating to the Company's financing sources is provided in Note 15 – Debt to the Company's 2021 Annual Consolidated
Financial Statements.
Credit ratings
The Company's ability to access funding in the debt capital markets and the cost and amount of funding available depends in part on its credit
ratings. Rating downgrades could limit the Company's access to the capital markets, or increase its borrowing costs.
The following table provides the Company's long-term debt and commercial paper credit ratings as of the date of this MD&A, which remain
unchanged from 2020.
DBRS Morningstar
Moody's Investors Service
Standard & Poor's
Long-term debt rating (1)
A
Commercial paper rating (1)
R-1 (low)
A2
A
P-1
A-1
(1)
These credit ratings are not recommendations to purchase, hold, or sell the securities referred to above. Ratings may be revised or withdrawn at any time by the credit rating
agencies. Each credit rating should be evaluated independently of any other credit rating.
As at April 20, 2021, subsequent to the Company's announcement regarding the proposal to combine with KCS, ratings agencies took the
following actions:
•
•
•
DBRS Morningstar placed CN's ratings under review with negative implications.
Moody's Investors Service placed CN's ratings on review for downgrade.
Standard & Poor's reported that the transaction would have decidedly negative credit implications.
These actions reflected expectations of increases in CN's debt to support the proposed combination with KCS.
Following KCS's notice of termination of the CN Merger Agreement on September 15, 2021 and CN's announcement of its strategic and
financial value creation plan on September 17, 2021, rating agencies took the following actions:
•
•
•
DBRS Morningstar removed CN's ratings from under review with negative implications and confirmed them with stable trends.
Moody's Investors Service removed CN's ratings from under review for downgrade and declared the outlook negative.
Standard & Poor's removed CN's ratings from CreditWatch with negative implications and declared the outlook negative.
Cash flows
The following table provides the cash flows for the year ended December 31, 2021 and 2020:
In millions
Year ended December 31,
2021
2020
Variance
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net increase in cash, cash equivalents, restricted cash, and
restricted cash equivalents
Cash, cash equivalents, restricted cash, and restricted cash equivalents,
beginning of year
$
6,971
$
6,165
$
(2,873)
(3,857)
241
1,100
(2,946)
(2,707)
512
588
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of year
$
1,341
$
1,100
$
806
73
(1,150)
(271)
512
241
40 CN | 2021 Annual Report
Management's Discussion and Analysis
Free cash flow
Free cash flow is a useful measure of liquidity as it demonstrates the Company's ability to generate cash for debt obligations and for
discretionary uses such as payment of dividends, share repurchases and strategic opportunities. The Company defines its free cash flow
measure as the difference between net cash provided by operating activities and net cash used in investing activities, adjusted for the impact of
business acquisitions and merger transaction-related payments and cash receipts, which are items that are not indicative of operating trends.
Free cash flow does not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures
presented by other companies.
The following table provides a reconciliation of Net cash provided by operating activities in accordance with GAAP, as reported for the
years ended December 31, 2021, 2020 and 2019, to the non-GAAP free cash flow presented herein:
In millions
Year ended December 31,
2021
2020
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided before financing activities
Adjustments:
Transaction-related costs (1)
Advance for acquisition (2)
Refund of advance for acquisition
Merger termination fee
Acquisition, net of cash acquired (3)
Total adjustments
Free cash flow
$
6,971
$
6,165
$
(2,873)
4,098
125
845
(886)
(886)
—
(802)
3,296
$
$
(2,946)
3,219
—
—
—
—
8
8
3,227
$
$
$
$
2019
5,923
(4,190)
1,733
—
—
—
—
259
259
1,992
(1)
(2)
(3)
Relates to transaction-related costs of $125 million paid. See section of this MD&A entitled Strategy overview - Acquisitions, Terminated CN KCS merger agreement, for
additional information.
Relates to the advance paid to KCS of US$700 million ($845 million). See section of this MD&A entitled Strategy overview - Acquisitions, Terminated CN KCS merger
agreement, for additional information.
Relates to the acquisitions of H&R Transport Limited ("H&R") and the TransX Group of Companies ("TransX"). See the section of this MD&A entitled Liquidity and capital
resources - Investing activities for additional information.
Operating activities
Net cash provided by operating activities increased by $806 million in 2021 when compared to 2020, mainly due to higher cash earnings,
primarily resulting from the merger termination fee of $886 million received from KCS.
Pension contributions
The Company's contributions to its various defined benefit pension plans are made in accordance with the applicable legislation in Canada and
the U.S. and such contributions follow minimum and maximum thresholds as determined by actuarial valuations. Pension contributions for the
years ended December 31, 2021 and 2020 of $127 million and $115 million, respectively, primarily represent contributions to the CN Pension
Plan, for the current service cost as determined under the Company's current actuarial valuations for funding purposes. Based on the
anticipated results of the Company's next actuarial valuations for funding purposes, the CN Pension Plan is expected to be fully funded and at a
level such that the Company would be prohibited from making contributions to the CN Pension Plan once the actuarial valuation report is filed
in 2022. As such, the Company expects to make total cash contributions of approximately $70 million for all pension plans in 2022.
See the section of this MD&A entitled Critical accounting estimates – Pensions and other postretirement benefits for additional information
pertaining to the funding of the Company's pension plans. Additional information relating to the pension plans is provided in Note 17 – Pensions
and other postretirement benefits to the Company's 2021 Annual Consolidated Financial Statements.
Income tax payments
The Company is required to make scheduled instalment payments as prescribed by the tax authorities. In Canada, the Company's domestic
jurisdiction, tax instalments in a given year are generally based on the prior year's taxable income whereas in the U.S., the Company's
predominant foreign jurisdiction, they are based on forecasted taxable income of the current year.
In 2021, net income tax payments were $759 million (2020 - $353 million). The increase was mainly due to the $329 million income tax
refund received in the fourth quarter of 2020 related to the carryback of U.S. federal net operating losses permitted under the CARES Act.
For 2022, the Company's net income tax payments are expected to be approximately $1.25 billion. The increase is primarily due to higher
required instalment payments caused by the merger termination fee and higher pre-tax income.
CN | 2021 Annual Report 41
Management's Discussion and Analysis
Investing activities
Net cash used in investing activities decreased by $73 million in 2021 when compared to 2020.
Property additions
The following table provides the property additions for the years ended December 31, 2021 and 2020:
In millions
Track and roadway (1)
Rolling stock
Buildings
Information technology
Other
Gross property additions
Less: Finance leases
Property additions
Year ended December 31,
2021
$
1,972
$
403
81
291
150
2,897
6
$
2,891
$
2020
1,842
478
103
301
139
2,863
—
2,863
(1)
In 2021, approximately 78% (2020 - 76%) of the Track and roadway property additions were incurred to renew basic infrastructure. Costs relating to normal repairs and
maintenance of Track and roadway properties are expensed as incurred, and amounted to approximately 11% of the Company's total operating expenses in 2021 (2020 -
11%).
Acquisitions
In the first quarter of 2020, the Company completed the purchase price allocation of the Manitoba-based TransX Group of Companies
("TransX") which was acquired on March 20, 2019. In the fourth quarter of 2019, the fair value of net assets acquired was adjusted to reflect the
settlement of working capital as well as changes to current and deferred income tax balances. The acquisition positions CN to strengthen its
intermodal business, and allows the Company to expand capacity and foster additional supply chain solutions.
In the fourth quarter of 2020, the Company completed the purchase price allocation of the intermodal temperature-controlled
transportation division of the Alberta-based H&R Transport Limited ("H&R") which was acquired on December 2, 2019. The acquisition positions
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.
Additional information relating to the acquisitions is provided in Note 3 - Acquisitions to the Company's 2021 Annual Consolidated Financial
Statements.
2022 Capital expenditure program
In 2022, the Company expects to invest approximately 17% of revenues in its capital program, which will be financed with cash generated from
operations or with cash from financing activities as required.
Financing activities
Net cash used in financing activities increased by $1,150 million in 2021 when compared to 2020, primarily driven by higher repurchases of
common shares and lower issuance of debt; partly offset by lower repayment of commercial paper.
Debt financing activities
Debt financing activities in 2021 included the following:
•
•
•
•
•
•
On September 15, 2021, early redemption of US$400 million ($506 million) 2.85% Notes due 2021;
On March 31, 2021, issuance of US$310 million ($389 million) equipment loan under the non-revolving credit facility;
On January 18, 2021, early redemption of $250 million 2.75% Notes due 2021;
Repayment of equipment loan under the non-revolving credit facility of $33 million;
Net issuance of commercial paper of $66 million ; and
Repayment of finance leases of $68 million.
42 CN | 2021 Annual Report
Management's Discussion and Analysis
Debt financing activities in 2020 included the following:
•
•
•
•
•
•
•
•
•
•
•
On May 1, 2020, issuance of US$600 million ($837 million) 2.45% Notes due 2050 in the U.S. capital markets, which resulted in net
proceeds of $810 million;
On February 3, 2020, repayment of US$300 million ($397 million) 2.40% Notes due 2020 upon maturity;
On February 3, 2020, issuance of US$300 million ($397 million) equipment loan under the non-revolving credit facility;
On December 1, 2020, issuance of US$25 million ($32 million) equipment loan;
Repayment of equipment loan under the non-revolving credit facility of $15 million;
Net repayment of commercial paper of $1,273 million;
Proceeds from borrowings under the accounts receivable securitization program of $450 million;
Repayment of borrowings under the accounts receivable securitization program of $650 million;
Proceeds from borrowings under revolving credit facility agreement of $100 million;
Repayment of borrowings under revolving credit facility agreement of $100 million; and
Repayment of finance leases of $59 million.
Cash obtained from the issuance of debt was used for general corporate purposes, including the redemption and refinancing of outstanding
indebtedness, share repurchases, acquisitions and other business opportunities. Additional information relating to the Company's outstanding
debt securities is provided in Note 15 – Debt to the Company's 2021 Annual Consolidated Financial Statements.
Repurchase of common shares
The Company may repurchase its common shares pursuant to a NCIB at prevailing market prices plus brokerage fees, or such other prices as
may be permitted by the Toronto Stock Exchange (TSX). 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 repurchased 11.1 million
common shares under its NCIB effective between February 1, 2021 and January 31, 2022, which allowed for the repurchase of up to 14.0 million
common shares.
Previous NCIBs allowed for the repurchase of up to 16.0 million common shares between February 1, 2020 and January 31, 2021, and up
to 22.0 million common shares between February 1, 2019 and January 31, 2020.
The following table provides the information related to the share repurchases for the years ended December 31, 2021, 2020 and 2019:
In millions, except per share data
Year ended December 31,
February 2021 - January 2022 NCIB
Number of common shares
Weighted-average price per share (1)
Amount of repurchase (1)
February 2020 - January 2021 NCIB
Number of common shares
Weighted-average price per share (1)
Amount of repurchase (1)
February 2019 - January 2020 NCIB
Number of common shares
Weighted-average price per share (1)
Amount of repurchase (1)
Total for the year
Number of common shares
Weighted-average price per share (1)
Amount of repurchase (1)
2021
10.3
153.69
1,582
—
—
—
N/A
N/A
N/A
10.3
153.69
1,582
$
$
$
$
$
$
2020
N/A
N/A
N/A
2.0
113.56
226
1.3
122.38
153
3.3
116.97
379
2019
Total NCIB
10.3
153.69
1,582
2.0
113.56
226
14.1
120.24
1,700
$
$
$
$
$
$
N/A
N/A
N/A
N/A
N/A
N/A
12.8
120.03
1,547
14.3
118.70
1,700
(2)
(2)
(2)
$
$
$
$
$
$
$
$
$
$
(1)
(2)
Includes brokerage fees.
Includes 2019 repurchases from the October 2018 - January 2019 NCIB, which consisted of 1.5 million common shares, a weighted-average price per share of $106.78 and
an amount of repurchase of $153 million.
CN | 2021 Annual Report 43
Management's Discussion and Analysis
On January 25, 2022, the Board of Directors of the Company approved a new NCIB, which allows for the repurchase of up to 42.0 million
common shares between February 1, 2022 and January 31, 2023.
The Company’s NCIB notices may be found online on SEDAR at www.sedar.com and on the SEC's website at www.sec.gov through
EDGAR. Printed copies may be obtained by contacting the Corporate Secretary’s Office.
Share Trusts
The Company's Employee Benefit Plan Trusts ("Share Trusts") purchase CN's common shares on the open market, which are used to deliver
common shares under the Share Units Plan and the Employee Share Investment Plan (ESIP). Shares purchased by the Share Trusts are retained
until the Company instructs the trustee to transfer shares to participants of the Share Units Plan or the ESIP. Additional information relating to
Share Trusts is provided in Note 18 – Share capital to the Company's 2021 Annual Consolidated Financial Statements.
The following tables provide the information related to the share purchases and settlements by Share Trusts under the Share Units Plan and
the ESIP for the years ended December 31, 2021, 2020 and 2019:
Year ended December 31,
2021
2020
2019
In millions, except per share data
Share purchases by ESIP Share Trusts
Number of common shares
Weighted-average price per share
Amount of purchase
Total purchases
In millions, except per share data
Year ended December 31,
Share settlements by Share Units Plan Share Trusts
Number of common shares
Weighted-average price per share
Amount of settlement
Share settlements by ESIP Share Trusts
Number of common shares
Weighted-average price per share
Amount of settlements
Total settlements
Dividends paid
0.2
142.90
26
26
2021
0.2
88.23
20
0.2
128.40
18
38
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.1
123.03
14
14
2020
0.4
88.23
35
0.2
118.04
27
62
$
$
$
$
$
$
$
$
0.3
118.83
33
33
2019
0.5
88.23
45
—
—
—
45
During 2021, the Company paid quarterly dividends of $0.6150 per share amounting to $1,740 million, compared to $1,634 million, at the rate of
$0.5750 per share, in 2020. On January 25, 2022, the Company's Board of Directors approved an increase of 19% to the quarterly dividend to
common shareholders, from $0.6150 per share in 2021 to $0.7325 per share in 2022.
Contractual obligations
In the normal course of business, the Company incurs contractual obligations. The following table sets forth the Company's contractual
obligations and related cash requirements for the following items as at December 31, 2021:
In millions
Debt obligations (1)
Interest on debt obligations
Finance lease obligations
Operating lease obligations (2)
Purchase obligations (3)
Other long-term liabilities (4)
Total
2022
2023
2024
2025
2026
2027 &
thereafter
$
12,475 $
501 $
222 $
476 $
385 $
667 $
10,224
9,288
10
468
1,784
677
501
7
117
1,341
93
486
1
93
229
51
478
—
66
105
44
465
—
54
103
41
446
2
34
1
37
6,912
—
104
5
411
Total contractual obligations
$
24,702 $
2,560 $
1,082 $
1,169 $
1,048 $
1,187 $
17,656
(1)
(2)
(3)
(4)
Presented net of unamortized discounts and debt issuance costs and excludes finance lease obligations.
Includes $70 million related to renewal options reasonably certain to be exercised and $38 million of imputed interest.
Includes fixed and variable commitments for information technology services and licenses, wheels, locomotives, railroad cars, rail, engineering services, rail ties as well as
other equipment and services. Costs of variable commitments were estimated using forecasted prices and volumes.
Includes expected payments for workers' compensation, postretirement benefits other than pensions, net unrecognized tax benefits, environmental liabilities and pension
obligations that have been classified as contractual settlement agreements.
44 CN | 2021 Annual Report
Management's Discussion and Analysis
Adjusted debt-to-adjusted EBITDA multiple
Management believes that the adjusted debt-to-adjusted EBITDA multiple is a useful credit measure because it reflects the Company's ability to
service its debt and other long-term obligations. The Company calculates the adjusted debt-to-adjusted EBITDA multiple as adjusted debt
divided by the last twelve months of adjusted EBITDA. Adjusted debt is defined as the sum of Long-term debt and Current portion of long-term
debt as reported on the Company’s Consolidated Balance Sheets as well as Operating lease liabilities, including current portion and pension
plans in deficiency recognized on the Company's Consolidated Balance Sheets due to the debt-like nature of their contractual and financial
obligations. Adjusted EBITDA is calculated as Net income excluding Interest expense, Income tax expense, Depreciation and amortization,
operating lease cost, Other components of net periodic benefit income, Other income, and other significant items that are not reflective of CN's
underlying business operations and which could distort the analysis of trends in business performance. Adjusted debt and adjusted EBITDA are
non-GAAP measures used to compute the Adjusted debt-to-adjusted EBITDA multiple. These measures do not have any standardized meaning
prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies.
The following table provides a reconciliation of debt and Net income in accordance with GAAP, reported as at and for the years ended
December 31, 2021, 2020 and 2019, respectively, to adjusted debt and adjusted EBITDA, which have been used to calculate the non-GAAP
adjusted debt-to-adjusted EBITDA multiple:
In millions, unless otherwise indicated
As at and for the year ended December 31,
2021
2020
2019
$
12,485
$
12,906
$
13,796
Debt
Adjustments:
Operating lease liabilities, including current portion (1)
Pension plans in deficiency (2)
Adjusted debt
Net income
Interest expense
Income tax expense
Depreciation and amortization
Operating lease cost (3)
Other components of net periodic benefit income
Other income
Adjustments:
Workforce reduction program (4)
Advisory fees related to shareholder matters (5)
Loss (recovery) on assets held for sale
Transaction-related costs
Merger termination fee
Adjusted EBITDA (6)
$
$
$
$
430
447
13,362
4,892
610
1,441
1,598
131
(398)
(43)
39
20
(137)
84
(886)
$
$
418
553
13,877
3,562
554
982
1,589
143
(315)
(6)
—
—
486
—
—
$
7,351
$
6,995
$
501
521
14,818
4,216
538
1,213
1,562
171
(321)
(53)
31
—
—
—
—
7,357
2.01
Adjusted debt-to-adjusted EBITDA multiple (times)
1.82
1.98
(1)
(2)
(3)
(4)
(5)
(6)
Represents the present value of operating lease payments. See Note 12 - Leases to the Company's 2021 Annual Consolidated Financial Statements for additional
information.
Represents the total funded deficit of all defined benefit pension plans with a projected benefit obligation in excess of plan assets. See Note 17 - Pensions and other
postretirement benefits to the Company's 2021 Annual Consolidated Financial Statements for additional information.
Represents the operating lease costs recorded in Purchased services and material and Equipment rents within the Consolidated Statements of Income. See Note 12 -
Leases to the Company's 2021 Annual Consolidated Financial Statements for additional information.
Relates to employee termination benefits and severance costs related to a workforce reduction program, recorded in Labor and fringe benefits within the Consolidated
Statements of Income.
Relates to advisory fees related to shareholder matters recorded in Casualty and other within the Consolidated Statements of Income.
Adjusted EBITDA for 2019 has been restated to include the workforce reduction program adjustment in order to conform with the current definition and be comparable with
the current year.
All forward-looking statements discussed in this section are subject to risks and uncertainties and are based on assumptions about events and
developments that may not materialize or that may be offset entirely or partially by other events and developments. See the section of this
MD&A entitled Forward-looking statements for a discussion of assumptions and risk factors affecting such forward-looking statements.
CN | 2021 Annual Report 45
Management's Discussion and Analysis
Off balance sheet arrangements
Guarantees and indemnifications
In the normal course of business, the Company enters into agreements that may involve providing guarantees or indemnifications to third
parties and others, which may extend beyond the term of the agreements. These include, but are not limited to, standby letters of credit, surety
and other bonds, and indemnifications that are customary for the type of transaction or for the railway business. As at December 31, 2021, the
Company has not recorded a liability with respect to guarantees and indemnifications. Additional information relating to guarantees and
indemnifications is provided in Note 21 – Major commitments and contingencies to the Company's 2021 Annual Consolidated Financial
Statements.
Outstanding share data
As at February 1, 2022, the Company had 699.8 million common shares and 3.9 million stock options outstanding.
Financial instruments
Risk management
In the normal course of business, the Company is exposed to various risks from its use of financial instruments. To manage these risks, the
Company follows a financial risk management framework, which is monitored and approved by the Company's Audit, Finance and Risk
Committee, with a goal of maintaining a strong balance sheet, optimizing earnings per share and free cash flow, financing its operations at an
optimal cost of capital and preserving its liquidity. The Company has limited involvement with derivative financial instruments in the
management of its risks and does not hold or issue them for trading or speculative purposes.
Credit risk
Credit risk arises from cash and temporary investments, accounts receivable and derivative financial instruments. To manage credit risk
associated with cash and temporary investments, the Company places these financial assets with governments, major financial institutions, or
other creditworthy counterparties, and performs ongoing reviews of these entities. To manage credit risk associated with accounts receivable,
the Company reviews the credit history of each new customer, monitors the financial condition and credit limits of its customers, and keeps the
average daily sales outstanding within an acceptable range. The Company works with customers to ensure timely payments, and in certain
cases, requires financial security, including letters of credit. CN also obtains credit insurance for certain high risk customers. Although the
Company believes there are no significant concentrations of customer credit risk, economic conditions can affect the Company's customers
and can result in an increase to the Company's credit risk and exposure to business failures of its customers. A widespread deterioration of
customer credit and business failures of customers could have a material adverse effect on the Company's results of operations, financial
position or liquidity. The Company considers the risk due to the possible non-performance by its customers to be remote.
The Company has limited involvement with derivative financial instruments, however from time to time, it may enter into derivative
financial instruments to manage its exposure to interest rates or foreign currency exchange rates. To manage the counterparty risk associated
with the use of derivative financial instruments, the Company enters into contracts with major financial institutions that have been accorded
investment grade ratings. Though the Company is exposed to potential credit losses due to non-performance of these counterparties, the
Company considers this risk to be remote.
Liquidity risk
Liquidity risk is the risk that sufficient funds will not be available to satisfy financial obligations as they come due. In addition to cash generated
from operations, which represents its principal source of liquidity, the Company manages liquidity risk by aligning other external sources of
funds which can be obtained upon short notice, such as revolving credit facilities, commercial paper programs, and an accounts receivable
securitization program. As well, the Company can issue debt securities in the Canadian and U.S. capital markets under its shelf prospectus and
registration statement. The Company's access to long-term funds in the debt capital markets depends on its credit ratings and market
conditions. The Company believes that its investment grade credit ratings contribute to reasonable access to capital markets. See the section
of this MD&A entitled Liquidity and capital resources for additional information relating to the Company's available financing sources and its
credit ratings.
46 CN | 2021 Annual Report
Management's Discussion and Analysis
Foreign currency risk
The Company conducts its business in both Canada and the U.S. and as a result, is affected by currency fluctuations. Changes in the exchange
rate between the Canadian dollar and the US dollar affect the Company's revenues and expenses. To manage foreign currency risk, the
Company designates US dollar-denominated debt of the parent company as a foreign currency hedge of its net investment in foreign
operations. As a result, from the dates of designation, foreign exchange gains and losses on translation of the Company's US dollar-
denominated debt are recorded in Accumulated other comprehensive loss, which minimizes volatility of earnings resulting from the conversion
of US dollar-denominated debt into the Canadian dollar.
The Company also enters into foreign exchange forward contracts to manage its exposure to foreign currency risk. As at December 31,
2021, the Company had outstanding foreign exchange forward contracts with a notional value of US$910 million (2020 - US$397 million) at a
weighted-average exchange rate of $1.27 per US$1.00 (2020 - $1.32 per US$1.00) for a weighted-average term of 251 days (2020 - 151 days).
Changes in the fair value of foreign exchange forward contracts, resulting from changes in foreign exchange rates, are recognized in Other
income in the Consolidated Statements of Income as they occur. For the year ended December 31, 2021, the Company recorded a loss of
$18 million (2020 - loss of $3 million; 2019 - loss of $75 million), related to foreign exchange forward contracts. These losses were largely
offset by the re-measurement of US dollar-denominated monetary assets and liabilities recognized in Other income. As at December 31, 2021,
the fair value of outstanding foreign exchange forward contracts included in Other current assets and Accounts payable and other was $nil and
$2 million, respectively (2020 - $nil and $18 million, respectively).
The estimated annual impact on Net income of a one-cent change in the Canadian dollar relative to the US dollar is approximately
$30 million.
Interest rate risk
The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a
result of changes in market interest rates. Such risk exists in relation to the Company's debt. The Company mainly issues fixed-rate debt, which
exposes the Company to variability in the fair value of the debt. The Company also issues debt with variable interest rates, which exposes the
Company to variability in interest expense.
To manage interest rate risk, the Company manages its borrowings in line with liquidity needs, maturity schedule, and currency and interest
rate profile. In anticipation of future debt issuances, the Company may use derivative instruments such as forward rate agreements. The
Company does not currently hold any significant derivative instruments to manage its interest rate risk.
The estimated annual impact on Net income of a one-percent change in the interest rate on floating rate debt is approximately $9 million.
Commodity price risk
The Company is exposed to commodity price risk related to purchases of fuel and the potential reduction in Net income due to increases in the
price of diesel. Fuel prices are impacted by geopolitical events, changes in the economy or supply disruptions. Fuel shortages can occur due to
refinery disruptions, production quota restrictions, climate, and labor and political instability.
The Company manages fuel price risk by offsetting the impact of rising fuel prices with the Company's fuel surcharge program. The
surcharge applied to customers is determined in the second calendar month prior to the month in which it is applied, and is generally calculated
using the average monthly price of On-Highway Diesel, and, to a lesser extent, West-Texas Intermediate crude oil.
While the Company's fuel surcharge program provides effective coverage, residual exposure remains given that fuel price risk cannot be
completely managed due to timing and given the volatility in the market. As such, the Company may enter into derivative instruments to
manage such risk when considered appropriate.
Fair value of financial instruments
The financial instruments that the Company measures at fair value on a recurring basis in periods subsequent to initial recognition are
categorized into the following levels of the fair value hierarchy based on the degree to which inputs are observable:
•
•
•
Level 1: Inputs are quoted prices for identical instruments in active markets
Level 2: Significant inputs (other than quoted prices included in Level 1) are observable
Level 3: Significant inputs are unobservable
The carrying amounts of Cash and cash equivalents and Restricted cash and cash equivalents approximate fair value. These financial
instruments include highly liquid investments purchased three months or less from maturity, for which the fair value is determined by reference
to quoted prices in active markets.
The carrying amounts of Accounts receivable, Other current assets and Accounts payable and other approximate fair value due to their
short maturity, unless otherwise specified. The fair value of equity investments with readily determinable fair values, included in Intangible
assets, goodwill and other, is classified as Level 1 with gains and losses being recorded in Other income within the Consolidated Statements of
Income. The fair value of derivative financial instruments, included in Other current assets and Accounts payable and other is classified as
CN | 2021 Annual Report 47
Management's Discussion and Analysis
Level 2 and is used to manage the Company's exposure to foreign currency risk. The fair value is measured by discounting future cash flows
using a discount rate derived from market data for financial instruments subject to similar risks and maturities. The fair value of assets held for
sale, included in Other current assets is classified as Level 3. Additional disclosures are provided in Note 5 - Assets held for sale to the
Company's 2021 Annual Consolidated Financial Statements.
The carrying amount of the Company's debt does not approximate fair value. The fair value is estimated based on quoted market prices for
the same or similar debt instruments, as well as discounted cash flows using current interest rates for debt with similar terms, company rating,
and remaining maturity. The Company classifies debt as Level 2. As at December 31, 2021, the Company's debt, excluding finance leases, had a
carrying amount of $12,475 million (2020 - $12,832 million) and a fair value of $14,424 million (2020 - $16,046 million).
Recent accounting pronouncements
The following recent Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB) came into effect in 2020,
was amended in 2021 and has not been adopted by the Company:
ASU 2020-04 Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting and related
amendments
London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities.
The administrator of LIBOR has ceased the publication of one week and two month USD LIBOR rates on January 1, 2022 and intends to
discontinue the remaining USD LIBOR rates immediately following the LIBOR publication on June 30, 2023.
The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by
reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of
debt securities classified as held-to-maturity.
The ASU was effective starting on March 12, 2020, and is available to be adopted on a prospective basis no later than December 31, 2022,
when the reference rate replacement activity is expected to be completed. The Company currently has outstanding loans referencing LIBOR,
that were not impacted by the administrator of LIBOR ceasing publication of one week and two month USD LIBOR rates, totaling US$572 million
that would be affected by the provisions of this ASU. The Company also has a revolving credit facility and an accounts receivable securitization
program that reference LIBOR (See Note 15 - Debt to the Company's 2021 Annual Consolidated Financial Statements). The Company had no
outstanding borrowing under these credit facilities as at December 31, 2021. The Company has fallback language to allow for the succession of
a clearly defined alternative reference rate within the contracts that reference LIBOR. The Company is evaluating the effects that the adoption
of the ASU will have on its Consolidated Financial Statements and related disclosures, and whether it will elect to apply any of the optional
expedients and exceptions provided in the ASU.
Other recently issued ASUs required to be applied on or after December 31, 2021 have been evaluated by the Company and are not expected to
have a significant impact on the Company's Consolidated Financial Statements.
Critical accounting estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that
affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities at the date of
the financial statements. On an ongoing basis, management reviews its estimates based upon available information. Actual results could differ
from these estimates. The Company's policies for income taxes, capital expenditures, depreciation, pensions and other postretirement benefits,
personal injury and other claims and environmental matters, require management's more significant judgments and estimates in the
preparation of the Company's consolidated financial statements and, as such, are considered to be critical. The following information should be
read in conjunction with the Company's 2021 Annual Consolidated Financial Statements and Notes thereto.
Management discusses the development and selection of the Company's critical accounting policies, including the underlying estimates
and assumptions, with the Audit, Finance and Risk Committee of the Company's Board of Directors. The Audit, Finance and Risk Committee has
reviewed the Company's related disclosures.
48 CN | 2021 Annual Report
Management's Discussion and Analysis
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method, the change in the net
deferred income tax asset or liability is included in the computation of Net income or Other comprehensive income (loss). Deferred income tax
assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. As a result, a projection of taxable income is required for those years, as well as an
assumption of the ultimate recovery/settlement period for temporary differences. The projection of future taxable income is based on
management's best estimate and may vary from actual taxable income.
On an annual basis, the Company assesses the need to establish a valuation allowance for its deferred income tax assets, and if it is
deemed more likely than not that its deferred income tax assets will not be realized, a valuation allowance is recorded. The ultimate realization
of deferred income tax assets is dependent upon the generation of sufficient future taxable income, of the necessary character, during the
periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred income tax
liabilities, the available carryback and carryforward periods, and projected future taxable income in making this assessment. As at December
31, 2021, in order to fully realize all of the deferred income tax assets, the Company will need to generate future taxable income of
approximately $2.2 billion, and, based upon the level of historical taxable income, projections of future taxable income of the necessary
character over the periods in which the deferred income tax assets are deductible, and the reversal of taxable temporary differences,
management believes, following an assessment of the current economic environment, it is more likely than not that the Company will realize
the benefits of these deductible differences.
In addition, Canadian, or domestic, tax rules and regulations, as well as those relating to foreign jurisdictions, are subject to interpretation
and require judgment by the Company that may be challenged by the taxation authorities upon audit of the filed income tax returns. Tax
benefits are recognized if it is more likely than not that the tax position will be sustained on examination by the taxation authorities. As at
December 31, 2021, the total amount of gross unrecognized tax benefits was $64 million, before considering tax treaties and other
arrangements between taxation authorities. The amount of net unrecognized tax benefits as at December 31, 2021 was $47 million. If
recognized, $12 million of the net unrecognized tax benefits as at December 31, 2021 would affect the effective tax rate.
The Company believes that it is reasonably possible that $14 million of the net unrecognized tax benefits as at December 31, 2021 related
to Canadian and U.S. federal, state, and provincial income tax matters, each of which are individually insignificant, may be recognized over the
next twelve months as a result of settlements and a lapse of the applicable statute of limitations, and will not significantly affect the effective
tax rate as they mostly relate to temporary differences.
The Company's deferred income tax assets are mainly composed of temporary differences related to lease liabilities, the pension liability,
accruals for personal injury and other claims, net operating losses and tax credit carryforwards, compensation reserves, and other
postretirement benefits liability. The Company's deferred income tax liabilities are mainly composed of temporary differences related to
properties, the pension asset and operating lease right-of-use assets. These deferred income tax assets and liabilities are recorded at the
enacted tax rates of the periods in which the related temporary differences are expected to reverse. As a result, fiscal budget changes and/or
changes in income tax laws that affect a change in the timing, the amount, and/or the income tax rate at which the temporary difference
components will reverse, could materially affect deferred income tax expense as recorded in the Company's results of operations. The reversal
of temporary differences is expected at future-enacted income tax rates which could change due to fiscal budget changes and/or changes in
income tax laws. As a result, a change in the timing and/or the income tax rate at which the components will reverse, could materially affect
deferred income tax expense as recorded in the Company's results of operations. From time to time, the federal, provincial, and state
governments enact new corporate income tax rates resulting in either lower or higher tax liabilities. A one-percentage-point change in the
Canadian and U.S. statutory federal tax rate would have the effect of changing the deferred income tax expense by $205 million and $141
million in 2021, respectively.
For the year ended December 31, 2021, the Company recorded an income tax expense of $1,441 million, of which $511 million was a
deferred income tax expense.
For the year ended December 31, 2020, the Company recorded an income tax expense of $982 million, of which $487 million was a
deferred income tax expense. The current income tax expense included a recovery of $141 million resulting from the enactment of the CARES
Act.
For the year ended December 31, 2019, the Company recorded an income tax expense of $1,213 million, of which $569 million was a
deferred income tax expense. The deferred income tax expense included a recovery of $112 million resulting from the enactment of a lower
provincial corporate income tax rate.
The Company's net deferred income tax liability as at December 31, 2021 was $9,303 million (2020 - $8,271 million). Additional disclosures
are provided in Note 7 – Income taxes to the Company's 2021 Annual Consolidated Financial Statements.
CN | 2021 Annual Report 49
Management's Discussion and Analysis
Depreciation
Properties are carried at cost less accumulated depreciation including asset impairment write-downs. The Company has a process in place to
determine whether or not costs qualify for capitalization, which requires judgment. The cost of properties, including those under finance leases,
net of asset impairment write-downs, is depreciated on a straight-line basis over their estimated service lives, measured in years, except for rail
and ballast whose services lives are measured in millions of gross tons. The Company follows the group method of depreciation whereby a
single composite depreciation rate is applied to the gross investment in a class of similar assets, despite small differences in the service life or
salvage value of individual property units within the same asset class. The Company uses approximately 40 different depreciable asset classes.
For all depreciable assets, the depreciation rate is based on the estimated service lives of the assets. Assessing the reasonableness of the
estimated service lives of properties requires judgment and is based on currently available information, including periodic depreciation studies
conducted by the Company. The Company's U.S. properties are subject to comprehensive depreciation studies as required by the STB and are
conducted by external experts. Depreciation studies for Canadian properties are not required by regulation and are conducted internally. Studies
are performed on specific asset groups on a periodic basis. Changes in the estimated service lives of the assets and their related composite
depreciation rates are implemented prospectively.
The studies consider, among other factors, the analysis of historical retirement data using recognized life analysis techniques, and the
forecasting of asset life characteristics. Changes in circumstances, such as technological advances, changes to the Company's business
strategy, changes in the Company's capital strategy or changes in regulations can result in the actual service lives differing from the Company's
estimates.
A change in the remaining service life of a group of assets, or their estimated net salvage value, will affect the depreciation rate used to
amortize the group of assets and thus affect depreciation expense as reported in the Company's results of operations. A change of one year in
the composite service life of the Company's fixed asset base would impact annual depreciation expense by approximately $66 million.
Depreciation studies are a means of ensuring that the assumptions used to estimate the service lives of particular asset groups are still
valid and where they are not, they serve as the basis to establish the new depreciation rates to be used on a prospective basis. In 2021, the
Company completed depreciation studies for road properties and as a result, the Company changed the estimated service lives for various
types of road assets and their related composite depreciation rates. The results of these depreciation studies did not materially affect the
Company's annual depreciation expense.
Given the nature of the railroad and the composition of its network which is made up of homogeneous long-lived assets, it is impractical to
maintain records of specific properties at their lowest unit of property.
Retirements of assets occur through the replacement of an asset in the normal course of business, the sale of an asset or the
abandonment of a section of track. For retirements in the normal course of business, generally the life of the retired asset is within a reasonable
range of the expected useful life, as determined in the depreciation studies, and, as such, no gain or loss is recognized under the group method.
The asset's cost is removed from the asset account and the difference between its cost and estimated related accumulated depreciation (net
of salvage proceeds), if any, is recorded as an adjustment to accumulated depreciation and no gain or loss is recognized. The historical cost of
the retired asset is estimated by using deflation factors or indices that closely correlate to the properties comprising the asset classes in
combination with the estimated age of the retired asset using a first-in, first-out approach, and applying it to the replacement value of the asset.
In each depreciation study, an estimate is made of any excess or deficiency in accumulated depreciation for all corresponding asset
classes to ensure that the depreciation rates remain appropriate. The excess or deficiency in accumulated depreciation is amortized over the
remaining life of the asset class.
For retirements of depreciable properties that do not occur in the normal course of business, the historical cost, net of salvage proceeds, is
recorded as a gain or loss in income. A retirement is considered not to be in the normal course of business if it meets the following criteria: (i) it
is unusual, (ii) it is significant in amount, and (iii) it varies significantly from the retirement pattern identified through depreciation studies. A
gain or loss is recognized in Other income for the sale of land or disposal of assets that are not part of railroad operations.
For the year ended December 31, 2021, the Company recorded total depreciation expense of $1,593 million (2020 - $1,583 million; 2019 -
$1,559 million). As at December 31, 2021, the Company had Properties of $41,178 million, net of accumulated depreciation of $15,093 million
(2020 - $40,069 million, net of accumulated depreciation of $14,443 million). Additional disclosures are provided in Note 11 – Properties to the
Company's 2021 Annual Consolidated Financial Statements.
GAAP requires the use of historical cost as the basis of reporting in financial statements. As a result, the cumulative effect of inflation,
which has significantly increased asset replacement costs for capital-intensive companies such as CN, is not reflected in operating expenses.
Depreciation charges on an inflation-adjusted basis, assuming that all operating assets are replaced at current price levels, would be
substantially greater than historically reported amounts.
50 CN | 2021 Annual Report
Management's Discussion and Analysis
Pensions and other postretirement benefits
The Company's plans have a measurement date of December 31. The following table provides the Company's pension asset, pension liability
and other postretirement benefits liability as at December 31, 2021, and 2020:
In millions
Pension asset
Pension liability
Other postretirement benefits liability (1)
December 31,
2021
3,050
447
212
$
$
$
$
$
$
2020
777
553
228
(1)
Includes current portion of $14 million as at December 31, 2021 (2020 - $14 million). See Note 14 - Accounts payable and other for the related current portion.
The descriptions in the following paragraphs pertaining to pensions relate generally to the Company's main pension plan, the CN Pension Plan,
unless otherwise specified.
Curtailment event
On October 31, 2021, the CN Board of Directors approved changes affecting non-unionized members participating in the Company’s defined
benefit pension plans. Effective April 1, 2024, the affected defined benefit pension plans will be amended to cease benefits accruals for non-
unionized members, generally known as a delayed hard freeze. Effective April 1, 2024, all non-unionized members will be transferred to the
Company’s defined contribution pension plans for their future service. This delayed hard freeze constitutes a plan curtailment event recognized
on October 31, 2021 resulting in a $52 million reduction to the Projected benefit obligation, recorded in Other comprehensive income as an
actuarial gain, mostly due to reflecting projected future salary increases and service only up to April 1, 2024. The curtailment event also
triggered an interim re-measurement of the funded status of the affected defined benefit pension plans resulting in an actuarial gain of
$1,915 million recorded in Other comprehensive income composed of i) an actuarial gain on the Projected benefit obligation of $1,808 million
substantially all due to the 84 basis point increase in the end of period discount rate between the prior year end (2.55%) and October 31, 2021
(3.39%), and ii) an actuarial gain on the Plan assets of $107 million due to higher actual returns ($982 million) compared to expected returns
($875 million) over that same ten-month period. Due to the interim re-measurement, the resulting Net periodic benefit income recorded during
the fourth quarter of 2021 increased by $25 million composed of i) a decrease to Current service cost of $9 million, and ii) an increase to Other
components of net periodic benefit income of $16 million.
Calculation of net periodic benefit cost (income)
In accounting for pensions and other postretirement benefits, assumptions are required for, among other things, the discount rate, the expected
long-term rate of return on plan assets, the rate of compensation increase, health care cost trend rates, mortality rates, employee early
retirements, terminations and disability. Changes in these assumptions result in actuarial gains or losses, which are recognized in Other
comprehensive income (loss). The Company generally amortizes these gains or losses into net periodic benefit cost (income) over the
expected average remaining service life of the employee group covered by the plans only to the extent that the unrecognized net actuarial gains
and losses are in excess of the corridor threshold, which is calculated as 10% of the greater of the beginning-of-year balances of the projected
benefit obligation or market-related value of plan assets. The Company's net periodic benefit cost (income) for future periods is dependent on
demographic experience, economic conditions and investment performance. Recent demographic experience has revealed no material net
gains or losses on termination, retirement, disability and mortality. Experience with respect to economic conditions and investment
performance is further discussed herein.
For the years ended December 31, 2021, 2020 and 2019, the consolidated net periodic benefit cost (income) for pensions and other
postretirement benefits were as follows:
In millions
Year ended December 31,
Net periodic benefit income for pensions
Net periodic benefit cost for other postretirement benefits
2021
(201)
2
$
$
2020
(141)
3
$
$
2019
(183)
7
$
$
CN | 2021 Annual Report 51
Management's Discussion and Analysis
As at December 31, 2021 and 2020, the projected pension benefit obligation and accumulated other postretirement benefit obligation were
as follows:
In millions
Projected pension benefit obligation
Accumulated other postretirement benefit obligation
Discount rate assumption
December 31,
2021
17,813
212
$
$
2020
19,499
228
$
$
The Company's discount rate assumption, which is set annually at the end of each year, is determined by management with the aid of third-
party actuaries. The discount rate is used to measure the single amount that, if invested at the measurement date in a portfolio of high-quality
debt instruments with a rating of AA or better, would provide the necessary cash flows to pay for pension benefits as they become due. For the
Canadian pension and other postretirement benefit plans, future expected benefit payments are discounted using spot rates based on a derived
AA corporate bond yield curve for each maturity year. A year-end discount rate of 3.15% based on bond yields prevailing at December 31, 2021
(2020 - 2.55%) was considered appropriate by the Company.
The Company uses the spot rate approach to measure current service cost and interest cost for all defined benefit pension and other
postretirement benefit plans. Under the spot rate approach, individual spot discount rates along the same yield curve used in the determination
of the projected benefit obligation are applied to the relevant projected cash flows for current service cost at the relevant maturity. More
specifically, current service cost is measured using the cash flows related to benefits expected to be accrued in the following year by active
members of a plan and interest cost is measured using the projected cash flows making up the projected benefit obligation multiplied by the
corresponding spot discount rate at each maturity.
As at December 31, 2021, a 0.25% decrease in the 3.15% discount rate used to determine the projected benefit obligation would have
resulted in a decrease of approximately $545 million to the funded status for pensions and would result in a decrease of approximately $20
million to the 2022 projected net periodic benefit income. A 0.25% increase in the discount rate would have resulted in an increase of
approximately $515 million to the funded status for pensions and would result in an increase of approximately $20 million to the 2022 projected
net periodic benefit income.
Expected long-term rate of return assumption
The expected long-term rate of return is determined based on expected future performance for each asset class and is weighted based on the
investment policy. Consideration is taken of the historical performance, the premium return generated from an actively managed portfolio, as
well as current target asset allocations, published market return expectations, economic developments, inflation rates and administrative
expenses. Based on these factors, the rate is determined by the Company. For the January to October and November to December periods of
2021, the Company used a long-term rate of return assumption of 6.75% and 7.00% respectively on the market-related value of plan assets
prevailing for those same periods to compute net periodic benefit cost (income). The Company has elected to use a market-related value of
assets whereby realized and unrealized gains/losses and appreciation/depreciation in the value of the investments are recognized over a
period of five years, while investment income is recognized immediately. The increase to the expected long-term rate of return on plan assets
by 25 basis points to 7.00% for the November to December period of 2021 reflects management's current view of long-term investment returns.
In 2022, the Company will maintain the expected long-term rate of return on plan assets of 7.00% as management's current view of long-term
investment returns remains unchanged from what was existing on October 31, 2021.
The assets of the Company's various plans are primarily held in separate trust funds ("Trusts") which are diversified by asset type, country,
sector and investment strategy. Each year, the CN Board of Directors reviews and confirms or amends the Statement of Investment Policies
and Procedures ("SIPP") which includes the plans' long-term target asset allocation ("Policy") and related benchmark indices. This Policy is
based on the long-term expectations of the economy and financial market returns and considers the dynamics of the plans' benefit obligations.
In 2021, the Policy was amended to implement a target asset allocation change to bonds and mortgages, emerging market debt, private debt,
resource and royalties (formerly oil and gas) and absolute return. In addition, the specialty portfolio was approved as a new investment
strategy.These changes were taken into account in the determination of the Company's expected long-term rate of return assumption. In 2021,
the Policy was: 2% cash and short-term investments, 37% bonds and mortgages, 2% emerging market debt, 3% private debt, 35% equities, 4%
real estate, 5% resource and royalties, 4% infrastructure, 2% specialty portfolio, 12% absolute return investments and negative 6% for
investment-related liabilities.
Annually, the CN Investment Division ("Investment Manager"), a division of the Company created to invest and administer the assets of the
plans, can also implement an investment strategy ("Strategy") which can lead the Plan's actual asset allocation to deviate from the Policy due to
changing market risks and opportunities. The Pension and Investment Committee of the Board of Directors ("Committee") regularly compares
the actual plan asset allocation to the Policy and Strategy and compares the actual performance of the Company's pension plan assets to the
performance of the benchmark indices.
52 CN | 2021 Annual Report
Management's Discussion and Analysis
The Committee's approval is required for all major investments in illiquid securities. The SIPP allows for the use of derivative financial
instruments to implement strategies, to hedge and to adjust existing or anticipated exposures. The SIPP prohibits investments in securities of
the Company or its subsidiaries.
The actual, market-related value and expected rates of return on plan assets for the last five years were as follows:
Actual
Market-related value
Expected
2021
8.7%
8.0%
6.79%
2020
12.5%
7.1%
7.00%
2019
12.2%
6.1%
7.00%
2018
(2.4%)
5.7%
7.00%
2017
9.2%
9.1%
7.00%
The Company's expected long-term rate of return on plan assets reflects management's view of long-term investment returns and the effect of
a 1% variation in such rate of return would result in a change to the net periodic benefit cost (income) of approximately $100 million.
Management's assumption of the expected long-term rate of return is subject to risks and uncertainties that could cause the actual rate of
return to differ materially from management's assumption. There can be no assurance that the plan assets will be able to earn the expected
long-term rate of return on plan assets.
Net periodic benefit income for pensions for 2022
In 2022, the Company expects net periodic benefit income to be $291 million (2021 - $201 million) for all its defined benefit pension plans.
Plan asset allocation
Based on the fair value of the assets held as at December 31, 2021, the assets of the Company's various plans are comprised of 2% in cash and
short-term investments, 37% in bonds and mortgages, 2% in emerging market debt, 3% in private debt, 40% in equities, 2% in real estate, 5% in
resource and royalties, 3% in infrastructure, 2% in specialty portfolio, 11% in absolute return investments, 1% in alternative risk premia
investments and negative 8% in investment-related liabilities. See Note 17 - Pensions and other postretirement benefits to the Company's 2021
Annual Consolidated Financial Statements for information on the fair value measurements of such assets.
A significant portion of the plans' assets are invested in publicly traded equity securities whose return is primarily driven by stock market
performance. Debt securities also account for a significant portion of the plans' investments and provide a partial offset to the variation in the
pension benefit obligation that is driven by changes in the discount rate. The funded status of the plan fluctuates with market conditions and
impacts funding requirements. The Company will continue to make contributions to the pension plans that as a minimum meet pension
legislative requirements.
Rate of compensation increase
The rate of compensation increase is determined by the Company based upon its long-term plans for such increases. For 2021, a basic rate of
compensation increase of 2.75% was used to determine the projected benefit obligation and the net periodic benefit cost (income).
Mortality
The Canadian Institute of Actuaries (CIA) published in 2014 a report on Canadian Pensioners' Mortality ("Report"). The Report contained
Canadian pensioners' mortality tables and improvement scales based on experience studies conducted by the CIA. The CIA's conclusions were
taken into account in selecting management's best estimate mortality assumption used to calculate the projected benefit obligation as at
December 31, 2021, 2020 and 2019.
Funding of pension plans
The Company's main Canadian defined benefit pension plan, the CN Pension Plan, accounts for 93% of the Company's pension obligation and
can produce significant volatility in pension funding requirements, given the pension fund's size, the many factors that drive the plan's funded
status, and Canadian statutory pension funding requirements. Adverse changes to the assumptions used to calculate the plan's funding status,
particularly the discount rate used for funding purposes, as well as changes to existing federal pension legislation, regulation and guidance
could significantly impact the Company's future contributions.
For accounting purposes, the funded status is calculated under generally accepted accounting principles for all pension plans. For funding
purposes, the funded status is also calculated under going concern and solvency scenarios as prescribed under pension legislation and subject
to guidance issued by the CIA and the Office of the Superintendent of Financial Institutions ("OSFI") for all registered Canadian defined benefit
pension plans. The Company's funding requirements are determined upon completion of actuarial valuations. Actuarial valuations are generally
required on an annual basis for all Canadian defined benefit pension plans, or when deemed appropriate by the OSFI. Actuarial valuations are
also required annually for the Company's U.S. qualified defined benefit pension plans.
CN | 2021 Annual Report 53
Management's Discussion and Analysis
The Company's most recently filed actuarial valuations for funding purposes for its Canadian registered defined pension plans conducted
as at December 31, 2020 indicated a funding excess on a going concern basis of approximately $3.4 billion and a funding excess on a solvency
basis of approximately $0.4 billion, calculated using the three-year average of the plans' hypothetical wind-up ratio in accordance with the
Pension Benefit Standards Regulations, 1985. The federal pension legislation requires funding deficits, if any, to be paid over a number of years,
as calculated under current pension regulations. Alternatively, a letter of credit can be subscribed to fulfill required solvency deficit payments.
In November 2021, the OSFI issued a revised instruction guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans
("Guide") to be used for the December 31, 2021 actuarial valuations. The revised Guide is not expected to have a significant impact on the
solvency status of the Company's defined benefit pension plans, and is not expected to trigger additional pension contributions in 2022.
The Company's next actuarial valuations for funding purposes for its Canadian registered defined benefit pension plans required as at
December 31, 2021 will be performed in 2022. These actuarial valuations are expected to identify a funding excess on a going concern basis of
approximately $3.9 billion, while on a solvency basis a funding excess of approximately $1.1 billion is expected.
Based on the anticipated results of these valuations, the CN Pension Plan is expected to be fully funded and at a level such that the
Company would be prohibited from making contributions to the CN Pension Plan once the actuarial valuation report is filed in 2022. As such,
the Company expects to make total cash contributions of approximately $70 million for all of the Company's pension plans in 2022. The
Company expects cash from operations and its other sources of financing to be sufficient to meet its 2022 funding obligations.
Information disclosed by major pension plan
The following table provides the Company's plan assets by category, projected benefit obligation at end of year, as well as Company and
employee contributions by major defined benefit pension plan:
In millions
December 31, 2021
CN
Pension Plan
BC Rail
Pension Plan
U.S. and
other plans
Plan assets by category
Cash and short-term investments
Bonds
Mortgages
Emerging market debt
Private debt
Public equities
Private equities
Real estate
Resource and royalties
Infrastructure
Absolute return
Alternative risk premia
Total investments
Investment-related liabilities (1)
Other (2)
Total plan assets
Projected benefit obligation at end of year
Company contributions in 2021
Employee contributions in 2021
$
395
$
6,882
19
357
705
7,679
610
361
954
638
2,325
234
21,159
(1,741)
67
19,485
16,557
81
61
$
$
$
$
$
$
$
$
11
352
—
6
14
133
12
7
19
13
40
4
611
(30)
4
585
464
—
—
$
$
4
205
—
2
4
98
3
2
5
3
12
1
339
(9)
16
346
792
23
—
$
$
$
$
$
$
$
$
Total
410
7,439
19
365
723
7,910
625
370
978
654
2,377
239
22,109
(1,780)
87
20,416
17,813
104
61
(1)
(2)
Investment-related liabilities include securities sold under repurchase agreements.
Other consists of operating assets of $134 million and liabilities of $47 million required to administer the Trusts' investment assets and the plans' benefit and funding
activities.
Additional disclosures are provided in Note 17 – Pensions and other postretirement benefits to the Company's 2021 Annual Consolidated
Financial Statements.
Personal injury and other claims
In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive
damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party
personal injuries, occupational disease and property damage, arising out of harm to individuals or property allegedly caused by, but not limited
to, derailments or other accidents.
54 CN | 2021 Annual Report
Management's Discussion and Analysis
Canada
Employee injuries are governed by the workers' compensation legislation in each province whereby employees may be awarded either a lump
sum or a future stream of payments depending on the nature and severity of the injury. As such, the provision for employee injury claims is
discounted. In the provinces where the Company is self-insured, costs related to employee work-related injuries are accounted for based on
actuarially developed estimates of the ultimate cost associated with such injuries, including compensation, health care and third-party
administration costs. An actuarial study is generally performed at least on a triennial basis. For all other legal actions, the Company maintains,
and regularly updates on a case-by-case basis, provisions for such items when the expected loss is both probable and can be reasonably
estimated based on currently available information.
In 2021, 2020 and 2019 the Company recorded a decrease of $11 million, $13 million and $7 million, respectively, to its provision for
personal injuries in Canada as a result of actuarial valuations for employee injury claims.
As at December 31, 2021, 2020 and 2019, the Company's provision for personal injury and other claims in Canada was as follows:
In millions
Beginning of year
Accruals and other
Payments
End of year
Current portion - End of year
2021
206
12
(36)
182
50
$
$
$
2020
207
31
(32)
206
68
$
$
$
2019
207
29
(29)
207
55
$
$
$
The assumptions used in estimating the ultimate costs for Canadian employee injury claims include, among other factors, the discount rate, the
rate of inflation, wage increases and health care costs. The Company periodically reviews its assumptions to reflect currently available
information. Over the past three years, the Company has not had to significantly change any of these assumptions. Changes in any of these
assumptions could materially affect Casualty and other expense as reported in the Company's results of operations.
For all other legal claims in Canada, estimates are based on the specifics of the case, trends and judgment.
United States
Personal injury claims by the Company's employees, including claims alleging occupational disease and work-related injuries, are subject to the
provisions of the Federal Employers' Liability Act (FELA). Employees are compensated under FELA for damages assessed based on a finding of
fault through the U.S. jury system or through individual settlements. As such, the provision is undiscounted. With limited exceptions where
claims are evaluated on a case-by-case basis, the Company follows an actuarial-based approach and accrues the expected cost for personal
injury, including asserted and unasserted occupational disease claims, and property damage claims, based on actuarial estimates of their
ultimate cost. An actuarial study is performed annually.
For employee work-related injuries, including asserted occupational disease claims, and third-party claims, including grade crossing,
trespasser and property damage claims, the actuarial valuation considers, among other factors, the Company's historical patterns of claims
filings and payments. For unasserted occupational disease claims, the actuarial valuation includes the projection of the Company's experience
into the future considering the potentially exposed population. The Company adjusts its liability based upon management's assessment and the
results of the study. On an ongoing basis, management reviews and compares the assumptions inherent in the latest actuarial valuation with
the current claim experience and, if required, adjustments to the liability are recorded.
Due to the inherent uncertainty involved in projecting future events, including events related to occupational diseases, which include but
are not limited to, the timing and number of actual claims, the average cost per claim and the legislative and judicial environment, the
Company's future payments may differ from current amounts recorded.
In 2021, the Company recorded a decrease of $20 million to its provision for U.S. personal injury and other claims attributable to non-
occupational disease claims, third-party claims and occupational disease claims pursuant to the 2021 actuarial valuation. In 2020 and 2019,
actuarial valuations resulted in a decrease of $10 million and an increase of $2 million, respectively. The prior years' adjustments from the
actuarial valuations were mainly attributable to non-occupational disease claims, occupational disease claims and third-party claims, reflecting
changes in the Company's estimates of unasserted claims and costs related to asserted claims. The Company has an ongoing risk mitigation
strategy focused on reducing the frequency and severity of claims through injury prevention and containment; mitigation of claims; and lower
settlements of existing claims.
CN | 2021 Annual Report 55
Management's Discussion and Analysis
As at December 31, 2021, 2020 and 2019, the Company's provision for personal injury and other claims in the U.S. was as follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
Current portion - End of year
2021
141
30
(45)
(1)
125
25
$
$
$
2020
145
28
(29)
(3)
141
41
$
$
$
2019
139
44
(31)
(7)
145
36
$
$
$
For the U.S. personal injury and other claims liability, historical claim data is used to formulate assumptions relating to the expected number of
claims and average cost per claim for each year. Changes in any one of these assumptions could materially affect Casualty and other expense
as reported in the Company's results of operations. A 5% change in the asbestos average claim cost would result in an increase or decrease in
the liability recorded of approximately $1 million and a 1% change in the inflation trend rate for all injury types would result in an increase or
decrease in the liability recorded of approximately $2 million.
Environmental matters
Known existing environmental concerns
The Company is or may be liable for remediation costs at individual sites, in some cases along with other potentially responsible parties,
associated with actual or alleged contamination. The ultimate cost of addressing these known contaminated sites cannot be definitively
established given that the estimated environmental liability for any given site may vary depending on the nature and extent of the
contamination; the nature of anticipated response actions, taking into account the available clean-up techniques; evolving regulatory standards
governing environmental liability; and the number of potentially responsible parties and their financial viability. As a result, liabilities are
recorded based on the results of a four-phase assessment conducted on a site-by-site basis. A liability is initially recorded when environmental
assessments occur, remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used
and the extent of the corrective action required, can be reasonably estimated. The Company estimates the costs related to a particular site
using cost scenarios established by external consultants based on the extent of contamination and expected costs for remedial efforts. In the
case of multiple parties, the Company accrues its allocable share of liability taking into account the Company's alleged responsibility, the
number of potentially responsible parties and their ability to pay their respective share of the liability. Adjustments to initial estimates are
recorded as additional information becomes available.
The Company's provision for specific environmental sites is undiscounted and includes costs for remediation and restoration of sites, as
well as monitoring costs. Environmental expenses, which are classified as Casualty and other in the Consolidated Statements of Income,
include amounts for newly identified sites or contaminants as well as adjustments to initial estimates. Recoveries of environmental remediation
costs from other parties are recorded as assets when their receipt is deemed probable.
As at December 31, 2021, 2020 and 2019, the Company's provision for specific environmental sites was as follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
Current portion - End of year
2021
2020
2019
$
$
$
59
23
(26)
—
56
38
$
$
$
57
44
(42)
—
59
46
$
$
$
61
31
(34)
(1)
57
38
The Company anticipates that the majority of the liability at December 31, 2021 will be paid out over the next five years. Based on the
information currently available, the Company considers its provisions to be adequate.
56 CN | 2021 Annual Report
Management's Discussion and Analysis
Unknown existing environmental concerns
While the Company believes that it has identified the costs likely to be incurred for environmental matters based on known information, the
discovery of new facts, future changes in laws, the possibility of releases of hazardous materials into the environment and the Company's
ongoing efforts to identify potential environmental liabilities that may be associated with its properties may result in the identification of
additional environmental liabilities and related costs. The magnitude of such additional liabilities and the costs of complying with future
environmental laws and containing or remediating contamination cannot be reasonably estimated due to many factors, including:
•
•
•
•
the lack of specific technical information available with respect to many sites;
the absence of any government authority, third-party orders, or claims with respect to particular sites;
the potential for new or changed laws and regulations and for development of new remediation technologies and uncertainty regarding the
timing of the work with respect to particular sites; and
the determination of the Company's liability in proportion to other potentially responsible parties and the ability to recover costs from any
third parties with respect to particular sites.
Therefore, the likelihood of any such costs being incurred or whether such costs would be material to the Company cannot be determined at
this time. There can thus be no assurance that liabilities or costs related to environmental matters will not be incurred in the future, or will not
have a material adverse effect on the Company's financial position or results of operations in a particular quarter or fiscal year, or that the
Company's liquidity will not be adversely impacted by such liabilities or costs, although management believes, based on current information,
that the costs to address environmental matters will not have a material adverse effect on the Company's financial position or liquidity. Costs
related to any unknown existing or future contamination will be accrued in the period in which they become probable and reasonably estimable.
Future occurrences
In railroad and related transportation operations, it is possible that derailments or other accidents, including spills and releases of hazardous
materials, may occur that could cause harm to human health or to the environment. As a result, the Company may incur costs in the future,
which may be material, to address any such harm, compliance with laws and other risks, including costs relating to the performance of clean-
ups, payment of environmental penalties and remediation obligations, and damages relating to harm to individuals or property.
Regulatory compliance
The Company may incur significant capital and operating costs 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. Environmental
expenditures that relate to current operations are expensed unless they relate to an improvement to the property. Expenditures that relate to an
existing condition caused by past operations and which are not expected to contribute to current or future operations are expensed. Operating
expenses related to regulatory compliance activities for environmental matters for the year ended December 31, 2021 amounted to $27 million
(2020 - $25 million; 2019 - $25 million). For 2022, the Company expects to incur operating expenses relating to environmental matters in the
same range as 2021. In addition, based on the results of its operations and maintenance programs, as well as ongoing environmental audits
and other factors, the Company plans for specific capital improvements on an annual basis. Certain of these improvements help ensure
facilities, such as fueling stations, waste water and storm water treatment systems, comply with environmental standards and include new
construction and the updating of existing systems and/or processes. Other capital expenditures relate to assessing and remediating certain
impaired properties. The Company's environmental capital expenditures for the year ended December 31, 2021 amounted to $18 million (2020 -
$20 million; 2019 - $25 million). For 2022, the Company expects to incur capital expenditures relating to environmental matters in the same
range as 2021.
CN | 2021 Annual Report 57
Management's Discussion and Analysis
Business risks
In the normal course of business, the Company is exposed to various business risks and uncertainties that can have an effect on the
Company's results of operations, financial position, or liquidity. While some exposures may be reduced by the Company's risk management
strategies, many risks are driven by external factors beyond the Company's control or are of a nature which cannot be eliminated. The key areas
of business risks and uncertainties described in this section are not the only ones that can affect the Company. Additional risks and
uncertainties not currently known to management or that may currently not be considered material by management, could nevertheless also
have an adverse effect on the Company's business.
Pandemic risk and economic downturn
Severe disruptions in regional economies and the world economy can be caused by the outbreak of a contagious illness, such as the current
COVID-19 pandemic. The transmission of COVID-19 and efforts to contain its spread have resulted in international, national and local border
closings, travel restrictions, significant disruptions to business operations, supply chains, customer activity and demand, service cancellations,
reductions and other changes, significant challenges in healthcare service preparation and delivery, and quarantines, as well as considerable
general concern and uncertainty, all of which have negatively affected the economic environment and may in the future have further impacts. It
is not possible to predict what additional measures and restrictions will be imposed by governmental authorities and the period in time during
which those measures and restrictions will apply. Economic and supply chain disruptions, including temporary staff shortages resulting from
the pandemic, could further materially affect the Company's financial results and operations. The COVID-19 pandemic could also further and
significantly impact freight demand and commodity prices in connection with ensuing economic disruption, supply shortages, trade disruption,
temporary staff shortages and temporary closures of facilities in geographic locations more importantly impacted by the outbreak. The scope
and severity of such disruptions and their impact on the Company's financial results and operations have been, and may continue to be
material.
Competition
The Company faces significant competition, including from rail carriers and other modes of transportation, and is also affected by its
customers' flexibility to select among various origins and destinations, including ports, in getting their products to market. Specifically, the
Company faces competition from CP, which operates the other major rail system in Canada and services most of the same industrial areas,
commodity resources and population centers as the Company; major U.S. railroads and other Canadian and U.S. railroads; long-distance
trucking companies, transportation via the St. Lawrence-Great Lakes Seaway and the Mississippi River and transportation via pipelines. In
addition, while railroads must build or acquire and maintain their rail systems, motor carriers and barges are able to use public rights-of-way
that are built and maintained by public entities without paying fees covering the entire costs of their usage.
Competition is generally based on the quality and the reliability of the service provided, access to markets, as well as price. Factors
affecting the competitive position of customers, including exchange rates and energy cost, could materially adversely affect the demand for
goods supplied by the sources served by the Company and, therefore, the Company's volumes, revenues and profit margins. Factors affecting
the general market conditions for the Company's customers can result in an imbalance of transportation capacity relative to demand. An
extended period of supply/demand imbalance could negatively impact market rate levels for all transportation services, and more specifically
the Company's ability to maintain or increase rates. This, in turn, could materially and adversely affect the Company's business, results of
operations or financial position.
Previous consolidation of rail systems in the U.S. have resulted in larger rail systems that are in a position to compete effectively with the
Company in numerous markets.
On September 15, 2021, KCS entered into a merger agreement with CP and filed an amended notice of intent to file a merger application.
On September 30, 2021, the STB found that the agency’s prior voting trust approval for CP and KCS would apply to the voting trust described in
the amended notice. On November 23, 2021, the STB accepted the joint CP-KCS merger application as complete and set a procedural schedule
for comments opposing the merger and seeking conditions. On December 14, 2021, CP acquired and deposited the securities of KCS into a
voting trust. On January 12, 2022, CN filed a description of anticipated responsive application to provide notice that it intends to seek a
condition requiring CP and KCS to divest the KCS lines between Kansas City, Missouri and Springfield, Illinois/East St. Louis, Illinois. CN expects
to file its application on February 28, 2022. If the merger is approved, this may impact the Company's competitive position.
There can be no assurance that the Company will be able to compete effectively against current or future competitors in the transportation
industry, or that further consolidation within the transportation industry and legislation allowing for more leniency in size and weight for motor
carriers will not adversely affect the Company's competitive position. No assurance can be given that competitive pressures in transportation
markets will not lead to reduced revenues, profit margins or both.
58 CN | 2021 Annual Report
Management's Discussion and Analysis
Environmental matters
The Company's operations are subject to numerous federal, provincial, state, municipal and local environmental laws and regulations in Canada
and the U.S. concerning, among other things, emissions into the air; discharges into waters; the generation, handling, storage, transportation,
treatment and disposal of waste, hazardous substances and other materials; decommissioning of underground and aboveground storage
tanks; and soil and groundwater contamination. 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.
While the Company believes that it has identified the costs likely to be incurred for environmental matters in the next several years based
on known information, the discovery of new facts, future changes in laws, the possibility of releases of hazardous materials into the
environment and the Company's ongoing efforts to identify potential environmental liabilities that may be associated with its properties may
result in the identification of additional environmental liabilities and related costs.
In railroad and related transportation operations, it is possible that derailments or other accidents, including spills and releases of
hazardous materials, may occur that could cause harm to human health or to the environment. In addition, the Company is also exposed to
potential catastrophic liability risk, faced by the railroad industry in general, in connection with the transportation of toxic inhalation hazard
materials such as chlorine and anhydrous ammonia, or other dangerous commodities such as crude oil and propane that the Company may be
required to transport as a result of its common carrier obligations. Therefore, the Company may incur costs in the future, which may be
material, to address any such harm, compliance with laws or other risks, including costs relating to the performance of clean-ups, payment of
environmental penalties and remediation obligations, and damages relating to harm to individuals or property.
The environmental liability for any given contaminated site varies depending on the nature and extent of the contamination; the available
clean-up techniques; evolving regulatory standards governing environmental liability; and the number of potentially responsible parties and their
financial viability. As such, the ultimate cost of addressing known contaminated sites cannot be definitively established. Also, additional
contaminated sites yet unknown may be discovered or future operations may result in accidental releases.
While some exposures may be reduced by the Company's risk mitigation strategies (including periodic audits, employee training programs,
emergency plans and procedures, and insurance), many environmental risks are driven by external factors beyond the Company's control or are
of a nature which cannot be completely eliminated. Therefore, there can be no assurance, notwithstanding the Company's mitigation strategies,
that liabilities or costs related to environmental matters will not be incurred in the future or that environmental matters will not have a material
adverse effect on the Company's results of operations, financial position or liquidity, or reputation.
Personal injury and other claims
In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive
damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party
personal injuries, occupational disease, and property damage, arising out of harm to individuals or property allegedly caused by, but not limited
to, derailments or other accidents. The Company maintains provisions for such items, which it considers to be adequate for all of its
outstanding or pending claims and benefits from insurance coverage for occurrences in excess of certain amounts. The final outcome with
respect to actions outstanding or pending at December 31, 2021, or with respect to future claims, cannot be predicted with certainty, and
therefore there can be no assurance that their resolution will not have a material adverse effect on the Company's results of operations,
financial position or liquidity, in a particular quarter or fiscal year.
Labor negotiations
The working conditions of the Company's unionized workforce are governed by collective agreements which are negotiated from time to time.
Disputes relating to the renewal of collective agreements could potentially result in strikes, lockouts, slowdown of the business and ultimately
loss of business. There can be no assurance that the Company will be able to renew and have its collective agreements ratified without a strike
or lockout or that the resolution of these negotiations will not have a material adverse effect on the Company's results or financial position.
Future labor agreements could increase labor and fringe benefits and related expenses.
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
CN | 2021 Annual Report 59
Management's Discussion and Analysis
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.
Regulation
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 under the Canada
Transportation Act, which provides rate and service remedies, including final offer arbitration, 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.
No assurance can be given that any current or future regulatory or legislative initiatives by the Canadian federal government and agencies will
not materially adversely affect the Company's results of operations or its competitive and financial position.
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 rail restructuring transactions such as mergers, line sales, line construction
and line abandonments. 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 proceedings undertaken by the STB in a number of
significant matters remain pending.
The Passenger Rail Investment and Improvement Act of 2008 (PRIIA) required Amtrak and the Federal Railroad Administration (FRA) to
jointly promulgate the PRIIA performance standards. The prior metrics were vacated and the arbitration provision in the statute was severed by
the U.S. Court of Appeals for the District of Columbia. On November 16, 2020, the FRA adopted metrics for measuring performance, which
included non-binding dispute resolution for schedules that are disputed. In April 2021, CN provided notice to Amtrak concerning which
passenger schedules are ready to be certified and which are to be disputed. As part of PRIIA, U.S. Congress authorized the STB to investigate
any railroad over whose track Amtrak operates that fails to meet the performance standards under PRIIA and the STB is authorized to assess
damages against the host railroad. On April 15, 2021, the Company provided notice to Amtrak that passenger schedules for certain trains
hosted by Illinois Central and Grand Trunk Western are disputed. Disputing schedules is the first step of a non-binding dispute resolution
process with Amtrak. For the schedules that the Company disputed, the Company proposed schedules for Amtrak’s consideration and offered
to continue working with Amtrak. Amtrak has stated that eight schedules are disputed and 18 schedules are certified.
On December 30, 2020, the STB instituted a rulemaking proceeding to consider a petition by three Class I railroads to change the Board’s
procedures for determining annually which Class I railroads are revenue adequate by examining the railroads in comparison to the performance
of S&P 500 companies. On February 4, 2021, the Board requested comments on the petition as well as responses to specific questions posed
by the Board. The railroads filed their responses to the questions, and comments have been filed. Reply comments were due on August 16,
2021.
60 CN | 2021 Annual Report
Management's Discussion and Analysis
On April 19, 2021, the FRA granted the Company’s request for an extension of the Company’s automated track inspection test program to
evaluate the optimal combination of visual and automated track inspections. The Company previously obtained approval from FRA to conduct
the test program in April 2020. The test program has been extended to November 23, 2022. On November 23, 2021, the FRA granted the
Company's request to move from Phase 2 to Phase 3 of the Company's automated track inspection test program.
On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. The order affirms the
policy to enforce antitrust laws to oppose excessive industry concentration and abuse of market power. The order establishes a White House
Competition Counsel. The order encourages the Chair of the STB to consider several steps, including rulemakings on reciprocal switching and
competitive access. The Chairman of the STB encouraged Board members to reform competitive access policies; increase customer visibility
into first mile/last mile, and increase the availability of rate relief methods in instances where a railroad has market dominance.
In 2019, the STB proposed rules to establish a new rate case method for smaller cases known as Final Offer Rate Review. On
November 15, 2021, the STB issued a supplemental proposed rulemaking to invite comments on certain modifications to the new final offer
rate reasonableness procedure proposed by the STB in 2019. Comments are due in the first quarter of 2022.
On November 12, 2021, the STB announced that it will hold a public hearing on March 15, 2022 and March 16, 2022 concerning a proposal
by the STB in 2016 to amend its regulations regarding reciprocal switching. Written testimony and comments are due on February 14, 2022.
On November 15, 2021, the STB proposed rules to modify its regulations and establish a voluntary arbitration program for small rate
disputes in response to a joint petition for rulemaking filed by five Class I railroads, including the Company. On December 29, 2021, the STB
denied a request by shipper associations to hold the proceeding in abeyance. Comments are due in the first and second quarters of 2022.
On November 23, 2021, the STB instituted a proceeding to consider a proposal by shipper associations to adopt regulations governing
railroads' use of private freight cars to assess a "private railcar delay charge" when a private railcar does not move for more than 72
consecutive hours between when it is released for transportation and the time it is placed. The STB will issue a future decision with procedures
for further public comment.
No assurance can be given that these and any other current or future regulatory or legislative initiatives by the U.S. federal government and
agencies will not materially adversely affect the Company's results of operations or its competitive and financial position.
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.
CN | 2021 Annual Report 61
Management's Discussion and Analysis
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).
No assurance can be given that these and any other current or future regulatory or legislative initiatives by the Canadian federal government
and agencies will not materially adversely affect the Company's results of operations or its competitive and financial position.
62 CN | 2021 Annual Report
Management's Discussion and Analysis
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.
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.
No assurance can be given that these and any other current or future regulatory or legislative initiatives by the U.S. federal government and
agencies will not materially adversely affect the Company's results of operations or its competitive and financial position.
Regulation – 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.
CN | 2021 Annual Report 63
Management's Discussion and Analysis
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.
While the Company will continue to work closely with the CBSA, CBP, and other Canadian and U.S. agencies, as described above, no assurance
can be given that these and future decisions by the U.S., Canadian, provincial, state, or local governments on homeland security matters,
legislation on security matters enacted by the U.S. Congress or Parliament, or joint decisions by the industry in response to threats to the North
American rail network, will not materially adversely affect the Company's results of operations, or its competitive and financial position.
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.
Economic conditions
The Company is susceptible to changes in the economic conditions of the industries and geographic areas that produce and consume the
freight it transports or the supplies it requires to operate. In addition, many of the goods and commodities carried by the Company experience
cyclical demand. For example, the volatility in domestic and global energy markets could impact the demand for transportation services as well
as impact the Company's fuel costs and surcharges. In addition, the volatility in other commodity markets such as coal and iron ore could have
an impact on volumes. Many of the bulk commodities the Company transports move offshore and are affected more by global rather than
North American economic conditions. Adverse North American and global economic conditions, or economic or industrial restructuring, that
affect the producers and consumers of the commodities carried by the Company, including customer insolvency, may have a material adverse
effect on the volume of rail shipments and/or revenues from commodities carried by the Company, and thus materially and negatively affect its
results of operations, financial position, or liquidity. Moreover, supply chain disruptions in North America and internationally may adversely
affect volumes of goods and timelines, and therefore adversely affect CN’s operations and financial results.
Pension funding volatility
The Company's funding requirements for its defined benefit pension plans are determined using actuarial valuations. See the section of this
MD&A entitled Critical accounting estimates – Pensions and other postretirement benefits for information relating to the funding of the
Company's defined benefit pension plans. Adverse changes with respect to pension plan returns and the level of interest rates as well as
changes to existing federal pension legislation and regulation may significantly impact future pension contributions and have a material
adverse effect on the funding status of the plans and the Company's results of operations.
64 CN | 2021 Annual Report
Management's Discussion and Analysis
There can be no assurance that the Company's pension expense and funding of its defined benefit pension plans will not increase in the future
and thereby negatively impact earnings and/or cash flow.
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. 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 risk
of 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. 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, a December 2021 Security Directive from the United
States Department of Homeland Security (DHS), Transportation Security Administration (TSA) requiring rail operators to take several actions in
2022 to enhance rail cybersecurity.
Trade restrictions
Global as well as North American trade conditions, including trade barriers on certain commodities, may interfere with the free circulation of
goods across Canada and the U.S. or the cost associated therewith.
On November 30, 2018, the U.S., Canada and Mexico signed the Canada-United States-Mexico Agreement (CUSMA), a new trade
agreement to replace the North American Free Trade Agreement. All three countries have ratified the agreement which came into force on
July 1, 2020.
On November 24, 2021, the U.S. Department of Commerce issued the final results of its second administrative review of anti-dumping and
countervailing duty orders regarding softwood lumber products from Canada, by applying a 17.9% combined duty rate, approximately twice the
current combined duty rate of 8.99%. Following completion of any legal challenges under the CUSMA or USMCA Chapter 10 or in U.S. courts,
these new duty rates will apply retroactively. The Government of Canada has stated that it still believes this is entirely unjustified and will hurt
consumers, businesses and workers on both sides of the border. The decision will be challenged while a negotiated solution to this
longstanding trade issue is pursued.
It remains too early to assess the potential outcome of other ongoing various trade actions taken by governments and agencies. As such,
there can be no assurance that trade actions will not materially adversely affect the volume of rail shipments and/or revenues from
commodities carried by the Company, and thus materially and negatively impact earnings and/or cash flow.
Terrorism and international conflicts
Potential terrorist actions can have a direct or indirect impact on the transportation infrastructure, including railway infrastructure in North
America, and can interfere with the free flow of goods. Rail lines, facilities and equipment could be directly targeted or become indirect
casualties, which could interfere with the free flow of goods. International conflicts can also have an impact on the Company's markets.
Government response to such events could adversely affect the Company's operations. Insurance premiums could also increase significantly or
coverage could become unavailable.
CN | 2021 Annual Report 65
Management's Discussion and Analysis
Customer credit risk
In the normal course of business, the Company monitors the financial condition and credit limits of its customers and reviews the credit history
of each new customer. Although the Company believes there are no significant concentrations of credit risk, economic conditions can affect
the Company's customers and can result in an increase to the Company's credit risk and exposure to the business failures of its customers. A
widespread deterioration of customer credit and/or business failures of customers could have a material adverse effect on the Company's
results of operations, financial position or liquidity.
Liquidity
Disruptions in financial markets or deterioration of the Company's credit ratings could hinder the Company's access to external sources of
funding to meet its liquidity needs. There can be no assurance that changes in the financial markets will not have a negative effect on the
Company's liquidity and its access to capital at acceptable terms and rates.
Supplier concentration
The Company operates in a capital-intensive industry where the complexity of rail equipment limits the number of suppliers available. The
supply market could be disrupted if changes in the economy caused any of the Company's suppliers to cease production or to experience
capacity or supply shortages. The supply market could become further concentrated and could result in changes to the product or service
offerings by suppliers. This could also result in cost increases to the Company and difficulty in obtaining and maintaining the Company's rail
equipment and materials. Since the Company also has foreign suppliers, international relations, trade restrictions and global economic and
other conditions may potentially interfere with the Company's ability to procure necessary equipment and materials. Widespread business
failures of, or restrictions on suppliers, could have a material adverse effect on the Company's results of operations or financial position.
Availability of qualified personnel
The Company may experience demographic challenges in the employment levels of its workforce. Changes in employee demographics, training
requirements and the availability of qualified personnel, particularly locomotive engineers and conductors and information technologists, could
negatively impact the Company's ability to meet demand for rail service. The Company monitors employment levels and seeks to ensure that
there is an adequate supply of personnel to meet rail service requirements. However, the Company's efforts to attract and retain qualified
personnel may be hindered by specific conditions in the job market. No assurance can be given that demographic or other challenges will not
materially adversely affect the Company's results of operations or its financial position.
Fuel costs
The Company is susceptible to the volatility of fuel prices due to changes in the economy or supply disruptions. Fuel shortages can occur due
to refinery disruptions, production quota restrictions, climate, as well as labor and political instability. Increases in fuel prices or supply
disruptions may materially adversely affect the Company's results of operations, financial position or liquidity.
Foreign exchange
The Company conducts its business in both Canada and the U.S. and as a result, is affected by currency fluctuations. Changes in the exchange
rate between the Canadian dollar and other currencies (including the US dollar) make the goods transported by the Company more or less
competitive in the world marketplace and thereby may adversely affect the Company's revenues and expenses.
Interest rates
The Company is exposed to interest rate risk relating to the Company's debt. The Company mainly issues fixed-rate debt, which exposes the
Company to variability in the fair value of the debt. The Company also issues debt with variable interest rates, which exposes the Company to
variability in interest expense. Adverse changes to market interest rates may significantly impact the fair value or future cash flows of the
Company's financial instruments. There can be no assurance that changes in the market interest rates will not have a negative effect on the
Company's results of operations or liquidity.
Transportation network disruptions
Due to the integrated nature of the North American freight transportation infrastructure, the Company's operations may be negatively affected
by service disruptions of its own network, including illegal blockades, as well as of other transportation links such as ports and other railroads
which interchange with the Company. A significant prolonged service disruption of CN's network or one or more of these entities could have an
adverse effect on the Company's results of operations, financial position or liquidity. Furthermore, deterioration in the cooperative relationships
with the Company's connecting carriers could directly affect the Company's operations.
66 CN | 2021 Annual Report
Management's Discussion and Analysis
Severe weather
The Company's success is dependent on its ability to operate its railroad efficiently. Severe weather and natural disasters, such as extreme cold
or heat, flooding, droughts, fires, hurricanes and earthquakes, can disrupt operations and service for the railroad, affect the performance of
locomotives and rolling stock, as well as disrupt operations for both the Company and its customers. Business interruptions resulting from
severe weather could result in increased costs, increased liabilities and lower revenues, which could have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
Climate change
Climate change, including the impacts of global warming, has the potential physical risks of increasing the frequency of adverse weather
events, which can disrupt the Company's operations and damage its infrastructure or properties. It could also affect the markets for, or the
volume of, the goods the Company carries or otherwise have a material adverse effect on the Company's results of operations, financial
position or liquidity. Government action or inaction to address climate change could also affect CN. The Company is currently subject to climate
change and other emissions-related laws and regulations that have been proposed and, in some cases adopted, on the federal, provincial and
state levels. While CN is continually focused on efficiency improvements and reducing its carbon footprint, cap and trade systems, carbon
taxes, or other controls on emissions of greenhouse gases imposed by various government bodies could increase the Company's capital and
operating costs. The Company may not be able to offset such impacts, including, for example, through higher freight rates. Climate change
legislation and regulation could also affect CN's customers; make it difficult for CN's customers to produce products in a cost-competitive
manner due to increased energy costs; and increase legal costs related to defending and resolving legal claims and other litigation related to
climate change.
Controls and procedures
The Company's Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2021, have concluded that the Company's
disclosure controls and procedures were effective.
During the fourth quarter ended December 31, 2021, there were no changes in the Company's internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that materially affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
As of December 31, 2021, management has assessed the effectiveness of the Company's internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) using the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, management has determined that the
Company's internal control over financial reporting was effective as of December 31, 2021, and issued Management's Report on Internal Control
over Financial Reporting dated February 1, 2022 to that effect.
CN | 2021 Annual Report 67
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Management has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2021 using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013).
Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of
December 31, 2021.
KPMG LLP, an independent registered public accounting firm, has issued an unqualified audit report on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2021 and has also expressed an unqualified audit opinion on the Company's 2021
consolidated financial statements as stated in their Reports of Independent Registered Public Accounting Firm dated February 1, 2022.
(s) Jean-Jacques Ruest
President and Chief Executive Officer
February 1, 2022
(s) Ghislain Houle
Executive Vice-President and Chief Financial Officer
February 1, 2022
68 CN | 2021 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Canadian National Railway Company:
Opinion on the consolidated financial statements
We have audited the accompanying consolidated balance sheets of Canadian National Railway Company (the "Company") as of December 31,
2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for
each of the years in the three‐year period ended December 31, 2021, and the related notes (collectively, the "consolidated financial
statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three‐year period ended
December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the
Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 1, 2022
expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to
the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Evaluation of income taxes
As discussed in Note 7 to the consolidated financial statements, the net deferred income tax liability was $9,303 million as of December 31,
2021 and income tax expense was $1,441 million for the year ended December 31, 2021. The Company operates in different tax jurisdictions
which requires the Company to make significant judgments and estimates in relation to its tax positions.
We identified the evaluation of the net deferred income tax liability and income tax expense as a critical audit matter due to the magnitude
of these tax balances and complexities in the evaluation of the application of the relevant tax regulations applicable to the Company. A high
degree of auditor judgment was required in assessing certain of the Company’s tax positions and balances.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the
operating effectiveness of certain internal controls related to the Company’s reconciliation and analysis of its deferred income tax balances. We
involved income tax professionals with specialized skills and knowledge who assisted in: (1) assessing the Company’s interpretation of the
relevant tax regulations; (2) evaluating the reasonability of the Company’s tax positions; and (3) analyzing the Company’s deferred income tax
balances by comparing prior year tax estimates to actual tax returns filed, and evaluating the Company’s reconciliation of the deferred income
tax balances to the underlying temporary differences.
© 2021 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International
Limited, a private English company limited by guarantee. All rights reserved.
CN | 2021 Annual Report 69
Report of Independent Registered Public Accounting Firm
Evaluation of capitalization of costs relating to track and railway infrastructure
As discussed in Note 11 to the consolidated financial statements, capital additions were $2,897 million for the year ended December 31, 2021,
of which $1,580 million related to track and railway infrastructure maintenance, including the replacement of rail, ties, bridge improvements, and
other general track maintenance. As discussed in Note 1 to the consolidated financial statements, expenditures related to self-constructed
properties include direct material, labor, and contracted services, as well as other allocated costs.
We identified the evaluation of capitalization of costs relating to track and railway infrastructure as a critical audit matter. The magnitude
and complexities in self-constructed properties, as well as the judgments involved in determining whether the expenditure met the Company’s
pre-determined capitalization criteria required subjective auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the
operating effectiveness of certain internal controls related to the Company’s capital additions process, including controls related to the
monitoring of budget versus actual costs on capital projects and the Company’s assessment that the expenditures charged to projects meet
the Company’s pre-determined capitalization criteria. For a sample of capital expenditure additions, we examined underlying documentation
and assessed whether the expenditure met the Company’s pre-determined capitalization criteria. The testing was performed at a disaggregated
level by type of cost (including direct material, labor, and contracted services), and for rail, included comparisons to prior period per unit
measures by region. In addition, we examined the Company’s budget versus actual analysis on capital projects and assessed the Company’s
explanations of differences exceeding pre-determined testing thresholds.
(s) KPMG LLP*
We have served as the Company's auditors since 1992.
Montréal, Canada
February 1, 2022
* CPA auditor, CA, public accountancy permit No. A122596
70 CN | 2021 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Canadian National Railway Company:
Opinion on internal control over financial reporting
We have audited the Canadian National Railway Company's (the "Company") internal control over financial reporting as of December 31, 2021,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the
consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income,
comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2021,
and the related notes (collectively the "consolidated financial statements'), and our report dated February 1, 2022 expressed an unqualified
opinion on those consolidated financial statements.
Basis for opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
(s) KPMG LLP*
Montréal, Canada
February 1, 2022
* CPA auditor, CA, public accountancy permit No. A122596
© 2021 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International
Limited, a private English company limited by guarantee. All rights reserved.
CN | 2021 Annual Report 71
Consolidated Statements of Income
In millions, except per share data
Year ended December 31,
2021
2020
2019
Revenues (Note 4)
$
14,477
$
13,819
$
14,917
Operating expenses
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Loss (recovery) on assets held for sale (Note 5)
Transaction-related costs (Note 3)
Total operating expenses
Operating income
Interest expense
Other components of net periodic benefit income (Note 17)
Merger termination fee (Note 3)
Other income (Note 6)
Income before income taxes
Income tax expense (Note 7)
Net income
Earnings per share (Note 8)
Basic
Diluted
Weighted-average number of shares (Note 8)
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
$
$
2,879
2,082
1,513
1,598
336
506
(137)
84
8,861
5,616
(610)
398
886
43
6,333
(1,441)
2,723
2,152
1,152
1,589
432
508
486
—
9,042
4,777
(554)
315
—
6
4,544
(982)
2,922
2,267
1,637
1,562
444
492
—
—
9,324
5,593
(538)
321
—
53
5,429
(1,213)
4,892
$
3,562
$
4,216
6.90
6.89
$
$
5.01
5.00
$
$
708.5
710.3
711.3
713.0
Consolidated Statements of Comprehensive Income
In millions
Net income
Year ended December 31,
2021
2020
$
4,892
$
3,562
$
Other comprehensive income (loss) (Note 20)
Net loss on foreign currency translation
Net change in pension and other postretirement benefit plans (Note 17)
Other comprehensive income (loss) before income taxes
Income tax recovery (expense)
Other comprehensive income (loss)
Comprehensive income
See accompanying notes to consolidated financial statements.
72 CN | 2021 Annual Report
(52)
2,075
2,023
(546)
1,477
(82)
160
78
(67)
11
$
6,369
$
3,573
$
3,582
5.85
5.83
720.1
722.6
2019
4,216
(256)
(440)
(696)
62
(634)
Consolidated Balance Sheets
In millions
Assets
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents (Note 15)
Accounts receivable (Note 9)
Material and supplies
Other current assets (Note 10)
Total current assets
Properties (Note 11)
Operating lease right-of-use assets (Note 12)
Pension asset (Note 17)
Intangible assets, goodwill and other (Note 13)
Total assets
Liabilities and shareholders' equity
Current liabilities
Accounts payable and other (Note 14)
Current portion of long-term debt (Note 15)
Total current liabilities
Deferred income taxes (Note 7)
Other liabilities and deferred credits (Note 16)
Pension and other postretirement benefits (Note 17)
Long-term debt (Note 15)
Operating lease liabilities (Note 12)
Shareholders' equity
Common shares (Note 18)
Common shares in Share Trusts (Note 18)
Additional paid-in capital
Accumulated other comprehensive loss (Note 20)
Retained earnings
Total shareholders' equity
December 31,
2021
2020
$
$
838
503
1,074
589
422
3,426
41,178
445
3,050
439
569
531
1,054
583
365
3,102
40,069
435
777
421
$
48,538
$
44,804
$
$
2,612
508
3,120
9,303
427
645
11,977
322
3,704
(103)
397
(1,995)
20,741
22,744
2,364
910
3,274
8,271
534
767
11,996
311
3,698
(115)
379
(3,472)
19,161
19,651
Total liabilities and shareholders' equity
$
48,538
$
44,804
See accompanying notes to consolidated financial statements.
On behalf of the Board of Directors:
(s) Robert Pace
Director
(s) Jean-Jacques Ruest
Director
CN | 2021 Annual Report 73
Consolidated Statements of Changes in Shareholders' Equity
In millions
Number of
common shares
Outstanding
Share
Trusts
Common
shares
Common
shares
in Share
Trusts
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
Retained
earnings
Total
shareholders'
equity
Balance at December 31, 2018
725.3
2.0 $ 3,634 $
(175) $
408 $
(2,849) $ 16,623 $
17,641
Net income
Stock options exercised
Settlement of equity settled awards
(Note 18)
Stock-based compensation expense and
other
1.1
89
(12)
4,216
4,216
77
0.5
(0.5)
45
(56)
(61)
(72)
Repurchase of common shares (Note 18)
(14.3)
(73)
Share purchases by Share Trusts
(Note 18)
Other comprehensive loss (Note 20)
Dividends ($2.15 per share)
Cumulative-effect adjustment from the
adoption of ASU 2016-02 (1)
(0.3)
0.3
(33)
63
(2)
(1,627)
(634)
(1,544)
61
(1,700)
(33)
(634)
(1,544)
29
29
Balance at December 31, 2019
712.3
1.8
3,650
(163)
403
(3,483)
17,634
18,041
Net income
Stock options exercised
Settlement of equity settled awards
(Note 18)
Stock-based compensation expense and
other
0.8
65
(9)
3,562
3,562
56
0.6
(0.6)
62
(82)
(37)
(57)
Repurchase of common shares (Note 18)
(3.3)
(17)
Share purchases by Share Trusts
(Note 18)
Other comprehensive income (Note 20)
Dividends ($2.30 per share)
(0.1)
0.1
(14)
11
67
(2)
(362)
65
(379)
(14)
11
(1,634)
(1,634)
Balance at December 31, 2020
710.3
1.3
3,698
(115)
379
(3,472)
19,161
19,651
Net income
Stock options exercised
Settlement of equity settled awards
(Note 18)
Stock-based compensation expense and
other
0.7
60
(8)
0.4
(0.4)
38
(60)
86
4,892
(42)
(2)
4,892
52
(64)
84
Repurchase of common shares (Note 18)
(10.3)
(54)
(1,528)
(1,582)
Share purchases by Share Trusts
(Note 18)
Other comprehensive income (Note 20)
Dividends ($2.46 per share)
(0.2)
0.2
(26)
1,477
(1,740)
(26)
1,477
(1,740)
Balance at December 31, 2021
700.9
1.1 $ 3,704 $
(103) $
397 $
(1,995) $ 20,741 $
22,744
(1)
The Company adopted Accounting Standards Update (ASU) 2016-02: Leases and related amendments (Topic 842) in the first quarter of 2019 using a modified
retrospective approach with a cumulative-effect adjustment to Retained earnings recognized on January 1, 2019, with no restatement of comparative period financial
information.
See accompanying notes to consolidated financial statements.
74 CN | 2021 Annual Report
Consolidated Statements of Cash Flows
In millions
Year ended December 31,
2021
2020
2019
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
4,892 $
3,562
$
4,216
Depreciation and amortization
Pension income and funding
Amortization of bridge financing and other fees (Note 3)
Deferred income taxes (Note 7)
Loss (recovery) on assets held for sale (Note 5)
Changes in operating assets and liabilities:
Accounts receivable
Material and supplies
Accounts payable and other
Other current assets
Other operating activities, net
1,598
(305)
97
511
(137)
(22)
(7)
141
35
168
1,589
(234)
—
487
486
158
20
(49)
—
146
1,562
(288)
—
569
—
(7)
(60)
(498)
5
424
Net cash provided by operating activities
6,971
6,165
5,923
Investing activities
Property additions
Advance for acquisition and other transaction-related costs (Note 3)
Refund of advance for acquisition (Note 3)
Acquisitions, net of cash acquired (Note 3)
Other investing activities, net
Net cash used in investing activities
Financing activities
Issuance of debt (Note 15)
Repayment of debt (Note 15)
Change in commercial paper, net (Note 15)
Bridge financing and other fees (Note 3)
Settlement of foreign exchange forward contracts on debt
Issuance of common shares for stock options exercised (Note 19)
Withholding taxes remitted on the net settlement of equity settled awards (Note 19)
Repurchase of common shares (Note 18)
Purchase of common shares for settlement of equity settled awards
Purchase of common shares by Share Trusts (Note 18)
Dividends paid
Acquisition, additional cash consideration (Note 3)
Net cash used in financing activities
Effect of foreign exchange fluctuations on cash, cash equivalents, restricted cash,
and restricted cash equivalents
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted
cash equivalents
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning
of year
Cash, cash equivalents, restricted cash, and restricted cash equivalents,
end of year
Cash and cash equivalents, end of year
Restricted cash and cash equivalents, end of year
Cash, cash equivalents, restricted cash, and restricted cash equivalents,
end of year
Supplemental cash flow information
Interest paid
Income taxes paid (Note 7)
See accompanying notes to consolidated financial statements.
$
$
$
$
$
(2,891)
(908)
886
—
40
(2,873)
403
(861)
66
(97)
(8)
52
(37)
(1,582)
(27)
(26)
(1,740)
—
(3,857)
—
241
1,100
(2,863)
—
—
(8)
(75)
(2,946)
1,789
(1,221)
(1,273)
—
26
56
(48)
(379)
(9)
(14)
(1,634)
—
(2,707)
—
512
588
1,341 $
1,100
838 $
503
569
531
$
$
(3,865)
—
—
(259)
(66)
(4,190)
1,653
(402)
141
—
2
77
(61)
(1,700)
(11)
(33)
(1,544)
(25)
(1,903)
(1)
(171)
759
588
64
524
1,341 $
1,100
$
588
(512) $
(759) $
(551) $
(353) $
(521)
(822)
CN | 2021 Annual Report 75
77
83
83
85
86
86
87
89
89
90
90
91
92
92
93
96
96
104
105
110
111
114
115
116
Notes to the Consolidated Financial Statements
Contents
1 Summary of significant accounting policies
2 Recent accounting pronouncements
3 Acquisitions
4 Revenues
5 Assets held for sale
6 Other income
7 Income taxes
8 Earnings per share
9 Accounts receivable
10 Other current assets
11 Properties
12 Leases
13 Intangible assets, goodwill and other
14 Accounts payable and other
15 Debt
16 Other liabilities and deferred credits
17 Pensions and other postretirement benefits
18 Share capital
19 Stock-based compensation
20 Accumulated other comprehensive loss
21 Major commitments and contingencies
22 Financial instruments
23 Segmented information
24 Subsequent events
76 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
Canadian National Railway Company, together with its wholly-owned subsidiaries, collectively "CN" or the "Company", is engaged in the rail and
related transportation business. CN 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 freight revenues are derived from the movement of a diversified and balanced portfolio of goods,
including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive.
1 – Summary of significant accounting policies
Basis of presentation
These consolidated financial statements are expressed in Canadian dollars, except where otherwise indicated, and have been prepared in
accordance with United States generally accepted accounting principles (GAAP) as codified in the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC).
Principles of consolidation
These consolidated financial statements include the accounts of all subsidiaries and variable interest entities for which the Company is the
primary beneficiary. The Company is the primary beneficiary of the Employee Benefit Plan Trusts ("Share Trusts") as the Company has the
direct ability to make decisions regarding the Share Trusts' principal activities. The Company's investments in which it has significant influence
are accounted for using the equity method and all other investments for which fair value is not readily determinable are accounted for at cost
minus impairment, plus or minus observable price changes.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial
statements. On an ongoing basis, management reviews its estimates, including those related to goodwill, intangible assets, identified assets
and liabilities acquired in business combinations, income taxes, depreciation, pensions and other postretirement benefits, personal injury and
other claims, and environmental matters, based upon available information. Actual results could differ from these estimates.
Revenues
Nature of services
The Company's revenues consist of freight revenues and other revenues. Freight revenues include revenue from the movement of freight over
rail and are derived from the following seven commodity groups:
•
•
•
•
•
•
•
Petroleum and chemicals, which includes chemicals and plastics, refined petroleum products, crude and condensate, and sulfur;
Metals and minerals, which includes energy materials, metals, minerals, and iron ore;
Forest products, which includes lumber, pulp, paper, and panels;
Coal, which includes coal and petroleum coke;
Grain and fertilizers, which includes Canadian regulated grain, Canadian commercial grain, U.S. grain, potash and other fertilizers;
Intermodal, which includes rail and trucking services for domestic and international traffic; and
Automotive, which includes finished vehicles and auto parts.
Freight revenues also comprise revenues for optional services beyond the basic movement of freight including asset use, switching, storage,
and other services.
Other revenues are derived from non-rail logistics services that support the Company's rail business including vessels and docks,
transloading and distribution, automotive logistics, and freight forwarding and transportation management.
Revenue recognition
Revenues are recognized when control of promised services is transferred to customers in an amount that reflects the consideration the
Company expects to be entitled to receive in exchange for those services.
The Company accounts for contracts with customers when it has approval and commitment from both parties, each party's rights have
been identified, payment terms are defined, the contract has commercial substance and collection is probable. For contracts that involve
multiple performance obligations, the Company allocates the transaction price to each performance obligation in the contract based on relative
standalone selling prices and recognizes revenue when, or as, performance obligations in the contract are satisfied.
Revenues are presented net of taxes collected from customers and remitted to governmental authorities.
CN | 2021 Annual Report 77
Notes to the Consolidated Financial Statements
Freight revenues
Freight services are arranged through publicly-available tariffs or customer-specific agreements that establish the pricing, terms and conditions
for freight services offered by the Company. For revenue recognition purposes, a contract for the movement of freight over rail exists when
shipping instructions are sent by a customer and have been accepted by the Company in connection with the relevant tariff or customer-
specific agreement.
Revenues for the movement of freight over rail are recognized over time due to the continuous transfer of control to the customer as
freight moves from origin to destination. Progress towards completion of the performance obligation is measured based on the transit time of
freight from origin to destination. The allocation of revenues between periods is based on the relative transit time in each period with expenses
recorded as incurred. Revenues related to freight contracts that require the involvement of another rail carrier to move freight from origin to
destination are reported on a net basis. Freight movements are completed over a short period of time and are generally completed before
payment is due. Freight receivables are included in Accounts receivable on the Consolidated Balance Sheets.
The Company has no material contract assets associated with freight revenues.
Contract liabilities represent consideration received from customers for which the related performance obligation has not been satisfied.
Contract liabilities are recognized into revenues when or as the related performance obligation is satisfied. The Company includes contract
liabilities within Accounts payable and other and Other liabilities and deferred credits on the Consolidated Balance Sheets.
Revenues for optional services are recognized at a point in time or over time as performance obligations are satisfied, depending on the
nature of the service.
Freight contracts may be subject to variable consideration in the form of volume-based incentives, rebates, or other items, which affect the
transaction price. Variable consideration is recognized as revenue to the extent that it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur. Variable consideration is accrued on the basis of management's best estimate of the expected
amount, which is based on available historical, current and forecasted information.
Other revenues
Other revenues are recognized at a point in time or over time as performance obligations are satisfied, depending on the nature of the service.
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method, the change in the net
deferred income tax asset or liability is included in the computation of Net income or Other comprehensive income (loss). Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are
expected to be recovered or settled.
Earnings per share
Basic earnings per share is calculated using the weighted-average number of basic shares outstanding during the period. The weighted-average
number of basic shares outstanding excludes shares held in the Share Trusts and includes vested equity settled stock-based compensation
awards other than stock options. Diluted earnings per share is calculated using the weighted-average number of diluted shares outstanding
during the period, applying the treasury stock method. The weighted-average number of diluted shares outstanding includes the dilutive effects
of common shares issuable upon exercise of outstanding stock options and nonvested equity settled awards.
Foreign currency
All of the Company's foreign subsidiaries use the US dollar as their functional currency. Accordingly, the foreign subsidiaries' assets and
liabilities are translated into Canadian dollars at the exchange rate in effect at the balance sheet date and the revenues and expenses are
translated at the average exchange rates during the year. All adjustments resulting from the translation of the foreign operations are recorded in
Other comprehensive income (loss).
The Company designates the US dollar-denominated debt of the parent company as a foreign currency hedge of its net investment in
foreign operations. Accordingly, foreign exchange gains and losses, from the dates of designation, on the translation of the US dollar-
denominated debt are included in Other comprehensive income (loss).
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments purchased three months or less from maturity and are stated at cost plus accrued
interest, which approximates fair value.
78 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
Restricted cash and cash equivalents
The Company has the option, under its bilateral letter of credit facility agreements with various banks, to pledge collateral in the form of cash
and cash equivalents for a minimum term of one month, equal to at least the face value of the letters of credit issued. Restricted cash and cash
equivalents include highly liquid investments purchased three months or less from maturity and are stated at cost plus accrued interest, which
approximates fair value.
Accounts receivable
Accounts receivable are recorded at cost net of billing adjustments and an allowance for credit losses. The allowance for credit losses is based
on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that
affect the collectibility of the reported amount. When a receivable is deemed uncollectible, it is written off against the allowance for credit
losses. Subsequent recoveries of amounts previously written off are credited to bad debt expense in Casualty and other in the Consolidated
Statements of Income.
Material and supplies
Material and supplies, which consist mainly of rail, ties, and other items for construction and maintenance of property and equipment, as well as
diesel fuel, are measured at weighted-average cost.
Assets held for sale
Assets that are classified as held for sale are measured at the lower of their carrying amount or fair value less expected selling costs
(“estimated selling price”) with a loss recognized to the extent that the carrying amount exceeds the estimated selling price. The classification
is applicable at the date upon which the sale of assets is probable, and the assets are available for immediate sale in their present condition.
The transfer of the assets must also be expected to qualify for recognition as a completed sale within the year following the date of
classification.
Assets once classified as held for sale, are not subject to depreciation or amortization and both the assets and any liabilities directly
associated with the assets held for sale are classified as current in the Company’s Consolidated Balance Sheets.
Subsequent changes to the estimated selling price of assets held for sale are recorded as recoveries or losses to the Consolidated
Statements of Income wherein the recognition of subsequent gains is limited to the cumulative loss previously recognized.
Properties
Capitalization of costs
The Company's railroad operations are highly capital intensive. The Company's properties mainly consist of homogeneous or network-type
assets such as rail, ties, ballast and other structures, which form the Company's Track and roadway properties, and Rolling stock. The
Company's capital expenditures are for the replacement of existing assets and for the purchase or construction of new assets to enhance
operations or provide new service offerings to customers. A large portion of the Company's capital expenditures are for self-constructed
properties, including the replacement of existing track and roadway assets and track line expansion, as well as major overhauls and large
refurbishments of rolling stock.
Expenditures are capitalized if they extend the life of the asset or provide future benefits such as increased revenue-generating capacity,
functionality or service capacity. The Company has a process in place to determine whether or not costs qualify for capitalization, which
requires judgment. For Track and roadway properties, the Company establishes basic capital programs to replace or upgrade the track
infrastructure assets which are capitalized if they meet the capitalization criteria.
In addition, for Track and roadway properties, expenditures that meet the minimum level of activity as defined by the Company are also
capitalized as follows:
•
•
•
•
grading: installation of road bed, retaining walls, and drainage structures;
rail and related track material: installation of 39 or more continuous feet of rail;
ties: installation of five or more ties per 39 feet; and
ballast: installation of 171 cubic yards of ballast per mile.
For purchased assets, the Company capitalizes all costs necessary to make the assets ready for their intended use. For self-constructed
properties, expenditures include direct material, labor, and contracted services, as well as other allocated costs. These allocated costs include,
but are not limited to, project supervision, fringe benefits, maintenance on equipment used on projects as well as the cost of small tools and
supplies. The Company reviews and adjusts its allocations, as required, to reflect the actual costs incurred each year.
For the rail asset, the Company capitalizes the costs of rail grinding which consists of restoring and improving the rail profile and removing
irregularities from worn rail to extend the service life. The service life of the rail asset is increased incrementally as rail grinding is performed
CN | 2021 Annual Report 79
Notes to the Consolidated Financial Statements
thereon, and as such, the costs incurred are capitalized given that the activity extends the service life of the rail asset beyond its original or
current condition as additional gross tons can be carried over the rail for its remaining service life.
For the ballast asset, the Company engages in shoulder ballast undercutting that consists of removing some or all of the ballast, which has
deteriorated over its service life, and replacing it with new ballast. When ballast is installed as part of a shoulder ballast undercutting project, it
represents the addition of a new asset and not the repair or maintenance of an existing asset. As such, the Company capitalizes expenditures
related to shoulder ballast undercutting given that an existing asset is retired and replaced with a new asset. Under the group method of
accounting for properties, the deteriorated ballast is retired at its historical cost.
Costs of deconstruction and removal of replaced assets, referred to herein as dismantling costs, are distinguished from installation costs
for self-constructed properties based on the nature of the related activity. For Track and roadway properties, employees concurrently perform
dismantling and installation of new track and roadway assets and, as such, the Company estimates the amount of labor and other costs that
are related to dismantling. The Company determines dismantling costs based on an analysis of the track and roadway installation process.
Expenditures relating to the Company's properties that do not meet the Company's capitalization criteria are expensed as incurred. For
Track and roadway properties, such expenditures include but are not limited to spot tie replacement, spot or broken rail replacement, physical
track inspection for detection of rail defects and minor track corrections, and other general maintenance of track infrastructure.
Depreciation
Properties are carried at cost less accumulated depreciation including asset impairment write-downs. The cost of properties, including those
under finance leases, net of asset impairment write-downs, is depreciated on a straight-line basis over their estimated service lives, measured in
years, except for rail and ballast whose service lives are measured in millions of gross tons. The Company follows the group method of
depreciation whereby a single composite depreciation rate is applied to the gross investment in a class of similar assets, despite small
differences in the service life or salvage value of individual property units within the same asset class. The Company uses approximately 40
different depreciable asset classes.
For all depreciable asset classes, the depreciation rate is based on the estimated service lives of the assets. Assessing the
reasonableness of the estimated service lives of properties requires judgment and is based on currently available information, including
periodic depreciation studies conducted by the Company. The Company's United States (U.S.) properties are subject to comprehensive
depreciation studies as required by the Surface Transportation Board (STB) and are conducted by external experts. Depreciation studies for
Canadian properties are not required by regulation and are conducted internally. Studies are performed on specific asset groups on a periodic
basis. Changes in the estimated service lives of the assets and their related composite depreciation rates are implemented prospectively.
The service life of the rail asset is based on expected future usage of the rail in its existing condition, determined using railroad industry
research and testing (based on rail characteristics such as weight, curvature and metallurgy), factoring in the rail asset's usage to date. The
annual composite depreciation rate for the rail asset is determined by dividing the estimated annual number of gross tons carried over the rail
by the estimated service life of the rail measured in millions of gross tons. The Company amortizes the cost of rail grinding over the remaining
life of the rail asset, which includes the incremental life extension generated by rail grinding.
Given the nature of the railroad and the composition of its network which is made up of homogeneous long-lived assets, it is impractical to
maintain records of specific properties at their lowest unit of property.
Retirements of assets occur through the replacement of an asset in the normal course of business, the sale of an asset or the
abandonment of a section of track. For retirements in the normal course of business, generally the life of the retired asset is within a reasonable
range of the expected useful life, as determined in the depreciation studies, and, as such, no gain or loss is recognized under the group method.
The asset's cost is removed from the asset account and the difference between its estimated historical cost and estimated related
accumulated depreciation (net of salvage proceeds and dismantling costs), if any, is recorded as an adjustment to accumulated depreciation
and no gain or loss is recognized. The estimated historical cost of the retired asset is estimated by using deflation factors or indices that
closely correlate to the properties comprising the asset classes in combination with the estimated age of the retired asset using a first-in, first-
out approach, and applying it to the replacement value of the asset.
In each depreciation study, an estimate is made of any excess or deficiency in accumulated depreciation for all corresponding asset
classes to ensure that the depreciation rates remain appropriate. The excess or deficiency in accumulated depreciation is amortized over the
remaining life of the asset class.
For retirements of depreciable properties that do not occur in the normal course of business, the historical cost, net of salvage proceeds, is
recorded as a gain or loss in income. A retirement is considered not to be in the normal course of business if it meets the following criteria: (i) it
is unusual, (ii) it is significant in amount, and (iii) it varies significantly from the retirement pattern identified through depreciation studies. A
gain or loss is recognized in Other income for the sale of land or disposal of assets that are not part of railroad operations.
80 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
Leases
The Company engages in short and long-term leases for rolling stock including locomotives and freight cars, equipment, real estate and service
contracts that contain embedded leases. The Company determines whether or not a contract contains a lease at inception. Leases with a term
of twelve months or less are not recorded by the Company on the Consolidated Balance Sheets.
Finance and operating lease right-of-use assets and liabilities are recognized based on the present value of the future lease payments over
the lease term at the commencement date. Where the implicit interest rate is not determinable from the lease, the Company uses internal
incremental borrowing rates by tenor and currency to initially measure leases in excess of twelve months on the Consolidated Balance Sheets.
Operating lease expense is recognized on a straight-line basis over the lease term.
The Company's lease contracts may contain termination, renewal, and/or purchase options, residual value guarantees, or a combination
thereof, all of which are evaluated by the Company on a quarterly basis. The majority of renewal options available extend the lease term from
one to five years. The Company accounts for such contract options when the Company is reasonably certain that it will exercise one of these
options.
Lease contracts may contain lease and non-lease components that the Company generally accounts for separately, with the exception of
the freight car asset category for which the Company has elected to not separate the lease and non-lease components.
Intangible assets
Intangible assets consist mainly of customer contracts and relationships acquired through business acquisitions. Intangible assets are
generally amortized on a straight-line basis over their expected useful lives, ranging from 20 to 50 years. If a change in the estimated useful life
of an intangible asset is determined, amortization is adjusted prospectively.
With respect to impairment, the Company tests the recoverability of its intangible assets held and used whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable, based on future undiscounted cash flows. If the carrying amount of
an intangible asset is not recoverable and exceeds the fair value, an impairment loss is recognized for the amount by which the carrying amount
of the asset exceeds the fair value.
Goodwill
The Company recognizes goodwill as the excess of the purchase price over the fair value of identifiable net assets acquired in business
combinations. Goodwill is assigned to the reporting units that are expected to benefit from the business acquisition. The carrying amount of
goodwill is not amortized; instead, it is tested for impairment annually as of the first day of the fiscal fourth quarter or more frequently if events
or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying amount.
With respect to impairment, the Company may first assess certain qualitative factors to determine if it is more likely than not that the fair
value of a reporting unit is less than its carrying amount, including goodwill, or proceed directly to a quantitative goodwill impairment test.
Qualitative factors include but are not limited to, economic, market and industry conditions, cost factors and overall financial performance of
the reporting unit, and events such as changes in management or customers. If the qualitative assessment indicates that it is more likely than
not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test must be performed. The quantitative
impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, including goodwill, and an impairment
loss is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the value of goodwill. The
Company defines the fair value of a reporting unit as the price that would be received to sell the reporting unit as a whole in an orderly
transaction between market participants as of the impairment date. To determine the fair value of a reporting unit, the Company uses the
discounted cash flow method using the pre-tax discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset or group of assets.
Accounts receivable securitization
Based on the structure of its accounts receivable securitization program, the Company accounts for the proceeds received as secured
borrowings.
CN | 2021 Annual Report 81
Notes to the Consolidated Financial Statements
Pensions
Pension costs are determined using actuarial methods. Net periodic benefit cost (income) includes the current service cost of pension benefits
provided in exchange for employee service rendered during the year, which is recorded in Labor and fringe benefits expense. Net periodic
benefit cost (income) also includes the following, which are recorded in Other components of net periodic benefit income (cost):
•
•
•
•
the interest cost of pension obligations;
the expected long-term return on pension fund assets;
the amortization of prior service costs and amendments over the expected average remaining service life of the employee group covered
by the plans; and
the amortization of cumulative net actuarial gains and losses in excess of 10% of the greater of the beginning of year balances of the
projected benefit obligation or market-related value of plan assets, over the expected average remaining service life of the employee group
covered by the plans.
The pension plans are funded through contributions determined in accordance with the projected unit credit actuarial cost method.
Postretirement benefits other than pensions
The Company accrues the cost of postretirement benefits other than pensions using actuarial methods. These benefits, which are funded as
they become due, include life insurance programs, medical benefits and, for a closed group of employees, free rail travel benefits.
The Company amortizes the cumulative net actuarial gains and losses in excess of 10% of the projected benefit obligation at the beginning
of the year, over the expected average remaining service life of the employee group covered by the plan.
Additional paid-in capital
Additional paid-in capital includes the stock-based compensation expense on equity settled awards and other items relating to equity settled
awards. Upon the exercise of stock options, the stock-based compensation expense related to those awards is reclassified from Additional
paid-in capital to Common shares. Upon settlement of all other equity settled awards, the Company reclassifies from Additional paid-in capital
to Retained Earnings the stock-based compensation expense and other items related to equity settled awards, up to the amount of the
settlement cost. The excess, if any, of the settlement cost over the stock-based compensation expense is recorded in Retained Earnings.
Stock-based compensation
For equity settled awards, stock-based compensation costs are accrued over the requisite service period based on the fair value of the awards
at the grant date. The grant date fair value of performance share unit (PSU) awards is dependent on the type of PSU award. The grant date fair
value of PSU-ROIC awards is determined using a lattice-based model incorporating a minimum share price condition and the grant date fair
value of PSU-TSR awards is determined using a Monte Carlo simulation model. The grant date fair value of equity settled deferred share unit
(DSU) awards is determined using the stock price at the grant date. The grant date fair value of stock option awards is determined using the
Black-Scholes option-pricing model. For cash settled awards, stock-based compensation costs are accrued over the requisite service period
based on the fair value determined at each period-end. The fair value of cash settled DSU awards is determined using their intrinsic value.
Personal injury and other claims
In Canada, the Company accounts for costs related to employee work-related injuries based on actuarially developed estimates on a discounted
basis of the ultimate cost associated with such injuries, including compensation, health care and third-party administration costs. In the U.S.,
the Company accrues the expected cost for personal injury, property damage and occupational disease claims, based on actuarial estimates of
their ultimate cost on an undiscounted basis. For all other legal actions in Canada and the U.S., the Company maintains, and regularly updates
on a case-by-case basis, provisions for such items when the expected loss is both probable and can be reasonably estimated based on
currently available information.
Environmental expenditures
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. Environmental liabilities are recorded when environmental
assessments occur, remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used
and the extent of the corrective action required, can be reasonably estimated. The Company accrues its allocable share of liability taking into
account the Company's alleged responsibility, the number of potentially responsible parties and their ability to pay their respective shares of the
liability. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
82 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
Derivative financial instruments
The Company uses derivative financial instruments from time to time in the management of its interest rate and foreign currency exposures.
Derivative instruments are recorded on the balance sheet at fair value. The changes in fair value of derivative instruments not designated or not
qualified as a hedge are recorded in Net income in the current period.
2 – Recent accounting pronouncements
The following recent Accounting Standards Update (ASU) issued by the FASB came into effect in 2020, was amended in 2021 and has not been
adopted by the Company:
ASU 2020-04 Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting and related
amendments
London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities.
The administrator of LIBOR has ceased the publication of one week and two month USD LIBOR rates on January 1, 2022 and intends to
discontinue the remaining USD LIBOR rates immediately following the LIBOR publication on June 30, 2023.
The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by
reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of
debt securities classified as held-to-maturity.
The ASU was effective starting on March 12, 2020, and is available to be adopted on a prospective basis no later than December 31, 2022,
when the reference rate replacement activity is expected to be completed. The Company currently has outstanding loans referencing LIBOR,
that were not impacted by the administrator of LIBOR ceasing publication of one week and two month USD LIBOR rates, totaling US$572 million
that would be affected by the provisions of this ASU. The Company also has a revolving credit facility and an accounts receivable securitization
program that reference LIBOR (See Note 15 - Debt). The Company had no outstanding borrowing under these credit facilities as at December 31,
2021. The Company has fallback language to allow for the succession of a clearly defined alternative reference rate within the contracts that
reference LIBOR. The Company is evaluating the effects that the adoption of the ASU will have on its Consolidated Financial Statements and
related disclosures, and whether it will elect to apply any of the optional expedients and exceptions provided in the ASU.
Other recently issued ASUs required to be applied on or after December 31, 2021 have been evaluated by the Company and are not expected to
have a significant impact on the Company's Consolidated Financial Statements.
3 – Acquisitions
2021
Terminated CN KCS merger agreement
On September 15, 2021, Kansas City Southern (“KCS”) notified CN that it terminated the previously announced May 21, 2021 definitive merger
agreement (the “CN Merger Agreement") under which CN would have acquired KCS for an implied total transaction value of US$33.6 billion,
including the assumption of US$3.8 billion of debt.
On August 31, 2021, the Surface Transportation Board ("STB") rejected the joint motion by CN and KCS to approve a proposed voting trust
agreement. On September 15, 2021, KCS and its Board of Directors announced that the revised acquisition proposal of September 12, 2021
from Canadian Pacific Railway Limited (“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 in order to
enter into a merger agreement with CP. As a result, CN received from KCS a merger termination fee of US$700 million ($886 million), recorded
in Merger termination fee within the Company’s Consolidated Statements of Income and reflected in Operating activities within the
Consolidated Statements of Cash Flows. In addition, KCS also refunded Brooklyn US Holdings, Inc. ("Holdco"), a wholly owned subsidiary of the
Company, US$700 million ($886 million) that CN had previously paid as an advance to KCS of US$700 million ($845 million) in connection with
KCS’s payment of the termination fee to CP under KCS’s original merger agreement with CP that was terminated on May 21, 2021. The refund
received in the third quarter was recorded in Transaction-related costs within the Consolidated Statements of Income and reflected in Investing
activities within the Consolidated Statements of Cash flows. The US$700 million ($845 million) advance had been recorded in Advance to KCS
and other transaction costs within the Consolidated Balance Sheets in the second quarter of 2021 and has been expensed to Transaction-
CN | 2021 Annual Report 83
Notes to the Consolidated Financial Statements
related costs within the Consolidated Statements of Income in the third quarter. This advance, along with $63 million of transaction-related
costs paid in the second quarter, have been reflected in Investing activities within the Consolidated Statements of Cash flows.
The Company incurred $84 million of transaction-related costs for the year ended December 31, 2021 recorded in Transaction-related
costs within the Consolidated Statements of Income. This included $125 million of transaction-related costs, consisting of a $76 million
expense for costs previously capitalized to Advance to KCS and other transaction costs within the Consolidated Balance Sheets in the second
quarter of 2021 in accordance with the expected application of equity method accounting and $49 million of additional transaction-related
costs incurred in the third quarter of 2021; partially offset by $41 million of income generated as a result of the applicable foreign exchange
rates prevailing at the time of payment of the US dollar denominated advance to KCS and receipt of the related refund.
The Company also paid $97 million of bridge financing and other fees (See Note 15 - Debt) which were recorded in Interest expense within
the Consolidated Statements of Income for the year ended December 31, 2021.
For the year ended December 31, 2021, after accounting for all direct and incremental expenses as well as income generated from the
merger termination fee, CN recorded additional income of $705 million ($616 million after-tax), as a result of its strategic decision to bid for
KCS.
2019
Acquisition of intermodal division of H&R Transport Limited
On December 2, 2019, the Company acquired the intermodal temperature-controlled transportation division of the Alberta-based H&R Transport
Limited ("H&R"). The acquisition positions 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.
The Company's Consolidated Balance Sheets include the assets and liabilities of H&R as of December 2, 2019, the acquisition date. Since
the acquisition date, H&R’s results of operations have been included in the Company's results of operations. The Company has not provided pro
forma information relating to the pre-acquisition period as it was not material.
The total purchase price of $105 million included $95 million cash paid on the closing date and subsequent consideration of $10 million
mostly related to funds withheld for the indemnification of claims.
The following table summarizes the consideration transferred to acquire H&R, as well as the fair value of the assets acquired and liabilities
assumed, and goodwill that were recognized at the acquisition date:
In millions
Consideration transferred
Cash paid at closing
Subsequent consideration (1)
Fair value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed (2)
Current assets
Non-current assets (3)
Non-current liabilities
Total identifiable net assets (4)
Goodwill (5)
December 2
2019
95
10
105
10
84
(1)
93
12
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
Primarily comprised of funds withheld for the indemnification of claims.
As at the acquisition date, the purchase price was preliminary and subject to change over the measurement period, permitted to be up to one year from the acquisition date.
The Company's purchase price allocation is now final.
Includes identifiable intangible assets of $52 million.
Includes operating lease right-of-use assets and liabilities.
The goodwill acquired through the business combination is mainly attributable to the premium of an established business operation. The goodwill is deductible for tax
purposes.
Acquisition of the TransX Group of Companies
On March 20, 2019, 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 positions CN to strengthen
its intermodal business, and allows the Company to expand capacity and foster additional supply chain solutions.
The Company's Consolidated Balance Sheets include the assets and liabilities of TransX as of March 20, 2019, the acquisition date. Since
the acquisition date, TransX's results of operations have been included in the Company's results of operations. The Company has not provided
pro forma information relating to the pre-acquisition period as it was not material.
84 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
The total purchase price of $192 million included an initial cash payment of $170 million, additional consideration of $25 million, less an
adjustment of $3 million in the fourth quarter of 2019 to reflect the settlement of working capital. The acquisition date fair value of the
additional consideration, recorded as a contingent liability, was estimated based on the expected outcome of operational and financial targets,
and remained unchanged since the acquisition date. The fair value measure was based on Level 3 inputs not observable in the market. On
August 27, 2019, the additional consideration was paid.
The following table summarizes the consideration transferred to acquire TransX, as well as the fair value of the assets acquired and
liabilities assumed, and goodwill that were recognized at the acquisition date:
In millions
Consideration transferred
Cash paid at closing
Additional cash consideration and other (1)
Fair value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed (2)
Current assets
Non-current assets (3)
Current liabilities
Non-current liabilities
Total identifiable net assets (4)
Goodwill (5)
March 20
2019
170
22
192
85
260
(134)
(77)
134
58
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
Includes additional cash consideration paid of $25 million less an adjustment of $3 million to reflect the settlement of working capital.
As at the acquisition date, the purchase price was preliminary and subject to change over the measurement period, permitted to be up to one year from the acquisition date.
In the first quarter of 2020, based on updated information available to the Company, the fair value of net assets acquired was adjusted to reflect a net decrease to current
and deferred income tax balances of $7 million, resulting in a decrease to Goodwill for the same amount. The Company’s purchase price allocation is now final.
Includes identifiable intangible assets of $34 million.
Includes finance and operating lease right-of-use assets and liabilities.
The goodwill acquired through the business combination is mainly attributable to the premium of an established business operation. The goodwill is not deductible for tax
purposes.
4 – Revenues
The following table provides disaggregated information for revenues for the years ended December 31, 2021, 2020 and 2019:
In millions
Freight revenues
Petroleum and chemicals
Metals and minerals
Forest products
Coal
Grain and fertilizers
Intermodal
Automotive
Total freight revenues
Other revenues
Total revenues (1) (2)
Year ended December 31,
$
$
2021
2,816
1,548
1,740
618
2,475
4,115
576
13,888
589
$
2020
2,631
1,409
1,700
527
2,609
3,751
591
13,218
601
$
14,477
$
13,819
$
2019
3,052
1,643
1,808
658
2,392
3,787
858
14,198
719
14,917
(1)
As at December 31, 2021, the Company had remaining performance obligations related to freight in-transit, for which revenues of $83 million (2020 - $101 million) are
expected to be recognized in the next period.
(2)
See Note 23 - Segmented information for the disaggregation of revenues by geographic area.
CN | 2021 Annual Report 85
Notes to the Consolidated Financial Statements
Contract liabilities
The following table provides a reconciliation of the beginning and ending balances of contract liabilities for the years ended December 31, 2021,
and 2020:
In millions
Beginning of year
Revenue recognized included in the beginning balance
Increase due to consideration received, net of revenue recognized
End of year
Current portion - End of year
5 – Assets held for sale
2021
200
(182)
56
74
74
$
$
$
2020
211
(16)
5
200
115
$
$
$
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 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. See Note 10 - Other current assets. 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.
6 – Other income
The following table provides the breakdown of Other income for the years ended December 31, 2021, 2020 and 2019:
In millions
Gain on disposal of land
Other (1)
Total other income
Year ended December 31,
$
$
2021
23
20
43
$
$
2020
11
(5)
6
$
$
2019
50
3
53
(1)
Includes foreign exchange gains and losses related to foreign exchange forward contracts and the re-measurement of foreign currency denominated monetary assets and
liabilities. See Note 22 – Financial instruments for additional information.
86 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
7 – Income taxes
The Company's consolidated effective income tax rate differs from the Canadian, or domestic, statutory federal tax rate. The effective tax rate
is affected by recurring items in provincial, U.S. federal, state and other foreign jurisdictions, such as tax rates and the proportion of income
earned in those jurisdictions. The effective tax rate is also affected by discrete items such as income tax rate enactments, and lower corporate
income tax rates on capital dispositions and other transactions that may occur in any given year.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a tax-and-spending
package aimed at providing additional stimulus to address the economic impact of the COVID-19 pandemic. The CARES Act corporate income
tax measures allow for U.S. federal net operating losses (NOLs) arising in tax years 2018, 2019, and 2020 to be fully carried back to each of the
five tax years preceding the tax year of the NOL. As a result of the CARES Act, the Company reclassified its 2019 deferred income tax asset of
$213 million on the NOL that arose in 2019, to a current income tax receivable and recorded a current income tax recovery of $141 million in
2020 to reflect an amount recoverable at the higher U.S. federal corporate income tax rate of 35% applicable to pre-2018 tax years.
The following table provides a reconciliation of income tax expense for the years ended December 31, 2021, 2020 and 2019:
In millions
Year ended December 31,
Canadian statutory federal tax rate
Income tax expense at the Canadian statutory federal tax rate
Income tax expense resulting from:
Provincial and foreign income taxes (1)
Income tax adjustments due to rate enactments and tax law changes (2)
Non-taxable portion of merger termination fee (3)
Other (4)
Income tax expense
Net cash payments for income taxes
2021
15%
950
616
—
(116)
(9)
1,441
759
$
$
$
$
$
$
2020
15%
682
416
(141)
—
25
982
353
$
$
$
2019
15%
814
551
(112)
—
(40)
1,213
822
(1)
Includes mainly the impact of Canadian provincial taxes and U.S. federal and state taxes.
(2)
Includes income tax recoveries (current or deferred as appropriate) resulting from the enactment of provincial, U.S. federal, and state corporate income tax laws and/or
rates.
(3) Relates to the permanent difference arising from applying a lower inclusion tax rate on the $886 million of income generated from the merger termination fee received from
KCS (see Note 3 - Acquisitions).
(4)
Includes adjustments relating to the filing or resolution of matters pertaining to prior years' income taxes, including net recognized tax benefits, excess tax benefits, and
other items. Prior year adjustments for gain on disposals are now presented within this item. As such, the figures presented for the 2020 and 2019 comparative years have
been adjusted by tax recoveries of $1 million and $6 million, respectively, to be consistent with the current year presentation.
The following table provides tax information on a domestic and foreign basis for the years ended December 31, 2021, 2020 and 2019:
In millions
Income before income taxes
Domestic
Foreign
Total income before income taxes
Current income tax expense (recovery)
Domestic
Foreign
Total current income tax expense
Deferred income tax expense
Domestic
Foreign
Total deferred income tax expense
Year ended December 31,
2021
4,717
1,616
6,333
763
167
930
358
153
511
$
$
$
$
$
$
2020
3,637
907
4,544
616
(121)
495
389
98
487
$
$
$
$
$
$
2019
4,162
1,267
5,429
608
36
644
423
146
569
$
$
$
$
$
$
CN | 2021 Annual Report 87
Notes to the Consolidated Financial Statements
The following table provides the significant components of deferred income tax assets and liabilities as at December 31, 2021 and 2020:
In millions
Deferred income tax assets
Lease liabilities
Pension liability
Personal Injury & legal claims
Net operating losses and tax credit carryforwards (1)
Other postretirement benefits liability
Compensation reserves
Other
Total deferred income tax assets
Deferred income tax liabilities
Properties
Pension asset
Operating lease right-of-use assets
Unrealized foreign exchange gains
Other
Total deferred income tax liabilities
Total net deferred income tax liability
Total net deferred income tax liability
Domestic
Foreign
Total net deferred income tax liability
December 31,
2021
2020
$
$
$
$
$
$
$
120
117
61
58
56
47
68
527
8,694
799
111
55
171
9,830
9,303
5,515
3,788
9,303
$
$
$
$
$
$
$
126
145
68
70
59
41
69
578
8,321
203
118
45
162
8,849
8,271
4,612
3,659
8,271
(1) As at December 31, 2021, the Company had net interest expense deduction carryforwards of $108 million which are available to offset future U.S. federal and state taxable
income over an indefinite period. In addition, the Company had net operating loss carryforwards of $277 million for U.S. state tax purposes which are available to offset
future U.S. state taxable income and are expiring between the years 2022 and 2041. The Company also had net operating loss carryforwards of $59 million for Canadian
federal and provincial tax purposes, which are available to offset future Canadian federal and provincial taxable income and are expiring between the years 2031 and 2041.
On an annual basis, the Company assesses the need to establish a valuation allowance for its deferred income tax assets, and if it is
deemed more likely than not that its deferred income tax assets will not be realized, a valuation allowance is recorded. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable income, of the necessary character, during the periods in
which those temporary differences become deductible. Management considers the scheduled reversals of deferred income tax liabilities, the
available carryback and carryforward periods, and projected future taxable income in making this assessment. As at December 31, 2021, in
order to fully realize all of the deferred income tax assets, the Company will need to generate future taxable income of approximately $2.2
billion, and, based upon the level of historical taxable income, projections of future taxable income of the necessary character over the periods
in which the deferred income tax assets are deductible, and the reversal of taxable temporary differences, management believes, following an
assessment of the current economic environment, it is more likely than not that the Company will realize the benefits of these deductible
differences. As at December 31, 2021, the Company has not recognized a deferred income tax asset of $264 million (2020 - $259 million) on
the unrealized foreign exchange loss recorded in Accumulated other comprehensive loss relating to its net investment in U.S. subsidiaries, as
the Company does not expect this temporary difference to reverse in the foreseeable future.
The following table provides a reconciliation of unrecognized tax benefits on the Company's domestic and foreign tax positions for the
years ended December 31, 2021, 2020 and 2019:
In millions
Year ended December 31,
2021
2020
Gross unrecognized tax benefits at beginning of year
$
92
$
62
$
Increases for:
Tax positions related to the current year
Tax positions related to prior years
Decrease for:
Tax positions related to prior years
Gross unrecognized tax benefits at end of year
Adjustments to reflect tax treaties and other arrangements
4
—
(32)
64
(17)
17
28
(15)
92
(25)
Net unrecognized tax benefits at end of year
$
47
$
67
$
2019
74
5
—
(17)
62
(2)
60
88 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
As at December 31, 2021, the total amount of gross unrecognized tax benefits was $64 million, before considering tax treaties and other
arrangements between taxation authorities. The amount of net unrecognized tax benefits as at December 31, 2021 was $47 million. If
recognized, $12 million of the net unrecognized tax benefits as at December 31, 2021 would affect the effective tax rate.
The Company believes that it is reasonably possible that $14 million of the net unrecognized tax benefits as at December 31, 2021 related
to Canadian and U.S. federal, state, and provincial income tax matters, each of which are individually insignificant, may be recognized over the
next twelve months as a result of settlements and a lapse of the applicable statute of limitations, and will not significantly affect the effective
tax rate as they mostly relate to temporary differences.
The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax expense in the Company's Consolidated
Statements of Income. The Company recorded a tax recovery of $2 million related to a net reversal of interest and penalties for the year ended
December 31, 2021, compared to a tax expense of $16 million and $1 million related to net interest and penalties expenses for the years ended
December 31, 2020 and 2019, respectively. As at December 31, 2021, the Company had accrued interest and penalties of $25 million (2020 -
$27 million).
In Canada, the Company's federal and provincial income tax returns filed for the years 2014 to 2020 remain subject to examination by the
taxation authorities. Examinations of the Company's federal income tax returns for the years 2014 to 2017 are currently in progress and are
expected to be completed during 2022. In 2020, the tax authorities proposed certain audit adjustments and, as a result, the Company recorded
a $25 million deferred tax expense which is comprised of net unrecognized tax benefits and related interest expenses. During 2021, the tax
authorities revised their proposed audit adjustment and as a result, the Company re-evaluated the relevant tax positions for all open years and
recorded an $8 million deferred tax recovery reducing net unrecognized tax benefits and related interest expenses. In the U.S., the federal
income tax returns filed for the years 2013 to 2020 and the state income tax returns filed for the years 2017 to 2020 remain subject to
examination by the taxation authorities. Examination of certain of the Company's state income tax returns are currently in progress. The
Company does not anticipate any additional significant impacts to its results of operations or financial position as a result of the final
resolutions of such matters.
8 – Earnings per share
The following table provides a reconciliation between basic and diluted earnings per share for the years ended December 31, 2021, 2020 and
2019:
In millions, except per share data
Year ended December 31,
2021
2020
Net income
$
4,892
$
3,562
$
Weighted-average basic shares outstanding
Dilutive effect of stock-based compensation
Weighted-average diluted shares outstanding
Basic earnings per share
Diluted earnings per share
Units excluded from the calculation as their inclusion would not have a dilutive effect
Stock options
Performance share units
9 – Accounts receivable
$
$
708.5
1.8
710.3
6.90
6.89
0.5
0.1
$
$
The following table provides the breakdown of Accounts receivable as at December 31, 2021 and 2020:
December 31,
$
In millions
Freight
Non-freight
Gross accounts receivable
Allowance for credit losses
Net accounts receivable
711.3
1.7
713.0
5.01
5.00
0.7
0.3
2021
877
225
1,102
(28)
$
$
$
2019
4,216
720.1
2.5
722.6
5.85
5.83
0.5
0.2
2020
869
211
1,080
(26)
1,054
$
1,074
$
CN | 2021 Annual Report 89
Notes to the Consolidated Financial Statements
10 – Other current assets
The following table provides the breakdown of Other current assets as at December 31, 2021 and 2020:
In millions
Assets held for sale (Note 5)
Prepaid expenses
Income taxes receivable
Other
Total other current assets
11 – Properties
December 31,
$
2021
260
142
—
20
422
$
$
$
2020
90
148
85
42
365
The following table provides the breakdown of Properties as at December 31, 2021 and 2020:
In millions
Properties including finance leases
Track and roadway (1) (2)
Rolling stock
Buildings
Information technology (3)
Other
December 31, 2021
Depreciation
rate
Cost
Accumulated
Depreciation
Net
Cost
December 31, 2020
Accumulated
Depreciation
Net
2 % $
41,262
$
9,148
$
32,114
$
39,805
$
8,717
$
31,088
4 %
2 %
10 %
5 %
7,767
2,043
2,412
2,787
3,062
695
959
1,229
4,705
1,348
1,453
1,558
7,665
2,047
2,218
2,777
2,986
727
833
1,180
4,679
1,320
1,385
1,597
Total properties including finance leases (4)
$
56,271
$
15,093
$
41,178
$
54,512
$
14,443
$
40,069
Finance leases included in properties
Track and roadway (5)
Rolling stock
Buildings
Other
$
406
$
11
27
94
94
1
10
25
$
312
$
406
$
10
17
69
61
27
107
90
3
10
21
$
316
58
17
86
Total finance leases included in properties
$
538
$
130
$
408
$
601
$
124
$
477
(1)
As at December 31, 2021, includes land of $2,308 million (2020 - $2,316 million).
(2) In 2021, the Company made an adjustment of $33 million for assets held for sale (2020 - $576 million). See Note 5 – Assets held for sale for additional information.
(3)
In 2021, the Company capitalized costs for internally developed software and related licenses of $191 million (2020 - $205 million).
(4)
In 2021, property additions, net of finance leases, were $2,891 million (2020 - $2,863 million), of which $1,580 million (2020 - $1,427 million) related to track and railway
infrastructure maintenance, including the replacement of rail, ties, bridge improvements, and other general track maintenance.
(5) As at December 31, 2021, includes right-of-way access of $106 million (2020 - $106 million).
90 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
12 – Leases
The following table provides the Company’s lease costs for the years ended December 31, 2021, 2020 and 2019:
In millions
Finance lease cost
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease cost
Operating lease cost
Short-term lease cost
Variable lease cost (1)
Total lease cost (2)
Year ended December 31,
2021
2020
2019
$
$
12
1
13
131
26
58
$
12
3
15
143
42
63
$
228
$
263
$
11
8
19
171
47
63
300
(1) Mainly relates to leases of trucks for the Company's freight delivery service contracts.
(2)
Includes lease costs from Purchased services and material and Equipment rents in the Consolidated Statements of Income.
The following table provides the Company's lease right-of-use assets and lease liabilities, and their classification on the Consolidated
Balance Sheets as at December 31, 2021 and 2020:
In millions
Classification
December 31,
2021
2020
Lease right-of-use assets
Finance leases
Operating leases
Total lease right-of-use assets
Properties
Operating lease right-of-use assets
Lease liabilities
Current
Finance leases
Operating leases
Noncurrent
Finance leases
Operating leases
Total lease liabilities
Current portion of long-term debt
Accounts payable and other
Long-term debt
Operating lease liabilities
$
$
$
$
408
445
853
$
$
7
$
108
3
322
440
$
477
435
912
70
107
4
311
492
The following table provides the remaining lease terms and discount rates for the Company's leases as at December 31, 2021 and 2020:
Weighted-average remaining lease term (years)
Finance leases
Operating leases
Weighted-average discount rate (%)
Finance leases
Operating leases
December 31,
2021
2020
1.9
6.2
1.29
2.43
0.8
6.8
3.10
2.79
The following table provides additional information for the Company's leases for the years ended December 31, 2021, 2020 and 2019:
In millions
Cash paid for amounts included in the measurement of
lease liabilities ($)
Operating cash outflows from operating leases
Operating cash outflows from finance leases
Financing cash outflows from finance leases
Right-of-use assets obtained in exchange for lease
liabilities ($)
Operating lease
Finance lease
Year ended December 31,
2021
2020
2019
129
1
68
135
6
142
3
59
53
—
170
6
162
79
—
CN | 2021 Annual Report 91
Notes to the Consolidated Financial Statements
The following table provides the maturities of lease liabilities for the next five years and thereafter as at December 31, 2021:
In millions
2022
2023
2024
2025
2026
2027 & thereafter
Total lease payments
Less: Imputed interest
Present value of lease payments
Finance leases Operating leases (1)
$
$
7
1
—
—
2
—
10
—
10
$
$
$
117
93
66
54
34
104
468
38
430
2020
145
83
70
64
37
22
(1)
Includes $70 million related to renewal options that are reasonably certain to be exercised.
13 – Intangible assets, goodwill and other
The following table provides the breakdown of the intangible assets, goodwill and other as at December 31, 2021 and 2020:
In millions
Intangible assets
Investments (1)
Goodwill (Note 3)
Deferred costs
Long-term receivables
Other long-term assets
December 31,
$
2021
139
119
70
59
32
20
Total intangible assets, goodwill and other
$
439
$
421
(1)
As at December 31, 2021, the Company had $59 million (2020 - $56 million) of investments accounted for under the equity method, $32 million of equity investments with
readily determinable fair values (2020 - $nil) as determined by the most recent exchange trade price with changes in fair value being recognized within Other income, see
Note 6 - Other income and $28 million (2020 - $27 million) of investments for which fair value was not readily determinable accounted for at cost minus impairment, plus or
minus observable price changes.
14 – Accounts payable and other
The following table provides the breakdown of the Accounts payable and other as at December 31, 2021 and 2020:
In millions
Trade payables
Payroll-related accruals
Accrued charges
Income and other taxes
Accrued interest
Operating lease liabilities (Note 12)
Personal injury and other claims provisions (Note 21)
Contract liabilities (Note 4)
Environmental provisions (Note 21)
Other postretirement benefits liability (Note 17)
Other
Total accounts payable and other
92 CN | 2021 Annual Report
December 31,
2021
2020
$
$
903
435
309
309
158
108
75
74
38
14
189
780
349
293
223
162
107
109
115
46
14
166
$
2,612
$
2,364
US dollar-
denominated
amount
December 31,
2021
2020
Notes to the Consolidated Financial Statements
15 – Debt
The following table provides the breakdown of debt as at December 31, 2021 and 2020:
In millions
Notes and debentures (1)
Canadian National series:
2.75% 7-year notes (2)
2.85% 10-year notes (2)
2.25% 10-year notes (2)
7.63% 30-year debentures
2.95% 10-year notes (2)
2.80% 10-year notes (2)
2.75% 10-year notes (2)
6.90% 30-year notes (2)
3.20% 10-year notes (2)
3.00% 10-year notes (2)
7.38% 30-year debentures (2)
6.25% 30-year notes (2)
6.20% 30-year notes (2)
6.71% Puttable Reset Securities PURSSM (2)
6.38% 30-year debentures (2)
3.50% 30-year notes (2)
4.50% 30-year notes (2)
3.95% 30-year notes (2)
3.20% 30-year notes (2)
3.60% 30-year notes (2)
3.65% 30-year notes (2)
3.60% 30-year notes (2)
4.45% 30-year notes (2)
3.60% 30-year notes (2)
3.05% 30-year notes (2)
2.45% 30-year notes (2)
4.00% 50-year notes (2)
Maturity
Feb 18, 2021
Dec 15, 2021
Nov 15, 2022
May 15, 2023
Nov 21, 2024
Sep 22, 2025
Mar 1, 2026
Jul 15, 2028
Jul 31, 2028
Feb 8, 2029
Oct 15, 2031
Aug 1, 2034
Jun 1, 2036
Jul 15, 2036
Nov 15, 2037
Nov 15, 2042
Nov 7, 2043
Sep 22, 2045
Aug 2, 2046
Aug 1, 2047
Feb 3, 2048
Jul 31, 2048
Jan 20, 2049
Feb 8, 2049
Feb 8, 2050
May 1, 2050
Sep 22, 2065
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
400
250
150
350
500
475
200
500
450
250
300
250
250
US$
650
US$
600
US$
650
US$
600
Illinois Central series:
7.70% 100-year debentures
Sep 15, 2096
US$
125
BC Rail series:
Non-interest bearing 90-year subordinated notes (3)
Jul 14, 2094
Total notes and debentures
Other
Commercial paper
Accounts receivable securitization
Finance leases
Equipment loans and other (4)
Total debt, gross
Net unamortized discount and debt issuance costs (3)
Total debt (5)
Less: Current portion of long-term debt
Total long-term debt
$
$
—
—
316
190
442
350
632
600
350
350
253
632
569
316
379
316
316
400
821
500
758
450
821
450
450
758
100
158
842
12,519
140
—
10
770
13,439
(954)
12,485
508
250
509
318
191
445
350
636
604
350
350
255
636
573
318
382
318
318
400
827
500
764
450
827
450
450
764
100
159
842
13,336
56
—
74
402
13,868
(962)
12,906
910
$
11,977
$
11,996
(1)
(2)
(3)
(4)
The Company's notes and debentures are unsecured.
The fixed rate debt securities are redeemable, in whole or in part, at the option of the Company, at any time, at the greater of par and a formula price based on interest rates prevailing at
the time of redemption.
As at December 31, 2021, these notes were recorded as a discounted debt of $14 million (2020 - $13 million) using an imputed interest rate of 5.75% (2020 - 5.75%). The discount of
$828 million (2020 - $829 million) is included in Net unamortized discount and debt issuance costs.
Includes $723 million (2020 - $368 million) of equipment loan under the non-revolving credit facility. Also included is $47 million (2020 - $34 million) of other equipment loans payable
monthly at a weighted average interest rate of 2.12% (2020 - 2.00%).
(5)
See Note 22 - Financial instruments for the fair value of debt.
CN | 2021 Annual Report 93
Notes to the Consolidated Financial Statements
Notes and debentures
For the year ended December 31, 2021, the Company repaid the following:
•
•
On September 15, 2021, early redemption of US$400 million ($506 million) 2.85% Notes due 2021; and
On January 18, 2021, early redemption of $250 million 2.75% Notes due 2021.
For the year ended December 31, 2020, the Company issued and repaid the following:
•
•
On May 1, 2020, issuance of US$600 million ($837 million) 2.45% Notes due 2050 in the U.S. capital markets, which resulted in net
proceeds of $810 million; and
On February 3, 2020, repayment of US$300 million ($397 million) 2.40% Notes due 2020 upon maturity.
Revolving credit facility
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.
As at December 31, 2020, the Company had no outstanding borrowings under this revolving credit facility. In 2020, the Company had proceeds
from borrowings under revolving credit facility agreement of $100 million and repayment of borrowings under revolving credit facility
agreement of $100 million.
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.
Credit facilities
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.
Equipment loans
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. 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.
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 $2.0 billion, or the US dollar equivalent, on a
combined basis.
As at December 31, 2021 and 2020, the Company had total commercial paper borrowings of US$111 million ($140 million) and US$44
million ($56 million), respectively, at a weighted-average interest rate of 0.18% and 0.13%, respectively, presented in Current portion of long-term
debt on the Consolidated Balance Sheets.
94 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
The following table provides a summary of cash flows associated with the issuance and repayment of commercial paper for the years
ended December 31, 2021, 2020 and 2019:
In millions
Year ended December 31,
2021
2020
2019
Commercial paper with maturities less than 90 days
Issuance
Repayment
Change in commercial paper with maturities less than 90 days, net
Commercial paper with maturities of 90 days or greater
Issuance
Repayment
Change in commercial paper with maturities of 90 days or greater, net
Change in commercial paper, net
$
$
$
$
$
5,254
$
5,315
$
(5,289)
(6,076)
(35)
$
(761)
$
353
(252)
101
66
$
$
$
736
(1,248)
(512)
(1,273)
$
$
$
5,069
(5,141)
(72)
2,115
(1,902)
213
141
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 December 20, 2021, the Company extended the term of its agreement by one year to February 1,
2024. 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 or LIBOR rates then in effect.
As at December 31, 2021, and 2020, the Company had no borrowings under the accounts receivable securitization program and there were
no activities in 2021.
The following table provides a summary of cash flows associated with the proceeds received and repayment of the accounts receivable
securitization program for the years ended December 31, 2021, 2020 and 2019:
In millions
Beginning of year
Proceeds received
Repayment
End of year
Bilateral letter of credit facilities
Year ended December 31,
2021
$
$
—
—
—
—
$
$
$
2020
200
450
(650)
—
$
2019
—
420
(220)
200
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 (2020 - $421 million) under the committed
facilities from a total available amount of $518 million (2020 - $492 million) and $158 million (2020 - $165 million) under the uncommitted
facilities.
As at December 31, 2021, included in Restricted cash and cash equivalents was $396 million (2020 - $424 million) and $100 million
(2020 - $100 million) which were pledged as collateral under the committed and uncommitted bilateral letter of credit facilities, respectively.
CN | 2021 Annual Report 95
Notes to the Consolidated Financial Statements
Debt maturities
The following table provides the debt maturities, excluding finance lease liabilities, as at December 31, 2021, for the next five years and
thereafter:
In millions
2022
2023
2024
2025
2026
2027 & thereafter
Total
Finance lease liabilities (2)
Total debt
Debt (1)
501
222
476
385
667
10,224
12,475
10
12,485
$
$
(1) Presented net of unamortized discounts and debt issuance costs.
(2) See Note 12 - Leases for maturities of finance lease liabilities.
Amount of US dollar-denominated debt
The following table provides the breakdown of US dollar-denominated debt as at December 31, 2021 and 2020:
In millions
Notes and debentures
Commercial paper
Finance lease liabilities
Equipment loans and other
Total amount of US dollar-denominated debt in US$
Total amount of US dollar-denominated debt in C$
December 31,
2021
2020
US$
6,550
US$
6,950
111
8
606
44
50
314
US$
7,275
US$
7,358
$
9,193
$
9,363
16 – Other liabilities and deferred credits
The following table provides the breakdown of Other liabilities and deferred credits as at December 31, 2021 and 2020:
In millions
Personal injury and other claims provisions (Note 21) (1)
Environmental provisions (Note 21) (1)
Stock-based compensation liability (Note 19)
Contract liabilities (Note 4) (1)
Deferred credits and other
Total other liabilities and deferred credits
(1)
See Note 14 – Accounts payable and other for the related current portion.
17 – Pensions and other postretirement benefits
December 31,
2021
$
232
$
18
9
—
168
427
$
$
2020
238
13
14
85
184
534
The Company has various retirement benefit plans under which substantially all of its employees are entitled to benefits at retirement age,
generally based on compensation and length of service and/or contributions. Senior and executive management employees, subject to certain
minimum service and age requirements, are also eligible for an additional retirement benefit under their Special Retirement Stipend
Agreements, the Supplemental Executive Retirement Plan or the Defined Contribution Supplemental Executive Retirement Plan.
The Company also offers postretirement benefits to certain employees providing life insurance, medical benefits and, for a closed group of
employees, free rail travel benefits during retirement. These postretirement benefits are funded as they become due. The information in the
tables that follow pertains to all of the Company's defined benefit plans. However, the following descriptions relate solely to the Company's
main pension plan, the CN Pension Plan, unless otherwise specified.
96 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
Curtailment event
On October 31, 2021, the CN Board of Directors approved changes affecting non-unionized members participating in the Company’s defined
benefit pension plans. Effective April 1, 2024, the affected defined benefit pension plans will be amended to cease benefits accruals for non-
unionized members, generally known as a delayed hard freeze. Effective April 1, 2024, all non-unionized members will be transferred to the
Company’s defined contribution pension plans for their future service. This delayed hard freeze constitutes a plan curtailment event recognized
on October 31, 2021 resulting in a $52 million reduction to the Projected benefit obligation, recorded in Other comprehensive income as an
actuarial gain, mostly due to reflecting projected future salary increases and service only up to April 1, 2024. The curtailment event also
triggered an interim re-measurement of the funded status of the affected defined benefit pension plans resulting in an actuarial gain of
$1,915 million recorded in Other comprehensive income composed of i) an actuarial gain on the Projected benefit obligation of $1,808 million
substantially all due to the 84 basis point increase in the end of period discount rate between the prior year end (2.55%) and October 31, 2021
(3.39%), and ii) an actuarial gain on the Plan assets of $107 million due to higher actual returns ($982 million) compared to expected returns
($875 million) over that same ten-month period. Due to the interim re-measurement, the resulting Net periodic benefit income recorded during
the fourth quarter of 2021 increased by $25 million composed of i) a decrease to Current service cost of $9 million, and ii) an increase to Other
components of net periodic benefit income of $16 million.
Description of the CN Pension Plan
The CN Pension Plan is a contributory defined benefit pension plan that covers the majority of CN employees. It provides for pensions based
mainly on years of service and final average pensionable earnings and is generally applicable from the first day of employment. Indexation of
pensions is provided after retirement through a gain/loss sharing mechanism, subject to guaranteed minimum increases. An independent trust
company is the Trustee of the Company's pension trust funds (which includes the CN Pension Trust Fund). As Trustee, the trust company
performs certain duties, which include holding legal title to the assets of the CN Pension Trust Fund and ensuring that the Company, as
Administrator, complies with the provisions of the CN Pension Plan and the related legislation. The Company utilizes a measurement date of
December 31 for the CN Pension Plan.
Funding policy
Employee contributions to the CN Pension Plan are determined by the plan rules. Company contributions are in accordance with the
requirements of the Government of Canada legislation, the Pension Benefits Standards Act, 1985, including amendments and regulations
thereto, and such contributions follow minimum and maximum thresholds as determined by actuarial valuations. Actuarial valuations are
generally required on an annual basis for all Canadian defined benefit pension plans, or when deemed appropriate by the Office of the
Superintendent of Financial Institutions. These actuarial valuations are prepared in accordance with legislative requirements and with the
recommendations of the Canadian Institute of Actuaries for the valuation of pension plans. Actuarial valuations are also required annually for
the Company's U.S. qualified defined benefit pension plans.
The Company's most recently filed actuarial valuations for funding purposes for its Canadian registered defined benefit pension plans
conducted as at December 31, 2020 indicated a funding excess on a going concern basis of approximately $3.4 billion and a funding excess on
a solvency basis of approximately $0.4 billion, calculated using the three-year average of the plans' hypothetical wind-up ratio in accordance
with the Pension Benefit Standards Regulations, 1985. The federal pension legislation requires funding deficits, if any, to be paid over a number
of years, as calculated under current pension regulations. Alternatively, a letter of credit can be subscribed to fulfill required solvency deficit
payments.
The Company's next actuarial valuations for funding purposes for its Canadian registered defined benefit pension plans required as at
December 31, 2021 will be performed in 2022. These actuarial valuations are expected to identify a funding excess on a going concern basis of
approximately $3.9 billion, while on a solvency basis a funding excess of approximately $1.1 billion is expected. Based on the anticipated
results of these valuations, the CN Pension Plan is expected to be fully funded and at a level such that the Company would be prohibited from
making contributions to the CN Pension Plan once the actuarial valuation report is filed in 2022. As such, the Company expects to make total
cash contributions of approximately $70 million for all of the Company's pension plans in 2022. As at February 1, 2022 the Company had
contributed $20 million to its defined benefit pension plans for 2022.
Plan assets
The assets of the Company's various Canadian defined benefit pension plans are primarily held in separate trust funds ("Trusts") which are
diversified by asset type, country, sector and investment strategy. Each year, the CN Board of Directors reviews and confirms or amends the
Statement of Investment Policies and Procedures ("SIPP") which includes the plans' long-term target asset allocation ("Policy") and related
benchmark indices. This Policy is based on the long-term expectations of the economy and financial market returns and considers the
dynamics of the plans' pension benefit obligations. In 2021, the Policy was amended to implement a target asset allocation change to bonds
CN | 2021 Annual Report 97
Notes to the Consolidated Financial Statements
and mortgages, emerging market debt, private debt, resource and royalties (formerly oil and gas) and absolute return. In addition, the specialty
portfolio was approved as a new investment strategy.
The CN Investment Division ("Investment Manager"), a division of the Company created to invest and administer the assets of the plan, can
also implement an investment strategy ("Strategy") which can lead the Plan's actual asset allocation to deviate from the Policy due to changing
market risks and opportunities. The Pension and Investment Committee of the Board of Directors ("Committee") regularly compares the actual
plan asset allocation to the Policy and Strategy and compares the actual performance of the Company's pension plan assets to the
performance of the benchmark indices. The Company's 2021 Policy and actual asset allocation for the Company's pension plans based on fair
value are as follows:
Cash and short-term investments
Bonds and mortgages
Emerging market debt
Private debt
Equities
Real estate
Resource and royalties (1)
Infrastructure
Specialty portfolio (2)
Absolute return
Alternative risk premia
Investment-related liabilities
Total
Actual plan asset allocation
Policy
2 %
37 %
2 %
3 %
35 %
4 %
5 %
4 %
2 %
12 %
— %
(6) %
2021
2 %
37 %
2 %
3 %
40 %
2 %
5 %
3 %
2 %
11 %
1 %
(8) %
2020
3 %
37 %
2 %
3 %
38 %
2 %
3 %
3 %
— %
10 %
1 %
(2) %
100 %
100 %
100 %
(1) Asset class description has been changed from oil and gas to resource and royalties.
(2)
In 2021, the specialty portfolio was approved as a new investment strategy.
The Committee's approval is required for all major investments in illiquid securities. The SIPP allows for the use of derivative financial
instruments to implement strategies, hedge and adjust existing or anticipated exposures. The SIPP prohibits investments in securities of the
Company or its subsidiaries. Investments held in the Company's pension plans consist mainly of the following:
•
•
•
•
•
•
•
•
•
•
Cash and short-term investments consist of highly liquid securities which ensure adequate cash flows are available to cover near-term
benefit payments as well as anticipated cash requirements needed to support derivative instruments or any other contractual
commitment. Short-term investments are mainly obligations issued by Canadian chartered banks and by Canadian governments.
Bonds include bond instruments, issued or guaranteed by governments and non-government entities. As at December 31, 2021, 80%
(2020 - 80%) of bonds were issued or guaranteed by Canadian, U.S. or other governments. Mortgages consist of mortgage bonds, interest
in mortgages or in funds making loans, all of which are secured by real estate. On an exposure basis, the Plan's Policy for bonds and
mortgages is 42%. This comprises a 37% allocation mainly to government and corporate bonds and a 5% allocation to derivative financial
instruments related to bond exposure.
Emerging market debt consists of units of co-mingled funds or in separate accounts managed by external managers whose mandate is to
invest in debt instruments of emerging market countries.
Private debt includes participations in private debt securities and funds focused on generating steady yields.
Equity investments include publicly traded securities diversified by industry sector, country and issuer and investments in private equity
funds. As at December 31, 2021, the most significant allocation to an individual issuer of a publicly traded security was 4% (2020 - 3%) and
the most significant allocation to an industry sector was 22% (2020 - 17%). On an exposure basis, the Plan's Policy for equities is 40%. This
comprises a 35% allocation to equities and a 5% allocation to derivative financial instruments related to equity exposure.
Real estate is a diversified portfolio of Canadian land and commercial properties and investments in global real estate private equity funds.
Resource and royalties investments include petroleum and natural gas properties and listed and non-listed securities of resource and
royalties companies.
Infrastructure investments include participations in private infrastructure funds, term loans and notes of infrastructure companies.
Specialty portfolio consists of mainly private equity, private debt and absolute return investments. Exposure to public assets may be
included to manage the risk-return profile and tactical allocation relative to the Policy portfolio weight.
Absolute return investments are primarily a portfolio of units of externally managed hedge funds, which are invested in various long/short
and derivatives strategies within multi-strategy, fixed income, commodity, equity, global macro funds and downside protection (formerly
growth insurance). Managers are monitored on a continuous basis through investment and operational due diligence.
98 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
•
•
Alternative risk premia investments are a portfolio of units of externally managed funds and internally managed strategies on a risk-
adjusted basis.
Investment-related liabilities reflect a certain level of financing associated with securities sold under repurchase agreements and other
assets.
The plans' Investment Manager monitors market events and risk exposures to foreign currencies, interest rates, market risks, credit risks
and liquidity risks daily. When investing in foreign securities, the plans are exposed to foreign currency risk that may be adjusted or hedged; the
effect of which is included in the valuation of the foreign securities. Net of the adjusted or hedged amount, the plans were 62% exposed to the
Canadian dollar, 23% to the US dollar, 7% to European currencies, 2% to the Japanese Yen and 6% to various other currencies as at
December 31, 2021. Interest rate risk represents the risk that the fair value of the investments will fluctuate due to changes in market interest
rates. Sensitivity to interest rates is a function of the timing and amount of cash flows of the interest-bearing assets and liabilities of the plans.
Derivatives are contractual agreements whose value is derived from interest rates, foreign currencies, commodities, or equities, among other
fluctuating inputs and factors. They may include forwards, futures, options, and swaps. Derivatives are included in the investment asset classes
based on their underlying exposure and are used from time to time to synthetically replace any investment activity that would otherwise be
accomplished through a direct investment in any investment asset class. When derivatives are used for hedging purposes, the gains or losses
on the derivatives are offset by a corresponding change in the value of the hedged assets. To manage counterparty credit risk, established
policies require dealing with counterparties considered to be of high credit quality. Adequate liquidity is maintained to cover cash flows by
monitoring factors such as fair value, collateral pledged and received, repurchase agreements and securities lending agreements.
Overall return in the capital markets and the level of interest rates affect the funded status of the Company's pension plans, particularly the
Company's main Canadian pension plan. Adverse changes with respect to pension plan returns and the level of interest rates from the date of
the last actuarial valuations may have a material adverse effect on the funded status of the plans and on the Company's results of operations.
The following tables present the fair value of plan assets by asset class as at December 31, 2021 and 2020:
In millions
Cash and short-term investments (1)
Bonds (2)
Canada, U.S. and supranational
Provinces of Canada and municipalities
Corporate
Emerging market debt (3)
Mortgages (4)
Private debt (5)
Public equities (6)
Canadian
U.S.
International
Private equities (7)
Real estate (8)
Resource and royalties (9)
Infrastructure (10)
Absolute return funds (11)
Multi-strategy
Fixed income
Commodity
Equity
Global macro
Downside protection
Alternative risk premia (12)
Total investments (13)
Investment-related liabilities (14)
Other (15)
Total plan assets
Fair value measurements at December 31, 2021
Total
Level 1
Level 2
Level 3
$
410
$
114
$
296
$
—
$
603
5,343
1,493
365
19
723
571
4,388
2,951
625
370
978
654
1,173
50
77
295
708
74
239
—
—
—
—
—
—
571
4,383
2,951
—
—
293
—
—
—
—
—
—
74
—
603
5,343
1,493
365
19
—
—
5
—
—
—
8
69
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
272
677
—
—
—
—
—
—
—
—
$
8,386
$
8,201
$
949
$
$
$
22,109
(1,780)
87
20,416
NAV
—
—
—
—
—
—
723
—
—
—
625
98
—
585
1,173
50
77
295
708
—
239
4,573
Level 1: Fair value based on quoted prices in active markets for identical assets.
Level 2: Fair value based on other significant observable inputs.
Level 3: Fair value based on significant unobservable inputs.
NAV: Investments measured at net asset value as a practical expedient.
Footnotes to the tables follow on the following page.
CN | 2021 Annual Report 99
Notes to the Consolidated Financial Statements
In millions
Cash and short-term investments (1)
Bonds (2)
Canada, U.S. and supranational
Provinces of Canada and municipalities
Corporate
Emerging market debt (3)
Mortgages (4)
Private debt (5)
Public equities (6)
Canadian
U.S.
International
Private equities (7)
Real estate (8)
Resource and royalties (9)
Infrastructure (10)
Absolute return funds (11)
Multi-strategy
Fixed income
Global macro
Downside protection
Alternative risk premia (12)
Total investments (13)
Investment-related liabilities (14)
Other (15)
Total plan assets
Fair value measurements at December 31, 2020
Total
Level 1
Level 2
Level 3
$
594
$
41
$
553
$
—
$
642
5,103
1,472
406
21
575
555
3,249
3,477
303
381
649
571
1,032
68
697
92
191
—
—
—
—
—
—
555
3,214
3,477
—
—
128
—
—
—
—
92
—
642
5,103
1,472
406
21
—
—
35
—
—
—
17
65
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
279
504
—
—
—
—
—
—
$
7,507
$
8,314
$
783
$
$
$
20,078
(441)
86
19,723
NAV
—
—
—
—
—
—
575
—
—
—
303
102
—
506
1,032
68
697
—
191
3,474
Level 1: Fair value based on quoted prices in active markets for identical assets.
Level 2: Fair value based on other significant observable inputs.
Level 3: Fair value based on significant unobservable inputs.
NAV: Investments measured at net asset value as a practical expedient.
Footnotes to the tables follow on the following table.
The following table reconciles the beginning and ending balances of the fair value of investments classified as Level 3:
Fair value measurements based on significant unobservable
inputs (Level 3)
In millions
Balance at December 31, 2019
Actual return relating to assets still held at the reporting date
$
Purchases
Sales
Disbursements
Balance at December 31, 2020
Actual return relating to assets still held at the reporting date
Purchases
Disbursements
Real estate (8)
Resource and
royalties (9)
$
329
(54)
6
(1)
(1)
279
(13)
6
—
$
707
(188)
—
—
(15)
504
191
—
(18)
Balance at December 31, 2021
$
272
$
677
$
Total
1,036
(242)
6
(1)
(16)
783
178
6
(18)
949
(1)
(2)
Cash and short-term investments with related accrued interest are valued at cost, which approximates fair value, and are categorized as Level 1 and Level 2 respectively.
Bonds are valued using mid-market prices obtained from independent pricing data suppliers. When prices are not available from independent sources, the fair value is
based on the present value of future cash flows using current market yields for comparable instruments.
(3)
Emerging market debt funds are valued based on the net asset value which is readily available and published by each fund's independent administrator.
(4) Mortgages are valued based on the present value of future net cash flows using current market yields for comparable instruments.
(5)
(6)
(7)
Private debt investments are valued based on the net asset value as reported by each fund's manager, generally based on the present value of future net cash flows using
current market yields for comparable instruments. In 2021, $16 million of private debt investments are included as part of the specialty portfolio strategy.
The fair value of public equity investments is based on quoted prices in active markets.
Private equity investments are valued based on the net asset value as reported by each fund's manager, generally using discounted cash flow analysis or earnings
multiples. In 2021, $295 million of private equity investments are included as part of the specialty portfolio strategy.
100 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
(8)
(9)
The fair value of real estate investments categorized as Level 3 includes immoveable properties. Land is valued based on the fair value of comparable assets, and income
producing properties are valued based on the present value of estimated future net cash flows or the fair value of comparable assets. Independent valuations of all
immoveable properties are performed triennially on a rotational basis. The fair value of real estate investments categorized as NAV consists mainly of investments in real
estate private equity funds and is based on the net asset value as reported by each fund's manager, generally using a discounted cash flow analysis or earnings multiples.
Resource and royalties investments categorized as Level 1 are valued based on quoted prices in active markets. Resource and royalties participations traded on a
secondary market are valued based on the most recent transaction price and are categorized as Level 2. Investments in resource and royalties categorized as Level 3
consist of operating resource and royalties properties and the fair value is based on estimated future net cash flows that are discounted using prevailing market rates for
transactions in similar assets. Estimated future net cash flows are based on forecasted resource and royalties prices and projected annual production and costs.
(10) The fair value of infrastructure investments categorized as Level 2 is based on the present value of future cash flows using current market yields for comparable
instruments. The fair value of infrastructure funds categorized as NAV is based on the net asset value as reported by each fund's manager, generally using a discounted
cash flow analysis or earnings multiples.
(11) Absolute return investments are valued using the net asset value as reported by each fund's independent administrator. All absolute return investments have contractual
redemption frequencies, ranging from monthly to annually, and redemption notice periods varying from 5 to 90 days. In 2021, $39 million of absolute return investments are
included as part of the specialty portfolio strategy.
(12) Alternative risk premia investments are valued using the net asset value as reported by each fund's independent administrator or fund manager. All funds have contractual
redemption frequencies ranging from daily to annually, and redemption notice periods varying from 5 to 60 days.
(13) Derivative financial instruments, which are included in total investments, are valued using quoted market prices when available and are categorized as Level 1, or based on
valuation techniques using market data, when quoted market prices are not available and are categorized as Level 2. Derivatives are included in the investment asset
categories based on their underlying exposure.
(14)
Investment-related liabilities include securities sold under repurchase agreements. The securities sold under repurchase agreement do not meet the conditions to remove
from the assets and are therefore maintained on the books with an offsetting liability recorded to represent the financing nature of this transaction. These agreements are
recorded at cost, which together with accrued interest approximates fair value due to their short-term nature.
(15) Other consists of operating assets of $134 million (2020 - $262 million) and liabilities of $47 million (2020 - $176 million) required to administer the Trusts' investment
assets and the plans' benefit and funding activities. Such assets are valued at cost and have not been assigned to a fair value category.
Obligations and funded status for defined benefit pension and other postretirement benefit plans
In millions
Year ended December 31,
2021
2020
2021
2020
Pensions
Other postretirement benefits
Change in benefit obligation
Projected benefit obligation at beginning of year
$
19,499
$
18,609
$
228
$
227
Curtailments
Interest cost
Actuarial (gain) loss on projected benefit obligation (1)
Current service cost
Plan participants' contributions
Foreign currency changes
Benefit payments, settlements and transfers
Projected benefit obligation at the end of the year (2)
Component representing future salary increases
Accumulated benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Employer contributions
Plan participants' contributions
Foreign currency changes
Actual return on plan assets
Benefit payments, settlements and transfers
Fair value of plan assets at end of year (2)
Funded status - Excess (deficiency) of fair value of plan assets
over projected benefit obligation at end of year
$
$
$
$
$
(52)
392
(1,206)
197
61
(3)
(1,075)
—
532
1,208
175
59
(7)
(1,077)
—
5
(7)
2
—
(2)
(14)
17,813
$
19,499
$
212
$
(179)
17,634
19,723
104
61
(2)
1,605
(1,075)
20,416
2,603
$
$
$
$
(271)
19,228
18,424
93
59
(6)
2,230
(1,077)
19,723
224
$
$
$
$
—
212
—
—
—
—
—
—
—
(212)
$
$
$
$
—
6
9
2
—
—
(16)
228
—
228
—
—
—
—
—
—
—
(228)
(1)
(2)
Substantially all of the pensions' actuarial gain for the year ended December 31, 2021 and actuarial loss for the year ended December 31, 2020 is the result of the change in
the end of year discount rate of the current year versus the prior year (60 basis points increase for 2021 and 55 basis points decrease for 2020).
For the CN Pension Plan, as at December 31, 2021, the projected benefit obligation was $16,557 million (2020 - $18,075 million) and the fair value of plan assets was
$19,485 million (2020 - $18,774 million). The measurement date of all plans is December 31.
CN | 2021 Annual Report 101
Notes to the Consolidated Financial Statements
Amounts recognized in the Consolidated Balance Sheets
Pensions
Other postretirement benefits
In millions
December 31,
2021
Noncurrent assets - Pension asset
Current liabilities (Note 14)
Noncurrent liabilities - Pension and other postretirement benefits
Total amount recognized
$
$
3,050
$
—
(447)
2020
777
—
(553)
2021
$
—
$
(14)
(198)
2,603
$
224
$
(212)
$
Amounts recognized in Accumulated other comprehensive loss (Note 20)
In millions
Net actuarial gain (loss)
Prior service credit (cost)
December 31,
$
$
Pensions
2021
(2,092)
—
$
$
Other postretirement benefits
2020
(4,165)
—
$
$
2021
3
3
$
$
Information for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets
In millions
Accumulated benefit obligation (1)
Fair value of plan assets (1)
December 31,
$
$
(1) All of the Company's other postretirement benefit pension plans have an accumulated benefit obligation in excess of plan assets.
Information for defined benefit pension plans with a projected benefit obligation in excess of plan assets
In millions
Projected benefit obligation
Fair value of plan assets
December 31,
$
$
Components of net periodic benefit cost (income) for defined benefit pension and other postretirement benefit plans
Pensions
2021
542
111
$
$
Pensions
2021
661
214
$
$
In millions
Current service cost
Year ended December 31,
2021
2020
2019
2021
2020
2019
Pensions
Other postretirement benefits
$
197
$
175
$
143
$
2
$
2
$
Other components of net periodic benefit cost (income)
Interest cost
Settlement loss
Expected return on plan assets
Amortization of prior service cost
Amortization of net actuarial loss (gain)
392
2
532
2
596
5
(1,061)
(1,095)
(1,085)
—
269
3
242
3
155
Total Other components of net periodic benefit cost (income)
Net periodic benefit cost (income)
$
$
(398)
(201)
$
$
(316)
(141)
$
$
(326)
(183)
$
$
5
—
—
(1)
(4)
—
2
$
$
6
—
—
—
(5)
1
3
$
$
102 CN | 2021 Annual Report
2020
—
(14)
(214)
(228)
2020
—
4
2020
724
242
2020
900
347
2
8
—
—
—
(3)
5
7
Notes to the Consolidated Financial Statements
Weighted-average assumptions used in accounting for defined benefit pension and other postretirement benefit plans
December 31,
2021
2020
2019
2021
2020
2019
Pensions
Other postretirement benefits
To determine projected benefit obligation
Discount rate (1)
Rate of compensation increase (2)
To determine net periodic benefit cost (income)
Rate to determine current service cost (3)
Rate to determine interest cost (3)
Rate of compensation increase (2)
Expected return on plan assets (4)
3.15 %
2.75 %
3.02 %
2.10 %
2.75 %
6.79 %
2.55 %
2.75 %
3.20 %
2.86 %
2.75 %
7.00 %
3.10 %
2.75 %
3.93 %
3.47 %
2.75 %
7.00 %
3.06 %
2.75 %
2.95 %
1.90 %
2.75 %
N/A
2.53 %
2.75 %
3.35 %
2.84 %
2.75 %
N/A
3.14 %
2.75 %
4.25 %
3.68 %
2.75 %
N/A
(1) The Company's discount rate assumption, which is set annually at the end of each year, is determined by management with the aid of third-party actuaries. The discount
rate is used to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments with a rating of AA or better, would
provide the necessary cash flows to pay for pension benefits as they become due. For the Canadian pension and other postretirement benefit plans, future expected benefit
payments are discounted using spot rates based on a derived AA corporate bond yield curve for each maturity year.
(2) The rate of compensation increase is determined by the Company based upon its long-term plans for such increases.
(3) The Company uses the spot rate approach to measure current service cost and interest cost for all defined benefit pension and other postretirement benefit plans. Under
the spot rate approach, individual spot discount rates along the same yield curve used in the determination of the projected benefit obligation are applied to the relevant
projected cash flows at the relevant maturity. The rates to determine current service cost and interest cost were 2.88% and 1.95% for the January to October 2021 period
and 3.69% and 2.83% for the November to December 2021 period.
(4) The expected long-term rate of return is determined based on expected future performance for each asset class and is weighted based on the investment policy. For the
January to October and November to December periods of 2021, the Company used a long-term rate of return assumption of 6.75% and 7.00% respectively on the market-
related value of plan assets prevailing for those same periods to compute net periodic benefit cost (income). The Company has elected to use a market-related value of
assets whereby realized and unrealized gains/losses and appreciation/depreciation in the value of the investments are recognized over a period of five years, while
investment income is recognized immediately. The increase to the expected long-term rate of return on plan assets by 25 basis points to 7.00% for the November to
December period of 2021 reflects management's current view of long-term investment returns. In 2022, the Company will maintain the expected long-term rate of return on
plan assets of 7.00% as management's current view of long-term investment returns remains unchanged from what was existing on October 31, 2021.
Expected future benefit payments
The following table provides the expected benefit payments for pensions and other postretirement benefits for the next five years and the
subsequent five-year period:
In millions
2022
2023
2024
2025
2026
Years 2027 to 2031
Pensions
Other postretirement
benefits
$
$
$
$
$
$
1,053
1,055
1,046
1,040
1,032
5,009
$
$
$
$
$
$
14
13
13
12
11
53
Defined contribution and other plans
The Company maintains defined contribution pension plans for certain salaried employees as well as certain employees covered by collective
bargaining agreements. The Company also maintains other plans including a Section 401(k) savings plan for U.S. based employees. The
Company's contributions under these plans were expensed as incurred and, in 2021, amounted to $23 million (2020 - $22 million; 2019 - $23
million).
Contributions to multi-employer plan
Under collective bargaining agreements, the Company participates in a multi-employer benefit plan named the Railroad Employees National
Early Retirement Major Medical Benefit Plan which provides certain postretirement health care benefits to certain retirees. The Company's
contributions under this plan were expensed as incurred and amounted to $10 million in 2021 (2020 - $10 million; 2019 - $12 million). The
annual contribution rate for the plan was $146.58 per month per active employee for 2021 (2020 - $153.43). The plan covered 328 retirees in
2021 (2020 - 388 retirees).
CN | 2021 Annual Report 103
Notes to the Consolidated Financial Statements
18 – Share capital
Authorized capital stock
The authorized capital stock of the Company is as follows:
•
•
•
Unlimited number of Common Shares, without par value
Unlimited number of Class A Preferred Shares, without par value, issuable in series
Unlimited number of Class B Preferred Shares, without par value, issuable in series
Common shares
The following table provides a breakdown of common shares as at December 31, 2021, 2020 and 2019:
In millions
Issued common shares
Common shares in Share Trusts
Outstanding common shares
Repurchase of common shares
December 31,
2021
702.0
(1.1)
700.9
2020
711.6
(1.3)
710.3
2019
714.1
(1.8)
712.3
The Company may repurchase its common shares pursuant to a Normal Course Issuer Bid (NCIB) at prevailing market prices plus brokerage
fees, or such other prices as may be permitted by the Toronto Stock Exchange. 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 may
repurchase up to 14.0 million common shares between February 1, 2021 and January 31, 2022 under its NCIB. As at December 31, 2021, the
Company had repurchased 10.3 million common shares under this NCIB.
The following table provides the information related to the share repurchases for the years ended December 31, 2021, 2020 and 2019:
In millions, except per share data
Year ended December 31,
Number of common shares repurchased
Weighted-average price per share (1)
Amount of repurchase (1)
(1)
Includes brokerage fees.
2021
10.3
153.69
1,582
$
$
2020
3.3
116.97
379
$
$
2019
14.3
118.70
1,700
$
$
See Note 24 - Subsequent events for information on the Company's new NCIB.
Share Trusts
The Company's Share Trusts purchase CN's common shares on the open market, which are used to deliver common shares under the Share
Units Plan and, beginning in 2019, the Employee Share Investment Plans (ESIP) (see Note 19 – Stock-based compensation). Shares purchased
by the Share Trusts are retained until the Company instructs the trustee to transfer shares to the participants of the Share Units Plan or the
ESIP. Common shares purchased by the Share Trusts are accounted for as treasury stock. The Share Trusts may sell shares on the open
market to facilitate the remittance of the Company's employee tax withholding obligations under the Share Units Plan.
104 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
The following tables provide the information related to the share purchases and settlements by Share Trusts under the Share Units Plan
and the ESIP for the years ended December 31, 2021, 2020 and 2019:
In millions, except per share data
Year ended December 31,
2021
2020
2019
Share purchases by ESIP Share Trusts
Number of common shares
Weighted-average price per share
Amount of purchase
Total purchases
In millions, except per share data
Year ended December 31,
Share settlements by Share Units Plan Share Trusts
Number of common shares
Weighted-average price per share
Amount of settlement
Share settlements by ESIP Share Trusts
Number of common shares
Weighted-average price per share
Amount of settlements
Total settlements
19 – Stock-based compensation
0.2
142.90
26
26
2021
0.2
88.23
20
0.2
128.40
18
38
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.1
123.03
14
14
2020
0.4
88.23
35
0.2
118.04
27
62
$
$
$
$
$
$
$
$
0.3
118.83
33
33
2019
0.5
88.23
45
—
—
—
45
The Company has various stock-based compensation plans for eligible employees. A description of the major plans is provided herein.
The following table provides the stock-based compensation expense for awards under all employee plans, as well as the related tax benefit
and excess tax benefit recognized in income, for the years ended December 31, 2021, 2020 and 2019:
In millions
Share Units Plan
Voluntary Incentive Deferral Plan (VIDP)
Stock option awards
Employee Share Investment Plan (ESIP)
Total stock-based compensation expense
Income tax impacts of stock-based compensation
Tax benefit recognized in income
Excess tax benefit recognized in income
Share Units Plan
Year ended December 31,
2021
2020
2019
$
$
$
$
47
2
12
20
81
18
10
$
$
$
$
28
4
11
21
64
14
16
$
$
$
$
26
4
12
15
57
12
23
The objective of the Share Units Plan is to enhance the Company's ability to attract and retain talented employees and to provide alignment of
interests between such employees and the shareholders of the Company. Under the Share Units Plan, the Company grants performance share
unit (PSU) awards.
PSU-ROIC awards settle depending on the level of attainment of a target return on invested capital (ROIC) performance condition, as
defined by the award agreement, over the plan period of three years. The level of attainment of the performance condition results in a
performance factor that ranges from 0% to 200%. Settlement is also conditional upon the attainment of a minimum share price market
condition, calculated using the average of the last three months of the plan period.
PSU-TSR awards settle depending on the level of attainment of a target total shareholder return (TSR) market condition, as defined by the
award agreement, over the plan period of three years. The level of attainment of the market condition results in a performance factor that
ranges from 0% to 200% depending on the Company's TSR relative to a Class I Railways peer group and the S&P/TSX 60 companies.
CN | 2021 Annual Report 105
Notes to the Consolidated Financial Statements
PSUs are settled in common shares of the Company, subject to the attainment of their respective performance and market conditions, by
way of disbursement from the Share Trusts (see Note 18 – Share capital). The number of shares remitted to the participant upon settlement is
equal to the number of PSUs awarded multiplied by the performance factor, less shares withheld to satisfy the participant's withholding tax
requirement.
For the 2019 grant, the level of ROIC attained resulted in a performance factor of 83%, and the level of TSR attained resulted in a
performance factor of 72% for the plan period ended December 31, 2021. The total fair value of the equity settled PSU awards that vested in
2021 was $30 million (2020 - $27 million; 2019 - $45 million). As the respective performance and market conditions under each award were met
as at December 31, 2021, a settlement of approximately 0.2 million shares, net of withholding taxes, is expected to occur in the first quarter of
2022.
The following table provides a summary of the activity related to PSU awards for the year ended December 31, 2021:
Outstanding at December 31, 2020
Granted
Settled (3)
Forfeited
Outstanding at December 31, 2021
Nonvested at December 31, 2020
Granted
Vested (4)
Forfeited
Nonvested at December 31, 2021
PSU-ROIC (1)
PSU-TSR (2)
Weighted-average
grant date fair value
Units
In millions
Weighted-average
grant date fair value
Units
In millions
0.9
0.2
(0.3)
—
0.8
0.6
0.2
(0.3)
—
0.5
$
$
$
$
$
$
$
$
$
$
65.06
64.50
51.28
68.28
69.84
72.22
64.50
70.76
68.28
69.27
0.3
0.2
(0.1)
—
0.4
0.2
0.2
(0.1)
—
0.3
$
$
$
$
$
$
$
$
$
$
131.57
148.02
105.26
145.48
144.37
142.37
148.02
128.20
145.48
150.59
(1)
(2)
(3)
The grant date fair value of equity settled PSUs-ROIC granted in 2021 of $17 million is calculated using a lattice-based valuation model. As at December 31, 2021, total
unrecognized compensation cost related to all outstanding awards was $20 million and is expected to be recognized over a weighted-average period of 1.7 years.
The grant date fair value of equity settled PSUs-TSR granted in 2021 of $20 million is calculated using a Monte Carlo simulation model. As at December 31, 2021, total
unrecognized compensation cost related to all outstanding awards was $13 million and is expected to be recognized over a weighted-average period of 1.6 years.
Equity settled PSUs-ROIC granted in 2018 met the minimum share price condition for settlement and attained a performance factor of 111%. Equity settled PSUs-TSR
granted in 2018 attained a performance factor of 99%. In the first quarter of 2021, these awards were settled, net of the remittance of the participants' withholding tax
obligation of $27 million, by way of disbursement from the Share Trusts of 0.2 million common shares.
(4)
These awards are expected to be settled in the first quarter of 2022.
The following table provides assumptions related to the fair values of PSU awards, and the weighted-average grant date fair values for
units granted in 2021, 2020 and 2019:
Year of grant
Assumptions
Stock price ($) (1)
Expected stock price volatility (%) (2)
Expected term (years) (3)
Risk-free interest rate (%) (4)
Dividend rate ($) (5)
Weighted-average grant date fair value ($)
ROIC
TSR
2021
2020
2019
133.36
125.82
110.41
24
3.0
0.19
2.46
64.50
148.02
17
3.0
1.40
2.30
73.92
153.00
17
3.0
1.75
2.15
70.76
128.20
(1)
(2)
(3)
(4)
(5)
Represents the closing share price on the grant date.
Based on the historical volatility of the Company's stock over a period commensurate with the expected term of the award.
Represents the period of time that awards are expected to be outstanding.
Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
Based on the annualized dividend rate.
106 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
Voluntary Incentive Deferral Plan
The Company's Voluntary Incentive Deferral Plan (VIDP) provides eligible senior management employees the opportunity to elect to receive
their annual incentive bonus payment in deferred share units (DSU) up to specific deferral limits. A DSU is equivalent to a common share of the
Company and also earns dividends when normal cash dividends are paid on common shares. The number of DSUs received by each participant
is established at the time of deferral. For each participant, the Company will grant a further 25% of the amount elected in DSUs, which will vest
over a period of four years. The election to receive eligible incentive payments in DSUs is no longer available to a participant when the value of
the participant's vested DSUs is sufficient to meet the Company's stock ownership guidelines.
Equity settled awards
DSUs are settled in common shares of the Company at the time of cessation of employment by way of an open market purchase by the
Company. The number of shares remitted to the participant is equal to the number of DSUs awarded less shares withheld to satisfy the
participant's withholding tax requirement.
Cash settled awards
The value of each participant's DSUs is payable in cash at the time of cessation of employment.
Stock price volatility
The Company's liability for the cash settled VIDP is marked-to-market at each period-end and varies with the Company's share price.
Fluctuations in the Company's share price cause volatility to stock-based compensation expense as recorded in Net income. The Company
does not currently hold any derivative financial instruments to manage this exposure.
The following table provides a summary of the activity related to DSU awards for the year ended December 31, 2021:
Outstanding at December 31, 2020
Granted
Settled (3)
Outstanding at December 31, 2021 (4)
Equity settled
DSUs (1)
Cash settled
DSUs (2)
Weighted-average
grant date fair value
Units
In millions
0.6
—
(0.1)
0.5
$
$
$
$
83.47
137.85
84.09
87.24
Units
In millions
0.1
—
—
0.1
(1)
(2)
(3)
(4)
The grant date fair value of equity settled DSUs granted is calculated using the Company's stock price on the grant date. As at December 31, 2021, the aggregate intrinsic
value of all equity settled DSUs outstanding amounted to $78 million.
The fair value of cash settled DSUs as at December 31, 2021 is based on the intrinsic value. As at December 31, 2021, the liability for all cash settled DSUs was $9 million
(2020 - $14 million). The closing stock price used to determine the liability was $155.38.
For the year ended December 31, 2021 the shares purchased for the settlement of equity settled DSUs were net of the remittance of the participants' withholding tax
obligation of $6 million.
The total fair value of equity settled DSU awards vested, the number of units outstanding that were nonvested, unrecognized compensation cost and the remaining
recognition period for cash and equity settled DSUs have not been quantified as they relate to a minimal number of units.
CN | 2021 Annual Report 107
Notes to the Consolidated Financial Statements
Stock option awards
The Company's stock option plan allows for eligible employees to acquire common shares of the Company upon vesting at a price equal to the
market value of the common shares at the grant date. The options issued by the Company are conventional options that vest over a period of
time. The right to exercise options generally accrues over a period of four years of continuous employment for options granted prior to 2020,
and five years for options granted in 2020 and onwards. Options are not generally exercisable during the first 12 months after the date of grant
and expire after 10 years. As at December 31, 2021, 13.6 million common shares remained authorized for future issuances under these plans.
During the year ended December 31, 2021, the Company granted 0.7 million (2020 - 0.7 million; 2019 - 0.9 million) stock options.
The following table provides the activity of stock option awards during 2021, and for options outstanding and exercisable at December 31,
2021, the weighted-average exercise price:
Outstanding at December 31, 2020 (1)
Granted (2)
Forfeited/Cancelled
Exercised (3)
Vested (4)
Outstanding at December 31, 2021 (1)
Exercisable at December 31, 2021 (1)
Options outstanding
Nonvested options
Number of
options
Weighted-average
exercise price
Number of
options
Weighted-average
grant date fair value
In millions
In millions
3.6
0.7
—
(0.7)
N/A
3.6
1.8
$
$
$
$
$
$
97.15
133.56
122.66
82.96
N/A
105.32
90.38
$
$
$
$
$
1.9
0.7
—
N/A
(0.8)
1.8
N/A
17.04
20.50
18.92
N/A
16.14
18.69
N/A
(1)
(2)
(3)
Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date.
The grant date fair value of options granted in 2021 of $14 million ($20.50 per option) is calculated using the Black-Scholes option-pricing model. As at December 31, 2021,
total unrecognized compensation cost related to all outstanding awards was $11 million and is expected to be recognized over a weighted-average period of 3.5 years.
The total intrinsic value of options exercised in 2021 was $42 million (2020 - $47 million; 2019 - $53 million). The cash received upon exercise of options in 2021 was
$52 million (2020 - $56 million; 2019 - $77 million) and the related excess tax benefit realized in 2021 was $1 million (2020 - $2 million; 2019 - $3 million).
(4)
The grant date fair value of options vested in 2021 was $12 million (2020 - $12 million; 2019 - $12 million).
The following table provides the number of stock options outstanding and exercisable as at December 31, 2021 by range of exercise price
and their related intrinsic value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate
intrinsic value for in-the-money stock options, which represents the value that would have been received by option holders had they exercised
their options on December 31, 2021 at the Company's closing stock price of $155.38.
Options outstanding
Options exercisable
Weighted-
average years
to expiration
Weighted-
average
exercise price
Aggregate
intrinsic
value
Number of
options
Weighted-
average
exercise price
In millions
In millions
Aggregate
intrinsic
value
In millions
3.0
5.6
7.1
8.0
9.1
6.6
$
$
$
69.59
94.58
$ 107.87
$ 121.87
$ 132.59
56
51
32
24
16
$ 105.32
$
179
0.7
0.7
0.3
0.1
—
1.8
$
$
$
69.59
93.82
$ 108.13
$ 121.18
$ 132.90
56
42
16
6
—
$
90.38
$
120
Number of
options
In millions
0.7
0.8
0.7
0.7
0.7
3.6
Range of exercise prices
$ 38.29 - $ 85.00
$ 85.01 - $ 100.00
$ 100.01 - $ 115.00
$ 115.01 - $ 130.00
$ 130.01 - $ 147.46
Balance at December 31, 2021 (1)
(1) Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date. The weighted-
average years to expiration of exercisable stock options was 5.1 years.
108 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
The following table provides assumptions related to the fair values of stock option awards, and the weighted-average grant date fair values
for units granted in 2021, 2020, and 2019:
Year of grant
Assumptions
Grant price ($)
Expected stock price volatility (%) (1)
Expected term (years) (2)
Risk-free interest rate (%) (3)
Dividend rate ($) (4)
Weighted-average grant date fair value ($)
2021
2020
2019
133.56
21
5.8
0.48
2.46
20.50
126.13
19
5.7
1.26
2.30
19.09
110.94
18
5.5
1.75
2.15
16.34
(1) Based on the historical volatility of the Company's stock over a period commensurate with the expected term of the award.
(2) Represents the period of time that awards are expected to be outstanding. The Company uses historical data to predict option exercise behavior.
(3) Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
(4) Based on the annualized dividend rate.
ESIP
The Company has an ESIP giving eligible employees the opportunity to subscribe for up to 10% of their gross salaries to purchase shares of the
Company's common stock on the open market and to have the Company invest, on the employees' behalf, a further 35% of the amount invested
by the employees, up to 6% of their gross salaries.
Company contributions to the ESIP, which consist of shares purchased on the open market, are subject to a one-year vesting period and
are forfeited should certain participant contributions be sold or disposed of prior to vesting. Company contributions to the ESIP are held in
Share Trusts until vesting, at which time shares are delivered to the employee.
The following table provides a summary of the activity related to the ESIP for the year ended December 31, 2021:
Unvested contributions, December 31, 2020
Company contributions
Vested (1)
Forfeited
Unvested contributions, December 31, 2021 (2)
ESIP
Number of
shares
In millions
Weighted-average
share price
0.2
0.2
(0.2)
—
0.2
$
$
$
$
$
122.07
142.21
121.95
138.76
142.80
(1)
(2)
The total fair value of units purchased with Company contributions that vested in 2021 was $17 million (2020 - $27 million).
As at December 31, 2021, total unrecognized compensation cost related to all outstanding units was $13 million and is expected to be recognized over the next 12 months.
The following table provides the number of participants holding shares, the total number of ESIP shares purchased on behalf of
employees, including the Company's contributions for the years ended December 31, 2021, 2020 and 2019:
Number of participants holding shares
Total number of ESIP shares purchased on behalf of employees (millions)
Year ended December 31,
2021
20,142
1.1
2020
20,270
1.1
2019
21,674
1.5
Directors' Deferred Share Unit Plan
The non-executive directors may elect to receive all or part of their director, committee member, Board Chair, and committee chair cash
retainers either in cash, common shares of the Company purchased on the open market or Directors' Deferred Share Units (DDSUs). They may
also elect to receive their common share grant retainer in DDSUs. Each DDSU entitles the beneficiary thereof to receive upon resignation,
retirement or death, one common share of the Company purchased on the open market, plus additional DDSUs reflecting dividend equivalents.
In 2021, eligible awards were settled net of the remittance of the directors' withholding tax obligation by purchasing $22 million worth of
common shares on the open market. These settlements resulted in an excess tax benefit recognized in income of $4 million for the year ended
December 31, 2021.
CN | 2021 Annual Report 109
Notes to the Consolidated Financial Statements
20 – Accumulated other comprehensive loss
In millions
Foreign
currency
translation
adjustments
Pension
and other
postretirement
benefit plans
Total
before
tax
Income tax
recovery
(expense) (1)
Total
net of
tax
Balance at December 31, 2018
$
(41)
$
(3,881)
$
(3,922)
$
1,073
$
(2,849)
Other comprehensive income (loss) before
reclassifications:
Foreign exchange loss on translation of net
investment in foreign operations
Foreign exchange gain on translation of US dollar-
denominated debt designated as a hedge of the net
investment in foreign operations
Actuarial loss arising during the year
Amounts reclassified from Accumulated other
comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service costs
Settlement loss arising during the year
Other comprehensive income (loss)
Balance at December 31, 2019
Other comprehensive income (loss) before
reclassifications:
Foreign exchange loss on translation of net
investment in foreign operations
Foreign exchange gain on translation of US dollar-
denominated debt designated as a hedge of the net
investment in foreign operations
Actuarial loss arising during the year
Amounts reclassified from Accumulated other
comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service costs
Settlement loss arising during the year
Other comprehensive income (loss)
Balance at December 31, 2020
Other comprehensive income (loss) before
reclassifications:
Foreign exchange loss on translation of net
investment in foreign operations
Foreign exchange gain on translation of US dollar-
denominated debt designated as a hedge of the net
investment in foreign operations
Actuarial gain arising during the year
Amounts reclassified from Accumulated other
comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service costs
Settlement loss arising during the year
(636)
380
(256)
(297)
(269)
187
(82)
(379)
(84)
32
(636)
—
(636)
380
(600)
(52)
155
152
3
5
(2)
(2)
(2)
(696)
(4,618)
(39) (3)
(1) (3)
(1) (3)
62
1,135
328
(445)
113
2
4
(634)
(3,483)
(269)
—
(269)
187
(82)
(2)
(2)
(2)
237
3
2
78
(24)
22
(64) (3)
(1) (3)
(3)
—
(67)
163
(60)
173
2
2
11
(600)
152
3
5
(440)
(4,321)
(82)
237
3
2
160
(4,161)
(4,540)
1,068
(3,472)
(84)
—
(84)
1,809
265
(1)
2
32
1,809
(2)
(475)
30
1,334
265
(2)
(1) (2)
(2)
2
(69) (3)
(3)
—
(3)
—
196
(1)
2
Other comprehensive income (loss)
(52)
2,075
2,023
(546)
1,477
Balance at December 31, 2021
$
(431)
$
(2,086)
$
(2,517)
$
522
$
(1,995)
(1)
(2)
The Company releases stranded tax effects from Accumulated other comprehensive loss to Net income upon the liquidation or termination of the related item.
Reclassified to Other components of net periodic benefit income in the Consolidated Statements of Income and included in net periodic benefit cost. See Note 17 -
Pensions and other postretirement benefits.
(3)
Included in Income tax expense in the Consolidated Statements of Income.
110 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
21 – Major commitments and contingencies
Purchase commitments
As at December 31, 2021, the Company had fixed and variable commitments to purchase information technology services and licenses, wheels,
locomotives, railroad cars, rail, engineering services, rail ties as well as other equipment and services with a total estimated cost of
$1,784 million. Costs of variable commitments were estimated using forecasted prices and volumes.
Contingencies
In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive
damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party
personal injuries, occupational disease and property damage, arising out of harm to individuals or property allegedly caused by, but not limited
to, derailments or other accidents.
Canada
Employee injuries are governed by the workers' compensation legislation in each province whereby employees may be awarded either a lump
sum or a future stream of payments depending on the nature and severity of the injury. As such, the provision for employee injury claims is
discounted. In the provinces where the Company is self-insured, costs related to employee work-related injuries are accounted for based on
actuarially developed estimates of the ultimate cost associated with such injuries, including compensation, health care and third-party
administration costs. An actuarial study is generally performed at least on a triennial basis. For all other legal actions, the Company maintains,
and regularly updates on a case-by-case basis, provisions for such items when the expected loss is both probable and can be reasonably
estimated based on currently available information.
In 2021, 2020 and 2019 the Company recorded a decrease of $11 million, $13 million and $7 million, respectively, to its provision for
personal injuries in Canada as a result of actuarial valuations for employee injury claims.
As at December 31, 2021, 2020 and 2019, the Company's provision for personal injury and other claims in Canada was as follows:
In millions
Beginning of year
Accruals and other
Payments
End of year
Current portion - End of year
United States
2021
206
12
(36)
182
50
$
$
$
2020
207
31
(32)
206
68
$
$
$
2019
207
29
(29)
207
55
$
$
$
Personal injury claims by the Company's employees, including claims alleging occupational disease and work-related injuries, are subject to the
provisions of the Federal Employers' Liability Act (FELA). Employees are compensated under FELA for damages assessed based on a finding of
fault through the U.S. jury system or through individual settlements. As such, the provision is undiscounted. With limited exceptions where
claims are evaluated on a case-by-case basis, the Company follows an actuarial-based approach and accrues the expected cost for personal
injury, including asserted and unasserted occupational disease claims, and property damage claims, based on actuarial estimates of their
ultimate cost. An actuarial study is performed annually.
For employee work-related injuries, including asserted occupational disease claims, and third-party claims, including grade crossing,
trespasser and property damage claims, the actuarial valuation considers, among other factors, the Company's historical patterns of claims
filings and payments. For unasserted occupational disease claims, the actuarial valuation includes the projection of the Company's experience
into the future considering the potentially exposed population. The Company adjusts its liability based upon management's assessment and the
results of the study. On an ongoing basis, management reviews and compares the assumptions inherent in the latest actuarial valuation with
the current claim experience and, if required, adjustments to the liability are recorded.
Due to the inherent uncertainty involved in projecting future events, including events related to occupational diseases, which include but
are not limited to, the timing and number of actual claims, the average cost per claim and the legislative and judicial environment, the
Company's future payments may differ from current amounts recorded.
In 2021, the Company recorded a decrease of $20 million to its provision for U.S. personal injury and other claims attributable to non-
occupational disease claims, third-party claims and occupational disease claims pursuant to the 2021 actuarial valuation. In 2020 and 2019,
actuarial valuations resulted in a decrease of $10 million and an increase of $2 million, respectively. The prior years' adjustments from the
actuarial valuations were mainly attributable to non-occupational disease claims, occupational disease claims and third-party claims, reflecting
changes in the Company's estimates of unasserted claims and costs related to asserted claims. The Company has an ongoing risk mitigation
CN | 2021 Annual Report 111
Notes to the Consolidated Financial Statements
strategy focused on reducing the frequency and severity of claims through injury prevention and containment; mitigation of claims; and lower
settlements of existing claims.
As at December 31, 2021, 2020 and 2019, the Company's provision for personal injury and other claims in the U.S. was as follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
Current portion - End of year
2021
141
30
(45)
(1)
125
25
$
$
$
2020
145
28
(29)
(3)
141
41
$
$
$
2019
139
44
(31)
(7)
145
36
$
$
$
Although the Company considers such provisions to be adequate for all its outstanding and pending claims, the final outcome with respect
to actions outstanding or pending at December 31, 2021, or with respect to future claims, cannot be reasonably determined. When establishing
provisions for contingent liabilities the Company considers, where a probable loss estimate cannot be made with reasonable certainty, a range
of potential probable losses for each such matter, and records the amount it considers the most reasonable estimate within the range.
However, when no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. For
matters where a loss is reasonably possible but not probable, a range of potential losses cannot be estimated due to various factors which may
include the limited availability of facts, the lack of demand for specific damages and the fact that proceedings were at an early stage. Based on
information currently available, the Company believes that the eventual outcome of the actions against the Company will not, individually or in
the aggregate, have a material adverse effect on the Company's financial position. However, due to the inherent inability to predict with certainty
unforeseeable future developments, there can be no assurance that the ultimate resolution of these actions will not have a material adverse
effect on the Company's results of operations, financial position or liquidity.
Environmental matters
The Company's operations are subject to numerous federal, provincial, state, municipal and local environmental laws and regulations in Canada
and the U.S. concerning, among other things, emissions into the air; discharges into waters; the generation, handling, storage, transportation,
treatment and disposal of waste, hazardous substances, and other materials; decommissioning of underground and aboveground storage
tanks; and soil and groundwater contamination. 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.
Known existing environmental concerns
The Company is or may be liable for remediation costs at individual sites, in some cases along with other potentially responsible parties,
associated with actual or alleged contamination. The ultimate cost of addressing these known contaminated sites cannot be definitively
established given that the estimated environmental liability for any given site may vary depending on the nature and extent of the
contamination; the nature of anticipated response actions, taking into account the available clean-up techniques; evolving regulatory standards
governing environmental liability; and the number of potentially responsible parties and their financial viability. As a result, liabilities are
recorded based on the results of a four-phase assessment conducted on a site-by-site basis. A liability is initially recorded when environmental
assessments occur, remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used
and the extent of the corrective action required, can be reasonably estimated. The Company estimates the costs related to a particular site
using cost scenarios established by external consultants based on the extent of contamination and expected costs for remedial efforts. In the
case of multiple parties, the Company accrues its allocable share of liability taking into account the Company's alleged responsibility, the
number of potentially responsible parties and their ability to pay their respective share of the liability. Adjustments to initial estimates are
recorded as additional information becomes available.
The Company's provision for specific environmental sites is undiscounted and includes costs for remediation and restoration of sites, as
well as monitoring costs. Environmental expenses, which are classified as Casualty and other in the Consolidated Statements of Income,
include amounts for newly identified sites or contaminants as well as adjustments to initial estimates. Recoveries of environmental remediation
costs from other parties are recorded as assets when their receipt is deemed probable.
112 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
As at December 31, 2021, 2020 and 2019, the Company's provision for specific environmental sites was as follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
Current portion - End of year
2021
2020
2019
$
$
$
59
23
(26)
—
56
38
$
$
$
57
44
(42)
—
59
46
$
$
$
61
31
(34)
(1)
57
38
The Company anticipates that the majority of the liability at December 31, 2021 will be paid out over the next five years. Based on the
information currently available, the Company considers its provisions to be adequate.
Unknown existing environmental concerns
While the Company believes that it has identified the costs likely to be incurred for environmental matters based on known information, the
discovery of new facts, future changes in laws, the possibility of releases of hazardous materials into the environment and the Company's
ongoing efforts to identify potential environmental liabilities that may be associated with its properties may result in the identification of
additional environmental liabilities and related costs. The magnitude of such additional liabilities and the costs of complying with future
environmental laws and containing or remediating contamination cannot be reasonably estimated due to many factors, including:
•
•
•
•
the lack of specific technical information available with respect to many sites;
the absence of any government authority, third-party orders, or claims with respect to particular sites;
the potential for new or changed laws and regulations and for development of new remediation technologies and uncertainty regarding the
timing of the work with respect to particular sites; and
the determination of the Company's liability in proportion to other potentially responsible parties and the ability to recover costs from any
third parties with respect to particular sites.
Therefore, the likelihood of any such costs being incurred or whether such costs would be material to the Company cannot be determined
at this time. There can thus be no assurance that liabilities or costs related to environmental matters will not be incurred in the future, or will not
have a material adverse effect on the Company's financial position or results of operations in a particular quarter or fiscal year, or that the
Company's liquidity will not be adversely impacted by such liabilities or costs, although management believes, based on current information,
that the costs to address environmental matters will not have a material adverse effect on the Company's financial position or liquidity. Costs
related to any unknown existing or future contamination will be accrued in the period in which they become probable and reasonably estimable.
Future occurrences
In railroad and related transportation operations, it is possible that derailments or other accidents, including spills and releases of hazardous
materials, may occur that could cause harm to human health or to the environment. As a result, the Company may incur costs in the future,
which may be material, to address any such harm, compliance with laws and other risks, including costs relating to the performance of clean-
ups, payment of environmental penalties and remediation obligations, and damages relating to harm to individuals or property.
Regulatory compliance
The Company may incur significant capital and operating costs 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. Operating expenses
related to regulatory compliance activities for environmental matters for the year ended December 31, 2021 amounted to $27 million (2020 -
$25 million; 2019 - $25 million). In addition, based on the results of its operations and maintenance programs, as well as ongoing environmental
audits and other factors, the Company plans for specific capital improvements on an annual basis. Certain of these improvements help ensure
facilities, such as fueling stations, waste water and storm water treatment systems, comply with environmental standards and include new
construction and the updating of existing systems and/or processes. Other capital expenditures relate to assessing and remediating certain
impaired properties. The Company's environmental capital expenditures for the year ended December 31, 2021 amounted to $18 million (2020 -
$20 million; 2019 - $25 million).
CN | 2021 Annual Report 113
Notes to the Consolidated Financial Statements
Guarantees and indemnifications
In the normal course of business, the Company enters into agreements that may involve providing guarantees or indemnifications to third
parties and others, which may extend beyond the term of the agreements. These include, but are not limited to, standby letters of credit, surety
and other bonds, and indemnifications that are customary for the type of transaction or for the railway business.
As at December 31, 2021, the Company had outstanding letters of credit of $394 million (2020 - $421 million) under the committed
bilateral letter of credit facilities and $158 million (2020 - $165 million) under the uncommitted bilateral letter of credit facilities, and surety and
other bonds of $150 million (2020 - $168 million), all issued by financial institutions with investment grade credit ratings to third parties to
indemnify them in the event the Company does not perform its contractual obligations.
As at December 31, 2021, the maximum potential liability under these guarantee instruments was $702 million (2020 - $754 million), of
which $659 million (2020 - $688 million) related to other employee benefit liabilities and workers' compensation and $43 million (2020 - $66
million) related to other liabilities. The guarantee instruments expire at various dates between 2022 and 2025.
As at December 31, 2021, the Company had not recorded a liability with respect to guarantees as the Company did not expect to make any
payments under its guarantees.
General indemnifications
In the normal course of business, the Company provides indemnifications, customary for the type of transaction or for the railway business, in
various agreements with third parties, including indemnification provisions where the Company would be required to indemnify third parties and
others. During the year, the Company entered into various contracts with third parties for which an indemnification was provided. Due to the
nature of the indemnification clauses, the maximum exposure for future payments cannot be reasonably determined. To the extent of any
actual claims under these agreements, the Company maintains provisions for such items, which it considers to be adequate. As at December
31, 2021, the Company had not recorded a liability with respect to any indemnifications.
22 – Financial instruments
Risk management
In the normal course of business, the Company is exposed to various risks from its use of financial instruments. To manage these risks, the
Company follows a financial risk management framework, which is monitored and approved by the Company's Audit, Finance and Risk
Committee, with a goal of maintaining a strong balance sheet, optimizing earnings per share and free cash flow, financing its operations at an
optimal cost of capital and preserving its liquidity. The Company has limited involvement with derivative financial instruments in the
management of its risks and does not hold or issue them for trading or speculative purposes.
Foreign currency risk
The Company conducts its business in both Canada and the U.S. and as a result, is affected by currency fluctuations. Changes in the exchange
rate between the Canadian dollar and the US dollar affect the Company's revenues and expenses. To manage foreign currency risk, the
Company designates US dollar-denominated debt of the parent company as a foreign currency hedge of its net investment in foreign
operations. As a result, from the dates of designation, foreign exchange gains and losses on translation of the Company's US dollar-
denominated debt are recorded in Accumulated other comprehensive loss, which minimizes volatility of earnings resulting from the conversion
of US dollar-denominated debt into the Canadian dollar.
The Company also enters into foreign exchange forward contracts to manage its exposure to foreign currency risk. As at December 31,
2021, the Company had outstanding foreign exchange forward contracts with a notional value of US$910 million (2020 - US$397 million) at a
weighted-average exchange rate of $1.27 per US$1.00 (2020 - $1.32 per US$1.00) for a weighted-average term of 251 days (2020 - 151 days).
Changes in the fair value of foreign exchange forward contracts, resulting from changes in foreign exchange rates, are recognized in Other
income in the Consolidated Statements of Income as they occur. For the year ended December 31, 2021, the Company recorded a loss of
$18 million (2020 - loss of $3 million; 2019 - loss of $75 million) related to foreign exchange forward contracts. These losses were largely offset
by the re-measurement of US dollar-denominated monetary assets and liabilities recognized in Other income. As at December 31, 2021, the fair
value of outstanding foreign exchange forward contracts included in Other current assets and Accounts payable and other was $nil and
$2 million, respectively (2020 - $nil and $18 million, respectively).
114 CN | 2021 Annual Report
Notes to the Consolidated Financial Statements
Interest rate risk
The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a
result of changes in market interest rates. Such risk exists in relation to the Company's debt. The Company mainly issues fixed-rate debt, which
exposes the Company to variability in the fair value of the debt. The Company also issues debt with variable interest rates, which exposes the
Company to variability in interest expense.
To manage interest rate risk, the Company manages its borrowings in line with liquidity needs, maturity schedule, and currency and interest
rate profile. In anticipation of future debt issuances, the Company may use derivative instruments such as forward rate agreements. The
Company does not currently hold any significant derivative instruments to manage its interest rate risk.
Fair value of financial instruments
The financial instruments that the Company measures at fair value on a recurring basis in periods subsequent to initial recognition are
categorized into the following levels of the fair value hierarchy based on the degree to which inputs are observable:
•
•
•
Level 1: Inputs are quoted prices for identical instruments in active markets
Level 2: Significant inputs (other than quoted prices included in Level 1) are observable
Level 3: Significant inputs are unobservable
The carrying amounts of Cash and cash equivalents and Restricted cash and cash equivalents approximate fair value. These financial
instruments include highly liquid investments purchased three months or less from maturity, for which the fair value is determined by reference
to quoted prices in active markets.
The carrying amounts of Accounts receivable, Other current assets and Accounts payable and other approximate fair value due to their
short maturity, unless otherwise specified. The fair value of equity investments with readily determinable fair values, included in Intangible
assets, goodwill and other, is classified as Level 1 with gains and losses being recorded in Other income within the Consolidated Statements of
Income. The fair value of derivative financial instruments, included in Other current assets and Accounts payable and other is classified as
Level 2 and is used to manage the Company's exposure to foreign currency risk. The fair value is measured by discounting future cash flows
using a discount rate derived from market data for financial instruments subject to similar risks and maturities. The fair value of assets held for
sale, included in Other current assets is classified as Level 3. Additional disclosures are provided in Note 5 – Assets held for sale.
The carrying amount of the Company's debt does not approximate fair value. The fair value is estimated based on quoted market prices for
the same or similar debt instruments, as well as discounted cash flows using current interest rates for debt with similar terms, company rating,
and remaining maturity. The Company classifies debt as Level 2. As at December 31, 2021, the Company's debt, excluding finance leases, had a
carrying amount of $12,475 million (2020 - $12,832 million) and a fair value of $14,424 million (2020 - $16,046 million).
23 – Segmented information
The Company manages its operations as one business segment over a single network that spans vast geographic distances and territories,
with operations in Canada and the U.S. Financial information reported at this level, such as revenues, operating income, and cash flow from
operations, is used by the Company's management, including its chief operating decision-maker, in evaluating financial and operational
performance and allocating resources across CN's network.
The Company's strategic initiatives, which drive its operational direction, are developed and managed centrally by management and are
communicated to its regional activity centers (the Western Region and Eastern Region). The Company's management is responsible for, among
others, CN's marketing strategy, the management of large customer accounts, overall planning and control of infrastructure and rolling stock,
the allocation of resources, and other functions such as financial planning, accounting and treasury.
The role of each region is to manage the day-to-day service requirements within their respective territories and control direct costs incurred
locally. Such cost control is required to ensure that pre-established efficiency standards set at the corporate level are met. The regions execute
the overall corporate strategy and operating plan established by the Company's management, as the regions' management of throughput and
control of direct costs does not serve as the platform for the Company's decision-making process. Approximately 95% of the Company's freight
revenues are from national accounts for which freight traffic spans North America and touches various commodity groups. As a result, the
Company does not manage revenues on a regional basis since a large number of the movements originate in one region and pass through and/
or terminate in another region.
The regions also demonstrate common characteristics in each of the following areas:
each region's sole business activity is the transportation of freight over the Company's extensive rail network;
the regions service national accounts that extend over the Company's various commodity groups and across its rail network;
the services offered by the Company stem predominantly from the transportation of freight by rail with the goal of optimizing the rail
•
•
•
network as a whole; and
CN | 2021 Annual Report 115
Notes to the Consolidated Financial Statements
•
the Company and its subsidiaries, not its regions, are subject to regulatory regimes in both Canada and the U.S.
For the years ended December 31, 2021, 2020, and 2019, no major customer accounted for more than 10% of total revenues and the
largest freight customer represented less than 4% of total annual freight revenues.
The following tables provide information by geographic area for the years ended December 31, 2021, 2020 and 2019:
In millions
Revenues
Canada
U.S.
Total revenues
Net income
Canada
U.S.
Total net income
In millions
Properties
Canada
U.S.
Total properties
Year ended December 31,
2021
2020
2019
$
$
$
$
10,167
4,750
14,917
3,131
1,085
4,216
$
$
$
$
$
$
9,955
4,522
14,477
3,596
1,296
4,892
2021
23,186
17,992
41,178
$
$
$
$
$
$
9,588
4,231
13,819
2,632
930
3,562
2020
22,235
17,834
40,069
December 31,
24 – Subsequent events
Normal course issuer bid
On January 25, 2022, the Board of Directors of the Company approved a new NCIB, which allows for the repurchase of up to 42.0 million
common shares between February 1, 2022 and January 31, 2023.
116 CN | 2021 Annual Report
Additional copies of this
report are available from:
La version française du présent rapport
est disponible à l’adresse suivante :
CN Public and Government Affairs
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
Telephone: 1‑888‑888‑5909
Email: contact@cn.ca
Affaires publiques et gouvernementales du CN
935, rue de La Gauchetière Ouest
Montréal (Québec) H3B 2M9
Téléphone : 1 888 888‑5909
Courriel : contact@cn.ca
30%
This report has been printed on 30% post‑consumer recycled content.
935 de La Gauchetière Street West
Montreal, Quebec H3B 2M9
cn.ca