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Share Name | Share Symbol | Market | Type |
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Canadian National Railway Co | NYSE:CNI | NYSE | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
1.58 | 1.30% | 123.54 | 123.77 | 122.445 | 123.07 | 795,233 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of March 2018
Commission File Number: 001-02413
Canadian National Railway Company
(Translation of registrants name into English)
935 de la Gauchetiere Street West
Montreal, Quebec
Canada H3B 2M9
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F |
o |
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Form 40-F |
x |
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes |
o |
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No |
x |
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes |
o |
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No |
x |
Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes |
o |
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No |
x |
If Yes is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Canadian National Railway Company |
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Date: |
March 23, 2018 |
By: |
/s/ Sean Finn |
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Name: |
Sean Finn |
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Title: |
Executive Vice-President |
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Corporate Services and Chief Legal Officer |
CANADIAN NATIONAL RAILWAY COMPANY
Table of Contents
Items |
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Description |
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1 |
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Notice of Annual Meeting of Shareholders |
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2 |
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Management Proxy Circular |
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3 |
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Form of Proxy |
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4 |
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Annual Report |
Item 1
Notice of Annual Meeting of Shareholders Our annual meeting of holders of common shares will be held at The Omni King Edward Hotel Sovereign Ballroom, Lobby Level 37 King Street East Toronto, Ontario, Canada on Tuesday, April 24, 2018 at 10:00 a.m. (Eastern Daylight Time) For the purposes of: 1. receiving the consolidated financial statements for the year ended December 31, 2017, and the auditors reports thereon; 2. electing the directors; 3. appointing the auditors; 4. considering and approving, in an advisory, non-binding capacity, a resolution (the full text of which is set out on page 9 of the accompanying management information circular) accepting the Companys approach to executive compensation as disclosed in the Statement of Executive Compensation section of the accompanying management information circular; and 5. transacting such other business as may properly be brought before the meeting or any adjournment or postponement thereof. The Board of Directors has fixed March 1, 2018 as the Record Date for the determination of the holders of common shares entitled to receive notice of the meeting and vote at the meeting. By order of the Board of Directors Sean Finn Executive Vice-President Corporate Services and Chief Legal Officer and Corporate Secretary March 6, 2018 Montreal, Quebec
Item 2
INVESTING FOR THE LONG HAUL Management Information Circular and Notice of Annual Meeting of Shareholders April 24, 2018
Notice of Annual Meeting of Shareholders Our annual meeting of holders of common shares will be held at The Omni King Edward Hotel Sovereign Ballroom, Lobby Level 37 King Street East Toronto, Ontario, Canada on Tuesday, April 24, 2018 at 10:00 a.m. (Eastern Daylight Time) For the purposes of: 1. receiving the consolidated financial statements for the year ended December 31, 2017, and the auditors reports thereon; 2. electing the directors; 3. appointing the auditors; 4. considering and approving, in an advisory, non-binding capacity, a resolution (the full text of which is set out on page 9 of the accompanying management information circular) accepting the Companys approach to executive compensation as disclosed in the Statement of Executive Compensation section of the accompanying management information circular; and 5. transacting such other business as may properly be brought before the meeting or any adjournment or postponement thereof. The Board of Directors has fixed March 1, 2018 as the Record Date for the determination of the holders of common shares entitled to receive notice of the meeting and vote at the meeting. By order of the Board of Directors Sean Finn Executive Vice-President Corporate Services and Chief Legal Officer and Corporate Secretary March 6, 2018 Montreal, Quebec
March 6, 2018 Dear Shareholder: On behalf of the Board of Directors and management of Canadian National Railway Company (the Company), we cordially invite you to attend the annual meeting of shareholders that will be held this year at The Omni King Edward Hotel, Sovereign Ballroom, Lobby Level, 37 King Street East, Toronto, Ontario, Canada on Tuesday, April 24, 2018, at 10:00 a.m. (Eastern Daylight Time). This management information circular (the Information Circular) describes the business to be conducted at the meeting and provides information on executive compensation and CNs governance practices. In addition to these items, we will discuss highlights of our 2017 performance and our plans for the future. Unprecedented Growth 2017 was a notable year for CN with unprecedented volume growth. It was also a year that ended with operational challenges. CN is responding with speed and determination to retain our leadership position and we are accelerating the execution of our innovation strategy to improve and maintain industry-leading operating metrics and best-in-class customer service. Investing for the Future CNs success and our economic sustainability depends on a stream of capital investments that supports our strategic agenda. With planned record investment in our capital program covering a wide range of areas, from track infrastructure and rolling stock, to information and operating technologies, and other equipment and assets that improve the safety, efficiency and reliability of CNs service offering we are investing for the long haul. Building for a Sustainable Future Delivering responsibly is at the heart of how we are building the business for the future. It means moving customer goods safely and efficiently, being environmentally responsible, attracting and developing the best railroaders and helping build safer, stronger communities, while adhering to the highest ethical standards. Our sustainability performance has continued to earn us a place among the worlds best for several years running. For example, we are consistently listed on the Dow Jones Sustainability World Index and recognized for climate change transparency, earning a position on CDPs exclusive A List in 2016 and 2017. Additionally, we were ranked as one of the Best 50 Corporate Citizens in Canada by Corporate Knights, and are a proud member of the FTSE4Good Index, Global Challenges Index and the Jantzi Social Index. The CN Board has always taken great pride in our commitment to being a good corporate citizen, which touches nearly every aspect of what we do, from governance and business ethics to diversity and inclusion. We also prioritize community engagement on safety along our rail lines. Together with the rail industry, we launched the AskRail mobile app, which has now been downloaded by over 2,600 first responders, giving them access to real-time information on the contents of railcars in their respective communities. We have received many accolades for our performance in corporate governance over the years, including ranking fifth overall and first in the industrials group on the Globe and Mails 2017 review of corporate governance practices and receiving the award for Best Overall Corporate Governance from the Governance Professionals of Canada in the fall of 2016. The meeting Your participation in the affairs of the Company is important to us. If you attend the meeting in person, you will have the opportunity to meet and interact with your directors and the senior officers of the Company. If you are however unable to attend in person, we encourage you to complete and return the enclosed proxy form or voting instruction form in the envelope provided for this purpose, so that your views can be represented. Also, it is possible for you to vote over the internet by following the instructions on the enclosed form. Even if you plan to attend the meeting, you may find it convenient to express your views in advance by completing and returning the proxy form or voting instruction form or by voting over the internet. Please consult the information on page 5 of the Information Circular to find out how to vote your shares. A live audiocast of the meeting will be available on the Companys website at www.cn.ca. We look forward to seeing you at the meeting. Robert Pace, D.COMM., C.M. Chair of the Board Jean-Jacques Ruest Interim President and Chief Executive Officer 1 CN MANAGEMENT INFORMATION CIRCULAR 2018 LET TER TO SHAREHOLDERS
Whats Inside Not ce of Annua Meet ng of Sha eho de s Letter to Shareholders 1 3 Proxy Summary Voting Information 5 8 Business of the Meeting Nominees for Election to the Board 10 17 Board of Directors Compensation Statement of Corporate Governance Practices 21 33 Statement of Executive Compensation Compensation Discussion and Analysis 38 64 Other Information Schedule A Mandate of the Board 65 66 Schedule B Reports of the Committees Schedule C Additional Audit Committee Disclosure 72 This Information Circular is provided in connection with the solicitation of proxies by management of Canadian National Railway Company for use at the annual meeting of its shareholders or at any adjournment or postponement thereof (the Meeting). In this document you and your refer to the shareholders of CN and CN, the Company, we, us, or our refer to Canadian National Railway Company. The Meeting will be held on Tuesday, April 24, 2018, at 10:00 a.m. (Eastern Daylight Time) for the purposes set forth in the foregoing Notice of Meeting. The information contained herein is given as at February 26, 2018, except as indicated otherwise. Shareholder Voting Matters and Recommendation Executive Compensation 2 CN MANAGEMENT INFORMATION CIRCULAR 2018 VOTING MATTERS Election of 12 Directors Appointment of KPMG LLP as Auditors Advisory Resolution on BOARD VOTE RECOMMENDATION FOR each nominee FOR FOR FOR MORE INFORMATION SEE PAGE 8 8 9
Proxy Summary The following summary highlights some of the important information you will find in this Information Circular, as well as information about our Company. We recommend that you read the entire Information Circular before voting. Board of Directors Highlights 100% BOARD AND COMMITTEE ATTENDANCE 42 COMBINED NUMBER OF BOARD AND COMMITTEE MEETINGS HELD IN 2017 100% OF BOARD NOMINEES ARE INDEPENDENT 0 BOARD MEMBERS THAT SIT TOGETHER ON 42% OF BOARD NOMINEES ARE WOMEN THE BOARD OF ANOTHER PUBLIC COMPANY Our Director Nominees SHARE OWNERSHIP (MULTIPLE OF REQUIREMENT) TOP 3 COMPETENCIES (1) DIRECTOR SINCE OTHER PUBLIC BOARDS % OF VOTES FOR IN 2017 NAME / AGE POSITION (1) Refer to description of competencies on page 27 of this Information Circular. 3 CN MANAGEMENT INFORMATION CIRCULAR 2018 PROXY SUMMARY Shauneen Bruder (58) Finance 2017Executive Vice-President, Operations,0199.87 Strategy Royal Bank of Canada Sales Donald J. Carty (71) Strategy 2011Corporate Director21198.96 Finance HR Gordon D. Giffin (68) Policy 2001Partner, Dentons US LLP21197.76 Legal HR Julie Godin (43) HR 2017Vice-Chair of the Board and1199.85 Strategy Executive Vice-President, Chief Planning Financeand Administration Officer, CGI Group Inc. Edith E. Holiday (66) Legal 2001Corporate Director and Trustee41297.42 Policy Strategy V. Maureen Kempston Darkes (69) Transport 1995Corporate Director32197.14 Sales HR Denis Losier (65) Finance 1994Corporate Director13398.41 HR Sales Kevin G. Lynch (67) Policy 2014Vice-Chair, BMO Financial Group2299.81 Finance Strategy James E. OConnor (68) Strategy 2011Corporate Director2399.36 Engineering HR Robert Pace (63) HR 1994Chair of the Board, CN11698.64 Transport President and CEO, The Pace Group Strategy Robert L. Phillips (67) Transport 2014President, R.L. Phillips Investments Inc. 3398.17 Strategy Sales Laura Stein (56) Legal 2014Executive Vice-President 1299.35 EngineeringGeneral Counsel & Corporate Affairs, Finance The Clorox Company
2017 Key Business Highlights EMPLOYEES AT YEAR END REVENUES OPERATING RATIO CAPITAL INVESTMENTS REPORTED DILUTED EARNINGS ADJUSTED DILUTED EARNINGS PER SHARE $4.99(1) PER SHARE $7.24 23,945 $13 B 57.4% $2.7 B Key Env ronment, Soc al & Governance H ghlights 42% Adopted a policy of having a minimum representation of 1/3 of the Board by women by the end of 2017, and 42% of our Board nominees are women. Transparency Publicly disclosing on www.cn.ca website information on our lobbying activities, a list of our political contributions and a detailed list of our corporate memberships, including industry associations and policy organizations. Iconic Brand Recognized by Interbrand Canada as one of the Catalyst Accord and 30% Club Signatory to the Catalyst Accord and a member of the 30% 150 companies, organizations and institutions that are the most iconic in Canada. Club which promotes gender diversity on Boards. Climate Change Over the past 20 years, CN has reduced its locomotive emission ntensity by 39% while achieving record growth in the volume of freight it moves. CN continues to lead the North American rail industry in fuel efficiency, consuming 15% less fuel per gross ton mile compared to the industry average. Sustainability Leader Identified as a global leader in the corporate response to climate change where CN has been awarded a position on the 2017 Climate A List by CDP, the non-profit global environmental disclosure platform. Best Corporate Citizen Ranked among the Best 50 Corporate Citizens in Canada by Corporate Knights for the 9th consecutive year in a row. First Recognized by the Globe and Mails annual review of corporate governance practices in Canada, where CN ranked 1st in the industrials group and 5th overall. Executive Compensation Disciplined Approach to Compensation CNs approach to executive compensation is driven by a commitment to deliver sustainable and solid returns to shareholders. CN exercises a disciplined approach to executive compensation by ensuring that target compensation, while reasonable, supports attraction and retention of executive talent. In addition, short-and long-term incentive plans are structured to align realized pay and shareholder returns. Compensation programs are designed to encourage appropriate behaviours and include appropriate risk mitigation mechanisms. The executive compensation policy aims to position target total direct compensation between the median and the 60th percentile of the executives respective comparator group. 2017 Target Pay at Risk All NEOs Salary At-Risk Annual Incentive Bonus Plan Performance Share Units Awards Stock Options Awards (1) See the section entitled Adjusted performance measures in CNs Managements Discussion and Analysis included in the Companys 2017 Annual Report for an explanation of this measure and reconciliation to the nearest GAAP measure. 4 PROXY SUMMARY CN MANAGEMENT INFORMATION CIRCULAR 2018 20.1% 17.2% 35.7% 27.0% BEST PRACTICES ADOPTED BY CN ~ 80% of NEOs target total direct compensation is variable and linked to CNs performance Incentive payout capped and no guaranteed minimum payout Inclusion of a relative total shareholder return condition as a performance measure for Performance Share Units Inclusion of a safety component in the Annual Incentive Bonus Plan Stringent stock ownership requirements and President and CEO post-retirement shareholding requirement Overlap of performance measures for short-and long-term incentives to mitigate risk Extended executive clawback policy, which was amended in 2017 to allow the clawback of bonus or incentive based compensation awarded after March 7, 2017 in circumstances of gross negligence, intentional misconduct, fraud, theft or embezzlement without the need for a financial restatement No employment contracts for NEOs i
Voting Information Your Vote is Important As a shareholder, it is important that you read this Information Circular carefully and then vote your shares, either by proxy or in person at the Meeting. The following section provides you with information on how to vote your shares. Who can vote Shareholders who were registered as at the close of business on March 1, 2018 (the Record Date), are entitled to vote at the Meeting or at any adjournment or postponement thereof, either in person or by proxy. As of the close of business on the Record Date, the Company had 740,185,100 common shares without par value outstanding. Subject to the voting restrictions described in this section, each common share carries the right to one vote. NON-REGISTERED SHAREHOLDERS If your common shares are not registered in your name and are held in the name of a nominee such as a trustee, financial institution or securities broker, you are a non-registered shareholder. If your common shares are listed in an account statement provided to you by your broker, those common shares will, in all likelihood, not be registered in your name. Such common shares will more likely be registered under the name of your broker or an agent of that broker. Without specific instructions, brokers and their agents or nominees are prohibited from voting shares for the brokers client. 1. Voting by Proxy (Voting Instruction Form) Below are the different ways in which you can give your voting instructions, details of which are found in the voting instruction form accompanying this Information Circular: Go to www.proxyvote.com and follow the instructions. How to vote If you are eligible to vote and your common shares are registered in your name or are held in the name of a nominee, you can vote your common shares in person at the Meeting or by proxy, as explained below. Voting by proxy is the easiest way to vote your shares. REGISTERED SHAREHOLDERS You are a registered shareholder if your name appears on your share certificate or your Direct Registration System (DRS) confirmation. 1. Voting by Proxy (Proxy Form) Below are the different ways in which you can give your voting instructions, details of which are found in the proxy form accompanying this Information Circular: Go to www.investorvote.com and follow the You will need your control number found on your voting instruction form. Complete and return the voting instruction form in the prepaid envelope provided. Call 1-800-474-7493 (English) or 1-800-474-7501 (French). You will need your control number found on your voting instruction form. instructions. You will need your control number found on your proxy form. Complete the voting instruction form and return it by fax at 905-507-7793 or 514-281-8911. Complete and return the proxy form in the prepaid envelope provided. Call 1-866-732-VOTE (8683) Toll Free. You will need your control number found on your proxy form. Your duly completed voting instruction form must have been received by your intermediary with sufficient time for your vote to be processed by our transfer agent, and in all cases, no later than 5:00 p.m. on April 20, 2018 (Eastern Daylight Time), similarly you must have voted by Internet or by phone or fax before 5:00 p.m. on April 20, 2018, (Eastern Daylight Time) or if the Meeting is adjourned or postponed, by no later than 5:00 p.m. on the business day prior to the day fixed for the adjourned or postponed meeting. 2. Voting in person If you wish to vote in person at the Meeting, insert your own name in the space provided on the voting instruction form provided by your nominee to appoint yourself as proxy holder Complete the proxy form and return it by fax at 1-866-249-7775. Your duly completed proxy form must have been received by our transfer agent, Computershare Trust Company of Canada, or you must have voted by Internet or by phone or fax before 5:00 p.m. on April 23, 2018, (Eastern Daylight Time) or if the Meeting is adjourned or postponed, by no later than 5:00 p.m. (Eastern Daylight Time) on the business day prior to the day fixed for the adjourned or postponed meeting. 2. Voting in person If you wish to vote in person, you do not need to complete or return your proxy form. The day of the Meeting you will have to present yourself to a representative of Computershare and follow the signature and return instructions of your nominee. Computershare Trust Company of Canada must receive your appointment no later than 5:00 p.m. on April 20, 2018 (Eastern Daylight Time). Non-registered shareholders who appoint themselves as proxy holders should present themselves at the Meeting to a representative of Computershare Trust Company of Canada. Do not otherwise complete the voting instruction form sent to you as you will be voting at the Meeting. Trust Company of Canada at the registration table. Your vote will be taken and counted at the Meeting. 5 CN MANAGEMENT INFORMATION CIRCULAR 2018 VOTING INFORMATION
Employee Shares Common shares purchased by employees of the Company under its Canadian and U.S. Employee Share Investment Plans and its Savings Plan for U.S. Operations (the Plans) are known as Employee Shares. Employee Shares remain registered in the name of the Plans Custodian (currently Computershare Trust Company of Canada or Fidelity Institutional Retirement Services Company as applicable), unless the employees have withdrawn their common shares from the Plans in accordance with their provisions. 1. Voting by Proxy (Computershare Voting Instruction Form) Below are the different manners in which you can give your voting instructions, details of which are found in the voting instruction form accompanying this Information Circular: Go to www.investorvote.com and follow the instructions. How your Shares will be Voted You can choose to vote FOR, WITHHOLD or AGAINST, depending on the items to be voted on. When you vote by proxy, you may appoint either the persons named as proxies in the proxy form or voting instruction form (who are the Board Chair and the Interim President and Chief Executive Officer of the Company, or in the case of Employee Shares, Computershare Trust Company of Canada or Fidelity Institutional Retirement Services Company) or you may appoint someone else to vote for you as your proxy holder by using the enclosed form of proxy or voting instruction form. You have the right to appoint any other person or company (who need not be a shareholder) to attend and act on your behalf at the Meeting. That right may be exercised by writing the name of such person or company in the blank space provided in the proxy form or voting instruction form, or by completing another proper form of proxy. Make sure that the person you appoint is aware that he or she is appointed and that this person attends the Meeting. Your common shares will be voted or withheld from voting in accordance with your instructions indicated on the proxy form or voting instruction form. If no instructions are indicated, your common shares represented by proxies in favour of the Board Chair or the Interim President and Chief Executive Officer (or in the case of Employee Shares, Computershare Trust Company of Canada or Fidelity Institutional Retirement Services Company) will be voted as follows: i) FOR the election of managements nominees as directors ii) FOR the appointment of KPMG LLP as auditors iii) FOR, in an advisory, non-binding capacity, the approach to executive compensation disclosed in the Statement of Executive Compensation section of this Information Circular and at the discretion of the proxy holder in respect of amendments to any of the foregoing matters or on such other business as may properly be brought before the Meeting. Should any nominee named herein for election as a director become unable to accept nomination for election, it is intended that the person acting under proxy in favour of management will vote for the election in his or her stead of such other person as management of the Company may recommend. Management has no reason to believe that any of the nominees for election as directors will be unable to serve if elected to office and is not aware of any amendment or other business likely to be brought before the Meeting. The Board of Directors and management are recommending that shareholders vote FOR items (i), (ii) and (iii). A simple majority of the votes cast, in person or by proxy, will constitute approval of each of these matters. You will need your control number found on your voting instruction form. Complete and return the voting instruction form in the prepaid envelope provided. Call 1-866-732-VOTE (8683) Toll Free. You will need your control number found on your voting instruction form. Complete the voting instruction form and return it by fax at 1-866-249-7775. Your duly completed voting instruction form must have been received by our transfer agent, Computershare Trust Company of Canada, or you must have voted by Internet or by phone or fax before 5:00 p.m. on April 23, 2018 (Eastern Daylight Time) or if the Meeting is adjourned or postponed, by no later than 5:00 p.m. (Eastern Daylight Time) on the business day prior to the day fixed for the adjourned or postponed meeting. 2. Voting in person If you wish to vote in person at the Meeting, insert your own name in the space provided on the voting instruction form provided by the Plans Custodian to appoint yourself as proxy holder and follow the signature and return instructions of the Plans Custodian. Computershare Trust Company of Canada must receive your appointment no later than 5:00 p.m. on April 23, 2018 (Eastern Daylight Time). Employee shareholders who appoint themselves as proxy holders should present themselves at the Meeting to a representative of Computershare Trust Company of Canada. Do not otherwise complete the voting instruction form sent to you as you will be voting at the Meeting. The voting instruction form must be used only with respect to Employee Shares. In the event that an employee holds common shares outside the Plans, he or she must also complete the enclosed form of proxy with respect to such additional common shares. No proxy form is to be completed with respect to Employee Shares only the Computershare voting instruction form should be used. 6 VOTING INFORMATION CN MANAGEMENT INFORMATION CIRCULAR 2018
Changing your Vote You may revoke your proxy at any time, by voting again on the Internet or by phone or fax before 5:00 p.m. on Monday April 23, 2018 (Eastern Daylight Time) or by following the below instructions: If you are a registered shareholder, by completing an instrument in writing (which includes another form of proxy with a later date) executed by you, or by your attorney (duly authorized in writing), and: deposited with the Corporate Secretary of the Company at the registered office of the Company (935 de La Gauchetière Street West, 16th Floor, Montreal, Quebec, Canada, H3B 2M9) at any time up to and including 5:00 p.m. on April 23, 2018 or any adjournment or postponement thereof. filed with the chair of the Meeting on the day of the Meeting or any adjournment or postponement thereof, or in any other manner permitted by law. If you are a non-registered shareholder, by contacting your intermediary to find out the correct procedure. If you hold Employee Shares, by contacting Computershare Trust Company of Canada or Fidelity Institutional Retirement Services Company as applicable. Additional Information Proxy Solicitation Management of the Company is soliciting your proxy. The solicitation is being made primarily by mail, but our directors, officers or employees may also solicit proxies at a nominal cost to the Company. The Company has retained and will pay for the services of D.F. King, a division of AST Investor Services Inc. (D.F. King), for the solicitation of proxies in Canada and the U.S., at an aggregate cost estimated to be approximately C$31,000 plus additional costs relating to out-of-pocket expenses. Questions If you have questions about the information contained in this Information Circular or require assistance in completing your form of proxy, please call D.F. King, the Companys proxy solicitation agent, toll-free in North America at 1-800-239-6813 or at 1-201-806-7301 outside of North America; or by e-mail at inquiries@dfking.com. Transfer agent You can contact the transfer agent either by mail at Computershare Trust Company of Canada, 100 University Ave., 8th Floor, Toronto (Ontario) M5J 2Y1, by telephone at 1-800-564-6253, by fax at 1-888-453-0330 or by internet at www.investorcentre.com/service, or in French at www.centredesinvestisseurs.com/service. CNs voting restrictions Our articles of continuance, as amended, provide that no person, together with his or her associates, shall hold, beneficially own or control, directly or indirectly, voting shares to which are attached more than 15% in the aggregate of the votes attached to all our voting shares that may ordinarily be cast to elect directors of the Company. In addition, where the total number of voting shares held, beneficially owned or controlled, directly or indirectly, by any one person together with his or her associates exceeds such 15% maximum, no person shall, in person or by proxy, exercise the voting rights attached to the voting shares held, beneficially owned or controlled, directly or indirectly, by such person or his or her associates. To the knowledge of the directors and senior officers of the Company, based on the most recent publicly available information, the only person who beneficially owns, or directly or indirectly exercises control or direction over, shares carrying 10% or more of the voting rights attached to any class of shares of the Company is Mr. William H. Gates, III. Mr. Gates is the sole member of Cascade Investment, L.L.C. (Cascade). Cascade held 100,400,770 common shares of the Company on the Record Date, representing 13.56% of the outstanding common shares of the Company. In addition, Mr. Gates is a co-trustee of the Bill & Melinda Gates Foundation Trust (Foundation), which held 17,126,874 common shares of the Company on the Record Date, representing 2.32% of the outstanding common shares of the Company. Hence, on the Record Date, Mr. Gates is deemed to have control or direction over 117,527,644 common shares, representing 15.88% of the outstanding common shares of the Company. As a result of the share repurchases for cancellation conducted by CN on an ongoing basis under its share repurchase program, the combined holdings of Cascade and the Foundation have exceeded 15% of CNs outstanding shares. In such instance where the increase above 15% in shareholdings is caused solely by repurchases conducted by CN, the only consequence to Cascade and the Foundation under CNs articles is that they may not exercise their voting rights in respect of the common shares that are in excess of the 15% maximum. Cascade and the Foundation will continue to receive their full amount of dividends, including on the CN common shares in excess of 15%, but are precluded by CNs articles (implemented in accordance with the CN Commercialization Act) from acquiring additional CN common shares. Intermediaries Fees Non-registered shareholders are either objecting beneficial owners who object that intermediaries disclose information about their ownership in the Company, or non-objecting beneficial owners, who do not object to such disclosure. The Company pays intermediaries to send proxy-related materials to both objecting and non-objecting beneficial owners. 7 CN MANAGEMENT INFORMATION CIRCULAR 2018 VOTING INFORMATION
Business of the Meeting Financial Statements Our consolidated financial statements for the year ended December 31, 2017, together with the auditors reports thereon, are included in the 2017 Annual Report of the Company, available on our website at www.cn.ca, on SEDAR at www.sedar.com, in the Companys annual report on Form 40-F available on the U.S. Securities and Exchange Commission (SEC) website at www.sec.gov through EDGAR, and in print, free of charge, to any shareholder who requests a copy by contacting our Corporate Secretary at (514) 399-7091 or Vice-President, Investor Relations at (514) 399-0052. Majority Voting Policy The Board of Directors has adopted a policy which is part of our Corporate Governance Manual, to the effect that a nominee for election as a director of the Company who receives a greater number of votes withheld than votes for, with respect to the election of directors by shareholders, will tender his or her resignation to the Board Chair promptly following the meeting of shareholders at which the director is elected. The Corporate Governance and Nominating Committee will consider such offer and make a recommendation to the Board of Directors whether to accept it or not. The Board of Directors will make its decision and promptly announce it in a press release within 90 days following the meeting of shareholders, a copy of which will be provided to the Toronto Stock Exchange (TSX). The Board of Directors shall however, accept such resignation absent exceptional circumstances. The resignation shall be effective when accepted by the Board of Directors. The director who offered to tender his or her resignation should not be part of any committee or Board of Directors deliberations pertaining to the resignation offer. This policy only applies in circumstances involving an uncontested election of directors. An uncontested election of directors means that the number of director nominees is the same as the number of directors to be elected to the Board and that no proxy material is circulated in support of one or more nominees who are not part of the candidates supported by the Board of Directors. Election of Directors Our articles of continuance, as amended, provide that our Board of Directors shall consist of a minimum of seven and a maximum of 21 directors (hereinafter the Board or Board of Directors). Pursuant to a resolution of the Board of Directors, 12 persons are to be elected as directors for the current year, each to hold office until the next annual meeting of shareholders or until such persons successor is elected or appointed. The term of office of each of the present directors expires at the close of the Meeting. The persons named in the section entitled Nominees for Election to the Board Description of Nominees will be presented for election at the Meeting as managements nominees. All of the nominees proposed for election as directors are currently directors of the Company. All persons nominated were recommended to the Board of Directors by the Corporate Governance and Nominating Committee. Unless authority is withheld, the persons designated in the accompanying form of proxy or voting instruction form intend to vote FOR the election of the persons named in the section entitled Nominees for Election to the Board Description of Nominees. These nominees are, in the opinion of the Board of Directors and management, well qualified to act as directors of the Company for the ensuing year and have confirmed their willingness to serve as directors. The Board of Directors and management do not contemplate that any of these nominees will be unable to serve as a director, but should that occur for any reason before the Meeting, the persons designated in the accompanying form of proxy or voting instruction form reserve the right to vote for another nominee at their discretion unless the shareholder who has given such proxy or voting instruction form has directed that the common shares be withheld from voting on the election of any of the directors. Appointment of Auditors The Board of Directors and the Audit Committee recommend that KPMG LLP be appointed to serve as the Companys auditors until the next annual meeting of shareholders. KPMG LLP has served as the Companys auditors since 1992. For the years ended December 31, 2017 and 2016, the fees for audit, audit-related, tax and all other services provided to the Company by KPMG LLP were the following: FEES (IN THOUSANDS) 2017 (C$) 2016 (C$) Audit Audit-related Tax All other 2,695 1,068 1,458 2,723 1,070 1,349 12 TOTAL FEES 5,221 5,154 Pursuant to the terms of its charter, the Audit Committee approves all audit and audit-related services, audit engagement fees and terms and all non-audit engagements provided by the external auditors. The Audit Committee pre-approved all the services performed by the auditors for audit, audit-related and non-audit related services for the years ended December 31, 2017 and 2016. The nature of the services under each category is described below. Audit fees Consists of fees incurred for professional services rendered by the auditors in relation to the audit of the Companys consolidated annual financial statements and those of its subsidiaries and the audit relating to the Companys internal control over financial reporting. 8 BUSINESS OF THE MEETING CN MANAGEMENT INFORMATION CIRCULAR 2018
Audit-related fees Audit-related fees were incurred for professional services rendered by the auditors in relation to the audit of the financial statements for the Companys pension plans, and for attestation services in connection with reports required by statute or regulation and due diligence and other services, including comfort letters, in connection with the issuance of securities and other audit-related fees. Tax fees Consists of fees incurred for consultations on cross-border tax implications for employees, for assistance related to the Canadian Scientific Research and Experimental Development (SR&ED) tax credit and for tax compliance. Other Business Following the conclusion of the formal business to be conducted at the Meeting, we will: discuss highlights of our 2017 performance and plans for the future, and invite questions and comments from shareholders. As of the date of this Circular, management is not aware of any changes to these items and does not expect any other items to be brought forward at the Meeting. If there are changes or new items, your proxyholder can vote your shares on these items as he or she sees fit. All Other fees Consists of fees related to data analytics assistance. Unless authority is withheld, the persons designated in the accompanying form of proxy or voting instruction form intend to vote FOR the appointment of KPMG LLP as auditors of the Company to hold office until the next annual meeting of shareholders. Advisory Vote on Executive Compensation The Company is again providing its shareholders with an opportunity to cast at the Meeting an advisory vote on the Companys approach to executive compensation, as disclosed in the Statement of Executive Compensation section of this Information Circular. Such section describes the role of the Human Resources and Compensation Committee in overseeing compensation of executives and ensuring that it is linked to the Companys three-year business plan. The section also describes the Companys executive compensation principles, the structure of the compensation plans for executives, and the alignment of such plans with the interests of our shareholders. The Board of Directors recommends that shareholders vote FOR the resolution set out below and, unless otherwise instructed, the persons designated in the form of proxy or voting information form intend to vote FOR the following resolution: RESOLVED that, on an advisory basis and not to diminish the role and responsibilities of the Board of Directors, the shareholders accept the approach to executive compensation disclosed in the section entitled Statement of Executive Compensation of the Information Circular of the Company dated March 6, 2018. The Board of Directors has adopted a policy to the effect that, if a majority of the shares represented in person or by proxy at the meeting are voted against the above non-binding advisory resolution, the Board Chair or the Chair of the Human Resources and Compensation Committee will oversee a process to engage with shareholders with a view to giving them the opportunity to express their specific concerns. The Board of Directors and the Human Resources and Compensation Committee will consider the results of this process and, if appropriate, review the Companys approach to executive compensation in the context of shareholders specific concerns. 9 CN MANAGEMENT INFORMATION CIRCULAR 2018 BUSINESS OF THE MEETING
Nominees for Election to the Board Description of Nominees The following tables set out information as of February 26, 2018, unless otherwise indicated, and include a profile of each nominated director with an explanation of his or her experience, qualifications, top three competencies, participation on the Board and its committees, ownership of securities of CN, as well as participation on the boards of other public companies during the past five years. A more detailed description of our directors competencies can be found under the heading Competency Matrix in the section entitled Statement of Corporate Governance Practices. Each nominee is a current director of the Company. Ms. Bruder is the Executive Vice-President, Operations at the Royal Bank of Canada (RBC) where she is responsible for overseeing operations related to all personal and business clients in Canada. Her previous senior roles at RBC include Executive Vice-President of Business and Commercial Banking, Chief Operating Officer of the Global Wealth Management division and President of RBC Centura Banks, Inc. in North Carolina. She is a member of the Institute of Corporate Directors and the Pine River Institute, and is Vice-Chair of the Board of Governors for the University of Guelph and Vice-Chair of the Board of Governors of the Shaw Festival. Previously, she was appointed as the Chairperson of the Canadian Chamber of Commerce and the Canadian American Business Council. She serves as Honorary Consul for Luxembourg in Toronto. In 2012, she was awarded the Queens Diamond Jubilee Medal. Ms. Bruder was inducted in the Womens Executive Network 100 Most Powerful Women in Canada Hall of Fame in 2016. Ms. Bruder holds a B.A. from the University of Guelph and an MBA (Gold Medalist) from Queens University. Shauneen Bruder Executive Vice-President, Operations Royal Bank of Canada Age: 58(1) Ontario, Canada Director Since: April 25, 2017 Independent Principal Competencies: Finance/Accounting Strategy Sales/Marketing MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Donations and Sponsorships Committee (3) Finance Committee Human Resources and Compensation Committee Pension and Investment Committee (3) Strategic Planning Committee 100% 100% 100% 100% 100% 100% Nil 99.87% 2017 VOTES IN FAVOUR Mr. Carty retired as Vice-Chairman and Chief Financial Officer of Dell, Inc. (computer manufacturer), a position he assumed from January 2007 until June 2008, and as Chairman and CEO of AMR Corporation and American Airlines in 2003 after 30 years in the airline business, where he previously served as President and Executive Vice-President of Finance & Planning of AMR Airline Group and American Airlines. He was President and CEO of CP Air from 1985 to 1987. In the voluntary sector, Mr. Carty is on the Executive Board of the SMU Cox School of Business. He is a former Chairman of Big Brothers Big Sisters of America. In 1999, Board Alert named Mr. Carty one of the years Outstanding Directors and in 2015, he was named to the top 100 of the National Association of Corporate Directors List. He was named an Officer of the Order of Canada in 2003. In addition to serving on the public boards mentioned in the following table, Mr. Carty serves as Chairman of the board of Porter Airlines, Inc. Mr. Carty holds a B.A. and an Honorary Doctor of Laws from Queens University and an MBA from Harvard Business School. Donald J. Carty, O.C., LL.D. Corporate Director MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Age: 71 (1) Board Audit Committee (Chair) Corporate Governance and Nominating Committee Environment, Safety and Security Committee Human Resources and Compensation Committee Strategic Planning Committee 100% 100% 100% 100% 100% 100% Hawaiian Holdings, Inc. VMWare, Inc. EMC Corporation Virgin America Inc. Talisman Energy Inc. Barrick Gold Corporation Gluskin, Sheff & Associates Inc. Dell, Inc. (2016-present) (2015-present) (2015-2016) (2006-2016) (2009-2015) (2006-2013) (2006-2013) (1992-2013) Texas, U.S.A. Director Since: January 1, 2011 Independent Principal Competencies: Strategy Finance/Accounting Human Resources 98.96% 2017 VOTES IN FAVOUR 10 NOMINEES FOR ELECTION TO THE BOARD CN MANAGEMENT INFORMATION CIRCULAR 2018 SECURITIES HELD Value at RiskC$9,796,533 (4) Common Shares Owned or Controlled (5) February 201897,788 February 201788,512 SECURITIES HELD Value at RiskC$629,252 (4) Common Shares Owned or Controlled (5) February 20186,290 February 2017Nil
Mr. Giffin is a Partner and the Chair of the Public Policy and Regulation practice at Dentons US LLP (law firm), where he maintains offices in Washington, D.C. and Atlanta. He has been engaged in the practice of law or government service for more than thirty-five years. Mr. Giffin was United States Ambassador to Canada from 1997 to 2001. Mr. Giffin is a member of the Board of Trustees of the Jimmy Carter Presidential Center and is a member of the Council on Foreign Relations and the Tri-Lateral Commission. In addition to serving on the public boards mentioned in the following table, Mr. Giffin serves on the Board of Counsellors of McLarty Global and on the boards of directors of CIBC USA Holdings Inc. and Atlantic Trust Ltd. Mr. Giffin holds a B.A. from Duke University and a J.D. from Emory University School of Law. Ambassador Gordon D. Giffin Partner, Dentons US LLP Age: 68(1) Georgia, U.S.A. Director Since: May 1, 2001 Independent Principal Competencies: Public Policy Legal Human Resources MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Human Resources and Compensation Committee (Chair) Audit Committee (6) Donations and Sponsorships Committee (3) Pension and Investment Committee (3) Strategic Planning Committee 100% 100% 100% 100% 100% 100% Canadian Natural Resources Limited (Lead Director) TransAlta Corporation (Chair) ECN Capital Corp. Canadian Imperial Bank of Commerce Element Financial Corporation Just Energy Group Inc. (2002-present) (2002-present) (2016-2017) (2001-2017) (2013-2016) (2006-2015) 2017 VOTES IN FAVOUR 97.76% Ms. Godin is Vice-Chair of the Board and Executive Vice-President, Chief Planning and Administration Officer of CGI Group Inc. (CGI) where she oversees the development of enterprise-wide policies, programs and processes related to the management of CGI and their consistent and high-quality application across all CGI business units. Ms. Godin is responsible for ensuring the continuous development of CGIs 72,500 professionals. Ms. Godin also directs the development and execution of CGIs global strategy, and oversees CGIs full spectrum of security activities, and leads mergers and acquisitions activity worldwide. Previously Ms. Godin was head of CGIs strategic planning and the companys global human resources function, including executive compensation and succession planning, as well as organizational model sustainability to secure organic growth. Before joining CGI, Ms. Godin founded Oxygen Corporate Health, a company that manages comprehensive health and wellness programs in the workplace. Oxygen merged its activities with those of CGI. In 2000, Ms. Godin co-founded Fondation Jeunesse-Vie, a non-profit organization that strives to reduce poverty, promote education and improve the health of children and teens in disadvantaged areas. Ms. Godin holds a B.A. from the Université de Sherbrooke. Julie Godin Vice-Chair of the Board and Executive Vice-President, Chief Planning and Administration Officer CGI Group Inc. Age: 43(1) Quebec, Canada Director Since: April 25, 2017 Independent Principal Competencies: Human Resources Strategy Finance/Accounting MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Corporate Governance and Nominating Committee Environment, Safety and Security Committee Finance Committee Human Resources and Compensation Committee Strategic Planning Committee 100% 100% 100% 100% 100% 100% CGI Group Inc. (2013-present) 99.85% 2017 VOTES IN FAVOUR 11 CN MANAGEMENT INFORMATION CIRCULAR 2018 NOMINEES FOR ELECTION TO THE BOARD SECURITIES HELD Value at RiskC$629,252 (4) Common Shares Owned or Controlled (5) February 20186,290 February 2017Nil SECURITIES HELD Value at RiskC$9,897,416 (4) Common Shares Owned or Controlled (5) February 201898,795 February 201795,487
Ms. Holiday is a Corporate Director and Trustee and a former General Counsel, United States Treasury Department and former Secretary of the Cabinet, The White House. Ms. Holiday serves on the public boards mentioned in the following table. She was also the recipient of the DirectWomens 2009 Sandra Day OConnor Board Excellence Award, which honours women who have served with distinction on the board of a public company and advanced the value of diversity in the workplace. She is also the recipient of the Secretary of the Treasurys highest award, the Alexander Hamilton Award. Ms. Holiday holds a B.S. and a J.D. from the University of Florida, and she was admitted to the bars of the states of Florida, Georgia and the District of Columbia. Edith E. Holiday Corporate Director & Trustee Age: 66(1) Florida, U.S.A. Director Since: June 1, 2001 Independent Principal Competencies: Legal Public Policy Strategy MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Pension and Investment Committee (3) (Chair) Audit Committee Finance Committee Human Resources and Compensation Committee Strategic Planning Committee 100% 100% 100% 100% 100% 100% Santander Consumer USA Holdings, Inc. White Mountains Insurance Group, Ltd. Franklin Templeton Group of Funds (various companies) Hess Corporation RTI International Metals, Inc. H.J. Heinz Company (2016-present) (2004-present) (1996-present) (1993-present) (1999-2015) (1994-2013) 2017 VOTES IN FAVOUR 97.42% Ms. Kempston Darkes is the retired Group Vice-President and President Latin America, Africa and Middle East, General Motors Corporation (GM). In 2009, she ended a 35-year career at GM during which she attained the highest operating position ever held by a woman at GM. From 1994 to 2001, she was President and General Manager of General Motors of Canada Limited and Vice-President of GM. She is an Officer of the Order of Canada, a member of the Order of Ontario and was ranked by Fortune magazine in 2009 as the 12th Most Powerful Woman in International Business and amongst the Womens Executive Networks 2012 Canadas Most Powerful Women: Top 100 Award Winners. In 2006, she was the recipient of the Governor General of Canadas Awards in Commemoration of the Persons Case and was inducted as a fellow of the Institute of Corporate Directors in 2011. She has also been an appointee of the Government of Canada to the Science, Technology and Innovation Council and the Advisory Council for Promoting Women on Boards. In addition to serving on the public boards mentioned in the following table, Ms. Kempston Darkes is the Lead Director of Irving Oil Company Ltd. Ms. Kempston Darkes has received Honorary Doctor of Law Degrees from the University of Toronto and the University of Victoria, as well as an Honorary Doctor of Commerce from Saint Marys University. She holds a B.A. in history and political science from Victoria University in the University of Toronto and an LL.B. from the University of Toronto Faculty of Law. V. Maureen Kempston Darkes, O.C., D. COMM., LL.D. Corporate Director Age: 69(1) Ontario, Canada Florida, U.S.A. Director Since: March 29, 1995 Independent Principal Competencies: Transport Industry/Safety Sales/Marketing Human Resources MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Environment, Safety and Security Committee (Chair) Audit Committee Corporate Governance and Nominating Committee Finance Committee Strategic Planning Committee 100% 100% 100% 100% 100% 100% Schlumberger Limited Enbridge Inc. Brookfield Asset Management Inc. Balfour Beatty Plc. (2014-present) (2010-present) (2008-present) (2012-2017) 97.14% 2017 VOTES IN FAVOUR 12 NOMINEES FOR ELECTION TO THE BOARD CN MANAGEMENT INFORMATION CIRCULAR 2018 SECURITIES HELD Value at RiskC$19,088,532 (4) Common Shares Owned or Controlled (5) February 2018190,809 February 2017187,577 SECURITIES HELD Value at RiskC$10,622,528 (4) Common Shares Owned or Controlled (5) February 2018106,033 February 2017109,389
The Honorable Denis Losier is the retired President and Chief Executive Officer of Assumption Life (life insurance company). Between 1989 and 1994, Mr. Losier held various cabinet level positions with the government of the Province of New Brunswick, including Minister of Fisheries and Aquaculture and Minister of Economic Development and Tourism. Mr. Losier was co-chair of the University of Monctons Excellence Campaign. In 2008, he was named a member of the Security Intelligence Review Committee of Canada, and, as such, was made a Member of the Queens Privy Council. In addition to serving on the public boards mentioned in the following table, Mr. Losier was a director of Enbridge Gas New Brunswick until 2017 and is the past chair of the board of directors of Invest N.B. He is also a past member and director of the New Brunswick Business Council and Canadian Blood Services, respectively. Mr. Losier was appointed a Member of the Order of Canada in 2011. Mr. Losier holds a Bachelor of Economics from the University of Moncton and a Masters of Economics from the University of Western Ontario. Mr. Losier was awarded an Honorary Doctorate Degree in Business Administration from the University of Moncton. The Hon. Denis Losier, P.C., LL.D., C.M. Corporate Director Age: 65(1) New Brunswick, Canada Director Since: October 25, 1994 Independent Principal Competencies: Finance/Accounting Human Resources Sales/Marketing MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Corporate Governance and Nominating Committee (Chair) Donations and Sponsorships Committee (3) Human Resources and Compensation Committee Pension and Investment Committee (3) Strategic Planning Committee 100% 100% 100% 100% 100% 100% Plaza Retail REIT Capital DGMC Inc. NAV CANADA XL-ID Solutions Inc. (formerly, Excellium Inc.) (2007-present) (2013-2016) (2004-2013) (2013) 98.41% 2017 VOTES IN FAVOUR The Honorable Kevin G. Lynch is Vice-Chair, BMO Financial Group. In this role, Dr. Lynch is a key strategic advisor to senior management and represents BMO in domestic and international markets. Prior to joining BMO, Dr. Lynch built a distinguished public service career in the Government of Canada. Before his retirement in 2009, he served as Clerk of the Privy Council, Secretary to the Cabinet, and Head of the Public Service of Canada. Dr. Lynch began his public service career at the Bank of Canada in 1976 and has held a number of senior positions in the Government of Canada. These included the post of Deputy Minister of Industry, from 1995 to 2000, and Deputy Minister of Finance, from 2000 to 2004. From 2004 to 2006, he served as Executive Director (for the Canadian, Irish and Caribbean constituency) at the International Monetary Fund in Washington, D.C. In addition to serving on the public boards mentioned in the following table, Dr. Lynch is the Chancellor of the University of Kings College and the past Chair of the Board of Governors of the University of Waterloo. As well, Dr. Lynch is a Trustee of the Killam Trusts, and serves on several other boards, including those of Communitech, the Governor Generals Rideau Hall Foundation and the Asia Pacific Foundation of Canada. Dr. Lynch is also a member of the World Economic Forums Global Policy Councils. Dr. Lynch has received eleven honorary degrees from Canadian universities and was made a Member of the Queens Privy Council for Canada in 2009, and an Officer of the Order of Canada in 2011. He has been awarded the Distinguished Alumni Award from McMaster University and the Queens Golden and Diamond Jubilee Medals. The Honorable Kevin G. Lynch earned his masters in Economics from the University of Manchester and a doctorate in Economics from McMaster University. The Hon. Kevin G. Lynch, P.C., O.C., PH.D., LL.D. Vice-Chair, BMO Financial Group Age: 67(1) Ontario, Canada Director Since: April 23, 2014 Independent Principal Competencies: Public Policy Finance/Accounting Strategy MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Finance Committee (Chair) Corporate Governance and Nominating Committee Human Resources and Compensation Committee Pension and Investment Committee (3) Strategic Planning Committee 100% 100% 100% 100% 100% 100% SNC-Lavalin Group Inc. (Chairman) CNOOC Limited Empire Company Limited (Sobeys, Inc.) (2017-present) (2014-present) (2013-2017) 99.81% 2017 VOTES IN FAVOUR 13 CN MANAGEMENT INFORMATION CIRCULAR 2018 NOMINEES FOR ELECTION TO THE BOARD SECURITIES HELD Value at RiskC$2,132,052 (4) Common Shares Owned or Controlled (5) February 201821,312 February 201717,238 SECURITIES HELD Value at RiskC$29,141,752 (4) Common Shares Owned or Controlled (5) February 2018291,301 February 2017288,917
Mr. OConnor is the retired chair of the board of directors of Republic Services, Inc., a leading provider of non-hazardous solid waste collection, recycling and disposal services in the United States. From 1998 to 2011, Mr. OConnor was chair and Chief Executive Officer of Republic Services, Inc. Prior to 1998, he had held various management positions at Waste Management, Inc. In 2001, Mr. OConnor was the recipient of the Ellis Island Medal of Honor from the National Ethnic Coalition of Organizations (NECO) which rewards Americans who exemplify outstanding qualities in both their personal and professional lives, while continuing to preserve the richness of their particular heritage. He was named to the list of Americas Best CEOs each year, between 2005 and 2010. In 2011, Mr. OConnor was named to the Institutional Investors All American Executive Team. He is also active in many community causes, especially those that benefit children. Mr. OConnor has served on the board of directors of the SOS Childrens Village. In addition to serving on the public boards mentioned in the following table, Mr. OConnor serves on the board of directors of the South Florida P.G.A. of America Foundation. Mr. OConnor holds a Bachelor of Science in Commerce (concentration in accounting) from DePaul University. James E. OConnor Corporate Director Age: 68(1) Florida, U.S.A. Director Since: April 27, 2011 Independent Principal Competencies: Strategy Engineering/Environment Human Resources MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Strategic Planning Committee (Chair) Audit Committee Environment, Safety & Security Committee Finance Committee Human Resources and Compensation Committee 100% 100% 100% 100% 100% 100% Casella Waste Systems, Inc. (Lead Director) Clean Energy Fuels Corp. (2015-present) (2011-present) 2017 VOTES IN FAVOUR 99.36% Mr. Pace became Chair of the Board of Directors of CN in 2014 and is President and Chief Executive Officer, The Pace Group (radio broadcasting, real estate development and environmental services). He began his professional career practicing law in Halifax. In 1981, he accepted an appointment to act as the Atlantic Advisor to the Prime Minister of Canada, the Right Honorable Pierre Elliott Trudeau, in Ottawa. In addition to serving on the public boards mentioned in the following table, Mr. Pace is Chairman of the Walter Gordon Foundation, a director of the Atlantic Salmon Federation and former director of the Asia Pacific Foundation. Mr. Pace holds an MBA and an LL.B from Dalhousie University and holds an Honorary Doctor of Commerce Degree from Saint Marys University. He was appointed a Member of the Order of Canada in 2016. Mr. Pace has also completed Corporate Director education programs at both Harvard and Chicago Business Schools. Robert Pace, D. COMM., C.M. Chair of the Board, CN President & CEO, The Pace Group Age: 63(1) Nova Scotia, Canada Director Since: October 25, 1994 Independent Principal Competencies: Human Resources Transport Industry/Safety Strategy MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS High Liner Foods Incorporated Hydro One Inc. (1998-present) (2007-2014) Board (Chair) Corporate Governance and Nominating Committee Donations and Sponsorships Committee (3) Environment, Safety & Security Committee Strategic Planning Committee 100% 100% 100% 100% 100% 98.64% 2017 VOTES IN FAVOUR 14 NOMINEES FOR ELECTION TO THE BOARD CN MANAGEMENT INFORMATION CIRCULAR 2018 SECURITIES HELD Value at RiskC$32,685,269 (4) Common Shares Owned or Controlled (5) February 2018326,722 February 2017315,223 SECURITIES HELD Value at RiskC$3,098,308 (4) Common Shares Owned or Controlled (5) February 201830,927 February 201728,412
Mr. Phillips is the President of R.L. Phillips Investments Inc. and was previously President and Chief Executive Officer and director of British Columbia Railway Company Limited from 2001 to 2004. Mr. Phillips was Executive Vice-President, Business Development and Strategy for MacMillan Bloedel Ltd. and, before that, held the position of Chief Executive Officer at PTI Group and Dreco Energy Services Limited. He also enjoyed a prestigious career as a corporate lawyer and was appointed to the Queens Counsel in Alberta in 1991. Mr. Phillips was inducted as a fellow of the Institute of Corporate Directors in June 2017. In addition to serving on the public boards mentioned in the following table, Mr. Phillips served as a director of the Canadian Chamber of Commerce, as a member of the Alberta Economic Development Authority (AEDA) and as a director of the Export and Trade Committee of the AEDA. Mr. Phillips received his Bachelor of Laws (Gold Medalist), and Bachelor of Science, Chemical Engineering (Hons) from the University of Alberta. Robert L. Phillips President, R.L. Phillips Investments Inc. Age: 67(1) British Columbia, Canada Director Since: April 23, 2014 Independent Principal Competencies: Transport Industry/Safety Strategy Sales/Marketing MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Audit Committee Corporate Governance and Nominating Committee Environment, Safety & Security Committee Human Resources and Compensation Committee Strategic Planning Committee 100% 100% 100% 100% 100% 100% West Fraser Timber Co. Ltd (Lead Director) Maxar Technologies Ltd (formerly MacDonald Dettwiler & Associates Ltd.) (Chairman) Canadian Western Bank (Chair) Precision Drilling Corporation Epcor Utilities Inc. Axia NetMedia Corporation Capital Power Corporation (2005-present) (2003-present) (2001-present) (2004-2017) (2000-2014) (2005-2014) (2009-2013) 2017 VOTES IN FAVOUR 98.17% Ms. Stein is the Executive Vice-President General Counsel & Corporate Affairs of The Clorox Company (marketer and manufacturer of consumer products) where she serves on the executive committee. From 2000 to 2005, Ms. Stein was Senior Vice-President, General Counsel of the H.J. Heinz Company. She was also previously a corporate lawyer with Morrison & Foerster in San Francisco and Hong Kong. Ms. Stein is a former director of Nash Finch Company and serves on the boards of several not-for-profit organizations, including Corporate Pro Bono, Equal Justice Works, the Leadership Council on Legal Diversity and the Association of General Counsel. Previously, Ms. Stein was chair of the Association of Corporate Counsel, co-chair of the General Counsel Committee of the ABA Business Law Section and a director of the Pittsburgh Ballet Theater. Ms. Stein has received the Margaret Brent Award, the American Bar Associations highest award for women lawyers; the Sandra Day OConnor Board Excellence Award; and the Corporate Board Member Americas Top General Counsel Recognition Award. Ms. Stein received her J.D. from Harvard Law School, and is a graduate of Dartmouth College where she earned undergraduate and masters degrees. Laura Stein Executive Vice-President General Counsel & Corporate Affairs, The Clorox Company Age: 56(1) California, U.S.A. Director Since: April 23, 2014 Independent Principal Competencies: Legal Engineering/Environment Finance/Accounting MEMBER OF (2) ATTENDANCE 2017 OTHER PUBLIC BOARDS DURING PAST 5 YEARS Board Audit Committee Environment, Safety & Security Committee Finance Committee Human Resources and Compensation Committee Strategic Planning Committee 100% 100% 100% 100% 100% 100% Franklin Resources Inc. (2005-present) 99.35% 2017 VOTES IN FAVOUR (1) The age of the directors is provided as at April 24, 2018, the date of the Meeting. (2) For a detailed review of the 2017 Board and committee attendance by directors, please refer to the Attendance Table found in the Statement of Corporate Governance Practices section of this Information Circular. (3) The Donations and Sponsorships Committee and the Pension and Investment Committee are mixed committees composed of both members of the Board of Directors, as well as officers of the Company. (4) The Value at Risk represents the total value of common shares and Deferred Share Units (DSUs) under the Deferred Share Unit Plan for Directors (DSU Plan), which total value is based on the February 26, 2018, closing price of the common shares on the Toronto Stock Exchange (C$100.04) or, for Donald J. Carty, Ambassador Gordon D. Giffin, Edith E. Holiday, James E. OConnor and Laura Stein, the closing price of the common shares on the New York Stock Exchange (U.S.$78.97) converted in Canadian dollars using the closing exchange rate (U.S.$1.00 = C$1.2686) on the same date. (5) The information regarding common shares beneficially owned, controlled or directed directly or indirectly, has been furnished by the respective nominees individually and includes DSUs for non-executive directors. For further information on the DSU Plan, please see the Board of Directors Compensation section of this Information Circular. (6) As of January 22, 2018, Ambassador Gordon D. Giffin stepped down from the Audit Committee. 15 CN MANAGEMENT INFORMATION CIRCULAR 2018 NOMINEES FOR ELECTION TO THE BOARD SECURITIES HELD Value at RiskC$2,060,530 (4) Common Shares Owned or Controlled (5) February 201820,568 February 201716,632 SECURITIES HELD Value at RiskC$2,613,245 (4) Common Shares Owned or Controlled (5) February 201826,122 February 201721,370
Additional Disclosure Relating to Directors information provided to it by the nominees for election to the Board of Directors, no such nominee is or has been, in the last 10 years, a director or executive officer of any company that, while such person was acting in that capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, As of the date hereof, to the knowledge of the Company and based upon (ii) Mr. Giffin, a director of the Company, was a director of AbitibiBowater Inc. AbitibiBowater Inc. and certain of its U.S. and Canadian subsidiaries filed voluntary petitions in the United States under Chapter 11 of the U.S. Bankruptcy Code on April 16, 2009. AbitibiBowater Inc. and certain of its Canadian subsidiaries filed for creditor protection under the CCAA in Canada on April 17, 2009. Mr. Giffin resigned as a director of AbitibiBowater Inc. on January 22, 2009; and (iii) Mr. Losier, a director of the Company, was a director of XL-ID Solutions Inc. (formerly, Excellium Inc.) (XL-ID) from July 23, 2013 to August 29, 2013. On January 3, 2014, XL-ID announced that it had submitted a proposal to its creditors under the Bankruptcy and Insolvency Act (Canada). On February 13, 2014, XL-ID announced that it had received a final order from the Superior Court of Quebec approving the proposal approved by its creditors. arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets, except for the following: (i) Ms. Kempston Darkes, a director of the Company, was an officer of GM when GM filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code on June 1, 2009. None of the operations for which she was directly responsible in Latin America, Africa and the Middle East were included in the bankruptcy filing. GM emerged from bankruptcy protection on July 10, 2009, in a reorganization in which a new entity acquired GMs most valuable assets. Ms. Kempston Darkes retired as a GM officer on December 1, 2009; 16 NOMINEES FOR ELECTION TO THE BOARD CN MANAGEMENT INFORMATION CIRCULAR 2018
Board of Directors Compensation CNs compensation program is designed to attract and retain the most qualified people to serve on CNs Board and its committees and takes into account the risks and responsibilities of being an effective director. To reflect the Companys extensive operations in the United States and the Companys need to attract and retain directors with experience in doing business in the United States, the compensation of the non-executive directors of the Company is designed to be comparable to that of large U.S.-based companies. The Board sets the compensation of non-executive directors based on the Corporate Governance and Nominating Committees recommendations. This Committee regularly reviews the compensation of non-executive directors and recommends to the Board such adjustments as it considers appropriate and necessary to recognize the workload, time commitment and responsibility of the Board and committee members and to remain competitive with director compensation trends in Canada and the U.S. Any director who is also an employee of the Company or of any of its affiliates, does not receive any compensation as a director. The Corporate Governance and Nominating Committee retained the services of Willis Towers Watson in late 2014 to provide expertise and advice on a compensation market review for the non-executive directors. For this study, the Committee mandated Willis Towers Watson to assist in the determination of the appropriate comparator groups for CN non-executive directors, review the level and form of directors compensation for the comparator groups, and review the trends in level and form of director compensation in Canada and the U.S. Following such review of the compensation arrangements for non-executive directors, the Board, upon the advice of the Corporate Governance and Nominating Committee, approved revisions to non-executive directors compensation, which became effective on January 1, 2015, and consisted of an all-inclusive annual retainer structure comprising both a cash and an equity component. Board and committee meeting attendance fees, as well as travel attendance fees were eliminated and the flat-fee compensation structure now applies regardless of the number of meetings attended by directors. The new compensation structure was initially set for two years starting in 2015 and was reviewed and considered appropriate for the 2017 and the 2018 years. The flat-fee approach was found to be consistent with the compensation trends of the comparator groups, adds predictability to compensation paid to non-executive directors, and is simpler to administer. Comparator Groups In late 2014, Willis Towers Watson compared CNs non-executive directors compensation against three separate comparator groups: (i) selected Class I Railroads (see table below) composed of the same companies used for benchmarking the NEOs compensation, given CN is one of the Class I Railroads; (ii) a Canadian peer group of companies (see table below) with comparable size to CN in terms of revenues and market capitalization, given CN is a Canadian company competing to attract and retain Canadian directors; and (iii) the U.S. companies comprised of the Standard and Poors 500 Index, given CNs extensive network in the U.S. and its need to attract and retain U.S.-based directors. Willis Towers Watson indicated that CNs compensation for non-executive directors was well-aligned with the upper end of each of these comparator groups. Selected Class I Railroads COMPANY NAME Canadian Peer Group of Companies COMPANY NAME PRIMARY INDUSTRY Union Pacific Corporation (U.S.) Norfolk Southern Corporation (U.S.) Canadian Pacific Railway Ltd. (Cdn.) CSX Corporation (U.S.) Chemicals Airlines Banks Metals & Mining Diversified Telecommunication Aerospace & Defense Banks of Commerce Oil, Gas and Consumable Fuels Road & Rail Multiline Retail Oil, Gas and Consumable Fuels IT services Insurance Corporation Chemicals Diversified Telecommunication Insurance Oil, Gas and Consumable Fuels Metals & Mining Diversified Telecommunication Media Oil, Gas and Consumable Fuels Agrium Inc. Air Canada Bank of Montreal Barrick Gold Corporation BCE Inc. Bombardier Inc. Canadian Imperial Bank of Commerce Canadian Natural Resources Ltd. Canadian Pacific Railway Ltd. Canadian Tire Corporation Cenovus Energy Inc. CGI Group Inc. Manulife Financial Potash Corporation of Saskatchewan Rogers Communications Inc. Sun Life Financial Inc. Suncor Energy Inc. Teck Resources Ltd. Telus Corporation Thomson Reuters Corporation TransCanada Corporation 17 CN MANAGEMENT INFORMATION CIRCULAR 2018 BOARD OF DIRECTORS COMPENSATION
Compensation levels The following table shows the compensation levels for CNs non-executive directors during 2017. The Corporate Governance and Nominating Committee reviewed the compensation levels for CNs non-executive directors in 2017 and in light of the flat fee compensation structure, resolved that such compensation levels remain unchanged for 2018. Directors compensation levels have therefore remained the same since 2015. FEES (U.S.$) TYPE OF FEE (1) 2017 Board Chair Cash Retainer (2) Board Chair Share Grant Retainer (2) Director Cash Retainer Director Share Grant Retainer Committee Chair Cash Retainers (3) Audit and HRC Committees Chairs Other Committees Chairs C ommittee Member Cash Retainer 175,000 375,000 35,000 200,000 (1) The non-executive directors (including the Board Chair) may choose to receive all or part of their cash retainers in common shares or DSUs (see the following Compensation Tables for details) and their common share grant retainer can also be received in DSUs. The common shares are purchased on the open market. (2) The Board Chair receives no additional director retainer nor committee chair or committee member retainer. (3) Committee chairs receive no additional committee chair or committee member retainer. 75,000 65,000 55,000 Compensation Table in Canadian Dollars (1) The table below reflects in detail the compensation earned by the Companys non-executive directors in the 12-month period ended December 31, 2017, in accordance with the disclosure rules issued by the Canadian Securities Administrators (the CSA). Directors compensation has been set in U.S. dollars since 2002 and the fluctuation in the exchange rate affects year-over-year comparability. Please see footnote 1 in the below table for currency exchange information and the Compensation Table in U.S. dollars. FEES EARNED (C$) PERCENTAGE OF TOTAL FEES RECEIVED IN COMMON DIRECTOR ANDCOMMITTEE CHAIR & BOARD CHAIR COMMITTEE MEMBER CASH RETAINER CASH RETAINER SHARE-BASED AWARDS (3) (C$) ALL OTHER COMPENSATION (C$) TOTAL CASH RETAINERS (2) TOTAL (C$) SHARES AND/OR DSUs (5) DIRECTOR CURRENT DIRECTORS (1) All directors earned compensation in U.S. dollars. The directors and the Board Chair may choose to receive all or part of their cash retainers in common shares or DSUs, and may also choose to receive their common share grant retainer in DSUs. Compensation received in cash was converted to Canadian dollars using the average rate of exchange of the Bank of Canada for 2017 (U.S.$1.00 = C$1.2986). Compensation elected to be received in common shares or DSUs was converted to Canadian dollars using the rate of exchange of the Bank of Canada (U.S.$1.00 = C$1.3098), on the purchase day (January 26, 2017). Such compensation elected to be received in common shares or DSUs by Ms. Shauneen Bruder and Ms. Julie Godin were converted to Canadian dollars using the rate of exchange of the Bank of Canada (U.S.$1.00 = C$1.3500) on May 31, 2017. (2) The following directors elected to receive cash retainers in common shares or DSUs with respect to the amounts set forth beside their names: Shauneen Bruder (C$91,126), Donald J. Carty (C$144,078), Julie Godin (C$91,126), the Hon. Kevin G. Lynch (C$130,980), and Laura Stein (C$117,882). (3) Represents a common share grant valued at U.S.$200,000 received by each non-executive director as part of the Director Retainer and U.S.$375,000 for the Board Chair as part of the Board Chair Retainer. See Note 1 for currency conversion information. (4) Includes the value of insurance premiums for 2017 for North American emergency protection outside Mr. Paces province of residence. The annual cost to the Company for such benefits was C$1,978.58. (5) This percentage is calculated by dividing the aggregate of the cash retainer elected by non-executive directors to be received in common shares or DSUs described in note (1) above and the value provided under the share-based awards column, by the value provided under the total column. The calculations are based on the directors U.S. dollar denominated compensation. (6) Shauneen Bruder and Julie Godin were elected to the Board of Directors on April 25, 2017. 18 BOARD OF DIRECTORS COMPENSATION CN MANAGEMENT INFORMATION CIRCULAR 2018 Shauneen Bruder (6) 35,43855,68891,126180,000271,126100% Donald J. Carty 45,84398,235144,078261,960406,038100% Ambassador Gordon D. Giffin 45,45197,395142,846261,960404,80665% Julie Godin (6) 35,43855,68891,126180,000271,126100% Edith E. Holiday 45,45184,409129,860261,960391,82067% V. Maureen Kempston Darkes 45,45184,409129,860261,960391,82067% The Hon. Denis Losier 45,45184,409129,860261,960391,82067% The Hon. Kevin G. Lynch 45,84385,137130,980261,960392,940100% James E. OConnor 45,45184,409129,860261,960391,82067% Robert Pace 227,255227,255491,1751,979 (4) 720,40968% Robert L. Phillips 45,45171,423116,874261,960378,83469% Laura Stein 45,84372,039117,882261,960379,842100% TOTAL 708,366873,2411,581,6073,208,8151,9794,792,40181%
Compensation Table in U.S. Dollars The table below reflects in detail the compensation earned by the Companys non-executive directors in U.S. dollars in the 12-month period ended December 31, 2017. Fees Earned (U.S.$) DIRECTOR AND COMMITTEE CHAIR & COMMITTEE MEMBER CASH RETAINER BOARD CHAIR CASH RETAINER SHARE BASED AWARDS NAME OF DIRECTOR TOTAL CASH RETAINERS TOTAL (1) Shauneen Bruder and Julie Godin were elected to the Board of Directors on April 25, 2017. (2) Excludes the value of insurance premiums for 2017 for North American emergency protection outside Mr. Paces province of residence. The annual cost to the Company for such benefits was C$1,978.58. Share Ownership The directors of the Company play a central role in enhancing shareholder value and each has a substantial investment in the Company. The Board has adopted a guideline to the effect that each non-executive director should own, within five years of joining the Board, common shares, DSUs or similar share equivalents of CN, if any, (CN Securities) with a value of at least the higher of: (i) C$500,000, or (ii) the Concurrent with the changes made to the compensation structure effective in 2015, the share ownership requirements for non-executive directors were modified to include the requirement that each director hold CN Securities with a value of at least the higher of: (i) C$250,000 or (ii) 50% of the Minimum Shareholding Requirement, for a period of two years after the director leaves the Board. Approximately 81% of the total annual compensation of the non-executive directors for Directors ownership requirement for two years beyond board tenure aligns with longer-term stewardship. Directors are required to be paid at least 50% in the form of equity until they attain their share ownership requirements. Canadian dollar equivalent of three times the aggregate of the annual director retainer (which includes cash and the value of any grant of CN Securities and in the case of the Board Chair, the aggregate of the annual Board Chair retainer in cash and the value of any grant of CN Securities) (the Minimum Shareholding Requirement). Each non-executive director is 2017 was in the form of CN Securities. The average value of CN Securities owned by non-executive directors is approximately C$10.2 million (based on the February 26, 2018 closing price of the common shares of the Company on the TSX (C$100.04), or the New York Stock Exchange (NYSE) (U.S.$78.97) for U.S. directors). required to continue to hold such value throughout his or her tenure as a director and the CN Securities held to comply with the Minimum Shareholding Requirement shall not be, during the directors tenure, the object of specific monetization procedures or other hedging procedures to reduce the exposure related to his or her holding. Each non-executive director is required to receive at least 50% of his or her annual director, committee, Board Chair and committee chair cash retainers in CN Securities and may elect to receive up to 100% of such retainers in CN Securities until his or her Minimum Shareholding Requirement is met. Once the Minimum Shareholding Requirement is met, directors may continue to elect to receive up to 100% of such retainers in CN Securities. 19 CN MANAGEMENT INFORMATION CIRCULAR 2018 BOARD OF DIRECTORS COMPENSATION Shauneen Bruder (1) 26,25041,25067,500133,333200,833 Donald J. Carty 35,00075,000110,000200,000310,000 Ambassador Gordon D. Giffin 35,00075,000110,000200,000310,000 Julie Godin (1) 26,25041,25067,500133,333200,833 Edith E. Holiday 35,00065,000100,000200,000300,000 V. Maureen Kempston Darkes 35,00065,000100,000200,000300,000 The Hon. Denis Losier 35,00065,000100,000200,000300,000 The Hon. Kevin G. Lynch 35,00065,000100,000200,000300,000 James E. OConnor 35,00065,000100,000200,000300,000 Robert Pace 175,000175,000375,000550,000(2) Robert L. Phillips 35,00055,00090,000200,000290,000 Laura Stein 35,00055,00090,000200,000290,000 TOTAL 542,500667,5001,210,0002,441,6673,651,667
Share Ownership Table The following table provides information on the number and the value of common shares and DSUs owned by each nominee for election to the Board of Directors as at February 26, 2018, and the Minimum Shareholding Requirement status. 2017 2017 TOTAL NUMBER TOTAL VALUE NUMBER OF COMMON TOTAL VALUE 2017OF COMMON OF COMMON GUIDELINE MET SHARES OR INVESTMENT OF COMMON TOTAL VALUE SHARES OWNED, VALUE AT RISK AS MULTIPLE OF SHAREHOLDING REQUIREMENT SHARES OWNED, CONTROLLED OR DIRECTED SHARES (VALUE OF DSUs CONTROLLED OR AND DSUsREQUIRED TO (VALUE AT RISK) (3) MEET GUIDELINE AT RISK) (3) (C$) (VALUE AT RISK) (3) DIRECTED NUMBER OF DSUs HELD (2) YEAR (1) AND DSUs (2) DIRECTOR (C$) (C$) (C$) (1) The number of common shares and DSUs held by each director for 2018 is set out as at February 26, 2018, and for 2017, is set out as at February 27, 2017. (2) Includes DSUs elected as part of directors compensation. (3) The total value is based on the February 26, 2018 closing price of the common shares on the TSX (C$100.04) or, for Donald J. Carty, Ambassador Gordon D. Giffin, Edith E. Holiday, James E. OConnor and Laura Stein, the NYSE (U.S.$78.97) converted into Canadian dollars using the closing exchange rate (U.S.$1.00 = C$1.2686) on the same date. Directors Deferred Share Unit Plan Subject to the Minimum Shareholding Requirement, 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 DSUs. They may also elect to receive their common share grant retainer in DSUs. Each DSU entitles the beneficiary thereof to receive upon resignation, retirement or death, one common share of the Company purchased on the open market, plus additional DSUs reflecting dividend equivalents. Each director has an account where notional DSUs are credited and held until the director leaves the Board. The number of DSUs credited to each directors account is calculated by dividing the amount elected to be received in DSUs by the non-executive director by the common share price on the day the credit is made. Participants in the DSU Plan are credited additional notional DSUs that are equivalent to the dividends declared on the Companys common shares. The number of DSUs is calculated using the methodology described above, using the total notional dividend amount and the share price on the dividend payment date. Such additional DSUs are credited to each non-executive directors account on each dividend payment date. When a non-executive director leaves the Board, the Company is required to deliver to such director a number of common shares purchased on the open market equivalent to the number of DSUs held by the director in the DSU Plan, taking into account the appropriate tax withholdings. All administration costs as well as any brokerage fees associated with the purchase and delivery of common shares are supported by CN. 20 BOARD OF DIRECTORS COMPENSATION CN MANAGEMENT INFORMATION CIRCULAR 2018 Shauneen Bruder 20186,2906,290 2017629,252629,252265,1111 VARIATION 6,2906,290 Donald J. Carty 201877,75920,02997,788 201768,8027,790,00119,7102,006,53288,5129,796,53311 VARIATION 8,9573199,276 Ambassador Gordon D. Giffin 201848,57150,22498,795 201746,5604,865,90848,9275,031,50895,4879,897,41611 VARIATION 2,0111,2973,308 Julie Godin 20186,2906,290 2017629,252629,252265,1111 VARIATION 6,2906,290 Edith E. Holiday 201869,49736,536106,033 201774,6796,962,30334,7103,660,226109,38910,622,52812 VARIATION(5,182) 1,826(3,356) V. Maureen Kempston Darkes 2018136,02854,781190,809 2017133,66813,608,24153,9095,480,291187,57719,088,53221 VARIATION 2,3608723,232 The Hon. Denis Losier 2018172,254119,047291,301 2017174,25417,232,290114,66311,909,462288,91729,141,75233 VARIATION(2,000) 4,3842,384 The Hon. Kevin G. Lynch 201821,31221,312 201717,2382,132,05217,2382,132,0522 VARIATION 4,0744,074 James E. OConnor 201830,92730,927 201728,4123,098,30828,4123,098,3083 VARIATION 2,5152,515 Robert Pace 2018205,457121,265326,722 2017200,55720,553,918114,66612,131,351315,22332,685,26916 VARIATION 4,9006,59911,499 Robert L. Phillips 20189,62516,49726,122 20177,625962,88513,7451,650,36021,3702,613,2453 VARIATION 2,0002,7524,752 Laura Stein 201820,56820,568 201716,6322,060,53016,6322,060,5302 VARIATION 3,9363,936
Statement of Corporate Governance Practices General We are committed to adhering to the highest standards of corporate governance and our corporate governance practices were designed in a manner consistent with this objective. The role, specific mandate and functioning rules of the Board of Directors and of each of its committees are set forth in our Corporate Governance Code of Business Conduct Our Code of Business Conduct is applicable to all directors, officers and employees of CN. We expect everyone working on our Companys behalf, including consultants, agents, suppliers and business partners, to obey the law and adhere to high ethical standards. The Code of Business Conduct addresses many important matters, including conflicts of interest, protection and proper use of corporate assets and opportunities, confidentiality of corporate information, fair dealing, compliance with laws and reporting of any illegal or unethical behaviour. The Corporate Governance and Nominating Committee and CNs Corporate Governance Manual is revised regularly with a view to continually improving our practices by assessing their effectiveness and comparing them with evolving best practices, changing circumstances and our needs. Manual which was formally approved by the Board of Directors on January 21, 2003, and last amended on December 15, 2017. Our Corporate Governance Manual is available on our website at www.cn.ca, under Delivering Responsibly/Governance. It is revised regularly with a view to continually improving our practices by assessing their effectiveness and comparing them with evolving best practices, changing circumstances and our needs. Our Corporate Governance Manual forms part of the documentation given to all persons elected or appointed to the Board of Directors. CNs Code of Business Conduct clearly communicates CNs organizational mission, values, and principles; and, most importantly, serves as a reference guide for employees to support everyday decision making. the Board of Directors review and update the Code of Business Conduct regularly to ensure that it is consistent with current industry trends and standards; clearly communicates CNs organizational mission, values, and principles; and, most importantly, serves as a reference guide for employees to support everyday decision making. Although waivers to the Code of Business Conduct may be granted in exceptional circumstances, no waiver has ever been granted to a director or executive officer in connection therewith. As a Canadian reporting issuer with securities listed on the TSX and the NYSE, our corporate governance practices comply with applicable rules adopted by the CSA, applicable provisions of the U.S. Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) and related rules of the SEC. We are exempted from complying with many of the NYSE corporate governance rules, provided that we comply with Canadian governance requirements. Except as summarized on our website at www.cn.ca, under Delivering Responsibly/Governance, our governance practices comply with the NYSE corporate governance rules in all significant respects. The CSA adopted, in June 2005, National Instrument 58-101 Disclosure of Corporate Governance Practices (as amended from time to time, the Disclosure Instrument) and National Policy 58-201 Corporate Governance Guidelines (as amended from time to time, the Governance Policy). The Governance Policy provides guidance on governance practices to Canadian issuers, while the Disclosure Instrument requires issuers to make the prescribed disclosure regarding their own governance practices. The Company believes that its corporate governance practices meet and exceed the requirements of the Disclosure Instrument and the Governance Policy. The text set forth hereunder refers to the items of the Disclosure Instrument as well as to the guidelines of the Governance Policy, where applicable. The Company also refers, where appropriate, to the NYSE Corporate Governance Standards (the NYSE Standards). The Board of Directors is of the opinion that the Companys corporate governance practices are well designed to assist the Company in achieving its principal corporate objective, which is the enhancement of shareholder value. The mandate of the Board is set out in Schedule A to this Information Circular. The Board of Directors has approved the disclosure of the Companys governance practices described below, on the recommendation of the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee reviews, monitors and oversees the disclosure relating to the Companys Code of Business Conduct. Each year, management reports to such committee on the implementation of the Code of Business Conduct within the organization and on any significant contravention of the Code of Business Conduct by employees of the Company. The Office of the Ombudsman offers a confidential, neutral and informal avenue which facilitates fair and equitable resolutions to concerns arising within the Company. Yearly, the CN Ombudsman presents a report that summarizes all cases logged and handled by the Office of the Ombudsman to the Corporate Governance and Nominating Committee. The Company believes that ethical business conduct is an important part of its success. Hence, the mandate of the Board attached as Schedule A to this Information Circular states that the Board has the responsibility for overseeing management in the competent and ethical operation of the Company. 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 CNs core values of integrity and respect. The Code of Business Conduct is regularly reviewed to ensure it reflects those core values and remains consistent with industry trends and standards. 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. To further strengthen our core values of integrity and respect, a live training course on Doing the Right Thing was provided to all managers in 2017. This training reflected the importance of protecting CNs reputation, understanding what Doing the Right Thing means and how to identify and avoid potential conflict of interest situations. This training is also part of every new employees onboarding program. 21 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF CORPORATE GOVERNANCE PRACTICES
As part of such ethics program, employees are required to avoid outside interests that may impair or appear to impair the effective performance of their responsibilities to the Company, and be fair and impartial in all dealings with customers, suppliers and partners. Employees must report to their manager any real or potential conflict of interest, and as required, provide written disclosure of such conflict. Similarly, the Board requests that every director disclose any direct or indirect interest he or she has in any organization, business or association, which could place the director in a conflict of interest. Every year, a questionnaire is sent to each director to ensure that the director is in no such conflict that has not been disclosed. Should there be a discussion or decision relating to an organization, business or association in which a director has an interest, the Board will request that such director not participate or vote in any such discussion or decision. The Board of Directors also adopted procedures allowing interested parties (i) to submit accounting and auditing complaints or concerns to CN; and (ii) to communicate directly with the Board Chair, who presides over all non-executive director sessions. These procedures are described on our website at www.cn.ca, under Delivering Responsibly/Governance. The Code of Business Conduct provides that concerns of employees regarding any potential or real wrongdoing in terms of accounting or auditing matters may be submitted confidentially through CNs Hotline. The Code of Business Conduct is available on our website at www.cn.ca, under Delivering Responsibly/Governance and in print to any shareholder who requests a copy by contacting our Corporate Secretary. The Code of Business Conduct has also been filed with the Canadian and U.S. securities regulatory authorities. Independent Chair of the Board The Companys Board has been led by a non-executive Chair since it became public in 1995 and we believe that the separation of the positions of President and Chief Executive Officer and Chair of the Board contributes to allowing the Board to function independently of management. Our Corporate Governance Manual provides that the Board Chair must be an independent director who is designated by the Board. The Corporate Governance Manual describes the responsibilities of the Chair of the Board. The key role of the Board Chair is to take all reasonable measures to ensure that the Board (i) has structures and procedures in place to enable it to function independently of management; (ii) carries out its responsibilities effectively; and (iii) clearly understands and respects the boundaries between the responsibilities of the Board and those of management. Mr. Pace, who is the current independent Chair, became Chair of the Board on April 23, 2014. Position Descriptions Our Corporate Governance Manual includes position descriptions for the Board Chair and the Committee Chairs, as well as a position description for the President and Chief Executive Officer of the Company. Committees of the Board Given our size, nature and geographical scope of our activities and the great number of laws and regulations to which we are subject, the Board of Directors has subdivided its supervision mandate into six areas and has established committees that have certain responsibilities for such areas. These committees are the Audit Committee, the Finance Committee, the Corporate Governance and Nominating Committee, the Human Resources and Compensation Committee, the Environment, Safety and Security Committee and the Strategic Planning Committee and their charters are available as part of CNs Corporate Governance Manual. The Board of Directors also established the Pension and Investment Committee and the Donations and Sponsorships Committee, which are mixed committees composed of members of the Board of Directors as well as officers of the Company. Each committee reports to the Board of Directors and, subject to certain limited exceptions, there are no standing delegations of the Board of Directors decision-making authority to any committees. A report of each committees activities over the past year can be found at Schedule B of this Information Circular. The following is a brief summary of the mandate of each committee of the Board of Directors. Independence of Directors To better align the interests of the Board of Directors with those of our shareholders, all of the nominees for election to the Board of Directors are independent. In determining whether a director is an independent director, the Board of Directors applies the standards developed by the Canadian securities regulatory authorities, the NYSE and the additional standards adopted by the Board. These standards are set out in CNs Corporate Governance Manual which is available on our website at www.cn.ca, under Delivering Responsibly/Governance. All of the nominees for election to the Board of Directors are independent. As shown in the accompanying table, all of the 12 nominees for election to the Board of Directors are independent: INDEPENDENCE STATUS Audit Committee The Audit Committee has the responsibility of overseeing the Companys financial reporting, monitoring risk management, internal controls and internal and external auditors. The mandate of the Audit Committee is further described in Schedule C Additional Audit Committee Disclosure and in its charter which is included in our Corporate Governance Manual. The charter of the Audit Committee provides that it must be composed solely of independent directors. As at March 6, 2018, each member of the Audit Committee is independent. No member of the Audit Committee receives, other than in his or her capacity as a director or member of a Board committee, directly or indirectly, any fee from the Company or any subsidiary of the Company, nor is an affiliated person of the Company, or any subsidiary of the Company. NAME INDEPENDENT NON-INDEPENDENT Finance Committee The Finance Committee has the responsibility of overseeing the Companys financial policies, and authorizing, approving and recommending financial activities. As part of these responsibilities, the Finance Committee provides oversight with respect to our capital structure, dividend policy, share repurchase program, cash flows and key financial ratios, reviews the opportunities and parameters for debt or equity financing, reviews 22 STATEMENT OF CORPORATE GOVERNANCE PRACTICES CN MANAGEMENT INFORMATION CIRCULAR 2018 Shauneen Bruder Donald J. Carty Ambassador Gordon D. Giffin Julie Godin Edith E. Holiday V. Maureen Kempston Darkes The Hon. Denis Losier The Hon. Kevin G. Lynch James E. OConnor Robert Pace Robert L. Phillips Laura Stein
financing documents and, within the scope of its authority levels established by the Board, may authorize the borrowing of money, the issuing of debt securities or other forms of financing, and makes recommendations to the Board thereon. The responsibilities, powers and operation of the Finance Committee are further described in its charter which is included in our Corporate Governance Manual. Strategic Planning Committee The Strategic Planning Committee, which is composed of all of the members of the Board of Directors, focuses on financial and strategic issues, including the review of the key assumptions, as well as the economic, business, regulatory and competitive conditions underlying the Companys business plan. It also reviews, with the President and Chief Executive Officer and other appropriate executive officers, the Companys business plan and capital budget prior to their formal approval by the Board of Directors. The responsibilities, powers and operation of the Strategic Planning Committee are further described in its charter which is included in our Corporate Governance Manual. Pension and Investment Committee The Pension and Investment Committee, which is a mixed committee composed of directors and officers, has historically had the responsibility, amongst other things, of reviewing the activities of the CN Investment Division (CNID), reviewing and approving CNID Incentive Plan and award payouts thereunder, advising CNID on investment of assets of CNs Pension Trust Funds and approving certain of the investments made by CNs Pension Trust Funds. At the end of 2017, the Board approved changes to the pension governance structure to further enhance the existing focus on both pension assets and liabilities, by establishing a more formal information sharing mechanism between CNID and CN management and by enhancing Board coordination and oversight over pension liability issues. The Committee was renamed the Pension and Investment Committee (formerly known as the Investment Committee of CNs Pension Trust Funds) and its mandate was enhanced by including the review of pension-related matters more broadly. While current responsibilities were retained, the Pension and Investment Committee is now informed of all matters related to pension liabilities or that are otherwise relevant in developing CNs pension risk management strategy and pension plan design. The change is intended to reinforce an integrated approach to pension management with a focus on the funded status of CNs defined benefit plans and associated risks. The responsibilities, powers and operation of the Pension and Investment Committee are further described in its charter which is included in our Corporate Governance Manual. Donations and Sponsorships Committee The Donations and Sponsorships Committee, which is a mixed committee composed of directors and officers, has the responsibility, amongst other things, of developing a donations and sponsorships strategy and for reviewing and approving donation and sponsorship requests. The responsibilities, powers and operation of the Donations and Sponsorships Committee are further described in its charter which is included in our Corporate Governance Manual. Corporate Governance and Nominating Committee The Corporate Governance and Nominating Committee has the responsibility of monitoring the composition of the Board of Directors and its committees and overseeing corporate governance matters. As part of its responsibilities, the Corporate Governance and Nominating Committee develops, reviews and monitors criteria for selecting directors, including required or desired competencies and skills to improve the Board of Directors and, in consultation with the Board Chair, identifies candidates qualified to become Board members. This Committee reviews the corporate governance guidelines applicable to the Company, recommends any change that should be made thereto and monitors the disclosure of its practices. The responsibilities, powers and operation of the Corporate Governance and Nominating Committee are further described in its charter which is included in our Corporate Governance Manual. The charter of the Corporate Governance and Nominating Committee provides that it must be composed solely of independent directors. As at March 6, 2018, each member of the Corporate Governance and Nominating Committee is independent. Human Resources and Compensation Committee The Human Resources and Compensation Committee has the responsibility of monitoring executive managements performance assessment and succession planning. This Committee also has the mandate to review human resources practices by ensuring, amongst other things, that appropriate human resources systems are in place so that the Company can attract, motivate and retain the quality of personnel required to meet its business objectives. The mandate of the Human Resources and Compensation Committee is further described in the section entitled Statement of Executive Compensation Human Resources and Compensation Committee on page 36 of this Information Circular and in its charter which is included in our Corporate Governance Manual. The charter of the Human Resources and Compensation Committee provides that it must be composed solely of independent directors. As at March 6, 2018, each member of the Human Resources and Compensation Committee is independent. The Board has adopted a policy, which is included in our Corporate Governance Manual, that no more than one in three members of the Human Resources and Compensation Committee shall be a sitting CEO of another company, at least one member shall be experienced in executive compensation, and the President and CEO of the Company shall be excluded from the Committee member selection process. Reference is also made to the subsection entitled Statement of Executive Compensation Human Resources and Compensation Committee Independent Advice on page 37 of this Information Circular for disclosure in respect of the executive compensation consultant. Risk Management Oversight At CN, the Board is entrusted with the responsibility to oversee that management identifies and evaluates the significant business risks that the Company is exposed to and implements processes and programs to manage these risks. A significant risk is generally defined as an exposure that has the potential to materially impact CNs ability to meet or support its business objectives. The Board achieves this risk oversight through strategic overviews of significant risks and issues, and business updates with the President and Chief Executive Officer, and executives. The overviews may cover among others, risks related to: general economic conditions; foreign currency; capital investments; information technology and cybersecurity; environnement; existing operations, such as labour disputes; and developments in regulations: tax legislation and safety regulations. Environment, Safety and Security Committee The Environment, Safety and Security Committee has the responsibility, amongst other things, of overseeing the development and implementation of environmental, safety and security policies, assessing environmental, safety and security practices, and reviewing the Companys business plan to ascertain whether environmental, safety and security issues are adequately taken into consideration. The responsibilities, powers and operation of the Environment, Safety and Security Committee are further described in its charter which is included in our Corporate Governance Manual. 23 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF CORPORATE GOVERNANCE PRACTICES
Company officers provide, to the Board or one of its committees, regular presentations and updates on the execution of business strategies, business opportunities, risk and safety management, ethical conduct, and detailed reports on specific risk issues. The risk oversight responsibility is shared between the Board and its committees. The Board delegates responsibility for oversight of certain risk elements to the various committees in order to ensure appropriate expertise, attention and diligence. The Board may use external resources when appropriate to assess enterprise risk and management processes. Risk information is reviewed by the Board and/or committees of the Board throughout the year. The ERM program provides a common risk management framework/ environment to identify, assess, monitor, and mitigate key business risks. Management provides to the Audit Committee an annual ERM update. Risks are given a rating based on an assessment of inherent risk, after considering mitigating processes and controls in place. Each risk is assigned to members of senior management who develop and implement controls to mitigate the risks. In addition, the Audit Committee requests that an independent review of the mitigating controls be performed on the identified risks on a rotational basis. For a detailed explanation of the material risks applicable to CN and its affiliates, see the section entitled Business risks in CNs Managements Discussion and Analysis included in CNs 2017 Annual Report, available on SEDAR at www.sedar.com, on the SEC website at www.sec.gov through EDGAR and on CNs website at www.cn.ca. COMMITTEE KEY RISKS OVERSEEN Financial Taxation Business Interruption Information and Operational Technology Security Cybersecurity ERM Framework (Program) Compliance with Laws and Regulations Board and Committee Meetings Process The Board Chair, in collaboration with the Corporate Secretary, has the responsibility of establishing a schedule for the meetings of the Board of Directors and its committees. During this process, the Corporate Secretary, in collaboration with the Board and committee Audit Credit Commodity Price Interest Rate Foreign Currency Liquidity Pension Funding chairs and the appropriate executive officers, establishes Board and committee working plans for the year. We believe that proceeding in this manner helps in the preparation of in-depth presentations conducive to meaningful information sessions and discussions while allowing management to plan ahead. If, during the course of the year, events or circumstances Finance Meaningful information sessions and discussions are a result of preparation and established meeting schedules. Corporate Governance & Nominating Compliance and Ethics Human Capital Compensation Succession Planning Employee Benefit Obligations Pension Plan Human Resource & Compensation require Board or committee action or consideration, additional meetings are called. The total number of meetings and the attendance record for each director for all Board and committee meetings held during the course of 2017 are set out in the section entitled Statement of Corporate Governance Practices Board and Committee Attendance of this Information Circular. Communication regularly takes place between the Board Chair and the Companys executives and, through the Office of the Corporate Secretary, between executive officers having responsibilities for matters placed under the supervision of particular committees and the Chairs of such committees. This open communication ensures that all meaningful information concerning the affairs and progress of the Company are transmitted to those members of the Board of Directors or committees having special supervisory responsibilities. Health & Safety Injury and Accident Security Regulatory Environmental Environment, Safety and Security Economic Market Competitive Regulatory Strategic Planning Pension Investment Pension Plan Pension & Investment The Audit Committee is responsible for ensuring that appropriate risk management processes are in place across the organization. It considers the effectiveness of the operation of CNs internal control procedures and reviews reports from CNs internal and external auditors. As part of its risk oversight activities, the Audit Committee ensures that significant risks identified are referred to a Board committee or the Board, as appropriate. Specifically, the Audit Committee reviews the Companys risk assessment and risk management policies under the Enterprise Risk Management (ERM) program. As such, cybersecurity risk oversight was expanded in 2016 with increased reporting by management to the Audit Committee. Management undertakes an enterprise-wide process to identify, classify, assess and report on CNs significant risks and mitigation strategies. In Camera Meetings The independent Board members meet at or after every regular in-person meeting of the Board of Directors during in camera sessions, without the presence of management and under the chairmanship of the Board Chair. During the financial year ended December 31, 2017, there were 9 in camera sessions that were attended exclusively by non-executive directors. 24 STATEMENT OF CORPORATE GOVERNANCE PRACTICES CN MANAGEMENT INFORMATION CIRCULAR 2018
Board and Committee Attendance The following tables show the record of attendance for each director at meetings of the Board and its committees, as well as the number of Board and Board committee meetings held during the 12-month period that ended on December 31, 2017. Attendance Table NUMBER AND % OF MEETINGS ATTENDED HUMAN CORPORATE GOVERNANCE AND NOMINATING COMMITTEE DONATIONS AND SPONSOR-SHIPS COMMITTEE ENVIRON-MENT RESOURCES ANDPENSION SAFETY AND SECURITY COMMITTEE COMPENSA-AND STRATEGIC PLANNING COMMITTEE AUDIT COMMITTEE FINANCE COMMITTEE TIONINVESTMENT COMMITTEES (TOTAL) OVERALL ATTENDANCE COMMITTEE (2) COMMITTEE DIRECTOR BOARD (1) Shauneen Bruder and Julie Godin were elected to the Board of Directors on April 25, 2017 and were appointed as a member of their respective Committees as of such date. (2) In addition to committee members, all non-executive board members attended the meetings of the Human Resources and Compensation Committee held in January, April and December. Meeting Held Table NUMBER OF MEETINGS HELD IN 2017 BOARD AND BOARD COMMITTEE MEETINGS Board Audit Committee Corporate Governance and Nominating Committee Donations and Sponsorships Committee Environment, Safety and Security Committee Finance Committee Human Resources and Compensation Committee Pension and Investment Committee Strategic Planning Committee 9 5 4 3 4 5 6 3 3 25 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF CORPORATE GOVERNANCE PRACTICES Shauneen Bruder (1) 5/52/2 3/3 3/3 2/22/212/12 17/17 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) Donald J. Carty 9/95/54/44/4 6/6 3/322/22 31/31 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) (Chair) Ambassador Gordon D. Giffin 9/95/53/3 6/6 3/3 3/320/20 29/29 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) (Chair) Julie Godin (1) 5/52/22/2 3/3 3/32/212/12 17/17 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) Edith E. Holiday 9/95/5 5/5 6/6 3/3 3/322/22 31/31 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) (Chair) Luc Jobin 9/93/3 3/36/6 15/15 (100%)(100%)(100%)(100%)(100%) (Chair) V. Maureen Kempston Darkes 9/95/54/44/4 5/5 3/321/21 30/30 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) (Chair) The Hon. Denis Losier 9/94/43/3 6/6 3/3 3/319/19 28/28 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) (Chair) The Hon. Kevin G. Lynch 9/94/4 5/5 6/6 3/33/321/2130/30 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) (Chair) James E. OConnor 9/95/54/4 5/5 6/6 3/323/23 32/32 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) (Chair) Robert Pace 9/9 4/4 3/3 4/4 3/3 14/14 23/23 (100%) (100%) (100%) (100%) (100%) (100%) (100%) (Chair) Robert L. Phillips 9/95/54/44/4 6/6 3/322/22 31/31 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%) Laura Stein 9/95/54/4 5/5 6/6 3/323/23 32/32 (100%)(100%)(100%)(100%)(100%)(100%)(100%)(100%)
Director Selection Review of Credentials In consultation with the Board Chair, the Corporate Governance and Nominating Committee annually reviews the credentials of nominees for election or re-election as members of the Board of Directors. It considers their qualifications, the validity of the credentials underlying each nomination, and, for nominees who are already directors of the Company, an evaluation of their effectiveness and performance as members of the Board of Directors, including their attendance at Board and committee meetings. Board and Board committee members are expected to attend all meetings. As stated in our Corporate Governance Manual, any director who has attended less than 75% of meetings of the Board or meetings of committees on which they sit, for more than two consecutive years, without a valid reason for the absences, will not be renominated. The Corporate Governance and Nominating Committee monitors and is constantly on the lookout for new candidates for nomination to the Board of Directors and is mindful of the mandatory retirement dates of current directors. The Corporate Governance and Nominating Committee regularly reviews its competency matrix with a view of expanding the Boards overall experience and expertise and filling any gaps so that the needs of the Board are met. The Corporate Governance and Nominating Committee and the Board have approved the matrix set out on page 27 of this Information Circular. In order to assist the Corporate Governance and Nominating Committee and the Board Chair in recommending candidates to become directors of CN, the Corporate Governance and Nominating Committee has constituted, together with the Board Chair, an evergreen list of potential Board candidates, which it updates from time to time. Prior to nominating a new director for election or appointment, the Board Chair and the President and Chief Executive Officer meet with the candidate to discuss his or her interest and willingness to serve on CNs Board, potential conflicts of interest, and his or her ability to devote sufficient time and energy to the Board of Directors. In 2016, in the process of searching for qualified persons to serve on the Board, the Corporate Governance and Nominating Committee examined its competency matrix, with a view to expanding the Boards overall experience and expertise and developed a set of criteria that focused particularly on diversity, including diversity of gender, background and skills for the Board. To accomplish this the Corporate Governance and Nominating Committee retained an external firm to help with the recruitment of two additional directors to join the Board in 2017. This sustained and rigorous process by which CN attracts and recruits new members to its Board ultimately brings new perspectives and diversity to the Board. See the following section entitled Board Diversity for additional information on the director selection process. Competency Matrix The Corporate Governance and Nominating Committee, together with the Board Chair, is responsible for determining the needs of the Board in the long term and identifying new candidates to stand as nominees for election or appointment as directors. The last few years, the Corporate Governance and Nominating Committee and the Board Chair focused on board renewal and succession in light of upcoming director retirements and on expanding and completing the Boards overall expertise in certain areas and diversity. The Board Chair and the Corporate Governance and Nominating Committee continue to engage in an ongoing, in-depth succession planning process. Board renewal and succession has been an item at most meetings of the Corporate Governance and Nominating Committee. In proposing the list of Board nominees, the Board of Directors is guided by the process described in our Corporate Governance Manual. As part of the process, the Board Chair, in consultation CNs competency matrix is based on areas of knowledge, expertise, diversity, age, gender and geography, and identifies any gaps to be addressed in the nomination process. with the Corporate Governance and Nominating Committee, develops a competency matrix based on knowledge areas, types of expertise, gender and geographical representation, and identifies any gaps to be addressed in the director nomination process. The Board ensures that the skill set developed by directors, through their business expertise and experience, meets the needs of the Board. The Board also gives careful consideration to factors such as age, diversity (including gender), geographical location, competencies and experience of current directors, the suitability and performance of directors proposed for election, as well as their independence, qualifications, financial acumen, business judgment and board dynamics. This competency matrix is reviewed regularly by the Board Chair with Board members, and is updated as may be required. 26 STATEMENT OF CORPORATE GOVERNANCE PRACTICES CN MANAGEMENT INFORMATION CIRCULAR 2018
The following table identifies the competencies of each nominee for election to the Board of Directors, together with their gender, age range, tenure at CN, and residency. Description of Competencies Sales/Marketing Experience as a senior executive in a product, service or distribution company; experience in supply chain management and strong knowledge of CNs markets, customers and strategy. Finance/Accounting Experience in corporate finance, overseeing complex financial transactions, investment management; experience in financial accounting and reporting, auditing, and internal controls. Legal Experience as a senior practicing lawyer either in private practice or the legal department of a major public entity. Strategy Experience in strategic planning and leading growth for a major public entity. Human Resources Experience in oversight of compensation programs, particularly compensation programs for executive level employees and incentive based compensation programs; experience with talent management, succession planning, leadership development and executive recruitment. Engineering/ Environment Thorough understanding of the operations of the transportation industry (particularly the rail industry), environmental issues and transportation industry regulations. Transport Industry/ Safety Knowledge and experience in the transportation industry, including strategic context and business and safety issues facing the transporta-tion industry. Public Policy Experience in, or a strong understanding of, the workings of government and public policy in Canada and the United States. Board Diversity In an increasingly complex global marketplace, the ability to draw on a wide-range of viewpoints, backgrounds, skills, and experience is critical to the Companys success. Further, director and nominee diversity helps to ensure that a wide-variety of different CN believes that diversity, including gender diversity, at the board and executive officer levels of corporate leadership (and at all levels of the Company), can provide a number of potential benefits, including: access to a significant part of the potential relevant talent pool that can contribute to and lead in a variety of technical and other functional areas; unique and tangible contributions, resulting from different perspectives, experiences, concerns and sensibilities, in finance, strategy, environment, marketing, customer relations, technology, safety, mentoring and employee relations in a world of diverse customers and workforces; the potential for richer discussion and debate at the executive and board level (and at other levels of management) that may ultimately increase effectiveness in decision-making and advising functions; executive and leadership teams and boards with diverse backgrounds increase the likelihood that the perspectives and concerns of all stakeholders are represented in discussions; and signaling CNs values to various stakeholders, including employees at all levels, shareholders, customers, communities, regulators and other government officials, and the public. The Corporate Governance and Nominating Committee has developed a set of criteria for Board membership that strives to attain a diversity of background and skills for the Board. perspectives are brought to bear on issues, while enhancing the likelihood that proposed solutions will be nuanced, inclusive and comprehensive. The Board believes that diversity is an important attribute of a well-functioning board. In selecting qualified candidates to serve as directors of the Company, a wide-range of CN became a signatory to the Catalyst Accord and a member of the 30% Club in 2017. aspects of diversity are considered, including gender, race, ethnicity, culture, age, and geography and measures ensuring that the Board, as a whole, reflects a range of viewpoints, backgrounds, skills, experience and expertise. 27 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF CORPORATE GOVERNANCE PRACTICES NAME OF DIRECTOR COMPETENCIES GENDER AGE RANGE BOARD TENURE REGION SALES / MARKETING FINANCE / ACCOUNTING LEGAL STRATEGY HUMAN RESOURCES ENGINEERING/ ENVIRONMENT TRANSPORT INDUSTRY/ SAFETY PUBLIC POLICY GENDER 59 AND UNDER 60-65 66-75 0-5 YEARS 6-10 YEARS 11-15 YEARS 16 + YEARS EAST WEST SOUTH Shauneen Bruder F Donald J. Carty M Ambassador Gordon D. Giffin M Julie Godin F Edith E. Holiday F V. Maureen Kempston Darkes F The Hon. Denis Losier M The Hon. Kevin G. Lynch M James E. OConnor M Robert Pace M Robert L. Phillips M Laura Stein F
In the process of searching for qualified persons to serve on the Board, the Corporate Governance and Nominating Committee strives for the inclusion of diverse groups, knowledge, and viewpoints. To accomplish this, the Corporate Governance and Nominating Committee has in the past and may again in the future retain an executive search firm to help meet the Boards diversity objective. In connection with its efforts to create and maintain a diverse Board, the Corporate Governance and Nominating Committee has: developed recruitment protocols that seek to include diverse candidates in any director search. These protocols take into account that qualified candidates may be found in a broad array of organizations, including academic institutions, privately held businesses, nonprofit organizations, professions such as accounting, human resources and legal services and trade associations, in addition to the traditional candidate pool of corporate directors and officers; strived to use CNs network of organizations and trade groups that may help identify diverse candidates and may rely on executive search firms to identify diversity candidates as well; and periodically reviewed director recruitment and selection protocols so that diversity remains a component of any director search. Diversity and Senior Management CN recognizes the importance of having a diverse senior management group which offers a depth of perspectives and enhances the Companys operations. In fulfilling part of its oversight role, the Human Resources and Compensation Committee has reviewed CNs integrated approach to executive and high-potential talent management and succession planning. The Committee considered processes and practices for leadership development and reviewed the depth of succession pools for senior leadership roles across the Company. In this regard, CN has developed and implemented a number of Company-wide and innovative diversity initiatives relating to women. These initiatives provide training, development and mentorship opportunities to assist women employees at CN to: understand opportunities for personal and professional growth within the Company; further develop their confidence in operations; build strong partnerships with fellow employees and communities where CN has operations; and gain access to mentoring and networking opportunities. CN is committed to creating an environment of inclusion that respects the contributions and differences of every individual by encouraging collaboration, creative thinking and innovation. Board Diversity Policy CN believes that increasing the diversity of the Board to reflect the communities and customers CN serves is essential in maintaining a competitive focus. Increased board diversity can contribute to enhanced performance, ensuring the presence of valuable capabilities that non-diverse boards lack, and changing board dynamics in positive ways such as by enhancing the Boards ability to handle conflict with a wider variety of viewpoints among directors from more diverse backgrounds. CN also believes that a diverse board signals that diverse perspectives are important to the Company, and that CN is committed to inclusion. Further, as a result of CNs commitment to diversity, CN has access to a wider pool of talent and a broader mix of leadership skills. On March 10, 2015, the Corporate Governance and Nominating Committee recommended, and the Board approved, a diversity policy for the Board. It provides that the Corporate Governance and Nominating Committee, which is responsible for recommending director nominees to the Board, will consider candidates on merit, based on a balance of skills, background, experience and knowledge. In identifying the highest quality directors, the Committee will take into account diversity considerations such as gender, age and ethnicity, with a view of ensuring that the Board benefits from a broader range of perspectives and relevant experience. The Committee will also set measurable objectives for achieving diversity and recommend them to the Board for adoption. Pursuant to the policy, the Board adopted a target of having a minimum representation of one-third of the Board by women by 2017. As of December 31, 2017, five out of 13 (38%) of our Board members were women; and currently five out of 12 (42%) of our Board nominees are women. The Board Diversity Policy is available on our website at www.cn.ca, under Delivering Responsibly/Governance. In addition, the Corporate Governance and Nominating Committee considers the level of representation of women on the Board by overseeing the selection process and ensuring that sufficient numbers of women and other diverse candidates are included in the slate of candidates for Board of Directors consideration. In 2017, CN became a signatory to the Catalyst Accord, a call to action to increase the representation of women directors of Financial Post 500 boards to 25% by the end of 2017. CN also became a member of the Canadian Chapter of the 30% Club, an organization with an aspirational objective of having representation by at least 30% women on boards by 2019. By focusing efforts on attracting, recruiting, retaining and promoting the most qualified and talented people, CN will achieve its strategic business objectives. As at December 31, 2017, five of CNs 29 executive officers were women, representing In 2018, for the second year in a row, CN was recognized as one of Canadas Best Diversity Employers. 17% of the executive officer population. Women represented 16% of the Executive and Senior Management category. Instead of adopting specific gender diversity targets for senior executive positions, CN has chosen to promote an inclusive and diverse hiring approach that supports the recruitment of women candidates and provides opportunities for their advancement. Appointments are based on a balance of criteria, including merit, skill, background, experience and competency of the individual at the relevant time. Nonetheless, executive officer appointments are reviewed with our diversity and talent management objectives in mind, including the level of representation of women in executive officer positions. With upcoming retirements and development actions, we continue to have the opportunity to place diverse talent at more senior levels. These actions, in line with our continuing education and training initiatives, create additional positions for diversity within our organization. To continue to advance diverse representation, the Company sets annual hiring goals in Canada for women, visible minorities, Aboriginals and persons with disabilities. In the U.S., the Company focuses on minorities, persons with disabilities, women and veterans. Across the Companys network, 19% of employees within the Executive and Senior Management category were diverse as at December 31, 2017, 33% of all 2017 new hires identified themselves as belonging to one or more of the diverse categories, and 31% of promotions in 2017 were filled by diverse internal candidates. Lastly, as at December 31, 2017, 26% of CNs employees self-identified as being diverse. 28 STATEMENT OF CORPORATE GOVERNANCE PRACTICES CN MANAGEMENT INFORMATION CIRCULAR 2018
The strategy of building a diverse and inclusive workforce involves an integrated approach on sensitizing, recognizing and building awareness on diversity and inclusion in the workplace. To support and sustain these efforts, CN ensures that mandatory and complementary training continues to be an integral part of CNs Onboarding Program for new supervisors who manage staff. CN is honoured to be recognized as one of the top 50 Best Diverse Employers in Canada for a second consecutive year and to receive the Employment Equity Achievement Award for the Companys outstanding commitment to Employment Equity from the Canadian Government. Supported by executive management and the Board, these initiatives represent the Boards and CNs commitment to diversity and inclusion across the Company. Retirement from the Board The Board has adopted a policy on the mandatory retirement age for directors whereby a director would not, unless otherwise determined by the Board, in its discretion, be nominated for re-election at the annual meeting of shareholders following his or her 75th birthday. Board Tenure and Term Limits On November 21, 2016, the Board approved an amendment to its Tenure Policy, to the effect that any new individual nominated or elected to the Board of Directors, effective as of April 25, 2017, would be subject to term limits. Effective as of April 25, 2017, new Effective as of April 25, 2017, new members of the Board will serve for a maximum term of fourteen (14) years. members of the Board of Directors will serve for a maximum term of fourteen (14) years. The Board has also adopted a policy, which is part of CNs Corporate Governance Manual, to the effect that the Board Chair and the Committee Chair tenure would be subject to term limits. The Board of Directors is of the view Common Directorships With a view to further strengthen directors independence, the Board has adopted a policy pursuant to which a director shall not accept the invitation to join an outside board on which a director of CN already sits without previously obtaining the approval of the Corporate Governance and Nominating Committee. In addition, the Board has adopted a policy, which is included in our Corporate Governance Manual, to the effect that no more than two of the Companys directors should generally serve on the same outside board or outside board committee. As of March 6, 2018, no members of our Board of Directors served together on the boards of other public companies. Number of Directorships CN recognizes that Board membership requires a significant dedication of time. As a result, the number of boards on which an individual can serve is necessarily limited. With a view to taking reasonable steps to ensure the ability of each candidate to make the commitment of time necessary to be a director of CN, the Board will apply the following guidelines when considering candidates to become directors of CN: for candidates that are chief executive officers or other senior executives of public corporations, the Board will prefer individuals who hold no more than two (2) public corporation directorships in total (including CNs Board and membership on the board of the corporation at which an individual is employed); and for other candidates, the Board will prefer individuals who hold no more than five (5) public corporation directorships in total (including CNs Board). Directors are expected to provide the Board Chair with information as to all boards of directors that they sit on or that they have been asked to join so as to allow the Board to determine whether it is appropriate for such director to continue to serve as a member of the Board or of a Board Committee. The Corporate Governance and Nominating Committee and the Board Chair will apply Board nominee selection criteria, including directors past contributions to the Board and availability to devote sufficient time to fulfill their responsibilities, prior to recommending directors for re-election for another term. The biographies on pages 10 to 15 of this Information Circular identify the other reporting issuers of which each nominee is a director. that CNs policy on Chair term limits, together with its policy on mandatory retirement age and its new director term limits, establishes a mechanism that ensures Board Chair, committee chair, and director renewal, provides a fresh perspective in the boardroom and improves the Boards ability to plan its composition over a longer period of time. Effective as of April 23, 2014, but without regard to past service, CNs Board Chair will serve for a term of five (5) years, renewable for one further three (3) year term, subject to the discretion of the Board of Directors to further extend the term, if deemed appropriate. At the end of the term(s) as Board Chair, the departing Board Chair would not stand for election as a director of CN at the next annual shareholders meeting. The above term(s) for the Board Chair would remain subject to the mandatory retirement age limit of 75 years of age. Effective as of April 23, 2014, but without regard to past service, committee chairs will serve for a term of three (3) years, renewable for one further two (2) year term, subject to the discretion of the Board of Directors to further extend the term, if deemed appropriate. In each of the above instances, the election or appointment of the CN Board Chair or committee chairs, respectively, remains subject to annual review and election/appointment. In addition, directors are expected to inform the Board Chair of any major change in their principal occupation so that the Board will have the opportunity to decide the appropriateness of such directors continuance as a member of the Board or of a Board committee. The Board retains its discretion to extend the above term limits, which will preserve its ability to deal with special circumstances warranting the extension of the mandate. 29 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF CORPORATE GOVERNANCE PRACTICES
Director Emeritus The Board of Directors confers, from time to time, the honorary status of Director Emeritus to retiring or former directors who have made significant contributions to the Board through long and distinguished service and accomplishments. Currently, lifetime emeritus status has been bestowed upon Raymond Cyr, James Gray, Michael Armellino, Hugh Bolton, Charles Baillie, Edward Lumley and David McLean as Chairman Emeritus, as well as upon the late Purdy Crawford and the late Cedric Ritchie. Directors Emeritus are invited to attend the annual meeting of shareholders and certain Company or Board events taking place in their geographic area of residence and are reimbursed for reasonable travel and other out-of-pocket expenses in connection with attendance at such events. Peer Assessment and Independent Advisor The Board Chair leads on an annual basis a peer review process through one-on-one meetings with each individual director. In addition, the Board may, from time to time, hire an independent advisor to assist the Board of Directors in independently assessing the performance of the Board of Directors, Board committees, Board and The overall results and suggestions derived from the annual Board performance assessment are taken into consideration to improve the functioning and activities of the Board and its committees. committee chairs and individual directors. The Corporate Governance and Nominating Committee also considers on an annual basis the appropriateness of conducting a peer assessment through an independent advisor. In 2016, an outside consultant was retained to conduct a peer review. The peer evaluation process provided for feedback on the effectiveness of individual directors. Each director was given the opportunity to assess the contribution of each of his or her peers relative to the performance standards for the director Board Performance Assessment Process The Board of Directors has implemented, and reviews, from time to time, a comprehensive process to annually assess its effectiveness, the effectiveness of its committees, the Board Chair, the committee chairs and individual directors. This process is under the supervision of the Corporate Governance and Nominating Committee and the Board Chair and is comprised of the following steps: The following questionnaires are prepared by the Office of the Corporate Secretary and approved by the Corporate Governance and Nominating Committee and the Board Chair, taking into account current issues, the findings of previous years and input from the Board of Directors: Board and committee performance evaluation questionnaires, including a self-assessment by individual directors; Board Chair evaluation questionnaire; and Committee Chair evaluation questionnaires. Each questionnaire is then sent to every director and a complete set of the responses is forwarded to the Board Chair, except for the responses to the evaluation questionnaire relating to the Board Chair, which is forwarded directly to each of the Chairs of the Corporate Governance and Nominating Committee and the Human Resources and Compensation Committee. Following receipt of the completed questionnaires, the Board Chair contacts every director and conducts open and confidential one-on-one meetings. The purpose of these meetings is to discuss the answers received from and in respect of each director, to take into account any comments which the director may have and to review the self-evaluation of each director. One of the Corporate Governance and Nominating Committee or Human Resources and Compensation Committee Chairs also discusses individually with each director his or her responses and comments on the Board Chair evaluation questionnaire. Reports are then made by the Board Chair, the Corporate Governance and Nominating Committee and Human Resources and Compensation Committee Chairs to the Board of Directors, with suggestions to improve the effectiveness of the Board of Directors, Board committees, Board and committee chairs, and separately to individual directors in respect of their personal performance. The Board Chair and committee chairs take into consideration the overall results and suggestions derived from the annual Board performance assessment in order to improve the functioning and activities of the Board and Board committees. position description as set out in CNs Corporate Governance Manual. The results were compiled and reviewed confidentially by the outside consultant. The Chair then received the results of each directors peer assessment and met with each director to discuss his or her respective assessment. The Board performance assessment process is further described in CNs Corporate Governance Manual which is available on our website at www.cn.ca, under Delivering Responsibly/Governance. Director Orientation and Continuing Education Orientation Our orientation program includes presentations by the Companys officers on CNs organizational structure and the nature and operation of its business, a review with the Board Chair of the methods of operation and the roles of the Board and its committees, a discussion on the contribution individual directors are expected to make and access to appropriate information or outside resources as required. New directors are provided with the following: a Directors handbook containing corporate and other information required to familiarize themselves with the Company, its organization and operations and CNs key corporate governance and public disclosure documents, including CNs Corporate Governance Manual and board and committee charters; information regarding the review process for the Board, its committees and their chairs, and individual directors; CNs important policies and procedures, including CNs Code of Business Conduct; and organizational charts and other business orientation materials, including CNs Investor Fact Book, sustainability and safety brochures, financial statements and regulatory information. In addition, meetings are arranged with new directors and members of CNs Leadership team to provide an overview of their areas of responsibility and their function/department. These areas include finance, corporate services, marketing, operations, human resources and investor relations. New directors also receive presentations by the Companys officers on CNs business and operations, safety, security, sustainability, community outreach initiatives and talent development, amongst others. New directors are also invited to attend the following Company events: Annual business plan meeting with top 200 employees; Annual sales meetings; Industry conferences or CNs analyst/investor meetings; Leadership training sessions and dinners with participants; and Other company events on an ad hoc basis. 30 STATEMENT OF CORPORATE GOVERNANCE PRACTICES CN MANAGEMENT INFORMATION CIRCULAR 2018
In addition, new directors are encouraged to visit sites across CNs network relating to the Companys operations. These sites include mechanical and car shops, intermodal and engineering groups, data centres, training centres, railway yards and ports. In 2017, Board members were provided with educational reading materials and presentations on a variety of matters and topics, including corporate governance, executive compensation, executive succession planning, shareholders and shareholder associations, key accounting considerations, financial strategy, risk management and disclosure, and Canadian and U.S. securities law developments. The Board regularly received updates and reports by CNs internal counsel on regulatory matters of importance and emerging issues of significance to CN and the railway industry, such as diversity, safety and risk mitigation. In addition, in 2017, members of the Board attended courses in subject areas which included effective corporate boards, board structure, processes and composition and participated in discussion panels. Directors also interacted with executive and senior management at every Board meeting and received regular and extensive presentations on matters of strategic importance to the Companys business, including presentations on its customer engagement initiatives, safety, stakeholder and community outreach initiatives, business growth strategy, operating plans, supply chain strategy, car management, CNs sustainability initiatives, cybersecurity and regulatory matters relevant to the business of the Company. Moreover, the directors have, from time to time, been provided with first-hand opportunities to visit certain sites where CN has made significant investments. They have visited our Information Technology command centre, certain CN main yards such as Kirk Yard and the Elgin, Joliet and Eastern Railway properties in the United States. The Board has also visited CNs state-of-the-art training centre in Winnipeg, Manitoba and toured a Geometry Test Car. In 2016, the Board visited Two Harbours, Minnesota to tour CNs iron ore dock operations and the E.H. Gott vessel. The Board of Directors met with the captain and the crew as well as the CN dock and support team in Two Harbors, for an in-depth review of the vessel and dock operations. In 2017, the Board, as part of its stakeholder engagement initiatives, attended community events in Regina, Saskatchewan and Ottawa, Ontario. Continuing Education The Board recognizes the importance of ongoing director education and the need for each director to take personal responsibility for this process. To facilitate ongoing education, the Company: maintains a membership for each director in an organization dedicated to corporate governance and ongoing director education; encourages and funds the attendance of each director at seminars or conferences of interest and relevance; encourages presentations by outside experts to the Board or committees on matters of particular importance or emerging significance; and at least annually, holds a Board meeting at or near an operating site or other facility of the Company, a key customer, supplier or affiliated company. The Board Chair arranges for Board members to have access to education and information on an ongoing basis pertaining to Board effectiveness and the best practices associated with successful boards, briefings on factors or emerging trends that may be relevant to the Companys business strategy and other material as deemed appropriate by the Board Chair. The Company also makes available, at its cost, a host of educational programs provided by leading institutions. We encourage directors to attend seminars and other educational programs and to report back to the Board on the quality of such programs. Educational reading materials on corporate governance and other topics are also included in the materials provided to the Board in advance of meetings. The following table lists seminars and courses by external providers, as well as dedicated internal sessions and presentations on key CN subject matters, that the directors of the Company attended in 2017 and early 2018. SUBJECT MATTER/TOPIC PRESENTED PRESENTED/HOSTED BY ATTENDED BY SAFETY Safety Update Mechanical Data Analytics CN Safety & Environment CN Mechanical & Engineering All directors All directors CUSTOMER RELATIONS Operational and Service Excellence Updates on the use of Data Analytics Supply Management Initiatives CN Operations & Marketing CN Strategy & Innovation CN Procurement and Supply Management All directors All directors All directors INVESTOR RELATIONS Competitive Context CN Investor Relations All directors MARKETING Market Update CN Marketing All directors FINANCE KPMG Training Session External Auditors KPMG, CN Accounting Audit Committee members SUSTAINABILITY Fuel Productivity Workforce Renewal & Training Excellence CN Financial Planning CN Human Resources All directors All directors TECHNOLOGY Positive Train Control Updates Cybersecurity and Information Technology CN Information Technology CN Information Technology & Supply Management All directors All directors LAW & GOVERNMENT AFFAIRS Updates on Canadian and U.S. Regulatory and Political environment Updates on NAFTA Leading Governance and Board Diversity Practices CN Corporate Services CN Corporate Development CN Corporate Services All directors All directors All directors 31 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF CORPORATE GOVERNANCE PRACTICES
Stakeholder and Aboriginal Engagement CN is recognized as a company that delivers responsibly, is a key part of the solution for customers, and a true backbone of the economy. Over the year, we continued to deepen the Companys sustainability agenda: moving customer goods safely and efficiently, ensuring environmental stewardship, attracting and developing the best railroaders, adhering to the highest ethical standards and building safer, stronger communities. In broad terms, the Company continued its stakeholder activities by: engaging with all levels of government as a participant on advisory councils, review boards and regulatory proceedings; conducting community outreach; working collaboratively with supply chain partners; participating in industry associations (Railway Association of Canada; Association of American Railroads); engaging with suppliers at our annual supplier council and through our Sustainable Procurement Excellence program; strengthening our relationships and improving our communication with customers; ensuring the opportunity for regular two-way communication with employees; and taking part in structured community engagement. In 2015, Canadas Truth and Reconciliation Commission called on corporations to play a role in reconciliation with Canadas Aboriginal peoples, including providing education for management and staff on the history of Aboriginal peoples. As part of its Aboriginal Vision, the Company actively encourages employee sensitivity to Aboriginal issues and has provided in-person cultural awareness training since 2015. An eLearning version of the training was launched in early 2017, providing access to a greater number of employees. As at December 31, 2017, 1,158 employees have completed the training. In February 2017, CN was recognized for excellence in Aboriginal Relations by the Alberta Chamber of Commerce, receiving the Alberta Business Award of Distinction in the Indigenous Relations Best Practices category. In September 2017, CN also obtained recertification at the Committed level under the Progressive Aboriginal Relations Program of the Canadian Council for Aboriginal Business. For more details, please refer to our website at www.cn.ca/aboriginalvision. On the safety front, CN actively engaged communities across its network, meeting with emergency responders and elected officials, providing training and expertise and sharing relevant information on dangerous goods shipments. Throughout 2017, CN also continued its support of hundreds of CN railroaders in the community who are champions in the causes they choose to support. CN granted C$1,175,000 to support its employees, their families and pensioners in their volunteer efforts. As well, our Investor Relations department actively engages with the broad investment community, including shareholders, analysts, potential investors, as well as shareholder advocacy groups, to provide public information on the Company, as well as to address any specific questions or concerns. We have in place various means of communication for receiving feedback from interested parties, such as a toll-free number for general inquiries (1-888-888-5909). Shareholders and other interested parties may also communicate with the Board and its Chair by calling 514-399-6544. The Board of Directors also adopted procedures allowing interested parties (i) to submit accounting and auditing complaints or concerns to us and (ii) to communicate directly with the Chair of the Board, who presides over all non-executive director sessions. These procedures are described on our website at www.cn.ca, under Delivering Responsibly/Governance. The Company is committed to developing respectful and mutually-beneficial relationships with all Aboriginal peoples and does so by: proactively engaging Aboriginal communities and maintaining open dialogue; promoting opportunities for Aboriginal peoples to join the Companys workforce; supporting Aboriginal Community initiatives and participating in Aboriginal organizations; and seeking out and encouraging opportunities for Aboriginal business development. 32 STATEMENT OF CORPORATE GOVERNANCE PRACTICES CN MANAGEMENT INFORMATION CIRCULAR 2018 For the year 20 7 CN received a number of awards and recogn t on nclud ng Recognized on the CDP climate performance leadership index Ranked among the best 50 corporate citizens in Canada by Corporate Knights Listed on the Jantzi Social Index Listed on FTSE4Good Index Listed on Canadas Top 100 Employers Named to Dow Jones Sustainability World Index for the sixth consecutive year and to the DJSI North American Index for the 9th consecutive year Visionary Award for Leadership and Governance of a Public Company by the Women Corporate Directors Foundation Examples of the Company s Aborig nal engagement activit es nclude Support of and attendance at the Assembly of First Nations Annual General Assembly and Circle of Trade Tradeshow Safety presentations made to First Nations Celebration of National Aboriginal Day Partnerships with Indspire and Level, two national organizations aimed at empowering Aboriginal peoples through education Sponsorship of the Mississaugas of the New Credit First Nation in their capacity as Host Nation of the 2017 North American Indigenous Games
Statement of Executive Compensation Dear Shareholder: On behalf of the Human Resources and Compensation Committee (Committee) and the Board of Directors of Canadian National Railway Company we welcome this opportunity to share our approach to executive compensation. On March 5, 2018, the Board of Directors announced that Mr. Luc Jobin had left the Company and appointed Mr. Jean-Jacques Ruest Interim President and Chief Executive Officer of CN, in addition to retaining his position as Executive Vice-President and Chief Marketing Officer, to which he had been named in January 2010. Jean-Jacques Ruest is well positioned to lead the Company and its proven team of railroaders. An international search for a permanent CEO is well underway. Once again in 2017, the Companys annual Say on Pay advisory vote received strong support with 98% of the votes in favour of CNs disciplined approach to executive compensation, the highest amongst the publicly traded Class I Railroads. CN remains committed to transparency by providing clear and comprehensive disclosure information to its shareholders. 2017 Overview In 2017, CN faced a rapid and unexpected volume growth across almost all of its commodity groups, resulting in an increase of more than C$1 billion in top-line growth with revenues increasing by 8% compared to last year. New records for volumes were set in a number of areas, especially in international intermodal, frac sand, coal, propane, and potash. Records were also attained in revenues and operating income, as well as in reported and adjusted net income and earnings per share in 2017. Disciplined Approach to Compensation CNs approach to executive compensation continues to be driven by our goal to deliver sustainable and solid returns to shareholders. CN exercises a disciplined approach by ensuring that target compensation supports the attraction and retention of executive talent while remaining within our executive compensation policy. In addition, short-and long-term incentive plans are structured to align realized pay and shareholder returns through the use of various key performance measures, including the use of Relative Total Shareholder Return (Relative TSR) performance measures. Long-term growth and value creation remain central to our pay strategy and targets are set to ensure that our compensation policies do not encourage undue risk-taking on the part of our executives. In some instances, performance measures such as return on invested capital (ROIC) are used under both short-and long-term incentive plans to ensure that short-term decisions support long-term performance. CNs executive compensation program also supports safe and reliable operations, environmentally and socially responsible practices and industry-leading returns. CNs executive compensation policy positions target total direct compensation between the median and the 60th percentile of the executives respective comparator group. Our disciplined approach to compensation continues to ensure sound and performance driven compensation which is reviewed annually by the Committee. The Committee also independently retains the services of Hugessen Consulting, Inc. (Hugessen), to provide advice on compensation recommendations that are presented for Committee approval. 2013 2014 2015 2016 2017 Revenues (C$ million) Operating income (C$ million) Operating ratio (%) Adjusted diluted earnings per share (C$) (1) 10,575 3,873 63.4 3.06 12,134 4,624 61.9 3.76 12,611 5,266 58.2 4.44 12,037 5,312 55.9 4.59 13,041 5,558 57.4 4.99 (1) See the section entitled Adjusted performance measures in CNs Managements Discussion and Analysis included in the Companys 2017, 2016 and 2015 Annual Reports for an explanation of this measure and reconciliation to the nearest GAAP measure. Broad based and significant growth in customer demand represented a challenge on the service and cost dimensions in the fourth quarter, as the Company was also dealing with mainline network disruptions in the Western region caused by unusual weather conditions in the fall, including wind storms and mudslides, followed by harsh early winter conditions across the network. To replace attrition and to accommodate higher volumes and new growth opportunities, CN hired 3,400 employees across its network and increased its capital budget during the year with an overall investment of C$2.7 billion in 2017 while maintaining its strong commitment to shareholders by returning over C$3.2 billion through share buybacks and dividends. The Companys capital allocations and its strong performance continued to be recognized by the market with a share price increase over the past three years of 29.5% in Canada, in comparison to a 10.8% increase over the same period for the S&P/TSX Composite Index. In addition, the Companys market capitalization in Canada has increased by nearly C$12 billion during this same period. On the safety side, the Company continued to focus on becoming the safest railroad in North America. In light, however, of higher volumes, challenging operating conditions and the coming on board of new railroaders, CNs performance deteriorated slightly in 2017 although the Federal Railroad Administration (FRA) accident performance remains on an improving five-year trend. CN continues to invest significantly in training, coaching, recognition and employee involvement initiatives, like the Just Culture initiative that was launched to embed the behaviors required to improve the safety culture. While there are a number of safety initiatives already underway, CN also launched ACTIV8, a challenge-based interactive employee innovation forum with the goal of tapping into the experience and ideas of all CN employees to generate, capture and implement new ways of performing. The first challenge focused on safety, more specifically in finding solutions on how CN can reduce personal injuries. Compensation Decisions in 2017 The compensation of our Named Executive Officers (NEOs) is paid in U.S. dollars to provide a more precise, meaningful and stable comparison with U.S. denominated compensation of incumbents in equivalent positions within the comparator group. Given that Canadian securities regulations require that the compensation information provided in the Summary Compensation Table and other prescribed tables be stated in Canadian dollars, currency fluctuations impact the year-over-year comparability of compensation levels. The Committee believes that the Companys comparator group and the U.S. dollar denominated approach to compensation for the NEOs is appropriate and, combined with an overall disciplined approach, provides a competitive total compensation package. Base Salary CNs policy for base salaries and target bonuses continues to be at the median of the comparator group. In 2017, the overall salary positioning for the NEOs was aligned with the policy. The Committee continues to closely monitor the compensation paid to all executives to ensure it supports a market competitive compensation envelope. 33 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF EXECUTIVE COMPENSATION
Annual Incentive Bonus Plan (AIBP) The 2017 annual incentive targets remained constant at 120% of base salary for the former President and Chief Executive Officer and at 80% of base salary for the other NEOs. The AIBP was comprised of three (3) components: corporate financial, safety and individual performance. The corporate financial component, which accounts for 70% of the annual incentive paid to executives, is designed to measure and reward against challenging targets for revenue, operating income, diluted earnings per share, return on invested capital, and free cash flow. For 2017, the Board approved a payout at 150% (and 200% for 206 executives and senior management employees, including the NEOs) of target on the corporate financial component. The safety component, which accounts for 10% and measures the Companys safety performance, resulted in no payout for 2017. Finally, individual performance, which accounts for 20%, continued to be measured against individual key strategic financial and operational objectives and the resulting average individual bonus factor of all NEOs was 102%. Long-Term Incentive Program No changes were made to the Long-Term Incentive (LTI) plan design in 2017, following the changes made in 2015 with the inclusion of relative TSR performance and the adjustment of the LTI mix to a lower weighting on stock options from 50% to 45%. The Committee continues to closely monitor the components of the LTI plan. Compensation Risk Mitigation Our compensation programs are designed to encourage appropriate behaviours and include appropriate risk mitigation mechanisms. In 2017, Willis Towers Watson conducted its annual review and confirmed its view that there are no significant risks arising from CNs compensation programs that are reasonably likely to have a material adverse effect on the Company. Willis Towers Watson also indicated that changes brought to CNs clawback policy in 2017 to allow the clawback of bonus or incentive based compensation awarded after March 7, 2017 in circumstances of gross negligence, intentional misconduct, fraud, theft or embezzlement without the need for a financial restatement, further reduced the risk associated with these plans. At its December 2017 meeting, the Committee reviewed the Willis Towers Watson risk assessment report and supported its conclusions. In its own assessment, the Committee has determined that proper risk mitigation features are in place within the Companys compensation programs. Conclusion The Committee and the Board of Directors believe that compensation outcomes are appropriate and aligned with CNs approach to executive compensation. The Committee remains fully engaged in ensuring that CNs executive compensation remains anchored to a disciplined approach, linked to performance, and is market competitive. The Chair of the Human Resources and Compensation Committee and other members will be present during the Meeting to answer questions you may have about CNs executive compensation. We believe that our approach to executive compensation supports the execution of the Companys strategic plan, and we remain committed to developing compensation programs that will continue to be aligned with our shareholders long-term interests. Robert Pace Chair of the Board Ambassador Gordon D. Giffin Chair of the Human Resources and Compensation Committee 34 STATEMENT OF EXECUTIVE COMPENSATION CN MANAGEMENT INFORMATION CIRCULAR 2018
Human Resources and Compensation Committee Composition of the Human Resources and Compensation Committee The Committee is composed of ten independent members. All members have a thorough understanding of compensation policies and principles related to executive compensation and have experience in human resources and compensation matters. Furthermore, members are also members of other committees of the Board and this overlap provides for a strong link between the committees risk oversight responsibilities. The following is a description of the education, skills and experience of each member of the Committee as at the date of this Information Circular that are relevant to the performance of his/her responsibilities as a member of the Committee, including skills and experience enabling the Committee to make decisions on the suitability of the Companys compensation policies and practices: Ms. Bruder is the Executive Vice-President, Operations at the Royal Bank of Canada where she is responsible for operations related to all personal and business clients in Canada delivered through more than 8,000 employees. In her corporate and board roles she has extensive experience overseeing human resource matters including compensation design, performance management and talent/ succession planning. Mr. Carty spent 30 years in the airline business before retiring as Vice-Chairman and Chief Financial Officer of Dell, Inc. Mr. Carty has experience in developing and implementing compensation plans and performance-based goals for executive and enterprise-wide personnel. Mr. Carty served as chair of the Human Resources Committee of Talisman Energy, Inc. until 2015 and is actively involved in human resources as chair of the board of directors of Porter Airlines, Inc., and past chair of the board of directors of Virgin America, Inc. Mr. Giffin is a Partner at the law firm of Dentons US LLP, where he maintains offices in Washington, D.C. and Atlanta. His practice focuses on international transactions and trade matters and public policy. He has been engaged in the practice of law or government service for more than thirty-five years. Mr. Giffin was the United States Ambassador to Canada from August 1997 to April 2001 and had responsibility for personnel matters. Mr. Giffin serves as chair of the board of TransAlta Corporation and was a member of the Management Resources and Compensation Committee of the Canadian Imperial Bank of Commerce until 2017. Ms. Godin is Vice-Chair of the Board and Executive Vice-President, Chief Planning and Administration Officer of CGI Group Inc. (CGI) where she oversees the development of enterprise-wide policies, programs and processes related to the management of CGI and their consistent and high-quality application across all CGI business units. Ms. Godin is responsible for ensuring the continuous development of CGIs 72,500 professionals. Previously Ms. Godin was head of CGIs strategic planning and the companys global human resources function, including executive compensation and succession planning, as well as organizational model sustainability to secure organic growth. Ms. Holiday has extensive experience serving as a board member for different companies such as Hess Corporation, White Mountains Insurance Group, Ltd., and Santander Consumer USA Holdings, Inc. She has also served on the board of H.J. Heinz Company and RTI International Metals, Inc. As former General Counsel at the United States Treasury Department and former Secretary of the Cabinet at The White House, Ms. Holiday was in charge of the supervision of approximately 2,200 lawyers. Mr. Losier was the President and Chief Executive Officer of Assumption Life. As Chief Executive Officer, the Vice-President of Human Resources reported directly to Mr. Losier. He worked with consultants to assess Assumption Lifes human resources practices and benefits and to measure the competitiveness of its executive compensation policies and practices. In addition, Mr. Losier gained human resources experience by actively participating and developing a leadership succession and development plan in anticipation of his retirement as Chief Executive Officer of Assumption Life. Mr. Losier has also been involved in succession planning for other publicly-traded companies. Mr. Lynch held various senior positions in the Government of Canada, including Clerk of the Privy Council, Secretary to the Cabinet and Head of the Public Service of Canada where he was responsible for the overall management of 263,000 employees in 80 departments and agencies of the Canadian government. Mr. Lynch is a member of the Leadership Council of the Bank of Montreal and a member of the Nominating Committee of CNOOC Limited. He was chair of the Corporate Governance Committee and a member of the Human Resources Committee of Empire Company Limited until 2017. Mr. OConnor was chair of the board of directors and Chief Executive Officer of Republic Services, Inc., a leading provider of non-hazardous solid waste collection, recycling and disposal services in the U.S., and was involved in various human resources and compensation matters. Mr. OConnor also serves as a director on the board of Clean Energy Fuels Corp. and Casella Waste Systems, Inc. (Lead Director). Mr. Phillips served as President and Chief Executive Officer of various companies, including Dreco Energy Services, Ltd., PTI Group, Inc., and British Columbia Railway Corporation where he gained in-depth exposure to human resources and compensation matters. He currently serves on the Human Resources and Compensation Committees of Canadian Western Bank and West Fraser Timber Co. Ltd. Mr. Phillips was inducted as a fellow of the Institute of Corporate Directors in June 2017. Ms. Stein currently serves as Executive Vice-President General Counsel & Corporate Affairs at The Clorox Company. She also served as Senior Vice-President and General Counsel at H.J. Heinz Company. Ms. Stein gained extensive human resources and compensation experience through the review and execution of compensation matters for both companies. Ms. Stein has also engaged with shareholders advisory groups on various compensation matters. 35 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF EXECUTIVE COMPENSATION
The following table summarizes the Committee members human resources and compensation-related experience: NUMBER OF COMMITTEE MEMBERS WITH VERY STRONG The Committees full charter is available as part of CNs Corporate Governance Manual at www.cn.ca, under Delivering Responsibly/ Governance. Finally, the Committee met six (6) times in 2017 and held in camera sessions during each meeting. The report of the Committee, set forth in Schedule B to this Information Circular, outlines the major subject areas reviewed by the Committee during the year. AREA OF EXPERIENCE OR STRONG EXPERIENCE Membership on HR committees Organizational exposure to the HR function Leadership and succession planning, talent development Approval of employment contracts Development/oversight of incentive programs Oversight of stress-testing of incentive programs vs. business/operating performance Pension plan administration/oversight Interpretation and application of regulatory requirements related to compensation policies and practices Engagement with investors and investor representatives on compensation issues Oversight of financial analysis related to compensation policies and practices Exposure to market analysis related to compensation policies and practices Drafting or review of contracts and other legal materials related to compensation policies and practices Oversight of labour matters 10/10 9/10 9/10 100% 90% 90% Talent Management and Succession Planning Effective talent management, leadership development, succession planning, and employee engagement are priorities for the Board of Directors and the Committee. A comprehensive framework, focusing on the identification, assessment, and development of talent is used to ensure that the Company has an appropriate pipeline of potential successors at the executive and management levels. CN prepares talent for broader and more complex roles by differentiating development needs and providing meaningful professional experiences. When required, the Company also uses external hiring to address succession gaps and procure critical skills. Regular updates on the talent management and leadership development of each function are reviewed by the Committee. Throughout the year, the Committee also conducts in-depth executive reviews focused on the strength and diversity of succession pools for key leadership roles across CN. The Company also integrates a more precise approach for high-potentials in an effort to prepare them for broader and more complex roles while developing critical leadership capabilities. A complete review of the contingency as well as short-, medium-and long-term succession plans for the executive team is conducted annually, and specific plans to address identified gaps are reviewed. Over the course of 2016, a number of executives were assigned new responsibilities. With the support of the Committee and the executive team, CN is engaged in supporting these recently-assigned executives in their new responsibilities while assessing and developing the next layer of executives and senior managers to ensure that the talent pipeline remains strong. In 2017, the Committee continued to monitor the development of members of the executive team and to initiate tailor-made development plans. CN also refines its career development program to provide targeted training and practical work experience that will support the development of talent. As part of this review, CN continues to recruit new executives from leading organizations who will provide additional skill sets and experience and continue to improve the strength of our leadership team. The Committee is satisfied that the proper talent management and succession planning strategies are in place to ensure the Companys ongoing success. 9/10 8/10 9/10 90% 80% 90% 7/10 8/10 70% 80% 6/10 60% 8/10 80% 9/10 90% 5/10 50% 5/10 50% Mandate of the Human Resources and Compensation Committee The Committees responsibilities include: ensuring that appropriate mechanisms are in place regarding succession planning for the executive management positions, including that of the President and Chief Executive Officer; reviewing executive managements performance assessment; reviewing leadership and talent management for the Companys key positions; overseeing the identification and management of risks associated with CNs compensation policies and practices and reviewing disclosure on: (i) the role of the Committee in that respect; (ii) any practices that CN uses to identify and mitigate such risks; and, (iii) any identified risk arising from CNs compensation policies and practices that is reasonably likely to have a material adverse effect on CN; overseeing the selection of any benchmark group used in determining compensation or any element of compensation and reviewing disclosure on such group; retaining outside advisors to assist in the performance of its functions and responsibilities, including compensation consultants, independent legal counsel or other independent advisors, and overseeing their work; evaluating the independence of compensation consultants in accordance with applicable NYSE listing standards or other applicable laws, rules or regulations; recommending to the Board of Directors executive managements compensation; and reviewing human resources practices by ensuring, among other things, that appropriate human resources systems are in place to allow the Company to attract, motivate and retain the quality of personnel required to meet its business objectives. 36 STATEMENT OF EXECUTIVE COMPENSATION CN MANAGEMENT INFORMATION CIRCULAR 2018
Independent Advice The Committee retains the services of executive compensation consultants to provide advice on compensation recommendations that are presented for Committee approval. Since October 2007, the Committee has retained the services of Hugessen for that purpose. The Committee mandated Hugessen to review and provide advice directly to the Committee on executive compensation recommendations and related questions. In aggregate, the fees invoiced by Hugessen in 2017 totalled approximately C$128,900. The Committee has also reviewed Hugessens independence and evaluated its performance for 2017. The Committee is satisfied with the advice received from Hugessen and that such advice is objective and independent. Hugessen also meets the independence requirements of the NYSE Listing Standards and confirmed that, on an annualized basis, the amount of fees received by the firm from CN represents less than 5% of Hugessens total fees. Since 2007, the Board of Directors has adopted a policy to the effect that the Chair of the Committee must pre-approve all non-compensation services provided to the Company by the consultant retained by the Committee to perform executive compensation-related services. Pursuant to an understanding between the Committee and Hugessen, the latter has agreed not to perform any work for management. During 2017, the only services performed by Hugessen were executive compensation-related services provided directly to the Committee. Executive Compensation Related Fees 37 CN MANAGEMENT INFORMATION CIRCULAR 2018 STATEMENT OF EXECUTIVE COMPENSATION SERVICES RENDERED IN 2017 (C$) SERVICES RENDERED IN 2016 (C$) EXECUTIVE COMPENSATION RELATED FEESALL OTHER FEES EXECUTIVE COMPENSATION RELATED FEESALL OTHER FEES Hugessen 128,9000 83,8000
Compensation Discussion and Analysis Execut ve Summa y Named Executive Officers On March 5, 2018, the Board of Directors announced that Mr. Luc Jobin had left the Company and appointed Mr. Jean-Jacques Ruest Interim President and Chief Executive Officer of CN, in addition to retaining his position as Executive Vice-President and Chief Marketing Officer. This CD&A section covers executive compensation for the year ended December 31, 2017, prior to the executive change and focuses on the following NEOs who appear in the compensation tables: 20 7 Base Salary Increases The base salaries of NEOs are paid in U.S. dollars in order to provide for a more precise, meaningful and stable comparison with U.S. denominated salaries of incumbents in equivalent positions within the comparator group. As part of the NEOs annual compensation review, base salaries were set with reference to the median of the selected Class I Railroads comparator group. Salary increases reflect market competitiveness, economic outlook, leadership abilities, retention considerations and succession plans. Base salaries for all the NEOs were adjusted in 2017 to maintain a market competitive compensation envelope. For more information on base salaries, please refer to page 42. 20 7 Annual Bonus Results As in prior years, the former President and CEOs target bonus in 2017 was 120% of base salary and the other NEOs target bonus was 80% of base salary. For 2017, the AIBP was comprised of corporate financial, safety and individual performance components: Corporate Financial Performance: This component accounted for 70% of the annual incentive bonus and was measured against challenging targets for revenue, operating income, diluted earnings per share, ROIC and free cash flow. The ROIC performance objective is also used as a performance measure for the Performance Share Units (PSUs) as it mitigates risk between short-and long-term performance on invested capital. The Board of Directors is of the view that its chosen corporate financial performance objectives are appropriate for a capital-intensive business such as CN. As the economy strengthened in 2017, so did customer demand, and CN hit records in volumes, revenues and operating income, as well as in earnings per share in 2017. As a result, performance exceeded target for all metrics. Consequently, the Board of Directors assessed the performance of the Company at exceeds, resulting in a corporate financial bonus factor of 150% (and 200% for 206 executives and senior management employees, including the NEOs). The table showing the 2017 corporate financial performance objectives, as approved by the Board of Directors in January 2017, and the 2017 results can be found on page 43. Corporate Safety Performance: This component accounted for 10% of the annual incentive bonus of executives and was subject to the achievement of challenging corporate safety accident and injury performance ratios. As a result of a slight deterioration of CNs safety performance in 2017 resulting from higher volumes, challenging operating conditions and the coming on board of new railroaders, the Board of Directors assessed the corporate safety performance of the Company at does not meet, resulting in no payout for the safety bonus component. The table showing the 2017 corporate safety performance objectives, as approved by the Board of Directors in January 2017, and the 2017 results can be found on page 44. Individual Performance: The remaining 20% of the annual incentive bonus for executives was based on individual performance that considered the strategic and operational priorities related to each NEOs function. The individual bonus factors for the NEOs, including the former President and CEO, were reviewed by the Committee. The resulting average individual bonus factor of all NEOs, including the former President and CEO, was 102%. The individual bonus factor, along with the corporate financial and safety bonus factors, served as the basis for calculating the annual incentive bonus payouts set out in the Summary Compensation Table on page 53. Overall, the average bonus payout for the NEOs (consisting of the Corporate Financial Performance Factor, the Corporate Safety Performance Factor, and the Individual Performance Factor) was 160% of target payout in 2017. Jean-Jacques Ruest Interim President and Chief Executive Officer (CEO), and Executive Vice-President and Chief Marketing Officer (CMO) Former President and Chief Executive Officer (CEO) Executive Vice-President and Chief Financial Officer (CFO) Executive Vice-President and Chief Operating Officer (COO) Executive Vice-President Corporate Services and Chief Legal Officer (CLO) Luc Jobin Ghislain Houle Michael Cory Sean Finn Compensat on Framework The Company follows a comprehensive executive compensation program for NEOs which includes: i) base salary; ii) annual incentive bonus; iii) long-term incentives; iv) pension benefits; and v) executive perquisites. The first three elements define total direct compensation. The objective of CNs compensation program is to attract, retain and engage top talent by ensuring that there is a clear link between the Companys long-term strategy, its business plan and executive rewards. Decisions on how much to pay the NEOs and all other executives in terms of total direct compensation are based on the Companys executive compensation policy. The policy aims to position target total direct compensation between the median and the 60th percentile of the executives respective comparator groups. For the NEOs, the comparator group consists of select Class I Railroads (Union Pacific Corporation, CSX Corporation, Norfolk Southern Corporation and Canadian Pacific Railway Limited). For all other executives, the comparator group is comprised of a broad sample of U.S. industrial organizations with revenues between U.S.$6 billion and U.S.$15 billion that participate in Willis Towers Watsons proprietary database. CN generated revenues of C$13 billion in 2017. For executives in group or division level positions, a total sample of the U.S. industrial organizations is used, with revenue ranges aligned to reflect the scope of the role of the respective CN executive. More information on the comparator groups can be found on page 41. In December 2017, as part of the annual compensation review process, Willis Towers Watson provided an assessment of how total direct compensation offered to all executives during the year compared against that of the respective comparator groups. Willis Towers Watson reported that the overall aggregate positioning of all executives total direct compensation is in line with CNs compensation philosophy. Dec s on Process The compensation of the NEOs, other than that of the position of President and CEO, is recommended by the President and CEO and reviewed and recommended by the Committee for approval by the Board of Directors. The compensation of the President and CEO is recommended by the Committee and approved by the independent members of the Board of Directors. The President and CEO serves at the will of the Board. Neither the President and CEO nor the other NEOs have an employment contract. 38 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018
20 7 Long Term Incentives In determining the appropriate long-term incentive fair value of LTI granted to NEOs, the Committee considered external market data, as well as other factors such as individual performance, retention risk and succession plans, and the Companys compensation philosophy. The fair value of LTI grants for NEOs is determined with reference to the 60th percentile of the selected Class I Railroads comparator group. To align with mid-and long-term business performance and shareholder value creation, long-term incentives consist of a combination of PSUs and stock options, respectively weighing 55% and 45% of the long-term incentive fair value granted(1). The payout of PSUs granted in 2017 to NEOs is subject to two distinct performance measures. 70% of the PSU award is subject to the achievement of solid ROIC performance for the period ending on December 31, 2019, and to the attainment of a minimum average closing share price established at the beginning of the cycle. The remaining 30% is subject to CNs Relative TSR measured against two comparator groups: i) selected Class I Railroads and ii) S&P/TSX 60 companies for the same period ending on December 31, 2019. The stock options granted in 2017 are conventional and vest over four years at a rate of 25% at each anniversary date. Stock options have a 10-year term. The table summarizing the performance objectives and payout condition of the 2017 PSU award can be found on page 45. 20 5 Performance Share Un ts Award Payout The 2015 PSU award was the first grant that included the relative TSR measure as one of the performance vesting conditions. The Committee reviewed the vesting of the 2015 PSU award against the performance targets for each measure: ROIC PSUs and Relative TSR PSUs. ROIC PSUs: The Company achieved a three-year average ROIC to December 31, 2017, of 16.7%. In accordance with the plan rules, this outcome resulted in a performance vesting factor of 135% (out of a maximum of 200%) for the ROIC PSUs awarded in 2015. As the minimum average closing share price condition was also met, payout under the plan occurred in February 2018, provided compliance with the other conditions of the award agreements. Relative TSR PSUs: The Company delivered a TSR performance of 39.5%(2) over the period from January 1, 2015 to December 31, 2017, resulting in an overall performance vesting factor of 142.3% (out of a maximum of 200%), reflecting the weighted average performance vesting factor of both measures (100% for Class I Railways and 184.6% for S&P/TSX 60). As part of the equity-settlement conversion introduced in 2014, PSUs were settled on February 23, 2018 in CN common shares purchased on the open market to encourage share ownership among participants. The table illustrating the 2015 PSU performance objectives and results can be found on page 46. Non Compete Non Sol c tat on and Non D sclosure The railroad industry operates in a highly competitive market. In recent years, the Company has continued in its efforts to protect itself and its confidential information. Accordingly, the Companys long-term incentive award agreements, as well as its non-registered pension plans, contain non-compete, non-solicitation, non-disclosure of confidential information and other restrictive clauses. Payout under the long-term incentive plans or the non-registered pension plans is subject to current or former employees complying with these conditions. Further details related to CNs non-compete and non-solicitation provisions are available on page 47. Risk M t gat on n Our Compensat on Program The Company has a formalized compensation philosophy to guide compensation program design and decisions. Many of the characteristics inherent in the Companys executive compensation program encourage the right behaviours, thus mitigating risks and aligning long-term results with shareholder interests. The following are examples of such characteristics: Appropriate balance between fixed and variable pay, as well as short-and long-term incentives; Multiple performance measures to be met or exceeded in the AIBP; Inclusion of a safety component in the AIBP; Overlap of performance measures for short-and long-term incentives to mitigate risk; Capped incentive payout opportunities with no minimum guaranteed payout; Cannot engage in hedging activity or in any form of transactions in publicly-traded options on CN securities; Executive compensation clawback policy is in place and was amended in 2017 to allow the clawback of bonus or incentive based compensation awarded after March 7, 2017 in circumstances of gross negligence, intentional misconduct, fraud, theft or embezzlement without the need for a financial restatement; Stock ownership guidelines apply to executives and senior management employees; and The Committee retains the services of an independent executive compensation consultant. A complete list and description of these risk-mitigating features is available on page 48. In December 2017, following a review of the Companys compensation policy, programs and practices, Willis Towers Watson concluded again this year that there are no significant risks arising from CNs compensation programs that are reasonably likely to have a material adverse effect on the Company. The Committee supports the conclusions from Willis Towers Watsons risk assessment report and, in its own assessment, determined that proper risk mitigation features are in place within the Companys compensation program. (1) The weighting of the 2017 long-term incentive grant value for the former President and CEO was different (64% PSUs and 36% Stock Options) to reflect stock option distribution requirements which limit the number of stock options that may be awarded during any calendar year to any individual participant to a maximum of 20% of the stock options awarded in that year. (2) TSR performance is calculated using CNR 20-day share price average immediately prior to January 1, 2015 (including dividend reinvestment) and CNR 20-day share price average ending on December 31, 2017 (including dividend reinvestment). The same calculation is used for all companies part of both comparator groups. 39 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS
Executive Compensation Policy Objectives The Companys executive compensation policy and programs are designed to ensure that there is a clear link between the Companys long-term strategy, its business plan and executive rewards, thus encouraging appropriate behaviour. A significant proportion of executive incentive compensation is, as a result, tied to key corporate objectives that play a critical role in driving the organizations short-and long-term profitability and return to shareholders. The executive compensation program is also designed to be competitive in order to attract, retain and motivate outstanding executive talent while providing for appropriate risk control features. Compensation Decisions and Process The compensation is determined as part of an annual process followed by the Committee and outlined in the chart below: Total Cash Compensation Compensation The executive compensation program is comprised of five elements: i) base salary; ii) annual incentive bonus; iii) long-term incentives; iv) pension benefits; and, v) executive perquisites. The combination of base salary, annual incentive bonus and long-term incentives defines the total direct compensation offering, which is weighted towards variable, pay-for-performance elements. Compensation Policy The Companys Executive Compensation Policy The executive compensation policy aims to target total direct compensation between the median and 60th percentile of the executives respective comparator groups. Base salaries and target annual bonuses are set with reference to the median level of the respective comparator group, whereas the grant date fair value of long-term incentives is set with reference to the 60th percentile. The Committee believes that the compensation policy and its principles provide for competitive and reasonable compensation levels. The Committee reviews benchmark information in December each year, and approves compensation adjustments in January of the following year by taking into consideration comparator group practices, economic outlook, individual performance, leadership abilities, retention considerations and succession plans. The Committee reviews and recommends for approval by the Board of Directors the performance targets related to both the AIBP and the PSUs in January. Aside from the relative TSR targets, these targets are derived from CNs annual business plan, which is prepared by management and reviewed with the full Board during the Strategic Planning Committee meeting prior to the beginning of the applicable year. Business planning is an extensive process during which Management examines with the Board the economic, business, regulatory and competitive conditions, which affect or can be expected to affect CNs business in the following three-year period. Throughout the year, members of the Committee are provided with updates related to the Companys performance against targets. (1) Exceptionally postponed to January 2018. 40 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018 Step 4 March to October Monitoring and evaluation of progress and performance of compensation programs Talent management reviews Pension Benefits and Executive Perquisites Indirect Step 3 January Review of annual and long-term incentive payouts for the prior year Review of compensation programs and annual compensation adjustments Review of new annual targets and long-term incentive awards and performance-vesting conditions Stress-testing of incentive grants Long-Term Incentives Performance Share Units (ROIC and Minimum Share Price Condition and Relative TSR Performance) Stock Options Variable Incentive Executive Compensation Program Total Direct Step 2 December Evaluation of the individual performance assessment for the NEOs (1) Review of compensation benchmark, and pay positioning Annual review of risk and assessment of risk mitigation features Base Salary Fixed Compensation Annual Incentive Bonus Corporate Financial Objectives Corporate Safety Objectives Individual Objectives Compensation Variable Incentive Step 1 September to December Business plan review and approval by the Board Definition of performance criterion and targets based on Business Plan
The Board and Committee also have open access to senior management throughout the year, should they wish to discuss specific business issues or seek clarification. The Board and the Committee are, therefore, confident that they have detailed visibility of the Companys financial performance and that they are appropriately equipped to recommend executive compensation decisions. Finally, throughout the annual executive compensation review process, the Committee also receives and considers advice from its independent compensation consultant, Hugessen. The annual grant of PSUs and stock options to NEOs and other eligible employees is reviewed and approved by the Board of Directors in January for the then current year. In determining the appropriate long-term incentive fair value granted to each NEO, the Committee considered external market data, as discussed in the Benchmarking Using Comparator Groups section, as well as other factors such as individual performance, leadership, and talent retention. Benchmarking Using Comparator Groups The median and 60th percentile competitive pay levels are determined using comparator groups, which have been carefully reviewed and endorsed by the Committee as being appropriate for the level and nature of the benchmarked positions. In determining compensation for the NEOs, the Company considers a comparator group of North American companies comprised of the following Class I Railroads: Union Pacific Corporation, CSX Corporation, Norfolk Southern Corporation, and Canadian Pacific Railway Limited. These companies are similar in terms of industry and complexity, including size, revenue, capital investment, and market capitalization and directly compete with CN for key talent. Furthermore, half of CNs Relative TSR performance indicator for the PSUs is measured against the same comparator group (please refer to page 45 for a description of the plan). Components of the 2017 Executive Compensation Program The following table shows CNs positioning relative to the primary comparator group for NEOs. Data is as at December 31, 2017. MARKET AVERAGE COMPARATOR GROUP REVENUE (MILLIONS) NET INCOME CAPITALIZATION (1) NUMBER OF (MILLIONS) (MILLIONS) EMPLOYEES Union Pacific Corporation CSX Corporation Norfolk Southern Corporation Canadian Pacific Railway, Limited U.S.$21,240 U.S.$11,408 U.S.$10,551 U.S.$10,712 U.S.$5,471 U.S.$5,404 U.S.$105,600 U.S.$49,200 U.S.$41,500 41,992 25,230 26,955 C$6,554 C$2,405 C$33,300 12,034 AVERAGE (2) C$15,663 C$7,609 C$70,000 26,553 Canadian National Railway Company C$13,041 C$5,484 C$77,300 23,074 RANK (2) 4 4 2 4 (1) Net income as reported including the deferred income tax recovery resulting from the enactment of the U.S. tax reform. (2) Values were converted into Canadian dollars using the 2017 average exchange rate of US$1.00 = CAD$1.2986, except for the market capitalization where the December 31, 2017 exchange rate of US1.00 = CAD$1.2571 was used. The comparator group used for the benchmarking of compensation for all executives other than the NEOs is a broad sample of comparably-sized U.S. industrial organizations with revenues between U.S.$6 billion and U.S.$15 billion that participate in Willis Towers Watsons proprietary database. For executives in group or division level positions, a total sample of the U.S. industrial organizations is used, with revenue ranges aligned to reflect the scope of the role of the respective CN executive. The Committee also considers data from this sample for NEOs for purposes of verifying the alignment with general compensation trends, but not for direct benchmarking purposes, given the direct comparability of the above-mentioned Class I Railroads. The following table summarizes the components of the Companys executive compensation program, which is driven by the executive compensation policy and weighted towards variable, pay-for-performance elements. Each component is then further detailed in this section. RISK-MITIGATING ELEMENTS OBJECTIVES AND RATIONALE COMPONENT 2017 DESIGN SUMMARY FORM OPPORTUNITY Base Salary Fixed rate of pay Individual salary recommendations based on competitive assessment and economic outlook, leadership, retention and succession considerations Cash Set with reference to the median of the respective comparator group Provides for a balanced mix of pay components (fixed vs. variable) Use of external advisor and peer group analysis Provide competitive level of fixed compensation Recognize sustained individual performance Reflect increase in role responsibility and/or growth in role Annual Incentive Bonus Cash-based performance pay Target is 120% of base salary for the President and CEO and 80% for the other NEOs. Maximum payout is limited to 2.0 times the target For other eligible management employees, target is based on grade level with a maximum Use of multiple performance measures Plan targets reviewed and approved annually based on in-depth review of annual business plan Increased diversification with the addition of a safety component Payouts are capped Reward the achievement of a balanced set of annual corporate financial performance objectives Reward the achievement of a set of annual corporate safety performance objectives Reward the achievement of personal objectives aligned with each employees area of responsibility and role in realizing operating results Drive superior corporate financial and safety as well as individual performance Annual awards based on achievement of five pre-determined corporate financial performance objectives (70%), two pre-determined corporate safety performance objectives (10%) and individual performance (20%) Performance period: 1 year No guaranteed payout limited to 1.5 orminimum payout 2.0 times the target Payouts subject to a clawback policy Executives, including the NEOs, and senior management employees, are required to provide the Company with a six-month notice period prior to retirement to maintain their eligibility for accrued and future bonuses under the Annual Incentive Bonus Plan 41 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS
RISK-MITIGATING ELEMENTS OBJECTIVES AND RATIONALE COMPONENT 2017 DESIGN SUMMARY FORM OPPORTUNITY Long-Term Incentives PERFORMANCE SHARE UNITS (55%) 70% of the PSU value is subject to the attainment of three-year average return on invested capital targets and to the attainment of a minimum average closing share price established at the beginning of the cycle 30% of the PSU value is subject to CNs relative performance against selected Class I Railroads and S&P/TSX 60 companies In the case of retirement, employees must remain in active and continuous service until March 31 of the year following the year in which the grant was made to be eligible for payout Performance period: Three years STOCK OPTIONS (45%) Conventional stock options that vest over four years at a rate of 25% per year In the case of retirement, employees must remain in active and continuous service until the last day of the year in which the grant was made to be eligible for payout Performance period: Four-year vesting, ten-year term Performance-based Long-term incentive Significant weighting Align management towards long-term interests with incentive compensation shareholder value share units payable in equity grant date fair value determined with reference to the 60th percentile of the respective comparator group for NEOs and executives PSU performance vesting factor capped at 200% growth and total return relative to comparable groups Overlapping multi-year performance periods Mix of financial, market and relative performance measures PSU payouts are capped and there is no minimum guaranteed payout Payouts subject to a clawback policy Reward the achievement of sustained financial performance Contribute to retention of key talent Recognize individual contribution and potential Stock options Pension Benefits CANADIAN PENSION PLANS Defined Benefit Plan (1): Benefits payable calculated as a percentage of the five-year highest average earnings multiplied by pensionable service Pensionable service period for most defined benefit plans: Maximum of 35 years Defined Contribution Plan (2): Benefits based on the participants required contributions and on Company-matched contributions Non-registered plans: Supplement to the registered plans and provide benefits in excess of the Canadian Income Tax Act limits U.S. PENSION PLANS Defined Benefit Plan: Benefits payable calculated as a percentage of the five-year highest average earnings (out of the last 10 years) multiplied by credited service Maximum of 35 years of credited service for most defined benefit plans Savings Plan: 401(k) benefits based on the participants voluntary contributions and 50% matching by the Company, limited to 3% of base pay Defined Contribution Feature: Additional benefits included in the Savings Plan based on Company contributions equal to 3.5% of base pay Non-registered plans: Supplement to the registered plans and provide benefits in excess of IRS and Railroad Retirement Board limits Cash payments following retirement Non-registered plans restricted to executives and senior management employees Most retirement benefits for executives and senior management employees are calculated using base salary and annual bonus (up to target levels) The former President and CEO participated in a Defined Contribution Plan, which limited CNs exposure to risk Provide an effective and attractive executive compensation program Executive Perquisites Healthcare and life insurance benefits, annual physical exam, club membership, company-leased vehicle, parking, financial counselling and tax services Non-cash perquisites Competitive No tax gross-ups on such perquisites Use of corporate aircraft restricted to business-related purposes (1) Applies to employees hired prior to 2006. (2) Applies to employees hired after 2005 or who have elected to convert from a defined benefit plan. Base Salary The Committee normally reviews the base salaries of executives in January each year, by taking into consideration median comparator group practices, economic outlook, leadership abilities, retention considerations, and succession plans. The base salaries of NEOs are paid in U.S. dollars in order to provide for a more precise, meaningful and stable comparison with U.S.-denominated salaries of incumbents in equivalent positions within the comparator group. The base salaries for all the NEOs were adjusted in 2017 to maintain a market competitive compensation envelope. Annual Incentive Bonus Plan In addition to the NEOs, approximately 4,800 active management employees are eligible to participate in an annual performance-based bonus plan. Under the Companys AIBP, minimum, target and maximum payouts, expressed as a percentage (%) of base salary, are as follows for the President and CEO, the other NEOs, the Senior Vice-Presidents and Vice-Presidents: TARGET (1) MAXIMUM (1) POSITION MINIMUM President and CEO Other NEOs Senior Vice-Presidents Vice-Presidents 0% 0% 0% 0% 120% 80% 65% 50/60% 240% 160% 130% 100/120% (1) As a percentage of base salary as at December 31, 2017. 42 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018
The bonus payout received under the AIBP for the executives depends on the achievement of corporate financial (70%) and safety (10%), and individual (20%) objectives. This design reflects the Companys view that any short-term incentive should be tied both to the overall financial and operational performance of the Company and to those areas of its business that each employee can influence directly. The following illustrates the 2017 AIBP for the former President and CEO: AIBP for the former President and CEO For 2017, the AIBP was comprised of the following components: 1. Corporate Financial Performance: 70% of the bonus was linked to the achievement of a balanced set of objectives that contribute to the Companys long-term financial growth and profitability. The Committee ensures that performance goals and conditions are directly aligned with the achievement of the Companys corporate objectives as set out in the Companys business plan, which is recommended by the Strategic Planning Committee and reviewed and approved by the Board of Directors. These corporate objectives are taken into account in establishing the Companys targets under the AIBP. In addition, in setting the AIBP targets for the upcoming year, the Company generally excludes items from the prior year that did not necessarily arise as part of the normal business of the Company, which can impact the comparability of the Companys year-over-year financial performance and the Companys current year targets in relation to the prior years results. In 2017, the Board of Directors assessed the Companys corporate financial performance against targets for revenues, operating income, diluted earnings per share, free cash flow, and one-year ROIC. These measures were selected because they are quantifiable measures that play a key role in driving the organizations profitability and return to shareholders. Additionally, the Board is of the view that its chosen corporate objectives are appropriate for a capital-intensive business like CN. The 2017 targets were approved by the Board of Directors in January 2017 based on the Companys business and financial outlook at that time. Under the terms of the AIBP, a maximum corporate performance factor of 150% (or 200% for 206 executives and senior management employees, including the NEOs) can be applied to an eligible employees annual bonus payout when financial results exceed all five corporate performance stretch (maximum) objectives. There is no payout under a given measure if base performance is not achieved. Base performance is equivalent to target performance as generally understood with the exception that performance below base for a given measure does not trigger any payment under that measure. Corporate Financial Performance Corporate Safety Performance Individual Performance Corporate Financial Performance Corporate Safety Performance Individual Performance Revenues 25% Operating Income 25% Diluted Earnings per Share 15% Free Cash Flow 20% Return on Invested Capital 15% FRA Accident Ratio 50% FRA Injury Ratio 50% Operational and Service Excellence 20% Top Line Focus, Business Development, and Evolving Strategy 20% Safety and Sustainability 20% Employee Engagement, Corporate Culture, and Team Building 20% Stakeholder and Regulatory Engagement 20% Performance Objectives and Results 2017 Annual Incentive Bonus Plan In January 2017, the performance targets were set assuming an exchange rate of U.S.$1.00 = C$1.32. During the year, the actual average exchange rate was U.S.$1.00 = C$1.30. At the end of 2017, the Companys targets, with the exception of ROIC, were adjusted to take into consideration the foreign exchange and, in the case of Revenues, the difference between actual and forecasted oil and diesel prices with respect to the Companys fuel surcharges. In addition, Diluted Earnings per Share and ROIC 2017 results were adjusted to exclude deferred income taxes from various tax enactments, including the U.S. tax reform. The following table, therefore, compares the 2017 adjusted performance targets with the actual 2017 results as reported by the Company. (1) Corporate objectives assume an average exchange rate of U.S.$1.00 = C$1.32. (2) Corporate objectives and results reflect an actual average exchange rate of U.S.$1.00 = C$1.30. (3) Revenues target has been adjusted to reflect actual fuel surcharges invoiced to clients based on actual oil and diesel prices in 2017. (4) Diluted Earnings per Share 2017 result was adjusted and excludes a net deferred income tax recovery of C$1,706 million (C$2.25 per diluted share) resulting from tax enactments, including the U.S. tax reform. (5) Adjusted Earnings per Share and Free cash flow are non-GAAP measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, may not be comparable to similar measures presented by other companies and as such, should not be considered in isolation. See the sections entitled Adjusted performance measures and Liquidity and capital resources Free cash flow in CNs Managements Discussion and Analysis included in the Companys 2017 Annual Report for explanations of these measures and reconciliations to the nearest U.S. GAAP measures. (6) As indicated in note (5), free cash flow does not have any standardized meaning prescribed by U.S. GAAP and, therefore, may not be comparable to similar measures presented by other companies. The Company believes that free cash flow is a useful measure of performance as it demonstrates the Companys ability to generate cash for debt obligations and for discretionary uses such as payment of dividends 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 changes in restricted cash and cash equivalents and the impact of major acquisitions, if any. (7) ROIC measures the Companys efficiency in the use of its capital funds and is viewed as a key measure of long-term value generation to its shareholders. ROIC is generally calculated as net income before interest expense, divided by the total of the average net indebtedness and the average shareholders equity and may, in certain instances, be adjusted for certain items as determined by the Committee. As such in 2017, ROIC result was adjusted to exclude a net deferred income tax recovery of C$1,706 million (C$2.25 per diluted share) resulting from tax enactments, including the U.S. tax reform. 43 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS IN MILLIONS (EXCEPT PER SHARE DATA AND ROIC) CORPORATE OBJECTIVES AS OF JANUARY 1, 2017 (1) CORPORATE OBJECTIVES AS ADJUSTED (2) RESULTS 2017 (C$) PERFORMANCE ASSESSMENT BASE (THRESHOLD/STRETCH TARGET)(MAXIMUM) WEIGHT(C$) (C$) BASE (THRESHOLD/STRETCH TARGET)(MAXIMUM) (C$) (C$) Revenues 25%12,33212,542 Operating Income25%5,2705,415 Diluted Earnings per Share15%$4.62$4.77 Free Cash Flow (5)(6) 20%2,4202,535 ROIC (7) 15%15.5%16.1% 12,357 (3) 12,567 (3) 5,1915,336 $4.56$4.71 2,3592,474 15.5%16.1% 13,041 5,558 $4.99 (4) (5) 2,778 16.77% Exceeds Exceeds Exceeds Exceeds Exceeds 70% 10% 20%
As the economy strengthened in 2017, so did customer demand, and CN hit record volumes in a number of areas, especially in international intermodal, frac sand, coal, propane, and potash. As a result the revenues increased by eight percent to C$13,041 million compared to prior year. Records were also attained in operating income, as well as in reported and adjusted net income and earnings per share while the Company continued to reinvest in the business with 2017 capital spending of C$2.7 billion. In 2017, CNs dividend was increased by 10% and 20.4 million shares were repurchased, returning over C$3.2 billion to shareholders. For 2017, after considering the financial results against established corporate objectives on a currency adjusted basis, the Board of Directors assessed the corporate performance at exceeds, resulting in a corporate performance factor of 150% (and 200% for 206 executives and senior management employees, including the NEOs). 2. Corporate Safety Performance: 10% of the annual bonus target was linked to the Companys safety performance. In 2017, the Board of Directors assessed the Companys corporate safety performance against two safety performance metrics with equal weighting: FRA accident and injury ratio. Under the terms of the AIBP, the performance factor for the corporate safety component can range from 0% to 200%. In 2017, the individual objectives of the NEOs included both quantitative measures and qualitative strategic and operational considerations related to their function. At year-end, the former President and CEO reviewed the performance of the other NEOs, taking into consideration their achievements against their pre-determined individual objectives and determined their individual bonus factor, subject to Committee review and Board approval. The Committee then reviewed and reflected on each NEOs individual achievements against objectives, as well as their overall leadership in meeting their functions objectives. For 2017, the overall average individual bonus factor for the NEOs, including the former President and CEO, was 102%. Any annual incentive bonus payout under the corporate safety and individual component is conditional upon a payout being declared under the corporate financial component. In addition, should corporate financial performance be assessed at partially meets (i.e., a corporate financial performance factor below 100%), the corporate safety and individual performance factors will be pro-rated to the same level. The following formula illustrates how an eligible executive employees annual base salary (as at December 31, 2017), target payout (expressed as a percentage of base salary), corporate financial, corporate safety and individual performance factors interact in the determination of the actual annual bonus payout: Corporate Safety Performance Objectives and Results 2017 Annual Incentive Bonus Plan payout salary factor + Annual salary Corporate financial when below 100% payout performance + In 2017, CN continued to focus on its objective of being the safest railroad in North America. As a result of significant volume growth, challenging operating conditions and the coming on board of new railroaders, safety targets were not met. The Company continues to focus on employee safety. Key initiatives in 2017 as part of CNs continued focus on its safety agenda include the Just Culture initiative that was launched to embed the required behaviors to improve the safety culture as well as a safety challenge where all CN employees were invited to provide ideas and solutions, via an innovation forum, on how CN can reduce personal injuries. For 2017, after considering the operational results against established safety objectives, the Board of Directors assessed the corporate safety performance of the Company at does not meet, resulting in no payout for the safety bonus component. 3. Individual Performance: 20% of the bonus was based on personal business-oriented objectives that considered the strategic and operational priorities related to each executives respective function, with a strong overall focus on: operational and service excellence, delivering superior growth, evolving strategy, workforce engagement and talent management, stakeholder and regulatory engagement, and safety and sustainability. The individual performance factor can range from 0% to 200% for NEOs and other executives and senior management employees. For all other eligible management employees, the performance factor can range from 0% to 150%. The individual performance factor for the President and CEO position is based on an individual assessment reviewed and approved by the Committee. X X X X base 20% performance performance factor payout The average bonus payout for the NEOs (consisting of the corporate financial performance factor, the corporate safety performance factor, and the individual performance factor) was 160% of target payout in 2017. The actual payouts are reported in the Summary Compensation Table on page 53, under the column Non-equity incentive plan compensation Annual incentive plans. Executives, including the NEOs, and senior management employees, are required to provide the Company with a six-month notice period prior to retirement. This measure was instituted to allow for improved succession planning and to maximize the effectiveness of transitions. Employees who fail to provide such notice forfeit any accrued and future bonus under the AIBP, save for specific and exceptional circumstances. Long-Term Incentives The Board of Directors considers a number of factors to assess the Companys long-term incentive strategy, including the balance between long-term value creation and shareholder wealth protection, executive stock ownership position versus stock option holdings, executive retention risk, as well as the dilution impact of different long-term incentive vehicles. Since 2005, the Board of Directors has elected to grant a combination of stock options and PSUs to NEOs, as well as to designated executives and senior management employees. 44 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018 AnnualTarget IndividualCorporate financial salaryfactor when below 100% Corporate base X Target X 10% XsafetyXperformance factor factor SAFETY OBJECTIVES AS OF JANUARY 1, 2017 RESULTS 2017 PERFORMANCE ASSESSMENT BASE STRETCH WEIGHT (THRESHOLD)(MAXIMUM) FRA Accident 50%1.601.50 Ratio (per million of train miles) FRA Injury 50%1.601.50 Ratio (per 200,000 person hours) 1.83 1.83 Does Not Meet Does Not Meet AnnualCorporate financial base XTarget X70%Xperformance
In 2014, the Company changed the methodology used for the valuation of long-term incentives to reinforce alignment throughout the compensation review process. As a result, LTI values disclosed in the Summary Compensation Table on page 53 are calculated using the Willis Towers Watson expected life binomial methodology. The same valuation methodology is also used for benchmark and grant purposes. This valuation methodology provides for precise and comparable compensation information. In 2016, the Company further adjusted its methodology and introduced a rolling three-year valuation factor to limit year-over-year fluctuations of the valuation factor for both stock options and PSUs. PSUs and stock options are weighted 55% and 45% of the long-term incentive award value, respectively, except for the President and CEO position. The President and CEOs long-term incentive award has a smaller relative weight in stock option value, due to the 20% limitation on the number of stock options that can be awarded to any one individual in a particular year, pursuant to the terms of the Management Long-Term Incentive Plan (please refer to page 58 for a description of the plan). of PSUs is subject to the achievement of performance measures defined at the beginning of the cycle and the payout can range from 0% to 200%. At the end of the performance cycle, the number of PSUs will be adjusted based on the achievement of the performance conditions detailed below. PSUs will be settled in CN common shares purchased on the open market. PSUs awarded in 2017 will be subject to the following two performance measures: 1. PSUs ROIC Seventy percent (70%) of the PSU award value is subject to the achievement of a target related to the Companys average three-year ROIC over the plan period and the payment will be conditional upon meeting a minimum average closing share price during the last three months of 2019. The ROIC for each of the applicable plan years is generally calculated as net income before interest expense, divided by the total of the Companys average net indebtedness and the average shareholders equity, and may, in certain instances, be adjusted for certain items as determined by the Committee. ROIC measures the Companys efficiency in the use of its capital funds and is viewed as a key measure of long-term value generation to its shareholders. The decision to use the ROIC performance measure for both short-and long-term incentives is based on a prudent risk management approach in order to focus on ROIC over different time periods (one year vs. three years). Moreover, the weighting of the ROIC condition under the AIBP is limited to 15% of the corporate component. Finally, ROIC performance objectives are based on CNs business plan. PSUs ROIC granted in 2017 to NEOs and other designated employees are subject to the attainment of the performance measures presented in the table below: PERFORMANCE LTI Award 45% Stock Options 55% PSUs 70% ROIC + Minimum Share Price Conditions 30% Relative TSR Performance VESTING FACTOR (1) OBJECTIVE PERFORMANCE OBJECTIVE: Average ROIC for the three-year period ending on December 31, 2019 Below 13.5% 13.5% 14.5% 16.0% 16.5% 17.0% and above 0% 50% 100% 125% 150% 200% 50% 50% S&P/TSX 60 Selected Class I Railroads The annual grant of PSUs and stock options to NEOs and other eligible employees is reviewed and approved at the meetings of the Committee and the Board of Directors, which occur each year in January. In order to determine each NEOs LTI award, the Committee takes into consideration individual performance, retention risk and succession plans, as well as the Companys compensation philosophy and the value of LTIs granted by the selected Class I Railroads included in the comparator group (please refer to section Benchmarking Using Comparator Groups on page 41). The Committee does not consider previous executive grants when setting the individual awards, as the LTI plans are inherently performance-based. The Board may also, at its discretion, approve additional grants of PSUs and stock options to NEOs during the year. The exercise price of the stock options granted is equal to the closing price of the Companys common shares on the TSX or the NYSE on the grant date. A minimum active service condition exists for stock options and PSUs to support the retention of key talent approaching retirement. The minimum active service condition is 12 months for stock options and 15 months for PSUs. Should an executive, including NEOs, or other management employees retire prior to the end of the minimum service condition in the award agreement, PSUs and stock options awarded pursuant to that agreement would be forfeited. Performance Share Units: 2017 Award The objective of the PSUs is to enhance the Companys ability to attract and retain talented employees and to provide alignment of interests between such employees and the shareholders of the Company. PSUs vest after three years and the grant date fair value of the PSUs awarded to each NEO in 2017 is included in the Summary Compensation Table on page 53, under the Share-Based Awards column. The vesting PAYOUT CONDITION: Minimum average closing share price for the last three months of 2019 C$90.56 on the TSX or U.S.$67.92 on the NYSE (1) Interpolation applies between objectives. 2. PSUs TSR Thirty percent (30%) of the PSU award value is subject to CNs Relative TSR measured against two equally-weighted comparator groups: i) selected Class I Railroads, and ii) S&P/TSX 60 companies. Relative TSR performance measures CNs share price appreciation, inclusive of dividends, over the three-year plan period against the companies within each comparator group. PSUs TSR awarded in 2017 to NEOs and other designated employees are subject to the attainment of the performance measures presented in the table below: TSR RELATIVE TO SELECTED CLASS I RAILWAYS CNR PAYOUT 1st 2nd 3rd 4th 5th 200% 150% 100% 50% 0% TSR RELATIVE TO S&P/TSX 60 CNR PAYOUT (1) 75th Percentile and above 50th Percentile 25th Percentile Less than the 25th Percentile 200% 100% 50% 0% (1) Interpolation between points. 45 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS
The grant date fair value of the PSUs awarded to each NEO in 2017 is included in the Summary Compensation Table on page 53, under the Share-Based Awards column. Performance Share Units: 2015 Award Payout The 2015 PSU award was the first grant that included the relative TSR measure as one of the performance vesting conditions. As a result, the PSUs awarded in 2015 to NEOs and other designated employees vested based on the achievement of performance targets for each measure: ROIC PSUs and Relative TSR PSUs. Over the past three years, CNs share price has increased by 29.5% in Canada, in comparison to a 10.8% increase of the S&P/TSX Composite Index. The Companys market capitalization in Canada has increased by nearly C$12 billion during this same period. ROIC PSUs (70% of the grant value): The Company delivered a three-year average ROIC of 16.7%, resulting in a performance vesting factor of 135% (out of a maximum of 200%). As the minimum average closing share price condition was also met, payout occurred in February 2018 in accordance with the Share Units Plan and the 2015 award agreement. Relative TSR PSUs (30% of the grant value): The Company delivered a TSR performance of 39.5% (1) over the period from January 1, 2015 to December 31, 2017, resulting in an overall performance vesting factor of 142.3% (out of a maximum of 200%), reflecting the weighted average performance vesting factor of both measures (100% for Class I Railways and 184.6% for S&P/TSX 60). As part of the equity-settlement conversion introduced in 2014, PSUs were settled on February 23, 2018 in CN common shares purchased on the open market. The value vested during the year for each NEO is included in the table Incentive Plan Awards Value Vested or Earned During the Year, and under the Share-Based Awards Value Vested During the Year column on page 57. Stock Options Stock options were granted in 2017 to NEOs and other designated employees pursuant to the Management Long-Term Incentive Plan (MLTIP). Please refer to page 58 for details of the MLTIP. The stock options granted in 2017 vest over four years at a rate of 25% at each anniversary date and have a ten-year term. Grants were made in the currency of the recipients salary. Stock options are granted with the objective of rewarding NEOs and other designated employees for creating sustainable, long-term shareholder value. If the share price increases between the grant date and the vesting date, stock options will have a realizable value. Gains are realized once the stock options are exercised. The gain will be equivalent to the difference between the share price on the date of exercise and the grant date share price, multiplied by the number of stock options exercised. The grant date fair value of the stock options awarded to NEOs in 2017 is included in the Summary Compensation Table on page 53, under the Option-Based Awards column. Executive Perquisites NEOs are eligible to receive perquisites and personal benefits in accordance with the Companys policy and in line with general market practice. These typically include the use of a Company-leased vehicle, parking, financial counselling and tax services, club membership, certain healthcare benefits and life insurance, and an annual executive physical exam. Other executives and senior management employees are also eligible to receive select perquisites; the type and value of the perquisites are generally determined by the grade of the employees position. All executives must comply with the aircraft utilization policy, which restricts the usage of the corporate aircraft to business-related purposes only, save for exceptional circumstances and provided all incremental costs are fully reimbursed. Tax gross-ups on the value of certain executive perquisites have been eliminated. Employee Share Investment Plan The Employee Share Investment Plan (ESIP), available to all Company employees, provides the opportunity to participate in CNs ownership through the purchase of CN common shares on the open market via payroll deductions. Employees may contribute between 1% and 10% of their gross base salary to the ESIP every pay period. The Company provides a 35% match on the first 6% of employee contributions. Over 80% of CNs employees are shareholders of the Company through participation in the ESIP, and in 2017, all NEOs participated in the ESIP. The value of the Company match received by NEOs in 2017 under the ESIP is indicated in the Details of the All Other Compensation Amounts table on page 55. Performance Objectives and Results Performance Share Units 2015 Award ROIC PSUs 70% of the grant value: PERFORMANCE VESTING FACTOR (1) OBJECTIVE RESULTS PERFORMANCE OBJECTIVE: Average ROIC for the three-year period ended on December 31, 2017 Below 14.0% 14.0% 15.0% 16.5% 17.0% 17.5% and above 0% 50% 100% 125% 150% 200% 16.7% (2) translating into a payout factor of 135% PAYOUT CONDITION: Minimum average closing share price for the last three months of 2017 C$77.59 on the TSX or U.S.$67.20 on the NYSE C$102.34 U.S.$80.54 (1) Interpolation applies between objectives. (2) Adjusted to exclude deferred income taxes resulting from various tax enactments, including U.S. tax changes. If no adjustment had been performed for the U.S. tax changes, the payout factor would have been 200%. Relative TSR PSUs 30% of the grant value: TSR RELATIVE TO SELECTED CLASS I RAILWAYS (15% OF THE GRANT VALUE) CNR PAYOUT RESULTS 1st 2nd 3rd 4th 5th 200% 150% 100% 50% 0% Other Key Compensation Programs of the Company Stock Ownership The Committee strongly supports stock ownership by executives. Stock ownership guidelines require a minimum level of stock ownership, set as a multiple of base salary, to be achieved within a five-year period to align the interests of executives with those of shareholders. As at December 31, 2017, 206 executives and senior management employees are subject to share ownership guidelines. Once executives and senior management employees have met their initial shareholding requirements, they are required to maintain compliance, which is reported annually to the Committee. Stock ownership guidelines can be met through the holding of common shares and vested deferred share units under the 39.5% TSR resulting in the 3rd place ranking and translating into a payout factor of 100% TSR RELATIVE TO S&P/TSX 60 (15% OF THE GRANT VALUE) CNR PAYOUT (1) RESULTS 75th Percentile and above 50th Percentile 25th Percentile Less than the 25th Percentile 200% 100% 50% 0% 39.5% TSR resulting in the 71st percentile and translating into a payout factor of 184.6% (1) Interpolation between points. (1) TSR performance is calculated using CNR 20-day share price average immediately prior to January 1, 2015 (including dividend reinvestment) and CNR 20-day share price average ending on December 31, 2017 (including dividend reinvestment). The same calculation is used for all companies part of both comparator groups. 46 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018
Companys Voluntary Incentive Deferral Plan (VIDP). Stock options (vested or unvested) and unvested LTI grants are not considered towards the minimum level of stock ownership. Stock ownership requirements are as follows: The provisions state that acceleration of vesting would not occur if a proper substitute to the original stock options or PSUs is granted to the participant. If such substitute is granted and a participant is terminated without cause or submits a resignation for good reason within 24 calendar months after a Change of Control, all outstanding substitute stock options or PSUs which are not then exercisable shall vest and become exercisable or payable in full upon such termination or resignation. Substitute stock options that are vested and exercisable shall remain exercisable for a period of 24 calendar months from the date of such termination or resignation and PSUs shall be remitted within 30 days. Discretion is left to the Board of Directors to take into account special circumstances. The definition of a resignation for good reason is included in the Termination and Change of Control Benefits table on page 62. Non-Compete / Non-Solicitation Provisions Non-compete and non-solicitation provisions are included in the PSU and stock option award agreements for all executives and other management employees. In 2010, the Board of Directors approved the inclusion of non-compete and non-solicitation provisions to certain supplemental retirement plans and arrangements. Such provisions were also harmonized in 2010 and 2011 across the non-registered pension plans that apply to all executives and senior management employees. Non-compete and non-solicitation provisions will be applied if a recipient fails to comply with certain commitments for a two-year period following termination of employment. Those commitments prohibit: a) the use of confidential CN information for any purpose other than performing his or her duties with CN; b) engaging in any business that competes with CN; c) soliciting, accepting the business of a customer, client, supplier or distributor of CN or hiring or engaging employees of CN; d) taking advantage or profit from any business opportunity of which they became aware in the course of employment with CN; and GUIDELINES President and CEO Executive and Senior Vice-Presidents Vice-Presidents Senior Management 5 times base salary 3 times base salary 1.5 to 2 times base salary 1 times base salary The President and CEO is also required to maintain his stock ownership guideline level until one year after retirement. As at December 31, 2017, all NEOs achieved their share ownership requirements. Stock Ownership Status as at December 31, 2017 VALUE REQUIRED HOLDINGS AS A MULTIPLE NUMBER VALUE OF (2) TO MEET (3) NAMED EXECUTIVE OFFICER OF SHARES HOLDINGS (C$) GUIDELINES (C$) OF BASE SALARY (3) HELD (1) (1) Common shares and/or vested deferred share units as at December 31, 2017. (2) Value is based on the closing share price of the common shares on December 31, 2017, on the TSX (C$103.65). (3) U.S.$ salaries as at December 31, 2017, were converted to Canadian dollars using the average rate during the year (U.S.$1.00 = C$1.2986). Anti-Hedging Policy Under the Companys Insider Trading and Reporting Policy, no directors, officers or employees can engage in hedging activity or in any form of transactions in publicly-traded options on CN securities. This relates to all forms of derivatives, including puts and calls. Change of Control Provisions The Management Long-Term Incentive Plan and the Share Units Plan include double trigger provisions. Pursuant to such provisions, the vesting of non-performance stock options or PSUs held by a participant would not accelerate upon a Change of Control, unless the participant is terminated without cause or resigns for good reason. A Change of Control means any of the following events: a) in the event the ownership restrictions in the CN Commercialization Act are repealed, a formal bid for a majority of the Companys outstanding common shares; b) approval by the Companys shareholders of an amalgamation, merger or consolidation of the Company with or into another corporation, unless the definitive agreement of such transaction provides that at least 51% of the directors of the surviving or resulting corporation immediately after the transaction are the individuals who, at the time of such transaction, constitute the Board and that, in fact, these individuals continue to constitute at least 51% of the board of directors of the surviving or resulting corporation during a period of two consecutive years; or c) approval by the Companys shareholders of a plan of liquidation or dissolution of the Company. e) taking any action as a result of which relations between CN and its consultants, customers, clients, suppliers, distributors, employees or others may be impaired or which might otherwise be detrimental to the business interests or reputation of CN. Executive Compensation Clawback CNs clawback policy, adopted in 2008, applies to all CN executives. Under this policy, the Board may, in its sole discretion, to the full extent permitted by governing laws and to the extent it determines that it is in the Companys best interest to do so, require reimbursement of all or a portion of annual and long-term incentive compensation received by an executive. The Board of Directors may seek reimbursement of full or partial compensation from an executive or former executive officer in situations where: a) the amount of incentive compensation received by the executive or former executive officer was calculated based upon, or contingent on, the achievement of certain financial results that were subsequently the subject of or affected by a restatement of all or a portion of the Companys financial statements; b) the executive officer engaged in gross negligence, intentional misconduct or fraud that caused or partially caused the need for the restatement; and c) the incentive compensation payment received would have been lower had the financial results been properly reported. 47 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS Jean-Jacques Ruest Luc Jobin Ghislain Houle Michael Cory Sean Finn 276,14928,622,8432,318,00137.0 x 114,33311,850,6156,979,9758.5 x 107,20411,111,6942,201,12715.1 x 42,7954,435,7012,318,0015.7 x 68,0557,053,9002,162,1699.8 x
In addition, with respect to bonus or incentive based compensation awarded after March 7, 2017, in the event that any executive officer is found to have engaged in gross negligence, intentional misconduct, fraud, theft or embezzlement, whether or not there is a financial restatement, the Board may in its discretion, to the full extent permitted by governing law and to the extent it determines that it is in CNs best interest to do so, require the reimbursement of some or all of the after-tax amount of any incentive compensation already paid in the previous 24 months or forfeit his or her vested or unvested incentive awards in accordance with plan terms. The LTI awards, which constitute a significant portion of NEO compensation, vest over a three-or four-year period, motivating executives to create longer-term value. The performance measures used within the Share Units Plan reflect an appropriate balance between financial and share price conditions. Payout of PSUs subject to ROIC performance is also contingent upon meeting a minimum share price condition that triggers payment only if share price appreciates during the three-year term. The use of relative TSR performance measures strengthen alignment between executive pay and shareholders return. The use of the same performance measure (ROIC) for the AIBP (one year) and PSUs (three-year average) ensures balance between short-and long-term performance sustainability on key capital investment expenditures. Fixed Limits on Variable Compensation The AIBP and the Share Units Plan are designed to include the possibility of a zero payout, as well as a pre-defined maximum. The former President and CEO participated in a Defined Contribution Plan, which limited CNs exposure to risk. Risk Mitigation in Our Compensation Program One of the Companys fundamental goals is to create sustained shareholder value. To support this objective, the Committee focuses on developing and recommending an executive compensation philosophy and program that aligns with the Companys business strategy, emphasizes pay-for-performance, and encourages the right behaviours. Hence, many characteristics of the Companys executive compensation program serve to mitigate risk and emphasize the importance of longer-term value creation: Structured Process An annual review of the performance measures under the Companys AIBP and Share Units Plan takes place to ensure their continued relevance. The Committee completes a formal assessment of performance each year, and can then use discretion to increase or decrease any compensation awards if it deems appropriate based on market factors or other extenuating circumstances. Stress-testing exercises are performed annually for proposed LTI grants and results are presented to the Committee for their consideration prior to the Committee and the Board approving such grants. Protection Mechanisms The Companys executive compensation clawback policy allows the Board, in certain situations, to request the full or partial reimbursement of annual and long-term incentive awards received by executives (please refer to section Executive Compensation Clawback on page 47 for more information). The NEOs are not governed by employment contracts and the long-term incentive plans include double-trigger provisions, such that the vesting of LTI awards would generally not accelerate upon a Change in Control. Under the Companys Insider Trading and Reporting Policy, directors, executives and employees are prohibited from engaging in hedging activities against CN securities. In order to further align their interests with those of shareholders, executives and senior management employees (206 individuals) are required to meet specific stock ownership guidelines. In addition, the President and CEO must maintain his stock ownership level for one year after retirement (please refer to section Stock Ownership on page 47 for more information). Commencing at various dates, for executives and senior management employees, the payout of LTI awards and the payment of retirement benefits under the Companys non-registered pension plans are conditional on compliance with the conditions of their benefit plans, award or employment agreements, including, but not limited to, non-compete, non-solicitation, non-disclosure of confidential information and other restrictive covenants (please refer to section Non-Compete/Non-Solicitation Provisions on page 47 for more information). Balanced Program The compensation program appropriately balances fixed and variable pay, as well as short-and long-term incentives (in aggregate, approximately 80% of NEOs target total direct compensation is directly linked to the Companys performance). The corporate component of the AIBP includes five performance measures that are appropriately balanced between top-line and bottom-line measures, thus diversifying the risk associated with the use of any single performance measure (please refer to section Annual Incentive Bonus Plan on page 42 for more information). The safety component of the AIBP includes two standard safety metrics and further increases diversification of the plan, thus reducing the potential risk associated with the plan. There are multi-year, overlapping performance periods for the PSUs and stock options, which encourages consistent, long-term behaviour and mitigates risk. 48 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018
Independent Advice Management retains the services of an external executive compensation consultant to assist in compensation-related matters for its executives. The Committee retains the services of an independent executive compensation consultant to provide advice on compensation recommendations that are presented for Committee approval. Seven years ago, Willis Towers Watson was mandated to review the Companys compensation policy, programs and practices and assessed any potential risk implications and concluded that there does not appear to be significant risks arising from CNs compensation programs that are reasonably likely to have a material adverse effect on the Company. The Committee played an active role in reviewing the risk assessment report and in discussing the improvement actions suggested by Willis Towers Watson. CN has since requested that Willis Towers Watson annually review the actions taken by CN since the initial risk assessment report and comment on any potential risks. In December 2017, Willis Towers Watson considered the actions taken by CN and once again confirmed that overall, there do not appear to be significant risks arising from CNs compensation programs that are reasonably likely to have a material adverse effect on the Company. The Committee supports the conclusion from the Willis Towers Watson risk assessment report and in its own assessment determined that proper risk mitigation features are in place within the Companys compensation programs. Throughout the year, the Committee plays an important oversight role related to the identification and management of risks associated with CNs compensation programs and practices. For example, in camera sessions, restricted to members of the Committee, are held at the start of each of the Committee meetings to allow for discussion regarding any compensation or risk-related issue. The Committee also believes in the benefits of a certain level of overlapping membership between the Audit and the Human Resources and Compensation Committees, particularly with regard to risk monitoring. As such, Donald J. Carty, Chair of the Audit Committee, is a member of the Human Resources and Compensation Committee; and, Ambassador Gordon D. Giffin, Chair of the Human Resources and Compensation Committee, was a member of the Audit Committee until January 22, 2018. James E. OConnor, Chair of the Strategic Planning Committee, is also a member of the Human Resources and Compensation Committee; and, Ambassador Gordon D. Giffin is a member of the Strategic Planning Committee. These overlaps effectively provide a link between committees risk oversight responsibilities. Compensation of the NEOs Jean-Jacques Ruest INTERIM PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND EXECUTIVE VICE-PRESIDENT AND CHIEF MARKETING OFFICER On March 5, 2018, the Board of Directors appointed Mr. Ruest as the Interim President and CEO of the Company. Mr. Ruest maintains his duties as CNs Executive Vice-President and CMO, a position he has occupied since January 1, 2010. In that role Mr. Ruest is responsible for providing the strategic direction and leadership for CNs Sales, Marketing and Supply Chain Solutions groups. Mr. Ruest is a seasoned executive and has extensive marketing experience within the railway industry. Prior to joining CN, he had more than 15 years of experience working for a major international chemical company. Mr. Ruest holds a Masters in Business Administration in Marketing from HEC Montréal and a Bachelor of Science degree in Applied Chemistry from Université de Sherbrooke. He also completed the executive program from the University of Michigans business school. In 2017, as Executive Vice-President and CMO, Mr. Ruests base salary was increased to U.S.$595,000 (C$772,667) to reflect his competitive positioning and experience. As in 2016, Mr. Ruests target bonus for 2017 was 80% of base salary under the AIBP. In addition, Mr. Ruest received 22,249 PSUs and 67,942 stock options, in accordance with the terms of the Share Units Plan and the Management Long-Term Incentive Plan, respectively. 2017 AIBP Objectives In 2017, Mr. Ruests performance as Executive Vice-President and CMO, was assessed against individual performance objectives which included: delivering growth; price and profit margin yield; stakeholder engagement with customer community, employees, and investors; supply chain transformation platform; and safety and sustainability. Mr. Ruest was assessed as having met his overall individual performance objectives. Based on the Companys financial and safety performance, as well as on his individual assessment, Mr. Ruest received a 2017 annual bonus in the amount of U.S.$761,600 (C$957,407). 2017 Target Total Direct Compensation Summary 2017 TOTAL DIRECT COMPENSATION (AT TARGET) AS A % OF TOTAL DIRECT COMPENSATION U.S.$ Salary 595,000 20.7% AT-RISK COMPENSATION Annual Incentive Bonus Performance Share Units Stock Options 476,000 990,074 809,869 16.6% 34.5% 28.2% TOTAL DIRECT COMPENSATION (TARGET) 2,870,943 2017 Target Pay Mix 79.3% Pay-at-Risk 49 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS 20.7% Base Salary 62.7% LTI (Fair Value) 16.6% Target Bonus
Luc Jobin FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER Ghislain Houle EXECUTIVE VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER Mr. Jobin became President and CEO of CN on July 1, 2016. On March 5, 2018, the Board of Directors announced that Mr. Jobin had left the Company. As President and CEO, Mr. Jobin was responsible for providing leadership and vision for CN, as well as achieving strategic and operational goals that would build long-term shareholder value. In 2017, Mr. Jobins base salary was increased to U.S.$1,075,000 (C$1,395,995) to maintain his competitive position against market, and his target bonus under the AIBP was 120% of base salary, unchanged from 2016 when he was appointed President and CEO. PSUs and stock options were granted to the former President and CEO pursuant to the Share Units Plan and the Management Long-Term Incentive Plan. Grants to the former President and CEO were made on the same basis and conditions as those to the other NEOs of the Company, subject to the 20% limitation under the Management Long-Term Incentive Plan. In 2017, Mr. Jobin received 80,554 PSUs and 172,000 stock options. The fair value of these awards is included in the Summary Compensation Table on page 53, under the Share-Based Awards and Option-Based Awards columns. 2017 AIBP Objectives Mr. Jobins performance in 2017 was assessed against individual performance objectives, approved by the Committee and the Board which included: operational and service excellence (20%); top-line focus, business development and evolving strategy (20%); safety and sustainability (20%); employee engagement, corporate culture and team building (20%); and stakeholder and regulatory engagement (20%). The Committee reviewed Mr. Jobins performance in each area. Mr. Jobin was assessed as having partially met his overall individual performance objectives, resulting in an individual performance factor of 89%. Based on the Companys financial and safety performance, as well as Mr. Jobins individual performance, the Committee recommended to the Board the approval of an annual incentive bonus payout of U.S.$2,035,620 (C$2,558,978). Mr. Houle was appointed Executive Vice-President and CFO on July 1, 2016. His responsibilities at CN include financial management, investor relations, procurement and supply management. Mr. Houle joined the Company in 1997 and occupied various executive roles, including Vice-President and Corporate Comptroller and Vice-President, Financial Planning, before being appointed to his current position. In 2017, Mr. Houles base salary was increased to U.S.$565,000 (C$733,709) to reflect his competitive positioning and experience. Under the AIBP, his 2017 target bonus was 80% of base salary. In addition, Mr. Houle received 18,542 PSUs and 56,618 stock options in 2017, in accordance with the terms of the Share Units Plan and the Management Long-Term Incentive Plan, respectively. 2017 AIBP Objectives Mr. Houles performance in 2017 was assessed against individual performance objectives which included: solid, disciplined finance function; operational and service excellence; evolving strategy agenda; employee engagement, corporate culture, and team building; and stakeholder and regulatory engagement. Mr. Houle was assessed as having met his overall individual performance objectives. Based on the Companys financial and safety performance, as well as on his individual assessment, Mr. Houle received a 2017 annual bonus in the amount of U.S.$732,240 (C$920,499). 2017 Target Total Direct Compensation Summary 2017 TOTAL DIRECT COMPENSATION (AT TARGET) AS A % OF TOTAL DIRECT COMPENSATION U.S.$ Salary 565,000 22.4% AT-RISK COMPENSATION Annual Incentive Bonus Performance Share Units Stock Options 452,000 825,118 674,887 18.0% 32.8% 26.8% TOTAL DIRECT COMPENSATION (TARGET) 2,517,005 2017 Target Pay Mix 2017 Target Total Direct Compensation Summary 2017 TOTAL DIRECT COMPENSATION (AT TARGET) AS A % OF TOTAL DIRECT COMPENSATION U.S.$ Salary 1,075,000 13.5% 77.6% Pay-at-Risk AT-RISK COMPENSATION Annual Incentive Bonus Performance Share Units Stock Options 1,290,000 3,584,639 2,050,240 16.1% 44.8% 25.6% TOTAL DIRECT COMPENSATION (TARGET) 7,999,879 2017 Target Pay Mix 86.5% Pay-at-Risk 50 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018 13.5% Base Salary 70.4% LTI (Fair Value) 16.1% Target Bonus 22.4% Base Salary 59.6% LTI (Fair Value) 18.0% Target Bonus
Michael Cory EXECUTIVE VICE-PRESIDENT AND CHIEF OPERATING OFFICER Sean Finn EXECUTIVE VICE-PRESIDENT CORPORATE SERVICES AND CHIEF LEGAL OFFICER Mr. Cory is responsible for the Companys North American rail operations. He was appointed Executive Vice-President and COO on July 1, 2016. Mr. Cory started with CN in 1981 at the Symington Yard Diesel Shop in Winnipeg. Over the years, he has held various operations positions before leading two out of the three CN operating regions as Senior Vice-President, Eastern Region, and Senior Vice-President, Western Region, from April 2009 until his appointment as Executive Vice-President and COO. In 2017, Mr. Corys base salary was increased to U.S.$595,000 (C$772,667) to reflect his competitive positioning and experience. Under the AIBP, his 2017 target bonus was 80% of base salary. In addition, Mr. Cory received 22,249 PSUs and 67,942 stock options in 2017, in accordance with the terms of the Share Units Plan and the Management Long-Term Incentive Plan, respectively. 2017 AIBP Objectives Mr. Corys performance in 2017 was assessed against individual performance objectives which included: operational and service excellence; delivering safely and responsibly; creating value for customers and shareholders (cost containment and asset utilization); and people. Mr. Cory was assessed as having met his overall individual performance objectives. Based on the Companys financial and safety performance, as well as on his individual assessment, Mr. Cory received a 2017 annual bonus in the amount of U.S.$771,120 (C$969,375). Mr. Finn was appointed Senior Vice-President, Chief Legal Officer and Corporate Secretary, in December 2000 and CNs Executive Vice-President Corporate Services and CLO in December 2008. He is responsible for a wide array of legal, governmental, regulatory, public affairs, risk mitigation and security matters. As Corporate Secretary, he is also responsible for CNs Corporate Governance practices, as well as overseeing CNs Code of Business Conduct and ethics program. Mr. Finn led CNs tax function and was appointed CNs Vice-President, Treasurer and Principal Tax Counsel, in January 2000. Before joining the Company, he was the Managing Tax Partner for a major Montreal law firm. Mr. Finn graduated from the Faculty of Law of Université de Montréal, after which he was admitted to the Quebec Bar, and is a member of the Canadian and American Bar Associations. Mr. Finn has completed the Directors Education Program offered by the Institute of Corporate Directors and the Rotman School of Management, as well as the Excellence in the Boardroom Program at the Rotman School of Management, Executive Programs, University of Toronto. In 2017, Mr. Finns base salary was increased to U.S.$555,000 (C$720,723) to reflect his competitive positioning and experience. As in 2016, Mr. Finns target bonus for 2017 was 80% of base salary under the AIBP. In addition, Mr. Finn received 17,305 PSUs and 52,844 stock options, in accordance with the terms of the Share Units Plan and the Management Long-Term Incentive Plan, respectively. 2017 AIBP Objectives Mr. Finns performance in 2017 was assessed against individual performance objectives which included: successfully taking CNs stakeholder engagement to the highest standards; leading key strategic initiatives associated with corporate services; leadership development and succession; corporate governance and CN Board; and being a trusted advisor to the Board and the executive team at CN. Mr. Finn was assessed as having met his overall individual performance objectives. Based on the Companys financial and safety performance, as well as on his individual assessment, Mr. Finn received a 2017 annual bonus in the amount of U.S.$710,400 (C$893,044). 2017 Target Total Direct Compensation Summary 2017 TOTAL DIRECT COMPENSATION (AT TARGET) AS A % OF TOTAL DIRECT COMPENSATION U.S.$ S alary 595,000 20.7% AT-RISK COMPENSATION Annual Incentive Bonus Performance Share Units Stock Options 476,000 990,074 809,869 16.6% 34.5% 28.2% TOTAL DIRECT COMPENSATION (TARGET) 2,870,943 2017 Target Pay Mix 2017 Target Total Direct Compensation Summary 2017 TOTAL DIRECT COMPENSATION (AT TARGET) AS A % OF TOTAL DIRECT COMPENSATION U.S.$ Salary 555,000 23.1% 79.3% Pay-at-Risk AT-RISK COMPENSATION Annual Incentive Bonus Performance Share Units Stock Options 444,000 770,069 629,900 18.5% 32.1% 26.3% TOTAL DIRECT COMPENSATION (TARGET) 2,398,969 2017 Target Pay Mix 76.9% Pay-at-Risk 51 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS 23.1% Base Salary 58.4% LTI (Fair Value) 18.5% Target Bonus 20.7% Base Salary 62.7% LTI (Fair Value) 16.6% Target Bonus
President and CEO Compensation Look-Back Table and Five-Year TSR Comparison CNs compensation plans are designed to align compensation with the creation of shareholder value. As a result, a significant portion of compensation is at risk and long-term incentives are structured to deliver compensation value to the President and CEO if value is created for shareholders. In a low share performance environment, limited value would be delivered to the President and CEO. Over the last five years, CNs strong operational and financial performance resulted in above target payouts, reflective of the Companys TSR performance of 149%. The table below compares the total direct compensation awarded to CNs President and CEOs over the past five years, as reflected in the Summary Compensation Table, to the current value (both realized and realizable) as at December 31, 2017. Compensation outcomes are set against the performance graph which indicates the yearly cumulative total shareholder return on a $100 investment in CNs common shares compared with the cumulative total return of the S&P/TSX and the S&P 500 Indices from the period beginning December 31, 2012 to the period ended December 31, 2017. It assumes reinvestment of all dividends during the covered period. $300 TOTAL DIRECT COMPENSATION CURRENT VALUE AS AT DEC. 31, 2017 (2) (C$000s) AWARDED (1) (C$000s) $200 $100 CNR CNI S&P/TSX S&P 500 (1) Includes salary and variable compensation awarded during the year, as reported in the Summary Compensation Table each year. (2) For any given year, the current value includes salary and annual incentive awarded and the value of long-term incentives (realized and realizable). Long-term incentives for any given year include the value of unexercised in-the-money stock options as at December 31, 2017 (none of the relevant stock options were exercised during the period), the value attributed to vested PSUs and the value of unvested PSUs as at December 31, 2017, assuming a 100% performance factor. (3) The compensation awarded for Mr. Mongeau was pro-rated to June 30, 2016. (4) PSUs awarded in 2016 were forfeited upon retirement on January 31, 2017 and were not included as at December 31, 2017. (5) The compensation awarded for Mr. Jobin was pro-rated to reflect the appointment date of July 1, 2016. $0 2012 2013 2014 2015 2016 2017 DEC-12 DEC-13 DEC-14 DEC-15 DEC-16 DEC-17 CNR (C$) CNI (U.S.$) S&P/TSX (C$) S&P 500 (U.S.$) 100 100 100 100 136 127 113 132 183 156 125 150 179 129 114 153 213 158 139 171 249 197 151 208 (1) (1) US tax reform has impacted the S&P 500 performance in 2017. Over the last five years, the total compensation paid, as per the Summary Compensation Table, increased by an average of 6.4% per year for the NEOs as a result of currency fluctuation and compensation increases. The total compensation for our NEOs over this period was generally aligned with the experience of our shareholders, as a substantial portion of NEOs total compensation is at risk and directly linked to CNs share price. The Committee believes that the Companys executive compensation policy is effective and appropriately supports a strong relationship between the compensation earned by NEOs and the investment return of shareholders. Cost of Management Ratio The cost of management ratio expresses the total compensation reported for the NEOs as a percentage of the Companys adjusted net income. 2013 2014 2015 2016 2017 Total compensation reported for the NEOs (C$ million) (1) Adjusted Net Income (C$ million) (2) 21.4 2,582 23.0 3,095 25.8 3,580 29.8 3,581 29.2 3,778 Cost of management ratio 0.8% 0.7% 0.7% 0.8% 0.8% (1) Total compensation as reported in the summary compensation table each year. (2) See the section entitled Adjusted performance measures in CNs Managements Discussion and Analysis included in the Companys 2017, 2016 and 2015 Annual Reports for an explanation of this measure and reconciliation to the nearest GAAP measure. 52 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018 Claude Mongeau Claude Mongeau Claude Mongeau Claude Mongeau (3) Luc Jobin (5) Luc Jobin 20137,51925,011 20149,21924,607 20159,84716,981 20165,7425,730 (4) 20165,4789,081 201711,79215,484
Compensation of the NEOs has been paid in U.S. dollars since 2002 as it provides a more precise, meaningful and stable comparison basis for compensation decisions with U.S.-denominated compensation from the selected Class I Railroad comparator group. A table presenting the compensation paid in U.S. dollars for the NEOs is presented on page 54 Total Compensation for the NEOs in U.S. Dollars. Summary Compensation Table in Canadian Dollars On March 5, 2018, the Board of Directors announced that Mr. Jobin had left the Company and appointed Mr. Jean-Jacques Ruest Interim President and Chief Executive Officer, in addition to retaining his position as Executive Vice-President and Chief Marketing Officer. The following table sets forth the annual total compensation in Canadian dollars for the NEOs, in accordance with the disclosure rules issued by the CSA, for the years ended December 31, 2017, 2016, and 2015. Fluctuation in the exchange rate affects year-over-year comparability. NON-EQUITY INCENTIVE PLAN COMPENSATION SHARE-BASED AWARDS (1) (C$) OPTION-BASED ANNUAL INCENTIVE PENSION ALL OTHER TOTAL AWARDS (2) (C$) PLANS (3) (C$) VALUE (4) COMPENSATION (5) COMPENSATION SALARY (C$) NAME AND PRINCIPAL POSITION YEAR (C$) (C$) (C$) *Appointed by the Board of Directors on March 5, 2018. Valuation Disclosure for Share-Based Awards The fair value of share-based awards at the grant date, as shown in the Summary Compensation Table above, reflects the number of PSUs awarded multiplied by the value calculated using the Willis Towers Watson expected life binomial methodology. This methodology was selected as it provides alignment throughout the compensation review process by using the same methodology for benchmarking, grant and disclosure purposes. A summary of the valuation factors calculated using the Willis Towers Watson expected life binomial methodology as well as under the accounting valuation methodology is presented in the following table. Detailed assumptions and valuation factors are presented on page 54. (1) January 28 C$8.65 January 28 (C$38.05) (2) Valuation Disclosure for Option-Based Awards The fair value of option-based awards at the grant date, as shown in the Summary Compensation Table above, reflects the number of stock options awarded multiplied by the value calculated using the Willis Towers Watson expected life binomial methodology. This methodology was selected as it provides alignment throughout the compensation review process by using the same methodology for benchmarking, grant and disclosure purposes. A summary of the valuation factors calculated using the Willis Towers Watson expected life binomial methodology as well as under the accounting valuation methodology is presented in the following table. Detailed assumptions for both methodologies are presented on page 54. (3) (4) (5) Represents the incentive award earned under the AIBP for the applicable year. Refer to page 42 for the details of the AIBP. Includes the compensatory value of pension benefits as reported in the Defined Benefit Plans and Defined Contribution Plans tables in the Pension Plan Benefits section on page 61. Includes the value of perquisites, personal benefits, and other compensation (as applicable), for example post-retirement benefits or the employer contribution under the ESIP. Perquisites and other personal benefits that, in aggregate, amount to less than C$50,000 or 10% of the total salary for any of the NEOs are not reported in this column. Details are provided in the table on page 55. Messrs. Jobin, Houle and Cory were appointed to their current position in 2016 and their compensation for that year reflects only a portion of their current position compensation. Mr. Jobins share-based award includes 4,824.34 deferred share units which represent the 25% Company-match awarded under the VIDP and vest over 4 years, upon the deferral of his 2016 AIBP. The grant date fair value of the award was calculated by multiplying the number of units by C$93.85, the share price on the day of the award. The pension plan value stated for Mr. Jobin excludes the notional investment earnings (and losses) from the Defined Contribution Supplemental Executive Retirement Plan. Refer to page 60 for details of the Defined Contribution Supplemental Executive Retirement Plans. Mr. Jobin was appointed President and CEO effective July 1, 2016. Mr. Jobins 2016 salary reflects six months as President and CEO and six months as Executive Vice-President and CFO. (6) (7) (8) (9) 53 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS WILLIS TOWERS WATSON EXPECTED LIFE BINOMIAL METHODOLOGY ACCOUNTING VALUATION METHODOLOGY VARIANCE VALUATION FACTORGRANT DATE FAIR VALUE VALUATION FACTORGRANT DATE FAIR VALUE WILLIS TOWERS WATSON VS. ACCOUNTING 2017 Option-Based Award17%C$15.62 2016 Option-Based Award19%July 27 C$15.94 January 28 C$14.09 2015 Option-Based Award20%C$16.91 15.6%C$14.37 July 27 14.5%July 27 C$12.18 January 28 14.0%January 28 C$10.39 15.6%C$13.22 C$1.25 July 27 C$3.76 January 28 C$3.70 C$3.69 WILLIS TOWERS WATSON EXPECTED LIFE BINOMIAL METHODOLOGY ACCOUNTING VALUATION METHODOLOGY VARIANCE VALUATION FACTORGRANT DATE FAIR VALUE VALUATION FACTORGRANT DATE FAIR VALUE WILLIS TOWERS WATSON VS. ACCOUNTING 2017 Share-Based Award ROIC 59%C$54.23 TSR 77%C$70.77 57.9%C$53.19 112.5%C$103.37 C$1.04 (C$32.60) 2016 Share-Based Award ROIC 59%July 27 C$49.50 January 28 C$43.76 TSR 77%July 27 C$64.60 January 28 C$57.11 July 27 66.4%July 27 C$55.68 January 28 47.3%January 28 C$35.11 July 27 116.6%July 27 C$97.85 January 28 128.3%January 28 C$95.16 July 27 (C$6.18) July 27 (C$33.25) 2015 Share-Based Award ROIC 59%C$49.88 TSR 78%C$65.95 60.2%C$50.87 135.8%C$114.86 (C$0.99) (C$48.91) Jean-Jacques Ruest Interim President and Chief Executive Officer*, and Executive Vice-President and Chief Marketing Officer 2017772,6671,297,5331,061,254957,407531,00021,5354,641,396 2016761,7601,333,2681,090,665813,435484,00021,2234,504,351 2015716,0721,179,933965,392575,762350,00020,4723,807,631 Luc Jobin (6) Former President and Chief Executive Officer 20171,395,9955,150,586 (7) 2,686,6402,558,978485,604 (8) 37,03212,314,835 20161,106,208 (9) 2,751,7412,251,1541,856,753305,588 (8) 30,7228,302,166 2015767,2201,266,6871,036,380663,155232,478 (8) 854,642 (10)4,820,562 Ghislain Houle (6) Executive Vice-President and Chief Financial Officer 2017733,7091,081,352884,373920,499506,00018,7224,144,655 2016524,498 (11)533,362436,262649,8644,368,000 (12)12,7006,524,686 2015340,000163,110133,454203,642110,0008,899959,105 Michael Cory (6) Executive Vice-President and Chief Operating Officer 2017772,6671,353,086 (13)1,061,254969,375161,00014,2094,331,591 2016602,784 (14)724,404592,576705,1244,143,000 (15)15,2596,783,147 2015441,152295,008241,356331,432262,00011,9221,582,870 Sean Finn Executive Vice-President Corporate Services and Chief Legal Officer 2017720,7231,009,208825,423893,044318,00019,1433,785,541 2016719,3661,062,765869,381709,838346,00018,9313,726,281 2015675,154937,017766,632542,861355,00018,2143,294,878
(10) The All Other Compensation column for Mr. Jobin includes a special cash award of U.S.$600,000 (C$830,400) in recognition of the additional leadership duties performed by Mr. Jobin in 2015 during the then President and Chief Executive Officers (Mr. Claude Mongeau) medical leave of absence. The cash award was paid in February 2016. (11) Mr. Houle was appointed Vice-President and Corporate Comptroller effective March 7, 2016 and Executive Vice-President and CFO effective July 1, 2016. Mr. Houles 2016 salary represents six months as Executive Vice-President and CFO, four months as Vice-President and Corporate Comptroller and two months as Vice-President Financial Planning. (12) Represents a one-time value increase as a result of Mr. Houles appointment as Executive Vice-President and CFO. The increase in present value is not immediately acquired and may or may not materialize. It is based on the assumption that Mr. Houle will remain with CN and retire at a future date with higher projected pensionable earnings. (13) Mr. Corys share-based award includes 591.94 deferred share units which represent the 25% Company-match awarded under the VIDP and vest over 4 years, upon the deferral of a portion of his 2016 AIBP. The grant date fair value of the award was calculated by multiplying the number of units by C$93.85, the share price on the day of the award. (14) Mr. Cory was appointed Executive Vice-President and COO effective July 1, 2016. Mr. Corys 2016 salary represents six months as Executive Vice-President and COO and six months as Senior Vice-President Western Region. (15) Represents a one-time value increase as a result of Mr. Corys appointment as Executive Vice-President and COO. The increase in present value is not immediately acquired and may or may not materialize. It is based on the assumption that Mr. Cory will remain with CN and retire at a future date with higher projected pensionable earnings. Total Compensation for the NEOs in U.S. Dollars The following table sets forth the annual total compensation in U.S. dollars for the NEOs, for the years ended December 31, 2017, 2016, and 2015. Compensation of the NEOs has been paid in U.S. dollars since 2002 as it provides a more precise, meaningful and stable comparison basis with U.S.-denominated compensation from the selected Class I Railroad comparator group. NON-EQUITY INCENTIVE PLAN COMPENSATION SHARE-BASED AWARDS (U.S.$) OPTION-BASED ANNUAL PENSION VALUE (U.S.$) ALL OTHER COMPENSATION (U.S.$) TOTAL COMPENSATION (U.S.$) SALARY (U.S.$) AWARDS INCENTIVE PLANS NAME AND PRINCIPAL POSITION YEAR (U.S.$) (U.S.$) *Appointed by the Board of Directors on March 5, 2018. Extension to Notes (1) and (2) of the Summary Compensation Table on the Calculation of Grant Date Fair Value of Awards The fair value of the LTI awards reflects their expected value on the date of the grant. Since 2014, the value is calculated based on Willis Towers Watsons expected life binomial methodology in an effort to align the valuation methodology used throughout the compensation review process for benchmarking, grant and disclosure purposes. Share-based awards represent the awards of PSUs under the Share Units Plan. Option-based awards represent the awards of stock options pursuant to the Management Long-Term Incentive Plan. The grant date fair value for PSUs and stock options considers the following assumptions: 2015 (JANUARY) 2016 (JANUARY) 2016 (JULY) 2017 (JANUARY) SHARE-BASED AWARDS (PSUs) Closing share price on grant date (C$) Risk-free interest rate over term of the award (1) 84.55 0.25% to 0.75% based on yield curve 17% 1.00 3 years ROIC 49.88 TSR 65.95 74.17 0.25% to 1.00% based on yield curve 19% 1.25 3 years ROIC 43.76 TSR 57.11 83.90 0.25% to 1.00% based on yield curve 19% 1.25 3 years ROIC 49.50 TSR 64.60 91.91 0.50% to 1.25% based on yield curve 20% 1.50 3 years ROIC 54.23 TSR 70.77 Expected stock price volatility over term of the award (2) Expected annual dividends per share (C$) Expected term (3) Resulting fair value per unit (C$) 2015 (JANUARY) 2016 (JANUARY) 2016 (JULY) 2017 (JANUARY) OPTION-BASED AWARDS Closing share price on grant date (C$) Risk-free interest rate over term of the award (1) 84.55 0.25% to 2.75% based on yield curve 23% 1.00 6.25 years 16.91 74.17 0.25% to 2.50% based on yield curve 20% 1.25 6.25 years 14.09 83.90 0.25% to 2.50% based on yield curve 20% 1.25 6.25 years 15.94 91.91 0.50% to 2.25% based on yield curve 20% 1.50 6.25 years 15.62 Expected stock price volatility over term of the award (2) Expected annual dividends per share (C$) Expected term (3) Resulting fair value per stock option (C$) (1) Based on the zero coupon yield curve rate commensurate with the expected term of a given award. The Willis Towers Watson expected life binomial model uses a yield curve for the risk-free interest rate (with different interest rates applying depending on the lattice node) rather than one particular rate. (2) Based on daily share prices, dividend data and average of volatilities for CNs NYSE and TSX-listed shares for a period commensurate with the expected term of a given award. (3) Represents the period of time that awards are expected to be outstanding. For option-based awards, the Company uses the SEC Safe Harbor calculation. The share-and option-based awards are sensitive to variations in assumptions, in particular the risk-free interest rate and stock price volatility. 54 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018 Jean-Jacques Ruest Interim President and Chief Executive Officer*, and Executive Vice-President and Chief Marketing Officer 2017595,000990,074809,869761,600395,47216,5833,568,598 2016575,000948,765776,392605,820349,71116,0203,271,708 2015560,000935,069765,006416,013301,69816,0102,993,796 Luc Jobin Former President and Chief Executive Officer 20171,075,0003,930,3522,050,2402,035,620361,66228,5179,481,391 2016835,0002,018,4771,651,4291,382,850220,80123,1906,131,747 2015600,0001,003,820821,259479,158200,395618,9583,723,590 Ghislain Houle Executive Vice-President and Chief Financial Officer 2017565,000825,118674,887732,240376,85314,4173,188,515 2016395,907396,074323,965483,9983,156,0699,5864,765,599 2015265,895129,261105,753147,14094,8196,959749,827 Michael Cory Executive Vice-President and Chief Operating Officer 2017595,0001,032,492809,869771,120119,90810,9423,339,331 2016455,000533,555436,481525,1542,993,49711,5184,955,205 2015345,000233,787191,258239,474225,8439,3241,244,686 Sean Finn Executive Vice-President Corporate Services and Chief Legal Officer 2017555,000770,069629,900710,400236,83614,7412,916,946 2016543,000756,273618,871528,665250,00014,2902,711,099 2015528,000742,564607,502392,241306,00814,2442,590,559
Details of All Other Compensation Amounts for 2017, 2016, and 2015(1) PERQUISITES AND OTHER PERSONAL BENEFITS (2) ALL OTHER COMPENSATION OTHER COMPENSATION (C$) (TOTAL OF THE TWO PREVIOUS COLUMNS) (C$) NAME YEAR (C$) (1) This table outlines the perquisites and other compensation received by NEOs in 2017, 2016, and 2015. The amounts are calculated based on the incremental cost to the Company. CN does not provide tax gross-ups on such perquisites. The policy of the Company on the usage of the corporate aircraft provides that it is restricted to business-related purposes, save for certain exceptional circumstances. (2) Perquisites and other personal benefits include the use of a Company-leased vehicle, parking, club membership, executive physical exam, financial counselling and tax services, and certain healthcare benefits and life insurance coverage. The incremental cost to the Company is determined by the actual cost of the Company-leased vehicle (including gas and maintenance fees), parking, club membership, annual executive physical exam, financial counselling and tax services and by the cost of certain healthcare benefits and life insurance coverage in excess of that offered to salaried employees. See section Executive Perquisites on page 46 for more details. Perquisites and other personal benefits that amount to less than C$50,000 (in aggregate) or 10% of total salary for any of the NEOs are reported as Nil in this column. (3) Represents the value of the Company-match under the ESIP. See section Employee Share Investment Plan on page 46 for more details. (4) Represents the service cost for post-retirement benefits, if applicable. (5) Represents a special cash award of U.S.$600,000 (C$830,400) in recognition of additional leadership duties performed by Mr. Jobin in 2015 during the then President and Chief Executive Officers (Mr. Claude Mongeau) medical leave of absence and converted to Canadian dollars using the December 31, 2015, exchange rate of U.S.$1.00 = C$1.3840. Incentive Plan Awards Share-Based and Option-Based Awards in 2017 The following table shows information regarding grants of PSUs made to NEOs under the Share Units Plan, grants of stock options made under the Management Long-Term Incentive Plan and awards of Company-matched deferred share units (DSUs) under the VIDP in 2017. SECURITIES, UNITS OR OTHER RIGHTS (#) SHARE PRICE ON DATE OF GRANT (C$) AWARDS GRANT DATE FAIR VALUE (1) (C$) END OF PLAN PERIOD OR EXPIRY DATE NAME GRANT DATE AWARD TYPE (1) The grant date fair values reported for PSUs and stock options are calculated using the same assumptions as described in the extension to footnotes 1 and 2 of the Summary Compensation Table on page 54. (2) The PSUs granted in 2017 were made under the Share Units Plan. The payout of PSUs granted in 2017 to NEOs is subject to two distinct performance measures. Seventy percent (70%) of the PSU award is subject to the achievement of return on invested capital objectives for the period ending on December 31, 2019, and to the attainment of a minimum average closing share price established at the beginning of the cycle of C$90.56 or U.S.$67.92. The remaining 30% is subject to the TSR performance of CN measured against two comparator groups i) selected Class I Railroads; and ii) S&P/TSX 60 companies for the period ending on December 31, 2019. Details are described under Performance Share Units: 2017 Award on page 45. (3) The stock options granted in 2017 were made under the Management Long-Term Incentive Plan and vest over a period of four years, with 25% of the stock options vesting at each anniversary date of the award. Unexercised stock options shall expire on the tenth anniversary of the date of the award. See section Management Long-Term Incentive Plan on page 58 for a description of the plan. (4) The DSUs represent the 25% Company-match granted upon the deferral of AIBP payouts. The Company-matched DSUs vest over four years, at a rate of 25% per year. See section Deferred Compensation Plans on page 59 for a description of the plan. 55 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS Jean-Jacques Ruest January 26, 2017PSUs (2) 22,249December 31, 201991.911,297,533 Options (3) 67,942January 26, 202791.911,061,254 Luc Jobin January 26, 2017PSUs (2) 80,554December 31, 201991.914,697,821 Options (3) 172,000January 26, 202791.912,686,640 February 17, 2017DSUs (4) 4,824Cessation of Employment93.85452,765 Ghislain Houle January 26, 2017PSUs (2) 18,542December 31, 201991.911,081,352 Options (3) 56,618January 26, 202791.91884,373 Michael Cory January 26, 2017PSUs (2) 22,249December 31, 201991.911,297,533 Options (3) 67,942January 26, 202791.911,061,254 February 17, 2017DSUs (4) 592Cessation of Employment93.8555,553 Sean Finn January 26, 2017PSUs (2) 17,305December 31, 201991.911,009,208 Options (3) 52,844January 26, 202791.91825,423 Jean-Jacques Ruest 2017NilESIP employer contribution:16,235 (3) 21,535 Post-retirement benefits:5,300 (4) 2016NilESIP employer contribution:16,023 (3) 21,223 Post-retirement benefits:5,200 (4) 2015NilESIP employer contribution:14,972 (3) 20,472 Post-retirement benefits:5,500 (4) Luc Jobin 2017NilESIP employer contribution:29,332 (3) 37,032 Post-retirement benefits:7,700 (4) 2016NilESIP employer contribution:23,222 (3) 30,722 Post-retirement benefits:7,500 (4) 2015NilSpecial award:830,400 (5) 854,642 ESIP employer contribution:16,042 (3) Post-retirement benefits:8,200 (4) Ghislain Houle 2017NilESIP employer contribution:15,422 (3) 18,722 Post-retirement benefits:3,300 (4) 2016NilESIP employer contribution:11,000 (3) 12,700 Post-retirement benefits:1,700 (4) 2015NilESIP employer contribution:7,099 (3) 8,899 Post-retirement benefits:1,800 (4) Michael Cory 2017NilESIP employer contribution:12,909 (3) 14,209 Post-retirement benefits:1,300 (4) 2016NilESIP employer contribution:12,659 (3) 15,259 Post-retirement benefits:2,600 (4) 2015NilESIP employer contribution:9,222 (3) 11,922 Post-retirement benefits:2,700 (4) Sean Finn 2017NilESIP employer contribution:15,143 (3) 19,143 Post-retirement benefits:4,000 (4) 2016NilESIP employer contribution:15,131 (3) 18,931 Post-retirement benefits:3,800 (4) 2015NilESIP employer contribution:14,114 (3) 18,214 Post-retirement benefits:4,100 (4)
Outstanding Share-Based Awards and Option-Based Awards The following table shows all awards made to NEOs and outstanding on December 31, 2017. OPTION-BASED AWARDS (1) SHARE-BASED AWARDS MARKET OR PAYOUT VALUE OF VESTED SHARE-BASED AWARDS NOT NUMBER OF SHARES OR NUMBER OF MARKET OR SECURITIES UNDERLYING UNEXERCISED OPTIONS (#) VALUE OF UNEXERCISED UNITS OF SHARES THAT PAYOUT VALUE OPTION OF SHARE-BASED EXERCISE OPTION EXPIRATION DATE IN-THE-MONEY HAVE NOT VESTED (4) (#) AWARDS THAT HAVE NOT VESTED (5) (C$) PAID OUT OR DISTRIBUTED (6) (C$) PRICE (2) (C$) OPTIONS (3) (C$) NAME (1) Includes all stock options granted under the Management Long-Term Incentive Plan and outstanding on December 31, 2017. (2) Where applicable, stock option exercise prices in U.S. dollars resulting from stock option grants to NEOs made in U.S. dollars were converted to Canadian dollars using the December 31, 2017, exchange rate of U.S.$1.00 = C$1.2571. The conversion of these option exercise prices result in different Canadian dollar equivalent values for stock option grants made in U.S. dollars when compared to the values presented in the Share-Based and Option-Based Awards in 2017 table on page 55, under the Share Price on Date of Grant column. The following table presents the option exercise prices that were converted to Canadian dollars based on the December 31, 2017 exchange rate: OPTION EXERCISE PRICE (U.S.$) OPTION EXERCISE PRICE (C$) OPTION EXERCISE PRICE (U.S.$) OPTION EXERCISE PRICE (C$) OPTION EXPIRATION DATE OPTION EXPIRATION DATE 2027/01/26 2026/07/27 2026/01/28 2025/01/29 2024/02/03 70.13 63.65 52.78 67.00 52.93 88.16 80.01 66.35 84.23 66.54 2023/01/24 2022/01/26 2021/01/27 2020/01/28 47.18 38.19 34.71 25.62 59.30 48.00 43.63 32.21 (3) The value of unexercised in-the-money stock options at financial year-end for stock options granted to NEOs in Canadian dollars is the difference between the closing share price of the common shares on December 31, 2017, on the TSX (C$103.65) and the exercise price. The value of unexercised in-the-money stock options at financial year-end for stock options granted to NEOs in U.S. dollars is the difference between the closing share price of the common shares on December 31, 2017, on the NYSE (U.S.$82.50) converted to Canadian dollars based on the December 31, 2017, exchange rate of U.S.$1 = C$1.2571 (i.e. U.S.$82.50 × 1.2571 = C$103.71) and the exercise price converted to Canadian dollars using this same exchange rate. Please refer to Note 2 of this table for additional details. This value has not been and may never be realized. The actual gains, if any, will depend on the value of the common shares on the date of exercise. (4) Includes all PSUs outstanding on December 31, 2017, that have not vested on such date under the Share Units Plan. Payouts for these units are conditional upon meeting performance measures and a minimum share price condition that may or may not be achieved. For Mr. Jobin and Mr. Cory, the value also includes the Company-matched DSUs outstanding on December 31, 2017 (4,824 and 592 units respectively) that have not vested on such date under the VIDP. Under the plan, company-match DSUs vest over four years, at a rate of 25% per year. (5) The value of outstanding share units awarded under the Share Units Plan in Canadian dollars is based on the closing price of the common shares on the TSX on December 31, 2017 (C$103.65). The value of outstanding share units awarded under the Share Units Plan in U.S. dollars is based on the closing price of the common shares on the NYSE on December 31, 2017 (U.S.$82.50), converted to Canadian dollars based on the December 31, 2017 exchange rate of U.S.$1 = C$1.2571 (i.e. U.S.$82.50 × 1.2571 = C$103.71). The values assume that the target average relative TSR and ROIC objectives (i.e., 100%) and the minimum share price condition are met. In accordance with the Share Units Plan, a performance vesting factor between 0% and 200% will apply to the awarded share units. For Mssrs. Jobin and Cory, the value of the Company-matched DSUs awarded under the VIDP is based on the closing price of the common shares on the TSX on December 31, 2017, and is equivalent to C$500,043 and C$61,354 respectively. 56 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018 Jean-Jacques Ruest 67,94288.162027/01/2610,207,06050,5805,245,69020,349,495 77,40766.352026/01/28 57,09084.232025/01/29 60,12066.542024/02/03 65,56059.302023/01/24 Luc Jobin 172,00088.162027/01/2623,606,992140,68914,590,70411,554,769 65,86280.012026/07/27 85,26066.352026/01/28 61,28884.232025/01/29 63,56066.542024/02/03 69,40059.302023/01/24 80,96048.002022/01/26 83,84043.632021/01/27 Ghislain Houle 56,61888.162027/01/263,362,12029,0093,008,3114,502,836 18,04780.012026/07/27 10,54674.172026/01/28 7,89284.552025/01/29 8,26058.712024/02/03 8,68047.302023/01/24 11,20038.292022/01/26 Michael Cory 67,94288.162027/01/265,314,57037,2873,867,0203,681,153 19,72280.012026/07/27 19,74566.352026/01/28 14,27384.232025/01/29 15,12066.542024/02/03 16,20059.302023/01/24 17,11448.002022/01/26 5,24043.632021/01/27 3,15032.212020/01/28 Sean Finn 52,84488.162027/01/263,471,35139,8884,136,8142,470,120 46,27766.352026/01/28 22,66884.232025/01/29 12,88566.542024/02/03
(6) Includes the value as at December 31, 2017 of the 2015 PSU awards granted under the Share Units Plan. The value is based on the closing price of the common shares on the TSX on December 31, 2017 (C$103.65) for grants made in Canadian dollars and based on the closing price of the common shares on the NYSE on December 31, 2017 (U.S.$82.50) converted to Canadian dollars based on the December 31, 2017 exchange rate of U.S.$1 = C$1.2571 (i.e. U.S.$82.50 × 1.2571 = C$103.71) for grants made in U.S. dollars. The payout of the 2015 PSUs awards was subject to two distinct performance measures. Seventy percent (70%) of the 2015 PSU award was subject to the achievement of ROIC objectives for the period ending on December 31, 2017, and to the attainment of a minimum average closing share price established at the beginning of the cycle of C$90.56 or U.S.$67.92. The average ROIC for the period ended on December 31, 2017 was 16.70%, exceeding the target for the plan period, and the minimum share price condition was met. The ROIC performance vesting factor was therefore 135.0%. The remaining thirty percent (30%) was subject to the TSR performance of CN measured against two comparator groups i) selected Class I Railroads; and ii) S&P/TSX 60 companies for the period ending on December 31, 2017. The TSR performance of CN resulted in a TSR performance vesting factor of 142.3%. The 2015 PSU awards were equity-settled for all NEOs on February 23, 2018. Also includes the value as at December 31, 2017 of the DSUs that have vested under the terms of the VIDP based on the closing share price of the Companys common shares on the TSX of C$103.65. Units held under this deferred compensation plan are only payable upon cessation of employment (please refer to page 59 for more details on the Companys Deferred Compensation Plans). The following table provides the breakdown, for each of the NEOs, of the market value of vested share-based awards that were not paid out or distributed on December 31, 2017: ACCUMULATED DSUs (C$) 2015 PSUs (C$) TOTAL (C$) NAME Incentive Plan Awards Value Vested or Earned During the Year The following table shows the value from incentive plans vested or earned by NEOs under the Companys incentive plans, including the annual incentive bonus, PSUs, DSUs and stock options earned during the financial year ended December 31, 2017. NON-EQUITY INCENTIVE PLAN OPTION-BASED AWARDS VALUE VESTED DURING THE YEAR (1) (C$) SHARE-BASED AWARDS VALUE VESTED DURING THE YEAR (2) (C$) COMPENSATION VALUE EARNED DURING THE YEAR (3) (C$) NAME (1) Represents the value of the potential gains from stock options granted under the Management Long-Term Incentive Plan in 2013, 2014, 2015, and 2016 that vested during the 2017 financial year. These grants all vest over four years, with 25% of stock options vesting on each anniversary date (see section Management Long-Term Incentive Plan starting on page 58 for a description of the Plan). The potential gains are calculated as the difference between the closing price of the common shares on each of the stock option grant anniversary dates in 2017 and the exercise price, converted to Canadian dollars when applicable using the exchange rate on such vesting date (see Currency Exchange Information on page 63). This value has not been, and may never be, realized. The actual gains, if any, will depend on the value of the common shares on the date of exercise. (2) Includes PSUs granted in 2015 that vested on December 31, 2017 under the Share Units Plan and, for Mr. Cory, the 25% of the Company-matched DSUs that vested on January 30, 2017 under the VIDP. The PSU values included in the table have been calculated by multiplying the number of units granted by the applicable performance vesting factors (135% for ROIC units and 142.3% for TSR units) and by the closing price of the common shares on December 31, 2017 on the TSX (C$103.65) for grants made in Canadian dollars and by the closing price of the common shares on the NYSE on December 31, 2017 (U.S.$82.50) converted to Canadian dollars based on the December 31, 2017 exchange rate of U.S.$1 = C$1.2571 (i.e. U.S.$82.50 × 1.2571 = C$103.71) for grants made in U.S. dollars. The 2015 PSU awards were equity-settled for all NEOs on February 23, 2018. The DSU values included in the table have been calculated by multiplying the number of units that have vested on January 30, 2017 by the closing share price of the Companys common shares on December 31, 2017 on the TSX of C$103.65. (3) Represents the amount of bonus earned under the AIBP for the financial year ended on December 31, 2017. Incentive Plan Awards Value of Exercised Stock Options and Performance Share Units Paid During the Year The following table lists the number of shares acquired and the value realized as a result of stock options exercised by NEOs in 2017 as well as PSUs which vested on December 31, 2017. For stock options exercised, the value realized is calculated by multiplying the number of shares acquired by the difference between the exercise price and the market price of CN common shares on the exercise date. (C$) 57 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS NAME STOCK OPTIONS PSUs TOTAL VALUE REALIZED (C$) VALUE REALIZED NUMBER OF SHARESON EXERCISE ACQUIRED ON EXERCISE(C$) VALUE REALIZED ON DECEMBER 31, 2017 Jean-Jacques Ruest Luc Jobin Ghislain Houle Michael Cory Sean Finn 76,2004,154,185 00 00 00 65,4381,769,771 3,110,489 3,339,175 429,735 777,692 2,470,120 7,264,674 3,339,175 429,735 777,692 4,239,891 Jean-Jacques Ruest Luc Jobin Ghislain Houle Michael Cory Sean Finn 1,345,3163,110,489957,407 1,756,8913,339,1752,558,978 315,399429,735920,499 431,353900,129969,375 1,135,4672,470,120893,044 Jean-Jacques Ruest Luc Jobin Ghislain Houle Michael Cory Sean Finn 3,110,48917,239,00620,349,495 3,339,1758,215,59411,554,769 429,7354,073,1014,502,836 777,6922,903,4613,681,153 2,470,1202,470,120
Management Long-Term Incentive Plan The MLTIP was approved by the Companys shareholders on May 7, 1996, and amended on April 28, 1998; April 21, 2005; April 24, 2007; March 4, 2008; and, on January 27, 2015. Eligible participants under the MLTIP are employees of the Company or its affiliates as determined by the Board of Directors. Grants cannot be made to non-employee directors under the MLTIP. The maximum number of common shares that may be issued under the MLTIP is 120,000,000. The following table provides information on the status of the reserve and the number of shares issued and issuable under the MLTIP, as at February 28, 2018. Stock Options Outstanding and Available for Grant as of February 28, 2018 Stock Option Features GRANT CURRENCY SAME CURRENCY AS THE RECIPIENTS SALARY Exercise Price At least equal to the closing share price of the common shares on the TSX or the NYSE (depending on the grant currency) on the grant date. Term Ten years Vesting Criteria Stock options may become exercisable on the anniversary date (conventional stock options) and/or upon meeting performance targets (performance options) as established for each grant. Since 2005, grants have been of conventional stock options, which vest over four years, with 25% of stock options vesting on each anniversary. Termination Conditions Stock options shall be cancelled upon the termination of a participants employment for cause or if the participant voluntarily terminates employment. In the event that a participants employment is terminated by the Company other than for cause, all stock options held by such participant shall be cancelled three months after termination of the participants employment. In the case of retirement, stock options are cancelled three years after the retirement date. In the event of a participants death, all available stock options may be exercised by the estate within a period of twelve months from the date of death. In the event non-compete, non-solicitation, confidentiality or other conditions of the grant are breached, stock options shall be forfeited and cancelled. These conditions are subject to the discretion of the Committee. NUMBER OF COMMON SHARES (#) % OF OUTSTANDING COMMON SHARES Stock options already granted and outstanding Stock options issuable under the MLTIP Shares issued following the exercise of stock options 5,835,620 15,506,802 98,657,578 0.79% 2.09% 13.33% Stock Options Granted under the MLTIP as at December 31, 2017, 2016 and 2015 The following table presents information concerning stock options granted under the MLTIP as at December 31 of the years indicated below. At the 2007 annual meeting, shareholders approved an ordinary resolution confirming the addition of new amendment provisions to the MLTIP. Such amendment provisions state that the Board of Directors or the Committee, as provided in the MLTIP or pursuant to a specific delegation and in accordance with applicable legislation and regulations, may amend any of the provisions of the MLTIP or suspend or terminate the MLTIP or amend the terms of any then outstanding award of stock options under the MLTIP (Options) provided, however, that the Company shall obtain shareholder approval for: 2017 2016 2015 Number of stock options granted during the year Number of employees who were granted stock options Number of stock options outstanding at year-end Weighted average exercise price of stock options outstanding Number of stock options granted as a % of outstanding shares (1) Number of stock options exercised 966,666 1,219,065 852,943 189 185 193 5,046,279 5,315,274 5,863,991 C$66.78 C$61.07 C$53.43 (i) any amendment to the maximum number of common shares issuable under the MLTIP, except for adjustments in the event that such shares are subdivided, consolidated, converted or reclassified by the Company or that any other action of a similar nature affecting such shares is taken by the Company (a Share Adjustment); any amendment which would allow non-employee directors to be eligible for new awards under the MLTIP; any amendment which would permit any Option granted under the MLTIP to be transferable or assignable other than by will or pursuant to succession laws (estate settlements); the addition of a cashless exercise feature, payable in cash or common shares, which does not provide for a full deduction of the number of underlying shares from the MLTIP reserve; the addition in the MLTIP of deferred or performance share unit provisions or any other provisions which result in participants receiving common shares while no cash consideration is received by the Company; any reduction in the exercise price of an Option after the Option has been granted to a participant or any cancellation of an Option and the substitution of that Option by a new Option with a reduced exercise price granted to the same participant, except in the case of a Share Adjustment; 0.13% 1,179,684 0.16% 1,619,735 0.11% 2,506,145 (1) Annual burn rate, as calculated in accordance with Section 613(p) of the TSX Company Manual. The maximum number of common shares that may be issued and/or be the subject of a grant to any one participant in a particular year is 20% of the awards in that year. The maximum aggregate number of common shares, with regard to which awards may be made to any participant under the MLTIP and under any other plan, which the Company has or may eventually have, shall not exceed 5% of the common shares issued and outstanding. The maximum number of common shares that may be issued to insiders, at any time, under all security-based compensation, cannot exceed 10% of the issued and outstanding common shares. Also pursuant to the March 8, 2005 amendment, the maximum number of common shares with regard to which awards may be made during a calendar year is limited to 1% of the outstanding common shares at the beginning of that year. As demonstrated in the previous table, the number of stock options granted is well below the 1% limitation. Stock options are non-transferable except, in certain circumstances, upon the death of the holder of such stock options. (ii) (iii) (iv) (v) (vi) (vii) any extension to the term of an outstanding Option beyond the original expiry date, except in the case of an extension due to a blackout period; 58 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018
(viii) any increase to the maximum number of common shares that may be issued: a. under the MLTIP to any participant during any calendar year; or b. under the MLTIP and under any other plan to any participant; (ix) the addition in the MLTIP of any form of financial assistance and any amendment to a financial assistance provision, which is more favourable to participants. No amendment, suspension or termination shall, except with the written consent or the deemed consent of the participants concerned, affect the terms and conditions of Options previously granted under the MLTIP, unless the rights of the participants have terminated in accordance with the MLTIP. On March 4, 2008, the MLTIP was amended to include a double-trigger provision. Pursuant to such provisions, provided that a proper substitute is granted, the vesting of non-performance-based stock options held by a participant would not accelerate upon a Change of Control, unless the participant is terminated without cause or resigns for good reason. Please refer to Change of Control Provisions on page 62 for more details on such amendment. On January 27, 2015, the MLTIP was amended to make certain changes to the retirement definition. Before January 27, 2015, the retirement definition of the MLTIP was based on the retirement definition of pension plans. All reporting and non-reporting Company insiders were subject to a retirement definition providing for a minimum retirement age of 55. The amended retirement definition maintains the retirement age at 55 and introduces a minimum continuous service condition of five (5) years to be eligible for continued vesting and exercise of stock options upon retirement. The amendment also provides the President and CEO with the option to waive or reduce, on an individual basis, the continuous service condition of five (5) years. The President and CEO may also reduce the retirement age condition to not lower than 63 years of age for Options granted prior to January 27, 2015. In October 2014, CN modified its VIDP to settle future award payouts in CN common shares purchased on the open market rather than cash. The changes affect DSU awards made in 2016 or after. As a result, amounts deferred in DSUs after January 1, 2016 are settled in shares upon retirement or termination (including vested Company-matched DSUs as well as notional dividends accrued over the deferral period and subject to mandatory waiting periods or monthly instalments for eligible U.S. taxpayers). Following the modification of the VIDP, executives, including NEOs and senior management employees, were offered a one-time election to settle past DSU awards in CN common shares purchased on the open market rather than cash and according to the plan terms. All NEOs have elected to convert their settlement in common shares purchased on the open market. No modification to the nature of the deferrals under the AIBP plan can be made, unless the Board of Directors approves an amendment to the plans. Employment Arrangements Former President and CEO Luc Jobin was appointed President and CEO of the Company effective July 1, 2016. The independent members of the Board of Directors, upon the recommendation of the Committee, approved, at its June 26, 2016, meeting, the terms and conditions of Mr. Jobins employment. Mr. Jobin served at the discretion of the Board and his employment as President and CEO was not subject to a fixed term. On March 5, 2018, the Board of Directors announced that Mr. Jobin had left the Company. The former President and CEO was eligible for the same compensation, benefit plans and programs as the other executives except for the following: Under the AIBP, his target payout was 120% of base salary with a payout ranging from 0% to 240%. Mr. Jobin was required to maintain a minimum level of stock ownership equivalent to five times his annual salary. He was also required to maintain this stock ownership level for one year following retirement. Mr. Jobin was limited to participating in only one outside public company board. Deferred Compensation Plans The VIDP was introduced by the Company in 2002. This plan allows NEOs and other senior management employees to elect to defer up to 100% of their annual bonus into deferred share units (DSUs) remitted upon retirement or termination of employment. A DSU is equivalent to a common share of the Company and earns notional dividends, which are re-invested into additional DSUs, when cash dividends are paid on the Companys common shares. The amount deferred is converted into a number of units at the deferral date, using the closing share price on the deferral date. Deferral elections are made at least six months prior to the end of the performance period of the incentive plan. The maximum total amount participants can defer to DSUs is equivalent to their ownership requirement under the Stock Ownership guidelines (see section on Stock Ownership under Other Key Compensation Programs of the Company on page 46 for a detailed description). The Company also credits a Company match equal to 25% of the number of DSUs resulting from an eligible deferral. These Company-matched DSUs vest over a period of four years (25% per year) from the deferral date. Due to its tax effectiveness and the additional match provided by the Company, this plan offers an opportunity for executives to increase their ownership in CN, linking their future returns to the share price performance. Other NEOs The Company has not entered into written employment agreements with the other NEOs. It has only provided appointment letters setting forth general details of employment, which are all described in this Information Circular. 59 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS
Pension Plan Benefits Canadian Pension Plans and Other Retirement Arrangements CN Pension Plan (CNPP) and CN Pension Plan for Senior Management (CNPPSM) Messrs. Houle, Cory, Ruest and Finn participate in the CNPP and CNPPSM, which are federally-registered defined benefit pension plans designed to provide retirement benefits based on pensionable years of service and highest average earnings. Highest average earnings are defined as the average pensionable earnings during the last 60 months of compensated service or the best five consecutive calendar years, whichever is greater. Under the CNPP, pensionable earnings consist of base salary and overtime. Under the CNPPSM, pensionable earnings include base salary, overtime, and bonuses paid by the Company under the AIBP, up to the employees target level. In 2017, the aggregate annual retirement benefit payable under both plans was subject to a maximum of C$2,914 per year of pensionable service and was calculated as follows: 1.7% of highest average earnings up to the average years maximum pensionable earnings (the YMPE) as defined under the Quebec/Canada Pension Plan, multiplied by the number of years of pensionable service (maximum 35 years) plus 2.0% of highest average earnings in excess of the YMPE, multiplied by the number of years of pensionable service (maximum 35 years). Under both the CNPP and CNPPSM, if the sum of the participants age and years of pensionable service is at least 85 and the participant is age 55 or over at the time of retirement from active employment, the participant is eligible to receive an immediate, unreduced pension, subject to the Companys consent. Retirement benefits vest immediately when participation begins. Special Retirement Stipend Executives and senior management employees who participate in the CNPP also participate in a non-registered, supplemental executive retirement program called the Special Retirement Stipend (the SRS). SRS participants enter into an agreement with the Company, which includes confidentiality, non-compete, and non-solicitation clauses. Messrs. Houle, Cory, Ruest and Finn have each signed a SRS agreement. The annual amount payable under the SRS equals 2% of the employees highest average earnings in excess of the average earnings that result in the maximum pension payable under the CNPP and CNPPSM (approximately C$153,744 in 2017), multiplied by the number of years of pensionable service (maximum 35 years). Earnings consist of base salary and bonuses paid by the Company under the AIBP, up to the employees target level. If the sum of the participants age and years of pensionable service is at least 85 and the participant is age 55 or over at the time of retirement, the participant is eligible to receive an immediate, unreduced SRS benefit, subject to the conditions set out in the SRS agreement. SRS benefits for employees who entered into a SRS agreement prior to July 1, 2002, vest after two years of employment. For employees who entered into a SRS agreement on or after July 1, 2002, the SRS benefits become vested only if the employee remains in active service for two years and until the age of 55. SRS retirement benefits are paid out of operating funds and secured through a combination of letters of credit and other financial instruments. Defined Contribution Pension Plan for Executives and Senior Management (DCPP) Mr. Jobin participated in the DCPP. The DCPP is a federally-registered defined contribution pension plan that was introduced for executives and senior management employees on January 1, 2006. For non-unionized employees other than executives and senior management, a separate defined contribution plan was also introduced on the same date. Executives and senior management employees hired prior to January 1, 2006, had a one-time opportunity to either join the DCPP or maintain participation in the CNPP and CNPPSM mentioned above. Messrs. Houle, Cory, Ruest and Finn elected to remain in the CNPP and CNPPSM. Executives and senior management employees hired on or after January 1, 2006, automatically join the DCPP. Executives participating in the DCPP contribute a specific percentage of their pensionable earnings into their account and the Company contributes the same percentage, subject to the maximum contribution imposed by the Canadian Income Tax Act (C$26,230 in 2017). The contribution percentage for executives depends on age and service as follows: % OF PENSIONABLE POINTS (SUM OF AGE AND SERVICE) EARNINGS Up to 39 4049 5059 60 and above 6% 7% 8% 9% Pensionable earnings include base salary and bonuses payable under the AIBP up to the employees target level. All contributions vest immediately and are invested in various investment funds as selected by the participant. No withdrawals or distributions are permitted prior to employment termination. Defined Contribution Supplemental Executive Retirement Plan (DC SERP) Mr. Jobin participated in the DC SERP. The DC SERP is a non-registered defined contribution pension plan designed to provide executives and senior management employees with retirement benefits in excess of the Canadian Income Tax Act limit applicable to the DCPP described above. Once contributions have reached the limit prescribed by the Canadian Income Tax Act in the DCPP in a given year, an amount equal to employer and employee contributions in excess of the limit is gradually credited by the Company to a notional account under the DC SERP. These notional contributions vest after two years of employment. Employees do not contribute to the DC SERP. By default, notional contributions accrue investment credits using investment options as selected by the participant in the DCPP. However, participants can make a different investment election under the DC SERP. No withdrawals or distributions are permitted prior to employment termination. Effective January 1, 2011, the DC SERP was amended to include certain confidentiality, non-compete, non-solicitation, and other covenants as a condition of payment of retirement benefits accruing as of the effective date. 60 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018
Defined Benefit Plans Table The following amounts have been calculated using the actuarial assumptions disclosed in Note 12 Pensions and Other Post-retirement Benefits, on page 75 of the 2017 Annual Report and in Note 12 Pensions and Other Post-retirement Benefits, on page 71 of the 2016 Annual Report, available on the Companys website at www.cn.ca and on SEDAR at www.sedar.com. The amounts calculated in this table are estimates only and are based on assumptions, which may or may not materialize. Amounts shown in this table include pension benefits from the Companys defined benefit registered pension plans and non-registered supplemental pension arrangements for 2017 and are in Canadian dollars. VALUE OF SERVICE OF SALARY/ OF PLAN (1) The change in present value that is attributable to compensation includes the service cost net of employee contributions, the impact of any increase in earnings in excess or below what was assumed and the impact of plan changes. The service cost net of employee contributions is the estimated value of the employer portion of benefits accrued during the calendar year. (2) Annual benefits payable at year end represent accrued benefits as at December 31, 2017 (based on service and pay up to December 31, 2017), payable at age 65 or at unreduced retirement date, if earlier. Actual benefits payable at year end would have been reduced for employees not yet eligible for unreduced benefits. (3) The projected pension is based on current compensation levels and assumes the executive will receive 80% of his target bonus for years after 2017. (4) The present value of the defined benefit obligation is the value of the benefits accrued for all service to the specified point in time. (5) The change in present value that is attributable to non-compensatory elements includes changes in assumptions, interest cost, change in currency, employee contributions and gains and losses (other than for difference in earnings). The impact on the present value at the end of 2017 relating to non-compensatory elements was mainly due to interest on benefit obligation and changes in assumptions (namely a decrease in the discount rate which increased the present value, partially offset by a decrease in the currency exchange rate). Defined Contribution Plans Table The table below includes amounts from the Companys registered and non-registered defined contribution plans. ACCUMULATED VALUE AT START OF YEAR (C$) COMPENSATORY AMOUNT (1) (C$) NON-COMPENSATORY AMOUNT (2) (C$) ACCUMULATED VALUE AT YEAR END (C$) NAME (1) Represents employer contributions and notional contributions. (2) Represents employee contributions and, if any, investment gains and losses and notional investment credits and losses. (3) Mr. Jobin participated in the DCPP and DC SERP. Non-Registered Plans Table The following table provides the total present value of CNs non-registered defined benefit and defined contribution plans. These amounts were determined using the actuarial assumptions disclosed in Note 12 Pensions and Other Post-retirement Benefits, on page 75 of the 2017 Annual Report and in Note 12 Pensions and Other Post-retirement Benefits, on page 71 of the 2016 Annual Report, available on the Companys website at www.cn.ca and on SEDAR at www.sedar.com. Amounts include the value of pension benefits for active, deferred and retired executive and senior management participants for 2017. OPENING PRESENT VALUE OF BENEFIT OBLIGATION (C$) CLOSING PRESENT VALUE OF BENEFIT OBLIGATION (C$) PLANS Non-Registered Defined Benefit Plans in Canada and the U.S. Non-Registered Defined Contribution Plans in Canada and the U.S. 407,100,000 4,900,000 431,300,000 (1) 6,400,000 (1) The increase in the present value at the end of 2017 was mainly due to benefit accruals, the decrease in the discount rate, and the plans demographic experience. This was partially offset by the impact of benefit payments and a decrease in the currency exchange rate. 61 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS Luc Jobin (3) 1,833,890485,604243,4712,562,965 NUMBER OF YEARS OF CREDITED SERVICE NAME(#) ANNUAL BENEFITS PAYABLE OPENING PRESENT VALUE OF DEFINED BENEFIT OBLIGATION (4) (C$) COMPENSATORY CHANGE (1) (C$) CLOSING PRESENT NON-COM-DEFINED PENSATORY BENEFIT CHANGE (5)OBLIGATION (4) (C$) (C$) AT YEAR END (2)AT AGE 65 (3) (C$) (C$) IMPACT IMPACT COST BONUSCHANGESTOTAL Jean-Jacques Ruest Ghislain Houle Michael Cory Sean Finn 21.67 20.32 35.00 24.00 546,000613,000 308,000761,000 610,000868,000 569,000674,000 8,473,000 7,512,000 13,027,000 9,068,000 387,000144,0000531,000 371,000135,0000506,000 0161,0000161,000 369,000(51,000)0318,000 117,0009,121,000 400,0008,418,000 165,00013,353,000 177,0009,563,000
Termination and Change of Control Benefits The Company does not have contractual arrangements or other agreements in connection with termination, resignation, retirement, Change of Control or a change in responsibilities of a NEO, other than the conditions provided in the compensation plans, and summarized as follows: RESIGNATION INVOLUNTARY TERMINATION RETIREMENT CHANGE OF CONTROL TERMINATION FOR CAUSE Annual Incentive Bonus Plan Forfeits eligibility for the plan Entitled to a bonus based on corporate and individual performance and pro-rated on active service in plan year (minimum of three months) Entitled to a bonus based on corporate and individual performance and pro-rated on active service in plan year (minimum of three months), subject to providing a six-month notice period prior to retirement No specific provision Forfeits eligibility for the plan Stock Options (1) All stock options are cancelled Continued vesting for three months Exercise of vested stock options within three months or otherwise forfeited Subject to respect of two-year non-compete, non-solicitation and confidentiality provisions Continued vesting for three years if the executive remains in continuous and active service until the last day of the year in which the grant was made Exercise of vested stock options within three years or otherwise forfeited If proper substitute is granted, immediate vesting would occur only if participant is terminated without cause or resigns for good reason (2) within two years of the Change of Control All stock options are cancelled Performance Share Units (1) All PSUs are cancelled Partial payout if performance measures are met and pro-rated based on active service during the plan period Subject to respect of two-year non-compete, non-solicitation and confidentiality provisions Full payout if performance measures are met and if the executive remains in continuous and active service until March 31 of the year following the year in which the grant was made Subject to respect of two-year non-compete, non-solicitation and confidentiality provisions If proper substitute is granted, immediate vesting would occur only if participant is terminated without cause or resigns for good reason (2) within two years of the Change in Control All PSUs are cancelled Deferred Share Units Payment of all vested units, including the vested Company-matched DSUs Payment of all vested units, including the vested Company-matched DSUs Payment of all vested units, including the vested Company-matched DSUs Immediate vesting of unvested Company-matched DSUs Payment of all vested units, including the vested Company-matched DSUs Registered Pension Plans Payment of vested benefits Payment of vested benefits Payment of vested benefits Payment of vested benefits Payment of vested benefits Non-Registered Pension Plans and Arrangements (1) Payment of vested benefits Payment of vested benefits Payment of vested benefits Payment of vested benefits Payment of vested benefits, except for SRS benefits which are forfeited (1) In the event of resignation, involuntary termination, retirement or Change of Control, the payment of awards or vested benefits is subject to certain non-compete, non-solicitation, non-disclosure of confidential information and other restrictive provisions as per the respective plan rules and arrangements. (2) A resignation for good reason may take place only during the 24 months following a Change of Control if (i) the executive is required to relocate his or her office or home base to a location that is outside a 100-kilometer radius of his or her office or home base immediately prior to the Change of Control or (ii) the executive is assigned a set of responsibilities and/or the employment or continued employment of the executive on terms and conditions that are not the substantial equivalent of such executives set of responsibilities and/or terms and conditions of employment in effect immediately prior to the Change of Control. Involuntary Termination In the event of an involuntary termination, an NEO would receive a severance amount generally in line with applicable legal requirements. No incremental amounts would be payable. Share-based awards, option-based awards and other benefits will be treated according to the terms of the plans under which they were granted, as described in the summary Termination and Change of Control Benefits table on this page. Mr. Luc Jobin On March 5, 2018, the Board of Directors announced that Mr. Jobin had left the Company. The Company is in the process of finalizing arrangements relating to Mr. Jobin leaving CN in the context of applicable legal requirements and the Companys plans. Retirement On December 31, 2017, Mr. Jobin was eligible for retirement under the defined contribution plans and Mr. Cory was eligible for retirement under the defined benefit plans with unreduced retirement benefits. Messrs. Ruest and Finn were also eligible for retirement but did not have sufficient service for unreduced retirement benefits under the defined benefit plans. Had Messrs. Jobin, Cory, Ruest, and Finn retired on December 31, 2017, no other material payments or benefits would have been payable. Share-based awards, option-based awards and other benefits are treated according to the terms of the plans under which they were granted, as described in the summary Termination and Change of Control Benefits table on this page. 62 COMPENSATION DISCUSSION AND ANALYSIS CN MANAGEMENT INFORMATION CIRCULAR 2018
Change of Control The following table shows the incremental benefits that NEOs would have been entitled to had there been a change of control on December 31, 2017. SHARE UNITS PLAN (1) (C$) STOCK OPTIONS (1) (C$) DEFERRED SHARE UNITS (2) (C$) TOTAL (C$) NAME (1) An NEO would be eligible for immediate vesting only if no proper substitute is granted, or if the executive is terminated without cause or resigns for good reason within two years of the change of control. (2) An NEO would be eligible for immediate vesting of the unvested Company-matched deferred share units allocated to an executive following the deferral of compensation in previous years (see Deferred Compensation Plans section on page 59 for a description of the VIDP). The value shown is equal to the number of deferred share units that would vest multiplied by the closing share price of common shares on December 31, 2017 (C$103.65). Currency Exchange Information Compensation disclosed in the Statement of Executive Compensation section that is paid in U.S. dollars was converted to Canadian dollars using the following currency exchange rates: EXCHANGE RATE USED ACTUAL RATE U.S.$1 = C$X Salary All other compensation Average rate during the year 2017: 2016: 2015: 1.2986 1.3248 1.2787 Annual incentive bonus plan When bonus is earned (i.e., December 31) December 31, 2017: December 31, 2016: December 31, 2015: 1.2571 1.3427 1.3840 Pension value Value of unexercised in-the-money options Market value of share-based awards that have not vested Non-equity incentive plan compensation Value earned during the year Termination scenarios incremental costs December 31 December 31 of prior year for pension value December 31, 2017: December 31, 2016: December 31, 2015: December 31, 2014: 1.2571 1.3427 1.3840 1.1601 Option-based awards Value vested during the year Actual vesting date of the grants made on: July 27, 2016 January 28, 2016 January 29, 2015 February 3, 2014 January 24, 2013 July 27, 2017: January 27, 2017: January 27, 2017: February 3, 2017: January 24, 2017: 1.2554 1.3153 1.3153 1.3023 1.3158 63 CN MANAGEMENT INFORMATION CIRCULAR 2018 COMPENSATION DISCUSSION AND ANALYSIS Jean-Jacques Ruest Luc Jobin Ghislain Houle Michael Cory Sean Finn 0000 00500,043500,043 0000 0061,35461,354 0000
Other Information Securities Authorized for Issuance Under Equity Compensation Plans The table below indicates, as at December 31, 2017, certain information with respect to the Companys Management Long-Term Incentive Plan. NUMBER OF SECURITIES REMAINING AVAILABLE Shareholder Proposals Shareholder proposals to be considered at the 2019 annual meeting of shareholders must be received at the head office of the Company no later than December 6, 2018, to be included in the Information Circular for such annual meeting. Availability of Documents The Company is a reporting issuer in Canada and the United States and is required to file various documents, including an annual information form and financial statements. Financial information is provided in the Companys comparative financial statements and Managements Discussion and Analysis for its most recently completed financial year. Copies of these documents and additional information relating to the Company are available on SEDAR at www.sedar.com and on the SEC website at www.sec.gov through EDGAR, or may be obtained on request from the Corporate Secretary of the Company by calling (514) 399-7091 or Investor Relations at (514) 399-0052. NUMBER OF FOR FUTURE ISSUANCE SECURITIES TO BE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES ISSUED UPON WEIGHTED AVERAGE EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS (#) EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS (C$) REFLECTED IN THE FIRST COLUMN) (#) PLAN CATEGORY Equity compensation plans approved by security holders Equity compensation plans not approved by security holders 5,046,279 66.78 16,428,079 Nil Nil Nil TOTAL 5,046,279 66.78 16,428,079 Indebtedness of Directors and Executive Officers As of March 6, 2018, there was no outstanding indebtedness of current and former directors or officers of the Company and its subsidiaries, whether entered into in connection with the purchase of common shares of the Company or otherwise. Approval The Board of Directors of the Company has approved the contents of this Information Circular and its sending to the shareholders of the Company. Interest of Informed Persons and Others in Material Transactions The management of the Company is not aware of any material interest, direct or indirect, of any informed person of the Company, any proposed director or any associate or affiliate of any informed person or proposed director in any transaction since the commencement of the Companys most recently completed financial year, or in any proposed transaction, that has materially affected or would materially affect the Company or any of its affiliates or subsidiaries. Sean Finn Executive Vice-President Corporate Services and Chief Legal Officer and Corporate Secretary March 6, 2018 64 OTHER INFORMATION CN MANAGEMENT INFORMATION CIRCULAR 2018
Schedule A Mandate of the Board The Board has clearly delineated its role and the role of management. The role of the Board is to supervise the management of CNs business and affairs, with the objective of increasing shareholder value. Managements role is to conduct the day-to-day operations in a way that will meet this objective. The Board approves all matters expressly required herein, under the Canada Business Corporations Act and other applicable legislation and CNs Articles and By-laws. The Board may assign to Board committees the prior review of any issues it is responsible for, or as required by applicable laws. Board committee recommendations are generally subject to Board approval. The Board has delegated the approval of certain matters to management pursuant to its Standing Resolutions on Delegation of Authority, as amended from time to time. Meetings of the Board are held at least seven times a year and as necessary. As part of its stewardship responsibility, the Board advises management on significant business issues and has the following responsibilities: A. Approving CNs Strategy adopting a strategic planning process, approving and reviewing, on at least an annual basis, a business plan and a strategic framework which take into account, among other things, the opportunities and risks of the business, and monitoring the implementation of the business plan by management. B. Assessing and Overseeing the Succession Planning of Executive Management approving the list of Board nominees for election by shareholders and filling Board vacancies; adopting and reviewing orientation and continuing education programs for directors; overseeing the disclosure of a method for interested parties to communicate directly with the Board Chair or with the non-management directors as a group; and ensuring a Board succession and renewal plan is in place. D. Monitoring Financial Matters and Internal Controls monitoring the quality and integrity of CNs accounting and financial reporting systems, disclosure controls and procedures, internal controls and management information systems, including by overseeing: the integrity and quality of CNs financial statements and other financial information and the appropriateness of their disclosure; the review of the Audit Committee on external auditors independence and qualifications; the performance of CNs internal audit function and of CNs external auditors; and CNs compliance with applicable legal and regulatory requirements (including those related to environment, safety and security); ensuring that an appropriate risk assessment process is in place to identify, assess and manage the principal risks of CNs business and financial strategy; and adopting communications and disclosure policies and monitoring CNs investor relations programs. (i) (ii) (iii) (iv) appointing executive management and monitoring the President and Chief Executive Officer (the President and CEO) and executive management performance taking into consideration Board expectations and fixed objectives, approving the President and CEOs corporate goals and objectives and approving annually the President and CEO and executive management compensation; ensuring that an appropriate portion of the President and CEO and executive management compensation is tied to both the short-and longer-term performance of CN; and taking all reasonable steps to ensure that processes are in place for the recruitment, training, development and retention of executives who exhibit the highest standards of integrity as well as competence. E. Monitoring Pension Fund Matters monitoring and reviewing, as appropriate, CNs pension fund policies and practices, including the investment policies of the Canadian National Railway Pension Trust Funds or any other pension trust fund established in connection with a new pension plan or any other pension plan offered or administered by CN (the CNs Pension Trust Funds); and approving the annual budget of the Investment Division of CNs Pension Trust Funds. Monitoring Environmental, Safety and Security Matters monitoring and reviewing, as appropriate, CNs environmental, safety and security policies and practices. C. Monitoring Corporate Governance Issues and Board Renewal F. monitoring the size and composition of the Board to favour effective decision-making; taking all reasonable measures to satisfy itself as to the integrity of management and that management creates a culture of integrity throughout CN; monitoring and reviewing, as appropriate, CNs approach to governance issues and monitoring and reviewing, as appropriate, CNs Corporate Governance Manual and policies and measures for receiving shareholder feedback; taking all reasonable steps to ensure the highest quality of ethical standards, including reviewing, on a regular basis, the Code of Business Conduct applicable to CNs directors, its President and CEO, senior financial officers, other executives and employees, monitoring compliance with such code, approving any waiver from compliance with the code for directors and executive officers and ensuring appropriate disclosure of any such waiver; ensuring the regular performance assessment of the Board, Board committees, Board and committee chairs and individual directors and determining their remuneration; The non-executive Board members meet before or after every Board meeting without the presence of management and under the chairmanship of the Board Chair. If such group includes directors who are not independent, an executive session including only independent directors is held regularly. Board members are expected to demonstrate a high level of professionalism in discharging their responsibilities. They are expected to attend the meetings of the Board and of the Board committees on which they sit and to rigorously prepare for and actively participate in such meetings. They should review all meeting materials in advance. They are also expected to be available to provide advice and counsel to the President and CEO or other corporate officers of CN upon request. The Board annually reviews the adequacy of its mandate. 65 CN MANAGEMENT INFORMATION CIRCULAR 2018 SCHEDULE A
Schedule B Reports of the Committees The following are reports of each Board committee for the year 2017 and up to March 6, 2018. These reports provide details on the activities of each committee but are not meant to be exhaustive. The Charter of each Committee is available in our Corporate Governance Manual available on our website at www.cn.ca. Report of the Audit Committee The role of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities with respect to the Companys financial reporting, monitoring risk management, internal controls and internal and external auditors. CURRENT MEMBERS: D.J. Carty (Chair), E.E. Holiday, V.M. Kempston Darkes, J.E. OConnor, R.L. Phillips, L. Stein HIGHLIGHTS The Audit Committee, in accordance with its mandate: Financial Information reviewed and approved annual and quarterly results, Managements Discussion and Analysis and the earnings press releases of the Company; reviewed the independent auditors reports of the external auditors on the consolidated financial statements and the internal controls over financial reporting of the Company, and on the financial statements of CNs Pension Trust Funds; reviewed financial information contained in the Annual Information Form, the Form 40-F and other reports requiring Board approval; reviewed and approved the Audit Committee Report and other information appearing in the Management Information Circular; reviewed analysis and communications materials prepared by management, the internal auditors or external auditors setting forth any significant financial reporting issues; reviewed the compliance of managements certification of financial reports with applicable legislation; reviewed, with the external auditors and management, the quality, appropriateness and disclosure of the Companys critical accounting principles and policies, underlying assumptions and reporting practices, and any proposed changes thereto; reviewed judgments made in connection with the preparation of the financial statements, if any, including analyses of the effect of alternative generally accepted accounting principles and/or methods; reviewed with external auditors and management, changes in accounting for CNs pension plans and other postretirement benefits; and held in camera meetings with management. Internal Auditors reviewed and approved the internal audit plan and Internal Audit Charter; monitored the internal audit functions performance, its responsibilities, staffing, budget and the compensation of its members; and held in camera meetings with the Chief, Internal Audit. External Auditors reviewed and approved the results of the external audit; recommended to the Board the appointment and terms of engagement of the Companys external auditors; evaluated, remunerated and monitored the qualifications, performance and independence of the external auditors; discussed, approved and oversaw the disclosure of all audit, review and attest services provided by the external auditors; determined which non-audit services the external auditors are prohibited from providing, and pre-approved and oversaw the disclosure of permitted non-audit services by the external auditors to the Company, in accordance with applicable laws and regulations; reviewed the formal statement from the external auditors confirming their independence and reviewed hiring policies for employees or former employees of the Companys external auditors; reviewed the external auditors observations on capital; and held in camera meetings with external auditors. Risk Management reviewed the Companys risk assessment and risk management policies including information technology risk management, and Business Interruption management; assisted the Board with the oversight of the Companys compliance with applicable legal and regulatory requirements; and oversaw the Companys cybersecurity program for Operations and Information Technologies. Internal Control received managements report assessing the adequacy and effectiveness of the Companys disclosure controls and procedures and systems of internal control; reviewed procedures established for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters or employee concerns regarding accounting or auditing matters; and reviewed minutes of the Corporate Disclosure Committee meetings. Committee Performance reviewed the processes in place to evaluate the performance of the Audit Committee; and reviewed and approved a forward-looking agenda for the Committee. Other made recommendations to the Board with respect to the declaration of dividends; monitored the tax affairs of the Company; and reviewed, on a quarterly basis, expense reports of the Chair of the Board and the Presidents Office. Submitted by the members of the Audit Committee. 66 SCHEDULE B CN MANAGEMENT INFORMATION CIRCULAR 2018
Report of the Finance Committee The role of the Finance Committee is to assist the Board in fulfilling its oversight responsibilities with respect to the monitoring and oversight of the Companys financial activities, which include overseeing financial policies, reviewing financings, authorizing and approving and recommending certain financial activities. CURRENT MEMBERS: K.G. Lynch (Chair), S. Bruder, J. Godin, E.E. Holiday, V.M. Kempston Darkes, J.E. OConnor, L. Stein HIGHLIGHTS The Finance Committee, in accordance with its mandate: Financial Policies provided oversight with respect to CNs capital structure, cash flows and key financial ratios; made recommendations to the Board with respect to the Companys financial policies and financial matters affecting the Company; reviewed policies with respect to distributions to shareholders, including policies on dividends, and policies regarding financial risk management, short-term investment and credit; and reviewed the Companys credit ratings and monitored the Companys activities with respect to credit rating agencies. Financing reviewed the Companys liquidity position, including the Companys capital expenditures, capital structure, financing plan and short-term investments; reviewed and recommended the extension of CNs credit facilities; approved a shelf prospectus for the issuance of an aggregate principal amount of C$6 billion of debt securities; and approved public debt offerings of U.S.$300 million 2.4% Notes due 2020, $C500 million 3.60% Notes due 2047 and U.S.$600 million 3.65% Notes due 2048. Financial Activities recommended decisions related to indebtedness of the Company, as well as loans, guarantees or extension of credit; reviewed Treasury and transactional activities; recommended decisions related to derivative financial instruments; reviewed and recommended a new share repurchase program and related progress reports; reviewed and recommended the Companys Capital Budget; reviewed, recommended and monitored significant capital and other expenditures, such as the purchase of locomotives, investments for the implementation of Positive Train Control and other strategic projects, major sales transactions and rail infrastructure projects, material purchases of products and services; and oversaw internal auditors reports on post-completion audits of selected capital projects approved by the Board. Committee Performance reviewed the processes in place to evaluate the performance of the Finance Committee; assessed the adequacy of the Finance Committees Charter and made a report thereon to the Board; and reviewed and approved a forward-looking agenda for the Committee. Other benchmarked quarterly results to those of other major railways. Submitted by the members of the Finance Committee. 67 CN MANAGEMENT INFORMATION CIRCULAR 2018 SCHEDULE B
Report of the Corporate Governance and Nominating Committee The role of the Corporate Governance and Nominating Committee is to assist the Board in fulfilling its oversight responsibilities with respect to corporate governance matters which include developing, reviewing and monitoring criteria for selecting directors and reviewing the corporate governance guidelines applicable to the Company. CURRENT MEMBERS: D. Losier (Chair), D.J. Carty, J. Godin, V. M. Kempston Darkes, K.G. Lynch, R. Pace, R.L. Phillips HIGHLIGHTS The Corporate Governance and Nominating Committee, in accordance with its mandate: Composition of the Board and its Committees reviewed the size and composition of the Board and assisted the Board in determining Board Committee size, composition and mandate; reviewed directors independence and financial literacy; reviewed criteria for selecting directors and assessed the competencies and skills of the Board members in relation to the Companys circumstances and needs; identified candidates qualified to become Board members, and recommended director nominees for the next annual meeting of shareholders; and reviewed director succession and board renewal and evergreen list. Performance of the Board and its Committees reviewed the performance of the Board, Board Committees, Board and Committee Chairs and Board members, including reviewing the Board, Committee, and Chair evaluation process and the development of Management Information Circular questionnaires. Director Compensation reviewed the compensation of Board members. Continuing Education for Directors monitored and reviewed the Companys orientation and continuing education programs for directors. Corporate Governance Initiatives reviewed and recommended changes to the Companys corporate governance guidelines and monitored disclosure of such guidelines in accordance with applicable rules and regulations; led the review of the Companys Corporate Governance Manual, including recommending to the Board an update to include recent best practices; reviewed and amended the Companys Clawback Policy; implemented a 14-year term limit applicable to CN Board members elected to the CN Board for the first time after April 25, 2017; updated CNs website disclosure relating to CNs lobbying activities and political contributions; reviewed, monitored and oversaw compliance with CNs Code of Business Conduct; reviewed adherence to the Companys Aircraft Utilization Policy; monitored developments, proposed rule changes and amendments to securities laws, disclosure and other regulatory requirements; reviewed the Management Information Circular; reviewed the Annual Report; reviewed the annual report of CNs Ombudsman; recommended to the Board a date and location for the annual meeting of shareholders; monitored the Companys Corporate Disclosure and Communications Policy and the Investor Relations Program and reviewed feedback from shareholders and shareholder associations; and assisted the Board with the oversight of the Companys corporate governance and monitored legal and regulatory requirements, as well as best practices. Committee Performance reviewed the processes in place to evaluate the performance of the Corporate Governance and Nominating Committee; and reviewed and approved a forward-looking agenda for the Committee. Submitted by the members of the Corporate Governance and Nominating Committee. 68 SCHEDULE B CN MANAGEMENT INFORMATION CIRCULAR 2018
Report of the Human Resources and Compensation Committee The role of the Human Resources and Compensation Committee is to assist the Board in fulfilling its oversight responsibility of monitoring executive managements performance assessment and succession planning. CURRENT MEMBERS: G.D. Giffin (Chair), S. Bruder, D.J. Carty, J. Godin, E.E. Holiday, D. Losier, K.G. Lynch, J.E. OConnor, R.L. Phillips, L. Stein HIGHLIGHTS The Human Resources and Compensation Committee, in accordance with its mandate: Succession Planning reviewed the mechanisms in place regarding succession planning for executive management positions, including that of the President and CEO; appointed an Interim President and CEO during the transition period until a permanent President and CEO is appointed; launched an international search process to fill the position of President and CEO; reviewed the leadership team assessment, including in-depth functional talent reviews; and reviewed the succession plan for management put in place by the President and CEO, including processes to identify, develop and retain the talent of outstanding officers. President and CEO Compensation reviewed corporate goals and objectives relevant to the President and CEO, evaluated his mid-year and annual performance based on those goals and objectives and recommended compensation based on this evaluation, for approval by the Independent Board members; and developed performance objectives in conjunction with the President and CEO. Appointment of Executive Management recommended the appointment of executive management and approved the terms and conditions of their appointment and termination or retirement. Executive Compensation reviewed the validity of the Companys benchmark group used in determining the compensation of executives; reviewed the evaluation of executive managements performance and recommended to the Board executive managements compensation; examined and reviewed elements of executive compensation and reported on compensation practices; monitored any potential risks that could arise from CNs compensation programs and practices, while ensuring proper risk identification and mitigation practices were in place; reviewed performance of NEOs and the Companys annual performance as measured under the AIBP; closely monitored bonus outlook, as well as PSU vesting outlook; and reviewed and recommended proposed bonus targets and performance targets related to PSUs. Executive Compensation Disclosure produced for review and approval by the Board a report on executive compensation for inclusion in the Management Information Circular. Compensation Philosophy monitored the compensation philosophy and policy that rewards the creation of shareholder value and reflects the appropriate balance between the short-and longer-term performance of the Company; and monitored the Company policy relating to the positioning of total direct compensation for executives. Pension Plans reviewed and monitored the financial position of CNs pension plans; and reviewed and recommended pension plan amendments. Human Resources Initiatives closely monitored the labour negotiation process; monitored pension and strategic labour and social issues; reviewed and discussed strategies for hiring, training, engaging, and developing talent; and reviewed and discussed strategies for workforce planning. Committee Performance reviewed the processes in place to evaluate the performance of the Human Resources and Compensation Committee; reviewed and approved a forward-looking agenda for the Committee; and retained the service of independent compensation advisors to help it carry out its responsibilities and approved appropriate fees for such services. Submitted by the members of the Human Resources and Compensation Committee. 69 CN MANAGEMENT INFORMATION CIRCULAR 2018 SCHEDULE B
Report of the Environment, Safety and Security Committee The role of the Environment, Safety and Security Committee is to assist the Board in fulfilling its oversight responsibilities with respect to environmental matters, safety and security of the Companys operations which include overseeing environmental, safety and security policies, practices and procedures, audits and assessments of compliance. CURRENT MEMBERS: V.M. Kempston Darkes (Chair), D.J. Carty, J. Godin, J.E. OConnor, R. Pace, R.L. Phillips, L. Stein HIGHLIGHTS The Environment, Safety and Security Committee, in accordance with its mandate: Environmental, Health and Safety Audits oversaw the development and implementation of environmental, safety and security policies, procedures and guidelines; reviewed environmental, health and safety audits and assessments of compliance, taking reasonable steps to ensure that the Company is exercising due diligence; oversaw the review of the Companys safety management systems and related management action plans and ensured those systems were fully aligned with and reinforce CNs safety culture and its goal of being the safest Class I railroad in North America; reviewed the Companys business plan to ascertain that environmental, safety and security issues are taken into consideration; ensured appropriate employee training standards and communications are developed and implemented; and reviewed all significant safety and security matters. Accounting Accrual monitored accounting accrual for environmental costs in conjunction with the Audit Committee. Environmental Investigations and Judgments reviewed reports in respect of all significant notices, complaints, investigations and proceedings by governmental authorities, and all significant judgments and orders in respect of environmental, safety and security matters. Other reviewed Canadian and U.S. environmental and safety, legal and regulatory developments of importance to the Company; and monitored results from various security initiatives and use of technology in risk mitigation. Committee Performance reviewed the processes in place to evaluate the performance of the Environment, Safety and Security Committee. Submitted by the members of the Environment, Safety and Security Committee. Report of the Strategic Planning Committee The role of the Strategic Planning Committee is to assist the Board in fulfilling its oversight responsibilities with respect to financial and strategic issues, including the review of the key assumptions, as well as the economic, business, regulatory and competitive conditions underlying the Companys business plan. CURRENT MEMBERS: J.E. OConnor (Chair), S. Bruder, D.J. Carty, G.D. Giffin, J. Godin, E.E. Holiday, V.M. Kempston Darkes, D. Losier, K.G. Lynch, R. Pace, R.L. Phillips, L. Stein HIGHLIGHTS The Strategic Planning Committee, in accordance with its mandate: Strategic Direction focused on financial and strategic issues, including the review of key assumptions underlying the business plan; reviewed and approved the Companys strategic direction, including its business plan and capital budget; and obtained regular briefings and presentations on strategic and financial issues. Committee Performance reviewed the processes in place to evaluate the performance of the Strategic Planning Committee. Submitted by the members of the Strategic Planning Committee. 70 SCHEDULE B CN MANAGEMENT INFORMATION CIRCULAR 2018
Report of the Pension and Investment Committee The role of the Pension and Investment Committee has historically been to assist the Board in fulfilling its oversight responsibilities with respect to investment of assets of CNs Pension Trust Funds overseen by the CN Investment Division (CNID). At the end of 2017, the Board approved changes to the pension governance structure to further enhance the existing focus on both pension assets and liabilities, by establishing a more formal information sharing mechanism between CNID and CN management and by enhancing Board coordination and oversight over pension liability issues. The Committee was renamed Pension and Investment Committee (formerly known as the Investment Committee of CNs Pension Trust Funds) and its mandate was expanded to review pension related matters more broadly. While current responsibilities were retained, the Committee is now informed of all matters related to pension liabilities or that are otherwise relevant in developing CNs pension risk management strategy and pension plan design. The change is intended to reinforce an integrated approach to pension management with a focus on the funded status of CNs defined benefit plans and associated risks. CURRENT MEMBERS (1): E.E. Holiday (Chair), S. Bruder, G.D. Giffin, D. Losier, K.G. Lynch HIGHLIGHTS The Pension and Investment Committee, in accordance with its mandate: Investment Division reviewed the activities of CNID and advised CNID on investment of assets of CNs Pension Trust Funds in accordance with applicable policies and procedures; reviewed and approved the Statement of Investment Policies and Procedures for CNs pension plans; reviewed and approved the Investment Strategy of CNID; reviewed and approved CNID Incentive Plans and any award payouts thereunder; and reviewed and approved the annual budget of CNID. oversee implementation of the overall pension risk management strategy by the Pension Advisory Working Committee, a newly formed management committee, and CNID; review and recommend, jointly with the Audit Committee, to the Board the financial statements of the CN Pension Trust Funds and annual report; review managements assessment of the effectiveness of internal controls relating to CNs Pension Plans and the CN Pension Trust Funds; review and approve the governance structure of the management Pension Advisory Working Committee; appoint members of the management Pension Advisory Working Committee and its Chair. Committee Performance reviewed the processes in place to evaluate the performance of the Pension and Investment Committee. Submitted by the members of the Pension and Investment Committee. Under its revised mandate the Pension and Investment Committee will also: in conjunction with the President and Chief Executive Officer of CN, oversee and determine the hiring, compensation, performance assessment, leadership development and succession planning of CNID executives, including the President and CEO of CNID, subject to the approval of the Human Resources & Compensation Committee and the Board; approve the overall pension risk management strategy and reporting thereon to the Board; Report of the Donations and Sponsorships Committee The role of the Donations and Sponsorships Committee is to assist the Board in fulfilling its oversight responsibilities with respect to developing a donations and sponsorships strategy and reviewing/approving donation and sponsorship requests. CURRENT MEMBERS (1): R. Pace (Chair), S. Bruder, G.D. Giffin, D. Losier HIGHLIGHTS The Donations and Sponsorships Committee, in accordance with its mandate: Donations and Sponsorship Strategy reviewed and approved the general donations and sponsorships strategy and goals of the Company; reviewed and approved the budget for donations and sponsorships; and reviewed the Railroaders in the Community Program. Donations and Sponsorship Requests reviewed donation requests and approved selected donations by the Company, including those having a total cost of more than $100,000; recommended to the Board for approval sponsorships by the Company, including those having a total cost of more than $500,000; and reviewed reports from the Vice-President, Public and Government Affairs concerning sponsorships having a total cost of more than $100,000 and donations of more than $50,000 and on other matters. Committee Performance reviewed committee mandate and processes in place to evaluate the performance of the Donations and Sponsorships Committee. Submitted by the members of the Donations and Sponsorships Committee. (1) The Pension and Investment Committee and the Donations and Sponsorships Committee are mixed committees composed of members of the Board of Directors as well as officers of the Company (not shown here). 71 CN MANAGEMENT INFORMATION CIRCULAR 2018 SCHEDULE B
Schedule C Additional Audit Committee Disclosure National Instrument 52-110 Audit Committees (NI 52-110) of the CSA requires issuers to include the charter of their audit committee and disclose information with respect to the composition, education and experience of the members of their audit committees, as well as all fees paid to external auditors in their annual information form. We comply with the requirements regarding composition and responsibilities, as summarized hereinafter, and we refer to our Annual Information Form section 9.2 Audit Committee Disclosure and Schedule A available on SEDAR at www.sedar.com and on our website at www.cn.ca, under Investors for a description of the education and relevant experience of the Audit Committee members and with regards to the charter of our Audit Committee. The Audit Committee is also responsible for assisting the Board with the oversight of CNs compliance with applicable legal and regulatory requirements. Additionally, the mandate of the Audit Committee provides that the Audit Committee must establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, or employee concerns regarding accounting or auditing matters, while ensuring confidentiality and anonymity. CN has adopted such procedures. Please refer to the Corporate Governance section of our website at www.cn.ca, under Delivering Responsibly/Governance for more details on these procedures. Monitoring Internal Auditors The Audit Committee is responsible for ensuring that the Chief, Internal Audit reports directly to the Audit Committee, and for regularly monitoring the internal audit functions performance, its responsibilities, staffing, budget and the compensation of its members. It further annually reviews the internal audit plan and ensures that the internal auditors are accountable to the Audit Committee. Monitoring External Auditors The mandate of the Audit Committee states that the Audit Committee is responsible for recommending the retention and, if appropriate, the removal of external auditors, evaluating and remunerating them, and monitoring their qualifications, performance and independence. The Audit Committee is also in charge of approving and overseeing the disclosure of all audit, review and attestation services provided by the external auditors, determining which non-audit services the external auditors are prohibited from providing, and pre-approving and overseeing the disclosure of permitted non-audit services by the external auditors. The Audit Committee is responsible for overseeing the external auditors and discussing with them the quality and not just the acceptability of the Companys accounting principles, including any material written communications between the Company and the external auditors (including disagreements, if any, with management and the resolution thereof). The Audit Committee also reviews at least annually, the formal written statement from the external auditors stating all relationships the external auditors have with CN and confirming their independence. The mandate of the Audit Committee also provides that the Audit Committee is responsible for reviewing hiring policies for employees or former employees of the Companys firm of external auditors. Furthermore, the mandate of the Audit Committee states that the Audit Committee may retain independent advisors to help it carry out its responsibilities, including fixing such advisors fees and retention terms, subject to advising the Board Chair. The Committee makes arrangements for the appropriate funding for payment of the external auditors and any advisors retained by it. Pursuant to its charter, the Audit Committee also has direct communication channels with the internal and external auditors to discuss and review specific issues as appropriate. The internal and external auditors must meet separately with the Audit Committee, without management, twice a year, and more frequently as required. The Audit Committee met five (5) times in 2017 and held in camera sessions at each meeting. The report of the Audit Committee, set forth in Schedule B of this Information Circular, outlines the major subject areas reviewed by the Committee during the year, in compliance with its mandate. Composition of the Audit Committee The Audit Committee is composed of six independent directors, namely, Donald J. Carty, Chair of the Committee, Edith E. Holiday, V. Maureen Kempston Darkes, James E. OConnor, Robert L. Phillips and Laura Stein. No member of the Audit Committee receives, other than in his or her capacity as a director or member of a Board committee, directly or indirectly, any fee from the Company or any subsidiary of the Company, nor is an affiliated person of the Company, or any subsidiary of the Company. Mandate of the Audit Committee As further described below, the Audit Committees responsibilities can be divided into four categories: overseeing financial reporting; monitoring risk management and internal controls; monitoring internal auditors; and monitoring external auditors. Overseeing Financial Reporting The mandate of the Audit Committee provides that the Audit Committee is responsible for reviewing, with management and the external auditors, the annual and quarterly financial statements of the Company and accompanying information, including the Companys Managements Discussion and Analysis disclosure and earnings press releases, prior to their release, filing and distribution. The mandate also provides that the Audit Committee should review the procedures in place for the review of the Companys disclosure of financial information extracted or derived from the Companys financial statements and periodically assess the adequacy of those procedures. The Audit Committee is also responsible for reviewing the financial information contained in the Annual Information Form and other reports or documents, financial or otherwise, requiring Board approval. Furthermore, the Audit Committee is in charge of reviewing the results of the external audit, any significant problems encountered in performing the audit, and managements response and/or action plan related to any issue identified by the external auditors and any significant recommendations relating thereto. Monitoring Risk Management and Internal Controls The Audit Committee is responsible for periodically receiving managements report assessing the adequacy and effectiveness of CNs disclosure controls and procedures and systems of internal control. The mandate of the Audit Committee also provides that the Audit Committee must review CNs risk assessment and risk management policies. 72 SCHEDULE C CN MANAGEMENT INFORMATION CIRCULAR 2018
Non-Audit Services The mandate of the Audit Committee provides that the Audit Committee determines which non-audit services the external auditors are prohibited from providing, approves audit services and pre-approves permitted non-audit services to be provided by the external auditors. CNs Audit Committee and the Board of Directors have adopted resolutions prohibiting the Company from engaging KPMG LLP to provide certain non-audit services to the Company and its subsidiaries, including bookkeeping or other services related to the accounting records or financial statements, financial information systems design and implementation, appraisal or valuation services, fairness opinions, Education and Relevant Experience of the Audit Committee Members The Board of Directors believes that the composition of the Audit Committee reflects a high level of financial literacy and experience. As required in the charter of the Audit Committee, all members of the Audit Committee are financially literate, as such term is defined under Canadian securities laws and regulations and the NYSE Standards, and several members of the Committee meet all criteria to be designated as audit committee financial expert under the rules of the SEC. The Board has made such determination based on the education and experience of each Committee member. All members of the Audit Committee are financially literate and several members are audit committee financial experts. The external auditors are prohibited from providing certain non-audit services. contribution in-kind reports, actuarial services, internal audit outsourcing services, management functions or human resources functions, broker or dealer, investment advisor, or investment banking services and legal services and expert In determining if a director is an audit committee financial expert, the Board considers if the director is a person who has: (a) an understanding of generally accepted accounting principles and financial statements; (b) the ability to assess the general application of such accounting principles in connection with the accounting for estimates, accruals and reserves; (c) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Companys financial statements, or experience actively supervising one or more persons engaged in such activities; (d) an understanding of internal controls and procedures for financial reporting; and (e) an understanding of audit committee functions. services unrelated to the audit. Pursuant to such resolutions, the Company may engage KPMG LLP to provide non-audit services, including tax services, other than the prohibited services listed above, but only if the services have specifically been pre-approved by the Audit Committee. Audit Committee Report Regarding Internal Control Over Financial Reporting The Audit Committee periodically received managements report assessing the adequacy and effectiveness of our disclosure controls and procedures and systems of internal control in respect of the 2017 fiscal year. The Companys external auditors, KPMG LLP, are responsible for performing an independent audit of our consolidated financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (PCAOB) in the U.S., and an independent audit of the effectiveness of internal controls over financial reporting, in accordance with the standards of the PCAOB. These audits serve as a basis for KPMG LLPs opinions addressing whether the consolidated financial statements fairly present our financial position, results of operations, and cash flows in conformity with U.S. Generally Accepted Accounting Principles (GAAP). The Audit Committee has discussed with KPMG LLP the matters required to be discussed by the PCAOB Auditing Standards No. 16 (Communication With Audit Committees) and Chartered Professional Accountants of Canada (CPA) Handbook Assurance Section 260 (Communications With Those Charged With Governance) including matters relating to the conduct of the audit of our financial statements and the assessment of the effectiveness of our internal control over financial reporting under section 404 of the Sarbanes-Oxley Act. KPMG LLP provided the Committee with written disclosures and the letter required by Rule 3526 of the PCAOB. The Audit Committee has discussed with KPMG LLP the firms independence from the Company. A formal written statement describing all relationships between KPMG LLP and the Company was remitted to the Audit Committee and it includes a written confirmation that KPMG LLP are independent within the meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulation and are independent public accountants with respect to the Company within the meaning of all relevant U.S. professional and regulatory standards, including the independence rules adopted by the SEC pursuant to the Sarbanes-Oxley Act, and Rule 3520 of the PCAOB. Based on this review and these discussions, the Audit Committee recommended to the Board that the Companys audited consolidated financial statements be filed with Canadian securities regulators and be included in the Companys annual report on Form 40-F for the year ended December 31, 2017 filed with the SEC. 73 CN MANAGEMENT INFORMATION CIRCULAR 2018 SCHEDULE C
Go Paperless Enroll now for e-delivery of your next shareholder information package. See the information in this package for easy steps to enroll. The Forest Stewardship Council® (FSC®) is an international certification and labeling system for products that come from responsibly managed forests, and verified recycled sources. Under FSC certification, forests are certified against a set of strict environmental and social standards, and fibre from certified forests is tracked all the way to the consumer through the chain of custody-certification system. CN shows its concern for protecting the environment through the use of FSC-certified paper Printed in Canada
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. 8th Floor, 100 University Avenue Toronto, Ontario M5J 2Y1 www.computershare.com Security Class Holder Account Number Fold Form of Proxy - Annual Shareholder Meeting to be held on Tuesday, April 24, 2018 Notes to Proxy 1. Every shareholder has the right to appoint a person of their choice, who need not be a shareholder, to attend and act on their behalf at the meeting. If you wish to appoint a person other than the persons whose names are printed herein, please insert the name of your chosen proxyholder in the space provided (see reverse). 2. If the securities are registered in the name of more than one owner (for example, joint ownership, trustees, executors, etc.), then all those registered should sign this proxy. If you are voting on behalf of a corporation or another individual you may be required to provide documentation evidencing your power to sign this proxy with signing capacity stated. 3. This form of proxy should be signed in the exact manner as the name appears on the proxy. 4. This form of proxy should be read in conjunction with the accompanying Notice of Annual Meeting of Shareholders and Management Information Circular. 5. If this form of proxy is not dated, it will be deemed to bear the date on which it is mailed by Management to the holder. 6. The shares represented by this proxy will be voted as directed by the holder, however, if such a direction is not made in respect of any matter, this proxy will be voted FOR items 1, 2 and 3 and in favour of Managements proposals generally. Proxies submitted must be received by 5:00 p.m. (Eastern Daylight Time), on April 23, 2018. Fold VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK! .. To Vote Using the Telephone To Vote Using the Internet To Receive Documents Electronically Call the number listed BELOW from a touch tone telephone. 1-866-732-VOTE (8683) Toll Free Go to the following web site: www.investorvote.com Smartphone: Scan the QR code to vote now. You can enroll to receive future securityholder communications electronically by visiting www.investorcentre.com and clicking at the bottom of the page. If you vote by telephone or the Internet, DO NOT mail back this proxy. Voting by mail may be the only method for securities held in the name of a corporation or securities being voted on behalf of another individual. Voting by mail or by Internet are the only methods by which a holder may appoint a person as proxyholder other than the Management nominees named on the reverse of this proxy. Instead of mailing this proxy, you may choose one of the two voting methods outlined above to vote this proxy. To vote by telephone or the Internet, you will need to provide your CONTROL NUMBER listed below. CONTROL NUMBER
. This Form of Proxy is solicited by and on behalf of Management. Appointment of ProxyholderPrint the name of the person you are I/We being holder(s) of Common Shares of Canadian National Railway Company hereby appoint: Robert Pace, OR or failing him, Jean-Jacques Ruest, appointing if this person is someone other than the Chair of the Board or the Interim President and Chief Executive Officer of the Company, as my/our proxyholder with full power of substitution and to vote in accordance with the following direction (or, in the case of amendments and new points brought before the Meeting, as the proxyholder sees fit) at the Annual Meeting of Shareholders of Canadian National Railway Company to be held at The Omni King Edward Hotel, 37 King Street East, Toronto, Ontario (Canada) on Tuesday, April 24, 2018, at 10:00 a.m. (Eastern Daylight Time) and at any adjournment thereof. The Board of Directors and Management recommend that shareholders VOTE FOR items 1, 2 and 3 below: 1. Election of Directors ForWithholdFor WithholdFor Withhold 01. Shauneen Bruder 06. V. Maureen Kempston Darkes 11. Robert L. Phillips Fold 02. Donald J. Carty07. The Hon. Denis Losier 12. Laura Stein 03. Ambassador Gordon D. Giffin 08. The Hon. Kevin G. Lynch 04. Julie Godin 09. James E. OConnor 05. Edith E. Holiday 10. Robert Pace 2. Appointment of Auditors Appointment of KPMG LLP as Auditors. ForWithhold 3. Non-binding Advisory Vote on Executive Compensation Non-binding advisory resolution to accept the approach to executive compensation disclosed in the accompanying Management Information Circular, the full text of which resolution is set out on p. 9 of the accompanying Management Information Circular. ForAgainst Fold Authorized Signature(s) - This section must be completed for your instructions to be executed. I/We authorize you to act in accordance with my/our instructions set out above. I/We hereby revoke any proxy previously given with respect to the Meeting. If no voting instructions are indicated above, this Proxy will be voted as recommended by the Board of Directors and Management. Signature(s) Date MM / DD / YY Quarterly reports To reduce costs and help protect the environment, we will not send you CNs quarterly financial reports and related managements discussion and analysis (MD&A), unless you tell us that you want to receive them by checking the box below. You will be required to complete this request on an annual basis. Please send me CNs quarterly financial reports If you do not check the box or do not return this form, we will assume that you do not want to receive CNs quarterly financial reports and MD&A. Annual report By law, we must send you our annual financial statements and related MD&A, unless you tell us that you do not want to receive them by checking the box below. Please do not send me CNs annual financial statements and MD&A If you do not check the box or do not return this form, we will assume that you want to receive CNs annual financial statements and MD&A. You can also receive these documents electronically - see reverse for instructions to enrol for electronic delivery. CNRQ 243774 AR2
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for the HAUL ANNUAL 2017 REPORT INVESTING LONG
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. 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 known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the outlook or any future results or performance 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 effects of general economic and business conditions; 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 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 Managements Discussion and Analysis in CNs annual and interim reports, Annual Information Form and Form 40-F, filed with Canadian and U.S. securities regulators and available on CNs website, for a description of major risk factors. C O N T E N T S I II IV A Message from Robert Pace A Message from Jean-Jacques Ruest Investing for the Long Haul: Innovation: Investing for Safety Highlights Innovation: Investing for Growth through Operational and Service Excellence Investing with Our Customers: Innovating Our Service Offering Investing for the Environment XIV XV XVI Corporate Governance Board of Directors Shareholder and Investor Information FINANCIAL SECTION Selected Railroad Statistics unaudited Managements Discussion and Analysis Managements Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to Consolidated Financial Statements 1 2 54 55 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. 57 61 As used herein, the word Company or CN means, as the context requires, Canadian National Railway Company and/or its subsidiaries.
Investing for the Long Haul Message from Robert Pace On behalf of CNs Board of Directors, I would like to express my sincerest gratitude to all our dedicated employees, shareholders, customers and supply chain partners for their support throughout 2017. Were pleased that CN posted another record-breaking year in numerous ways. We have great confidence in Interim President and CEO Jean-Jacques Ruest. He has been with the company for 22 years, and is well known to customers and investors. Jean-Jacques is well positioned to focus the company and its proven team of railroaders to rapidly address operational challenges during this transition. An international search for a CEO is well underway. Of course, running a successful company goes over and above numbers and metrics. CN is committed to being a responsible corporate citizen in every aspect of what we do, from the field to the boardroom, including the efforts the Company is making to improve diversity and become the safest railroad in North America. With an experienced leadership team and the best railroaders in the business, CN not only continued to be North Americas most efficient railroad, we were also the fastest growing. And, as a measure of our solid financial performance, with CN generating strong earnings per share growth and record free cash flow in 2017, the Board was pleased to approve a 10% hike in the Companys dividend, our 22nd consecutive annual increase. We believe that good corporate governance is good business, and we are honoured to be recognized for our efforts by several Canadian and international organizations, including the Globe and Mails 2017 annual review, where we placed first in the industrials group and in the top five among Canadian publicly traded companies. Additionally, CN was ranked one of the Best 50 Corporate Citizens in Canada by Corporate Knights for a ninth consecutive year. The Board is proud of the Companys long track record of outstanding performance. At the same time, we know that in an increasingly competitive marketplace, CN must respond with speed and innovation to retain its leadership position. The Board also recognizes the immediate operational and customer service challenges that emerged for CN in Fall 2017 led by high demand and insufficient network resiliency, coupled with severe winter weather conditions. We are confident that the actions we are taking and the investments we are making will help ensure a future for CN that we can all continue to be proud of. Sincerely, CN is accelerating the execution of our innovation strategy, which we are confident remains the right course to continuously improve and maintain industry-leading operating metrics and best-in-class customer service. Robert Pace, D.COMM., C.M. Chair of the Board IC N 2 0 17 A N N U A L R E P O R T
Investing for the Long Haul Message from Jean-Jacques Ruest I am honoured to have been entrusted by the Board to help lead our great company through this transition period. 2017 was a remarkable year for CN with unprecedented volume growth. It was also a year that ended with operational challenges. We moved more carloads than ever before, across a broad range of commodity groups. CNs team of outstanding railroaders is responding to the challenge of maintaining the best level of service possible for our customers. I would like to express my most sincere thanks to the entire team for their boundless efforts. committed to working with our supply chain partners and we have a solid plan in place to meet customer requirements. First, were addressing the immediate needs of our customers by hiring across the Company to address attrition and accommodate growth. We onboarded 3,400 new railroaders in 2017 and plan to hire another 2,000 in 2018, with the biggest share being in operations. We are also securing additional locomotives to respond to demand growth in the short term. Second, were building our business in a methodical and sustainable way for the long haul. Were bullish on the North American economy and expect to see continued volume growth. As a reflection of our confidence in our ability to win new business with our superior service model, we plan to invest a record $3.2 billion in our capital program in 2018. Approximately $400 million of our capital budget is earmarked for equipment, including the acquisition of new high-horsepower locomotives. A further $800 million is targeted toward initiatives to increase capacity and enable growth, such as expansion of our track infrastructure, improvements in yards and intermodal terminals, and investments in information technology to improve safety performance, operational efficiency and customer service. The capital program also includes $1.6 billion for basic track and railway infrastructure maintenance supporting safety and efficiency, and $400 million for continued implementation of Positive Train Control in the United States. Our robust growth has led to temporary capacity constraints and challenging customer service levels, specifically in the fourth quarter as weather and other incidents outside our control disrupted some parts of our network. Notwithstanding, in 2017, the number of revenue ton miles (RTMs) delivered by CN was 11% higher than in 2016, with strong volumes across almost all commodity groups. Growth was particularly notable in intermodal, frac sand, coal and petroleum coke exports, and Canadian grain. While we were expecting a recovery from our slightly lower 2016 volumes, we and our customers never anticipated such a strong and fast rebound. Todays supply chains are complex and require an unprecedented level of cooperation between partners to provide customers more reliability and visibility on their shipments. We are I IC N 2 0 17 A N N U A L R E P O R T
Strong Financial Performance 2017 was a year of many accomplishments, especially in terms of our financial performance. Revenues were up more than $1 billion, or 8%, over 2016, to a record $13 billion. Diluted earnings per share increased 55% to a record $7.24. Adjusted diluted earnings per share1 which excludes an income tax recovery resulting from the impact of the U.S. tax reform and other items increased 9% to $4.99, also a record high. Our growth continues to outpace the strengthening North American economy and the entire CN team deserves credit. And, while our operating ratio did increase 1.5 points to 57.4%, due in part to higher fuel prices and challenging operating conditions in the fourth quarter, it remains the lowest of all Class I railroads. But were far from complacent. We are always looking for opportunities that will lead to permanent improvements. CN is a dynamic organization and were deepening our competitive advantage through innovation, teamwork and a proven strategic agenda. into the causes of injuries and accidents. Were also investing in training and furthering our shift to a learning and coaching safety culture. One initiative is Looking Out For Each Other, which teaches employees the importance of speaking up whenever they see unsafe behaviour at work. Another example is Activ8, an enterprise-wide mobile platform designed to encourage innovation through idea sharing and problem solving. Our first initiative with this program generated hundreds of ideas for reducing personal injuries. Looking Forward Our 2018 investments will help us leverage our strong pipeline of growth opportunities. As always, safety, service and efficiency remain our top priorities. The unprecedented level of investment planned for 2018 will improve the resiliency of our network and help CNs great team handle our customers business, now and for the long haul. Sincerely, Coaching Safety Culture Safety remains a core value at CN. While we did not reach all our safety targets for 2017, the long-term trend is positive, reflecting our investments in infrastructure and monitoring over the past 20 years. Were highly focused on reducing accidents and preventing people from getting hurt on the job. As we continue to address these issues, were approaching safety by diving much deeper Jean-Jacques Ruest Interim President and CEO, and Executive Vice-President and Chief Marketing Officer 1. See the section entitled Adjusted performance measures in the MD&A for an explanation of this non-GAAP measure. I I IC N 2 0 17 A N N U A L R E P O R T were building our business in a methodical and sustainable way for the long haul. Were bullish on the North American economy and expect to see continued volume growth. Jean-Jacques Ruest
Innovation: Investing for Safety Executing our innovation strategy means investing in technology to improve every aspect of our business including safety. Safety is not just a priority at CN, but a deeply held core value. Our vision is to become the safest railway in North America. Thats why were adopting a multifaceted risk reduction strategy that combines developing our people, executing good processes and investing in technology. Were also fostering trust, pride, teamwork and innovation in our safety culture by shifting to a learning and coaching approach. Investing in People At our CN Claude Mongeau National Training Centre in Winnipeg, MB, and our sister campus in Homewood, IL, we take a systematic and comprehensive approach to safety training. Employees, and some of our customers, receive hands-on technical training focused on instilling and reinforcing a strong safety culture. We are improving the quality of employee interaction in the field. Our innovative Looking Out For Each Other training program is a joint union-management initiative that focuses on moving our people from compliance with the rules to a commitment to safe behaviour for themselves and those around them. Investing in Communities An important part of our safety responsibility is to engage with communities on emergency response. Our dangerous goods experts and other colleagues reach out to hundreds of communities along our network each year. We regularly share information on dangerous goods traffic and emergency response training. For example, thousands of firefighters, police I VC N 2 0 17 A N N U A L R E P O R T Innovative track inspection boxcar The Autonomous Track Geometry Measurement System (ATGMS) car is designed to operate on any freight train and will allow for additional geometry inspections across CNs network to detect wear and irregularities in track gauge, curvature, alignment and cross-level.
officers and emergency managers from communities across our network have downloaded the AskRailTM mobile app, which provides real-time information about the contents of railcars. The CN Police Service plays a vital role in ensuring safer communities. Through education and enforcement, CN Police officers strive to protect the communities in which we operate. A fine example is our participation in Rail Safety Week, when we conduct safety blitzes and information sessions at schools, community centres, railway stations and level crossings in Canada and the United States. Investing in Innovative Safety Technology We are investing to enhance our early detection technologies. These include additional wayside inspection systems that detect hot wheels and dragging equipment, hi-rail trucks that measure track geometry, and machine vision systems that detect hard-to-see defects. In addition, were testing the use of aerial drones for bridge inspections. We use the data collected by many of these systems to better target maintenance and investment activities, and were developing ways to use the data for predictive analytics. CN is also continuing to implement Positive Train Control as mandated by the U.S. government, for a total investment of US$1.4 billion, of which $400 million will be spent in 2018. VC N 2 0 17 A N N U A L R E P O R T
Highlights 1. See the section entitled Adjusted performance measures in the MD&A for an explanation of this non-GAAP measure. 2. See the section entitled Liquidity and capital resources Free cash flow in the MD&A for an explanation of this non-GAAP measure. V IC N 2 0 17 A N N U A L R E P O R T RE C ORD CA SH GENERATION $2,778M Free Cash Flow 2 CNs solid generation of free cash flow in 2017 (up 10% over 2016) continues to demonstrate our ability to generate cash for repayment of debt obligations, payment of dividends, and share repurchases. RE C ORD E ARNINGS $7.24 Diluted EPS $4.99 Adjusted Diluted EPS1 Earnings per share reflect top-line growth that outpaced the strengthening economy as well as control of expenses. RE C ORD T OP -LINE PERF ORMANCE $13B Revenues Our customer-centric supply chain model delivered an increase in revenues of 8% over 2016, mainly attributable to higher volumes of traffic in overseas intermodal, frac sand, coal and petroleum coke exports, and Canadian grain, as well as freight rate increases.
Innovation: Investing for Growth through Operational and Service Excellence On average, CN invests approximately 20% of annual revenues back into the Company to build for the future. This steady and predictable level of investment provides benefits that keep on giving over time. For example, CNs investments of approximately $850 million in long sidings and double track since 2000 have enabled 42% higher car velocity and 59% more RTMs. With our sights firmly set on the long haul, we plan to invest a record $3.2 billion in 2018 to improve the safety, efficiency and capacity of our network. CNs innovative expansion of long-train operations is improving the efficiency of the entire supply chain. Over the past 15 years, we have invested heavily to serve our customers with more efficient long-train operations by extending sidings from 6,000 to 12,000 feet, doubling track, acquiring new locomotives, and expanding the use of distributed power. CN now has the capability of running trains of more than 200 railcars. The longer trains add more efficiency for customers by reducing the number of loading days and increasing overall throughput for terminals. To deliver service excellence, we must be nimble, because supply chains are complex from the standpoint of distance, integration of globally sourced components, variability of demand, and tight inventories. Any supply chain failure can translate into higher costs and lost sales. Therefore, customers are demanding more from every provider in the supply chain, including CN. Our objective is to provide our customers with greater ease and reliability of service, as well as more visibility on their shipments. Investing in Technology CN plans to deliver a high level of service through a combination of business process innovation, automation and optimization of key activities. Well support these efforts by investing $500 million over a five-year period to leverage technology and information systems to deliver improved safety, efficiency and service. Better data will help our people make better decisions and will bring improvement in core functions, including Safety, Mechanical, Engineering and Transportation, among others. Our investments in technology will evolve some basic applications to reduce manual and clerical work. Fostering a value creation mindset will take our supply chain performance to the next level, with digitalization to increase agility, reliability and visibility. Investing in Our Assets and Network In late 2017, CN committed to purchasing 200 new alternating current traction locomotives over the next three years to accommodate future growth opportunities and drive operational efficiency across the system. CNs order is the largest among Class I railways since 2014. These high-horsepower engines are equipped with advanced digital technologies to optimize power distribution, train handling, brake control and fuel utilization. V I IC N 2 0 17 A N N U A L R E P O R T A new way to transport bitumen CN is helping to develop a new way to transport bitumen the heavy crude produced from Albertas oil sands. CanaPuxTM is an innovative process that turns bitumen into a solid form by mixing and coating it with polymer. The result is a non-hazardous pellet that doesnt burn, leak, dissolve or sink. CN expects CanaPuxTM pellets will help Canadian producers reach new markets overseas.
V I I IC N 2 0 17 A N N U A L R E P O R T New gateway for the U.S. economy With increased Panama Canal capacity and new, efficient intermodal facilities at the Port of Mobile and the Port of New Orleans providing on-dock access for rail shipments, CN is looking to draw increased volumes of container traffic entering North America via the Gulf of Mexico.
Investing with Our Customers: Innovating Our Service Offering At CN, we create value for our customers by listening to them, focusing on their needs and defining service as they see it. We invest the time needed to build close customer relationships and gain a deep understanding of their business. We are expanding and improving our service offering as well as increasing the level of predictability and visibility for our customers. To provide optimal service, CN works closely with customers to understand every detail of a shipment, from true origin to ultimate destination. Our Domestic Repositioning Program and extensive transloading facilities provide our intermodal customers with match-back opportunities that enhance their round-trip economics. Investing Together We have invested significantly to expand our service offering at our Toronto, Detroit, Memphis and Joliet intermodal terminals, and we are planning more, such as our Milton Logistics Hub. We have also opened new storefronts, such as our Duluth Intermodal Terminal. Our customers are expressing confidence in our company by investing in new or expanded facilities on our network. A great example is the Port of Prince Rupert, which expanded its Fairview Container Terminals capacity from 850,000 twenty-foot equivalent units to 1.35 million. Also, one of our long-time logistics partners recently opened the only transload facility for grain unit trains on the Canadian West Coast at Prince Rupert. And, a major North American energy producer is building the first propane export terminal on Canadas West Coast in Prince Rupert. Other examples include: Reopening of shuttered coal mines in northeastern B.C. New efficient loop track grain elevators in Western Canada and a new high-throughput grain terminal at the Port of Vancouver Investing in Food Security We at CN are proud to be an important part of the food supply chain, and we continue to invest in temperature-controlled shipping as well as bringing grain and a wide variety of other foodstuffs to market. CNs CargoCool® service provides a fast, convenient, cost-competitive and eco-friendly approach to moving temperature-sensitive goods. With state-of-the-art monitoring systems and a dedicated team of service representatives, CargoCool® provides a superior cold supply chain process that enhances food security. New frac sand production and unit train loading and unloading facilities in Wisconsin and Alberta, respectively High-profile customers joining our logistics parks New and expanded petrochemical plants near Edmonton, AB I XC N 2 0 17 A N N U A L R E P O R T
Investing for the Long Haul A leading transportation and logistics company Project Enable is one of CNs key IT initiatives to support our vision of being a leading North American transportation and logistics company. The program looks at streamlining our supply chain processes, offering a simpler customer experience and providing more reliable multimodal service. Ultra-modern hands-on railroader training Our CN Claude Mongeau National Training Centre in Winnipeg, MB, and our CN Campus in Homewood, IL, are state-of-the-art facilities where CN employees and customers receive enhanced railroader training programs focused on instilling and reinforcing a strong safety culture. Over 15,000 CN employees, and hundreds of our customers employees, have completed the hands-on technical training at these facilities since 2010. Opening new markets for Canadian crude Working with InnoTech Alberta, CN has developed CanaPuxTM, an innovative new way of transporting bitumen that puts safety and the environment at the forefront. CanaPuxTM are solid, dry pellets that meet rigorous strength requirements for bulk transport, float in water and dont leak or dissolve, resulting in minimal risk of environmental contamination. CN has selected Toyo Engineering Canada Ltd. of Calgary, AB, to design and build a pilot project demonstrating the commercial viability of transporting solid bitumen by rail. Creating a network advantage in Chicago CNs investments after the acquisition of the Elgin, Joliet and Eastern (EJ&E) include multi-million-dollar upgrades to the EJ&Es infrastructure, interchange points and yards creating an outer belt around the congested corridors of Chicago, through which more than 25% of U.S. rail traffic passes. This belt provides a key competitive advantage for CN, with a seamless route around Chicago that is the fastest of any Class I railroad operating through the Windy City.
Investing in intermodal growth Since 2010, Intermodal has been CNs fastest growing business unit. Our 21 intermodal terminals are located near ports and large urban centres, providing access to markets in North America and overseas. Ten of our terminals serve major Canadian cities. In 2017, we launched service to Duluth, our 11th U.S. intermodal terminal, which provides our intermodal customers with access to major markets in Minnesota and Wisconsin. Overall, we also invested significantly to add track and cranes at our Toronto, Detroit, Memphis and Joliet terminals. Investing in cold supply chain solutions CN has created a new and fast-growing service for our customers by investing in innovative cold supply chain solutions. Our CargoCool® service transports temperature-sensitive goods quickly and cost-competitively using smart containers and advanced monitoring systems that can detect the slightest variation in cargo temperature. In 2018, we will be adding 100 reefers to our fleet to handle growth opportunities and develop new markets. Investing in information systems CN plans to invest $500 million in technology over a five-year period to improve safety, efficiency and customer service. By providing our railroaders with quality data and more dynamic insights into evolving customer demand, well give them the tools they need to make more proactive decisions. The transformation of our data architecture will also provide our customers with the ability to better track their shipments. Investing in network safety and fluidity CN invested $1.6 billion in basic track infrastructure in 2017 to improve the safety and fluidity of our network. The work included the replacement of more than 2.2 million cross ties and the installation of over 600 miles of new rail, as well as bridge repairs, branch line upgrades and other general track maintenance. In 2018, CN is targeting a record $3.2 billion in total capital investment, up $500 million over last year. The plan includes spending on capacity projects to enhance the resiliency of our network and to accommodate future growth.
X I IC N 2 0 17 A N N U A L R E P O R T
Investing for the Environment At CN, our goal is to conduct our operations with minimal environmental impact, while providing cleaner, more sustainable transportation services to our customers. With approximately 84% of our greenhouse gas emissions generated from rail operations, we believe the single best way we can positively impact the environment is by continuously improving our operating efficiency. CNis already the most carbon-efficient more than 1.6 million trees since 2012, making CN the largest non-forestry company tree planter in Canada. North American railroad, consuming 15% less fuel per gross ton mile than the industry average. Since 1996, our fuel efficiency has improved 37%, thanks, in part, to our strategy of continually upgrading our fleet of locomotives. Investing in Technology CN has committed to purchasing 200 new fuel-efficient locomotives over the next three years. These high-horsepower engines are equipped with advanced technologies to maximize sustainability. These include Trip Optimizer, an energy management system that processes real-time information on train characteristics, performance and terrain, and continuously computes the most efficient way to handle the train. Our new locomotives will also be equipped with Distributed Power, which allows a locomotive to be placed anywhere along a freight train and be remotely controlled from the lead locomotive, to improve train handling and fuel utilization. Many of our locomotives are also equipped with wireless telemetry systems that collect data to drive improved locomotive and train performance, including fuel conservation. Our Horsepower Tonnage Analyzer uses the data to optimize a locomotives horsepower-to-tonnage ratio. Our significant investments in innovative fuel-efficient technologies and data analytics capabilities are paying off. Between 2008 and 2016, fuel efficiency gains have translated into more than 4 million tonnes of carbon saved. Investing in People Our train crews and rail traffic controllers are continuously being trained on best practices for fuel conservation, including locomotive shutdowns in our yards, streamlined railcar handling as well as train pacing, coasting and braking strategies. Over the past two years, we decreased train idling by 14%. Investing in Programs Through our various EcoConnexions programs, we have been engaging our employees, communities and customers to help us make a difference and achieve our environmental goals of reducing emissions, conserving energy and increasing biodiversity. Since our employee program was launched in 2011, we have reduced our energy consumption at key yards and facilities by 22% and saved 65,000 tonnes of CO2. Our reduce-reuse-recycle programs have diverted over 90,000 tonnes of operational waste from landfill. In addition, through our EcoConnexions From the Ground Up and reforestation programs, and our EcoConnexions Partnership program, we have planted X I I IC N 2 0 17 A N N U A L R E P O R T Preserving Ecosystems We are committed to proactively protecting the rich and diverse ecosystems through which we operate. We have a broad range of programs to protect endangered species in proximity of our projects, including the turtle habitat at Carrolls Bay Point Marsh in Hamilton Harbour, ON, and bighorn sheep in Albertas Jasper National Park.
Corporate Governance CN is committed to being a responsible corporate citizen. be reported, CN has adopted several methods for employees and third parties to anonymously report accounting, auditing and other concerns. We are proud of our corporate governance practices. In 2017, CN was recognized in the Globe and Mails annual review of corporate governance practices in Canada, where CN ranked first in the industrials group and in the top five of publicly traded Canadian companies. In 2016, we received the Best Overall Corporate Governance Award for publicly traded Canadian companies from Governance Professionals of Canada. CN is committed to inclusion, not only in principle, but also in practice. CN believes that a diverse board benefits from a broader range of perspectives and relevant experience. In 2015, the Board approved a Diversity Policy (available on our website) that considers gender, age and ethnicity when recommending director nominees. The Board also adopted a target of having at least one-third representation by women by the end of 2017. We are pleased to report that, currently, five of our directors are women, which exceeds our commitments to the Catalyst Accord and the Canadian chapter of the 30% Club. We understand that our long-term success is connected to our contribution to a sustainable future. That is why we are committed to enhancing the safety of our employees, the public and the environment; building stronger communities; and providing a great place to work. CNs sustainability practices have earned it a place among the worlds best for several years running. For example, CN is consistently listed on the Dow Jones Sustainability World and North American indices as well as CDPs exclusive Climate A List. Our sustainability activities and the accolades we have received are outlined in our Delivering Responsibly report on www.cn.ca. At CN, sound corporate citizenship touches nearly every aspect of what we do, from governance and business ethics to diversity and sustainability. Central to this comprehensive approach is our strong belief that good corporate citizenship is simply good business. CN has always recognized the importance of good governance. As a Canadian reporting issuer with securities listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE), our 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. We are exempted from complying with many of the NYSE corporate governance rules, provided that we comply with Canadian governance requirements. Except as summarized on our website at www.cn.ca/delivering-responsibly/governance, our 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 solid governance culture, we publish and enforce CNs Corporate Governance Manual and Code of Business Conduct. Because it is important that any potential wrongdoings X I VC N 2 0 17 A N N U A L R E P O R T
Board of Directors As at March 6, 2018 Robert Pace, D.Comm., C.m. Chair of the Board Canadian National Railway Company President and Chief Executive Officer The Pace Group Committees: 3, 4*, 5, 7 Shauneen Bruder Executive Vice-President, Operations Royal Bank of Canada Committees: 2, 4, 6, 7, 8 Julie Godin Vice-Chair of the Board and Executive Vice-President, Chief Planning and Administrative Officer CGI Group Inc. Committees: 2, 3, 5, 6, 7 Edith E. Holiday Former General Counsel, United States Treasury Department and Secretary of the Cabinet The White House Committees: 1, 2, 6, 7, 8* The Honourable Kevin G. Lynch, P.C., o.C., Ph.D., LL.D. Vice-Chair BMO Financial Group Committees: 2*, 3, 6, 7, 8 James E. OConnor Retired Chairman and Chief Executive Officer Republic Services, Inc. Committees: 1, 2, 5, 6, 7* Donald J. Carty, o.C., LL.D. Retired Chairman and Chief Executive Officer American Airlines Committees: 1*, 3, 5, 6, 7 Ambassador Gordon D. Giffin Partner Dentons US LLP Committees: 4, 6*, 7, 8 Robert L. Phillips President R.L. Phillips Investments Inc. Committees: 1, 3, 5, 6, 7 Laura Stein Executive Vice-President General Counsel & Corporate Affairs The Clorox Company Committees: 1, 2, 5, 6, 7 V. Maureen Kempston Darkes, O.C., D.Comm., LL.D. Retired Group Vice-President General Motors Corporation and President GM Latin America, Africa and Middle East Committees: 1, 2, 3, 5*, 7 The Honourable Denis Losier, P.C., LL.D., C.m. Retired President and Chief Executive Officer Assumption Life Committees: 3*, 4, 6, 7, 8 Chair of the Board and Select Senior Officers of the Company As at March 6, 2018 Robert Pace Chair of the Board Jean-Jacques Ruest Interim President and Chief Executive Officer, and Executive Vice-President and Chief Marketing Officer Kimberly A. Madigan Vice-President Human Resources Mike Cory Executive Vice-President and Chief Operating Officer Sean Finn Executive Vice-President Corporate Services and Chief Legal Officer Matthew Barker Senior Vice-President Network Operations and Planning Scott Daniels Senior Vice-President Strategy and Innovation Paul Butcher Vice-President Investor Relations Janet Drysdale Vice-President Corporate Development and Sustainability Doug Ryhorchuk Vice-President Western Region Marlene Puffer President and Chief Executive Officer CN Investment Division Serge Leduc Senior Vice-President Chief Information and Technology Officer John Orr Senior Vice-President Southern Region Ghislain Houle Executive Vice-President and Chief Financial Officer Michael Farkouh Vice-President Eastern Region X VC N 2 0 17 A N N U A L R E P O R T Committees: 3 Corporate governance and nominating6 Human resources and compensation* denotes chair or 1 Audit 4 Donations and sponsorships7 Strategic planninginterim chair of the 2 Finance5 Environment, safety and security8 Pension and Investmentcommittee
Shareholder and Investor Information Annual meeting The annual meeting of shareholders will be held at 10:00 a.m. EDT on April 24, 2018 at: Shareholder services 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: Computershare Trust Company of Canada Shareholder Services 100 University Avenue, 8th Floor Toronto, Ontario M5J 2Y1 Telephone: 1-800-564-6253 www.investorcentre.com The Omni King Edward Hotel 37 King Street East Toronto, Ontario, Canada 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, Quebec H3B 2M9 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) It is also available on CNs website. Transfer agent and registrar Computershare Trust Company of Canada Offices in: Montreal, Quebec Toronto, Ontario Calgary, Alberta Vancouver, British Columbia Investor relations Paul Butcher Vice-President, Investor Relations Telephone: 514-399-0052 Telephone: 1-800-564-6253 www.investorcentre.com Head office Canadian National Railway Company 935 de La Gauchetière Street West Montreal, Quebec H3B 2M9 Co-transfer agent and co-registrar Computershare Trust Company N.A. Att: Stock Transfer Department P.O. Box 8100 Montreal, Quebec H3C 3N4 Overnight Mail Delivery: 250 Royall Street, Canton, MA 02021 Regular Mail Delivery: P.O. Box 43078, Providence, RI 02940-3078 Telephone: 1-800-962-4284 X V I C N 2 0 17 A N N U A L R E P O R T
2017
|
2016
|
2015
|
||
Financial
|
||||
Key financial performance indicators
|
||||
Total revenues
($ millions)
|
13,041
|
12,037
|
12,611
|
|
Rail freight revenues
($ millions)
|
12,293
|
11,326
|
11,905
|
|
Operating income
($ millions)
|
5,558
|
5,312
|
5,266
|
|
Net income
($ millions)
|
5,484
|
3,640
|
3,538
|
|
Diluted earnings per share
($)
|
7.24
|
4.67
|
4.39
|
|
Adjusted diluted earnings per share
($)
(1)
|
4.99
|
4.59
|
4.44
|
|
Free cash flow
($ millions)
(2)
|
2,778
|
2,520
|
2,373
|
|
Gross property additions
($ millions)
|
2,703
|
2,752
|
2,706
|
|
Share repurchases
($ millions)
|
2,000
|
2,000
|
1,750
|
|
Dividends per share
($)
|
1.65
|
1.50
|
1.25
|
|
Financial position
|
||||
Total assets
($ millions)
|
37,629
|
37,057
|
36,402
|
|
Total liabilities
($ millions)
|
20,973
|
22,216
|
21,452
|
|
Shareholders' equity
($ millions)
|
16,656
|
14,841
|
14,950
|
|
Financial ratios
|
||||
Operating ratio
(%)
|
57.4
|
55.9
|
58.2
|
|
Adjusted debt-to-adjusted EBITDA
(times)
(3)
|
1.65
|
1.75
|
1.71
|
|
Operations
(4)
|
||||
Statistical operating data
|
||||
Gross ton miles (GTMs)
(millions)
|
469,200
|
423,426
|
442,084
|
|
Revenue ton miles
(RTMs)
(millions)
|
237,098
|
214,327
|
224,710
|
|
Carloads
(thousands)
|
5,737
|
5,205
|
5,485
|
|
Route miles
(includes Canada and the U.S.)
|
19,500
|
19,600
|
19,600
|
|
Employees
(end of year)
|
23,945
|
22,249
|
23,066
|
|
Employees
(average for the year)
|
23,074
|
22,322
|
24,406
|
|
Key operating measures
|
||||
Rail freight revenue per RTM
(cents)
|
5.18
|
5.28
|
5.30
|
|
Rail freight revenue per carload
($)
|
2,143
|
2,176
|
2,170
|
|
GTMs per average number of employees
(thousands)
|
20,335
|
18,969
|
18,114
|
|
Operating expenses per GTM
(cents)
|
1.59
|
1.59
|
1.66
|
|
Labor and fringe benefits expense per GTM
(cents)
|
0.47
|
0.50
|
0.54
|
|
Diesel fuel consumed
(US gallons in millions)
|
441.4
|
398.9
|
425.0
|
|
Average fuel price
($/US gallon)
|
2.74
|
2.34
|
2.68
|
|
GTMs per US gallon of fuel consumed
|
1,063
|
1,061
|
1,040
|
|
Terminal dwell
(hours)
|
16.2
|
14.0
|
15.0
|
|
Train velocity
(miles per hour)
|
25.3
|
27.3
|
26.3
|
|
Safety indicators
(5)
|
||||
Injury frequency rate
(per 200,000 person hours)
|
1.83
|
1.70
|
1.63
|
|
Accident rate
(per million train miles)
|
1.83
|
1.42
|
2.06
|
|
(1)
|
See the section entitled Adjusted performance measures in the MD&A for an explanation of this non-GAAP measure.
|
|||
(2)
|
See the section entitled Liquidity and capital resources - Free cash flow in the MD&A for an explanation of this non-GAAP measure.
|
|||
(3)
|
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.
|
|||
(4)
|
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 these indicators are provided on our website,
www.cn.ca/glossary
.
|
|||
(5)
|
Based on Federal Railroad Administration (FRA) reporting criteria.
|
Contents
|
|
Business profile
|
3
|
Corporate organization
|
3
|
Strategy overview
|
3
|
Forward-looking statements
|
7
|
Financial outlook
|
8
|
Financial highlights
|
8
|
2017 compared to 2016
|
8
|
Non-GAAP measures
|
8
|
Adjusted performance measures
|
9
|
Constant currency
|
9
|
Revenues
|
10
|
Operating expenses
|
15
|
Other income and expenses
|
16
|
2016 compared to 2015
|
17
|
Summary of quarterly financial data
|
22
|
Summary of fourth quarter 2017
|
22
|
Financial position
|
23
|
Liquidity and capital resources
|
24
|
Off balance sheet arrangements
|
31
|
Outstanding share data
|
31
|
Financial instruments
|
31
|
Recent accounting pronouncements
|
33
|
Critical accounting estimates
|
35
|
Business risks
|
44
|
Controls and procedures
|
53
|
·
|
CN attained record revenues and operating income, as well as record reported and adjusted net income and earnings per share in 2017.
(1)
|
·
|
Net income increased by $1,844 million, or 51%, to $5,484 million, and diluted earnings per share increased by 55% to $7.24, in 2017 compared to the prior year.
|
·
|
Adjusted net income increased by $197 million, or 6%, to $3,778 million, and adjusted diluted earnings per share increased by 9% to $4.99, in 2017 compared to the prior year.
(1)
|
·
|
Operating income increased by $246 million, or 5%, to $5,558 million in 2017.
|
·
|
Operating ratio of 57.4%, an increase of 1.5 points over 2016.
|
·
|
Revenues increased by $1,004 million, or 8%, to $13,041 million in 2017, compared to the prior year.
|
·
|
Operating expenses increased by $758 million, or 11%, to $7,483 million in 2017.
|
·
|
The Company generated record free cash flow of $2,778 million, a 10% increase over 2016.
(2)
|
Forward-looking statements
|
Key assumptions
|
Statements relating to revenue growth opportunities, including
|
·
North American and global economic growth
|
those referring to general economic and business conditions
|
·
Long-term growth opportunities being less affected by current economic
|
conditions
|
|
Statements relating to the Company's ability to meet debt
|
·
North American and global economic growth
|
repayments and future obligations in the foreseeable future,
|
·
Adequate credit ratios
|
including income tax payments, and capital spending
|
·
Investment-grade credit ratings
|
·
Access to capital markets
|
|
·
Adequate cash generated from operations and other sources of financing
|
|
·
Reasonable interpretations of existing or future tax laws and
|
|
regulations
|
|
Statements relating to pension contributions
|
·
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
|
|
Financial highlights
|
|||||||||
Change
|
|||||||||
Favorable/(Unfavorable)
|
|||||||||
In millions, except percentage and per share data
|
2017
|
2016
|
2015
|
2017 vs 2016
|
2016 vs 2015
|
||||
Revenues
|
$
|
13,041
|
$
|
12,037
|
$
|
12,611
|
8%
|
(5%)
|
|
Operating income
|
$
|
5,558
|
$
|
5,312
|
$
|
5,266
|
5%
|
1%
|
|
Net income
|
$
|
5,484
|
$
|
3,640
|
$
|
3,538
|
51%
|
3%
|
|
Adjusted net income
(1)
|
$
|
3,778
|
$
|
3,581
|
$
|
3,580
|
6%
|
-
|
|
Basic earnings per share
|
$
|
7.28
|
$
|
4.69
|
$
|
4.42
|
55%
|
6%
|
|
Adjusted basic earnings per share
(1)
|
$
|
5.02
|
$
|
4.61
|
$
|
4.47
|
9%
|
3%
|
|
Diluted earnings per share
|
$
|
7.24
|
$
|
4.67
|
$
|
4.39
|
55%
|
6%
|
|
Adjusted diluted earnings per share
(1)
|
$
|
4.99
|
$
|
4.59
|
$
|
4.44
|
9%
|
3%
|
|
Dividends declared per share
|
$
|
1.65
|
$
|
1.50
|
$
|
1.25
|
10%
|
20%
|
|
Total assets
|
$
|
37,629
|
$
|
37,057
|
$
|
36,402
|
2%
|
2%
|
|
Total long-term liabilities
|
$
|
16,990
|
$
|
19,208
|
$
|
18,454
|
12%
|
(4%)
|
|
Operating ratio
|
57.4%
|
55.9%
|
58.2%
|
(1.5)-pts
|
2.3-pts
|
||||
Free cash flow
(2)
|
$
|
2,778
|
$
|
2,520
|
$
|
2,373
|
10%
|
6%
|
|
(1)
|
See the section of this MD&A entitled Adjusted performance measures for an explanation of this non-GAAP measure.
|
||||||||
(2)
|
See the section of this MD&A entitled Liquidity and capital resources – Free cash flow for an explanation of this non-GAAP measure.
|
·
|
in the fourth quarter, a deferred income tax recovery of $1,764 million ($2.33 per diluted share) resulting from the enactment of the U.S. Tax Reform and a deferred income tax expense of $50 million ($0.07 per diluted share) resulting from the enactment of higher provincial corporate income tax rates;
|
·
|
in the third quarter, a deferred income tax expense of $31 million ($0.04 per diluted share) resulting from the enactment of a higher state corporate income tax rate;
|
·
|
in the second quarter, a deferred income tax recovery of $18 million ($0.02 per diluted share) resulting from the enactment of a lower provincial corporate income tax rate; and
|
·
|
in the first quarter, a deferred income tax recovery of $5 million ($0.01 per diluted share) resulting from the enactment of a lower provincial corporate income tax rate.
|
In millions, except per share data
|
Year ended December 31,
|
2017
|
2016
|
2015
|
||||
Net income as reported
|
$
|
5,484
|
$
|
3,640
|
$
|
3,538
|
||
Adjustments:
|
||||||||
Other income
|
-
|
(76)
|
-
|
|||||
Income tax expense (recovery)
|
(1,706)
|
17
|
42
|
|||||
Adjusted net income
|
$
|
3,778
|
$
|
3,581
|
$
|
3,580
|
||
Basic earnings per share as reported
|
$
|
7.28
|
$
|
4.69
|
$
|
4.42
|
||
Impact of adjustments, per share
|
(2.26)
|
(0.08)
|
0.05
|
|||||
Adjusted basic earnings per share
|
$
|
5.02
|
$
|
4.61
|
$
|
4.47
|
||
Diluted earnings per share as reported
|
$
|
7.24
|
$
|
4.67
|
$
|
4.39
|
||
Impact of adjustments, per share
|
(2.25)
|
(0.08)
|
0.05
|
|||||
Adjusted diluted earnings per share
|
$
|
4.99
|
$
|
4.59
|
$
|
4.44
|
Revenues
|
|||||||||
In millions, unless otherwise indicated
|
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
||||
Rail freight revenues
|
$
|
12,293
|
$
|
11,326
|
9%
|
10%
|
|||
Other revenues
|
748
|
711
|
5%
|
6%
|
|||||
Total revenues
|
$
|
13,041
|
$
|
12,037
|
8%
|
10%
|
|||
Rail freight revenues
|
|||||||||
Petroleum and chemicals
|
$
|
2,208
|
$
|
2,174
|
2%
|
3%
|
|||
Metals and minerals
|
1,523
|
1,218
|
25%
|
27%
|
|||||
Forest products
|
1,788
|
1,797
|
(1%)
|
1%
|
|||||
Coal
|
535
|
434
|
23%
|
25%
|
|||||
Grain and fertilizers
|
2,214
|
2,098
|
6%
|
7%
|
|||||
Intermodal
|
3,200
|
2,846
|
12%
|
13%
|
|||||
Automotive
|
825
|
759
|
9%
|
10%
|
|||||
Total rail freight revenues
|
$
|
12,293
|
$
|
11,326
|
9%
|
10%
|
|||
Revenue ton miles (RTMs)
(millions)
|
237,098
|
214,327
|
11%
|
11%
|
|||||
Rail freight revenue/RTM
(cents)
|
5.18
|
5.28
|
(2%)
|
(1%)
|
|||||
Carloads
(thousands)
|
5,737
|
5,205
|
10%
|
10%
|
|||||
Rail freight revenue/carload
(dollars)
|
2,143
|
2,176
|
(2%)
|
-
|
Petroleum and chemicals
|
|||||||
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
|||
Revenues
(millions)
|
$
|
2,208
|
$
|
2,174
|
2%
|
3%
|
|
RTMs
(millions)
|
44,375
|
43,395
|
2%
|
2%
|
|||
Revenue/RTM
(cents)
|
4.98
|
5.01
|
(1%)
|
1%
|
|||
Carloads
(thousands)
|
614
|
599
|
3%
|
3%
|
Percentage of commodity group revenues
|
2017
|
2016
|
|
Chemicals and plastics
|
45%
|
46%
|
|
Refined petroleum products
|
36%
|
33%
|
|
Crude and condensate
|
15%
|
17%
|
|
Sulfur
|
4%
|
4%
|
Metals and minerals
|
|||||||
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
|||
Revenues
(millions)
|
$
|
1,523
|
$
|
1,218
|
25%
|
27%
|
|
RTMs
(millions)
|
27,938
|
20,233
|
38%
|
38%
|
|||
Revenue/RTM
(cents)
|
5.45
|
6.02
|
(9%)
|
(8%)
|
|||
Carloads
(thousands)
|
995
|
807
|
23%
|
23%
|
Percentage of commodity group revenues
|
2017
|
2016
|
|
Energy materials
|
32%
|
21%
|
|
Metals
|
29%
|
33%
|
|
Minerals
|
23%
|
27%
|
|
Iron ore
|
16%
|
19%
|
Forest products
|
|||||||
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
|||
Revenues
(millions)
|
$
|
1,788
|
$
|
1,797
|
(1%)
|
1%
|
|
RTMs
(millions)
|
30,510
|
31,401
|
(3%)
|
(3%)
|
|||
Revenue/RTM
(cents)
|
5.86
|
5.72
|
2%
|
4%
|
|||
Carloads
(thousands)
|
424
|
440
|
(4%)
|
(4%)
|
Percentage of commodity group revenues
|
2017
|
2016
|
|
Lumber
|
41%
|
41%
|
|
Pulp
|
30%
|
31%
|
|
Paper
|
17%
|
16%
|
|
Panels
|
12%
|
12%
|
Coal
|
|||||||
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
|||
Revenues
(millions)
|
$
|
535
|
$
|
434
|
23%
|
25%
|
|
RTMs
(millions)
|
14,539
|
11,032
|
32%
|
32%
|
|||
Revenue/RTM
(cents)
|
3.68
|
3.93
|
(6%)
|
(5%)
|
|||
Carloads
(thousands)
|
303
|
333
|
(9%)
|
(9%)
|
Percentage of commodity group revenues
|
2017
|
2016
|
|
Canadian coal - export
|
28%
|
23%
|
|
U.S. coal - export
|
27%
|
23%
|
|
Petroleum coke
|
26%
|
22%
|
|
U.S. coal - domestic
|
19%
|
32%
|
Grain and fertilizers
|
|||||||
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
|||
Revenues
(millions)
|
$
|
2,214
|
$
|
2,098
|
6%
|
7%
|
|
RTMs
(millions)
|
56,123
|
51,485
|
9%
|
9%
|
|||
Revenue/RTM
(cents)
|
3.94
|
4.07
|
(3%)
|
(2%)
|
|||
Carloads
(thousands)
|
619
|
602
|
3%
|
3%
|
Percentage of commodity group revenues
|
2017
|
2016
|
Canadian grain - regulated
|
39%
|
38%
|
U.S. grain - domestic
|
20%
|
21%
|
Canadian grain - commercial
|
14%
|
14%
|
Fertilizers - potash
|
12%
|
11%
|
Fertilizers - other
|
10%
|
9%
|
U.S. grain - exports
|
5%
|
7%
|
Intermodal
|
|||||||
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
|||
Revenues
(millions)
|
$
|
3,200
|
$
|
2,846
|
12%
|
13%
|
|
RTMs
(millions)
|
59,356
|
53,056
|
12%
|
12%
|
|||
Revenue/RTM
(cents)
|
5.39
|
5.36
|
1%
|
1%
|
|||
Carloads
(thousands)
|
2,514
|
2,163
|
16%
|
16%
|
Percentage of commodity group revenues
|
2017
|
2016
|
|
International
|
66%
|
63%
|
|
Domestic
|
34%
|
37%
|
Automotive
|
|||||||
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
|||
Revenues
(millions)
|
$
|
825
|
$
|
759
|
9%
|
10%
|
|
RTMs
(millions)
|
4,257
|
3,725
|
14%
|
14%
|
|||
Revenue/RTM
(cents)
|
19.38
|
20.38
|
(5%)
|
(3%)
|
|||
Carloads
(thousands)
|
268
|
261
|
3%
|
3%
|
Percentage of commodity group revenues
|
2017
|
2016
|
Finished vehicles
|
94%
|
93%
|
Auto parts
|
6%
|
7%
|
Other revenues
|
|||||||
Year ended December 31,
|
2017
|
2016
|
% Change
|
% Change
at constant
currency
|
|||
Revenues
(millions)
|
$
|
748
|
$
|
711
|
5%
|
6%
|
Percentage of other revenues
|
2017
|
2016
|
|
Vessels and docks
|
50%
|
50%
|
|
Other non-rail services
|
40%
|
39%
|
|
Other revenues
|
10%
|
11%
|
% Change
|
% Change
at constant
currency
|
||||||
In millions
|
Year ended December 31,
|
2017
|
2016
|
||||
Labor and fringe benefits
|
$
|
2,221
|
$
|
2,119
|
(5%)
|
(6%)
|
|
Purchased services and material
|
1,769
|
1,592
|
(11%)
|
(12%)
|
|||
Fuel
|
1,362
|
1,051
|
(30%)
|
(32%)
|
|||
Depreciation and amortization
|
1,281
|
1,225
|
(5%)
|
(5%)
|
|||
Equipment rents
|
418
|
375
|
(11%)
|
(14%)
|
|||
Casualty and other
|
432
|
363
|
(19%)
|
(21%)
|
|||
Total operating expenses
|
$
|
7,483
|
$
|
6,725
|
(11%)
|
(13%)
|
In millions, unless otherwise indicated
|
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
||
Rail freight revenues
|
$
|
11,326
|
$
|
11,905
|
(5%)
|
(7%)
|
|
Other revenues
|
711
|
706
|
1%
|
(1%)
|
|||
Total revenues
|
$
|
12,037
|
$
|
12,611
|
(5%)
|
(7%)
|
|
Rail freight revenues
|
|||||||
Petroleum and chemicals
|
$
|
2,174
|
$
|
2,442
|
(11%)
|
(13%)
|
|
Metals and minerals
|
1,218
|
1,437
|
(15%)
|
(17%)
|
|||
Forest products
|
1,797
|
1,728
|
4%
|
1%
|
|||
Coal
|
434
|
612
|
(29%)
|
(30%)
|
|||
Grain and fertilizers
|
2,098
|
2,071
|
1%
|
-
|
|||
Intermodal
|
2,846
|
2,896
|
(2%)
|
(3%)
|
|||
Automotive
|
759
|
719
|
6%
|
3%
|
|||
Total rail freight revenues
|
$
|
11,326
|
$
|
11,905
|
(5%)
|
(7%)
|
|
Revenue ton miles (RTMs)
(millions)
|
214,327
|
224,710
|
(5%)
|
(5%)
|
|||
Rail freight revenue/RTM
(cents)
|
5.28
|
5.30
|
-
|
(2%)
|
|||
Carloads
(thousands)
|
5,205
|
5,485
|
(5%)
|
(5%)
|
|||
Rail freight revenue/carload
(dollars)
|
2,176
|
2,170
|
-
|
(2%)
|
Petroleum and chemicals
|
|||||||
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
|||
Revenues (millions)
|
$
|
2,174
|
$
|
2,442
|
(11%)
|
(13%)
|
|
RTMs (millions)
|
43,395
|
51,103
|
(15%)
|
(15%)
|
|||
Revenue/RTM (cents)
|
5.01
|
4.78
|
5%
|
2%
|
|||
Carloads (thousands)
|
599
|
640
|
(6%)
|
(6%)
|
Metals and minerals
|
|||||||
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
|||
Revenues (millions)
|
$
|
1,218
|
$
|
1,437
|
(15%)
|
(17%)
|
|
RTMs (millions)
|
20,233
|
21,828
|
(7%)
|
(7%)
|
|||
Revenue/RTM (cents)
|
6.02
|
6.58
|
(9%)
|
(11%)
|
|||
Carloads (thousands)
|
807
|
886
|
(9%)
|
(9%)
|
Forest products
|
|||||||
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
|||
Revenues (millions)
|
$
|
1,797
|
$
|
1,728
|
4%
|
1%
|
|
RTMs (millions)
|
31,401
|
30,097
|
4%
|
4%
|
|||
Revenue/RTM (cents)
|
5.72
|
5.74
|
-
|
(3%)
|
|||
Carloads (thousands)
|
440
|
441
|
-
|
-
|
Coal
|
|||||||
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
|||
Revenues (millions)
|
$
|
434
|
$
|
612
|
(29%)
|
(30%)
|
|
RTMs (millions)
|
11,032
|
15,956
|
(31%)
|
(31%)
|
|||
Revenue/RTM (cents)
|
3.93
|
3.84
|
2%
|
1%
|
|||
Carloads (thousands)
|
333
|
438
|
(24%)
|
(24%)
|
Grain and fertilizers
|
|||||||
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
|||
Revenues (millions)
|
$
|
2,098
|
$
|
2,071
|
1%
|
-
|
|
RTMs (millions)
|
51,485
|
50,001
|
3%
|
3%
|
|||
Revenue/RTM (cents)
|
4.07
|
4.14
|
(2%)
|
(3%)
|
|||
Carloads (thousands)
|
602
|
607
|
(1%)
|
(1%)
|
Intermodal
|
|||||||
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
|||
Revenues (millions)
|
$
|
2,846
|
$
|
2,896
|
(2%)
|
(3%)
|
|
RTMs (millions)
|
53,056
|
52,144
|
2%
|
2%
|
|||
Revenue/RTM (cents)
|
5.36
|
5.55
|
(3%)
|
(5%)
|
|||
Carloads (thousands)
|
2,163
|
2,232
|
(3%)
|
(3%)
|
Automotive
|
|||||||
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
|||
Revenues (millions)
|
$
|
759
|
$
|
719
|
6%
|
3%
|
|
RTMs (millions)
|
3,725
|
3,581
|
4%
|
4%
|
|||
Revenue/RTM (cents)
|
20.38
|
20.08
|
1%
|
(1%)
|
|||
Carloads (thousands)
|
261
|
241
|
8%
|
8%
|
Other revenues
|
|||||||
Year ended December 31,
|
2016
|
2015
|
% Change
|
% Change
at constant
currency
|
|||
Revenues (millions)
|
$
|
711
|
$
|
706
|
1%
|
(1%)
|
% Change
|
% Change
at constant
currency
|
||||||
In millions
|
Year ended December 31,
|
2016
|
2015
|
||||
Labor and fringe benefits
|
$
|
2,119
|
$
|
2,406
|
12%
|
13%
|
|
Purchased services and material
|
1,592
|
1,729
|
8%
|
9%
|
|||
Fuel
|
1,051
|
1,285
|
18%
|
20%
|
|||
Depreciation and amortization
|
1,225
|
1,158
|
(6%)
|
(4%)
|
|||
Equipment rents
|
375
|
373
|
(1%)
|
3%
|
|||
Casualty and other
|
363
|
394
|
8%
|
11%
|
|||
Total operating expenses
|
$
|
6,725
|
$
|
7,345
|
8%
|
10%
|
2017
Quarters
|
2016
Quarters
|
|||||||||||||||||
In millions, except per share data
|
Fourth
(1)
|
Third
(2)
|
Second
(3)
|
First
(4)
|
Fourth
(5)
|
Third
|
Second
(6)
|
First
|
||||||||||
Revenues
|
$
|
3,285
|
$
|
3,221
|
$
|
3,329
|
$
|
3,206
|
$
|
3,217
|
$
|
3,014
|
$
|
2,842
|
$
|
2,964
|
||
Operating income
|
$
|
1,301
|
$
|
1,459
|
$
|
1,495
|
$
|
1,303
|
$
|
1,395
|
$
|
1,407
|
$
|
1,293
|
$
|
1,217
|
||
Net income
|
$
|
2,611
|
$
|
958
|
$
|
1,031
|
$
|
884
|
$
|
1,018
|
$
|
972
|
$
|
858
|
$
|
792
|
||
Basic earnings per share
|
$
|
3.50
|
$
|
1.28
|
$
|
1.36
|
$
|
1.16
|
$
|
1.33
|
$
|
1.26
|
$
|
1.10
|
$
|
1.01
|
||
Diluted earnings per share
|
$
|
3.48
|
$
|
1.27
|
$
|
1.36
|
$
|
1.16
|
$
|
1.32
|
$
|
1.25
|
$
|
1.10
|
$
|
1.00
|
||
Dividends per share
|
$
|
0.4125
|
$
|
0.4125
|
$
|
0.4125
|
$
|
0.4125
|
$
|
0.3750
|
$
|
0.3750
|
$
|
0.3750
|
$
|
0.3750
|
||
(1)
|
Included in Net income was a deferred income tax recovery of $1,764 million that resulted from the enactment of the U.S. Tax Reform and a deferred income tax expense of $50 million that resulted from the enactment of higher provincial corporate income tax rates.
|
|||||||||||||||||
(2)
|
Included in Net income was a deferred income tax expense of $31 million that resulted from the enactment of a higher state corporate income tax rate.
|
|||||||||||||||||
(3)
|
Included in Net income was a deferred income tax recovery of $18 million that resulted from the enactment of a lower provincial corporate income tax rate.
|
|||||||||||||||||
(4)
|
Included in Net income was a deferred income tax recovery of $5 million that resulted from the enactment of a lower provincial corporate income tax rate.
|
|||||||||||||||||
(5)
|
Included in Net income was a gain on disposal of the Viaduc du Sud of $76 million, or $66 million after-tax, which was recorded in Other income.
|
|||||||||||||||||
(6)
|
Included in Net income was a deferred income tax expense of $7 million that resulted from the enactment of a higher provincial corporate income tax rate.
|
In millions
|
December 31,
|
2017
|
2016
|
Foreign
exchange
impact
|
Variance excluding foreign exchange
|
Explanation of variance,
other than foreign exchange impact
|
|||||||||
Total assets
|
$
|
37,629
|
$
|
37,057
|
$
|
(1,104)
|
$
|
1,676
|
|||||||
Variance mainly due to:
|
|||||||||||||||
Properties
|
34,189
|
33,755
|
(1,053)
|
1,487
|
Increase primarily due to gross property additions of $2,703 million, partly offset by depreciation of $1,281 million.
|
||||||||||
Pension asset
|
994
|
907
|
-
|
87
|
Increase primarily due to higher actual returns partly offset by the decrease in the year-end discount rate from 3.81% in 2016 to 3.51% in 2017.
|
||||||||||
Total liabilities
|
$
|
20,973
|
$
|
22,216
|
$
|
(910)
|
$
|
(333)
|
|||||||
Variance mainly due to:
|
|||||||||||||||
Deferred income taxes
|
6,953
|
8,473
|
(312)
|
(1,208)
|
Decrease primarily due to deferred income tax recovery of $1,195 million, recorded in Net income, mostly attributable to the U.S. Tax Reform, partly offset by deferred income tax expense on new temporary differences generated during the year.
|
||||||||||
Pension and other postretirement benefits
|
699
|
694
|
(12)
|
17
|
Increase primarily due to the decrease in the year-end discount rate from 3.81% in 2016 to 3.51% in 2017.
|
||||||||||
Total long-term debt, including the current portion
|
10,828
|
10,937
|
(609)
|
500
|
Increase primarily due to issuance of notes of $493 million, proceeds from accounts receivable securitization program of $423 million and net issuance of commercial paper of $379 million, partly offset by repayment of notes of $635 million and debt related to capital leases of $206 million.
|
||||||||||
In millions
|
December 31,
|
2017
|
2016
|
Variance
|
Explanation of variance
|
||||||||||
Total shareholders' equity
|
$
|
16,656
|
$
|
14,841
|
$
|
1,815
|
|||||||||
Variance mainly due to:
|
|||||||||||||||
Additional paid-in capital
|
242
|
364
|
(122)
|
Decrease primarily due to the settlement of equity settled awards.
|
|||||||||||
Accumulated other comprehensive loss
|
(2,784)
|
(2,358)
|
(426)
|
Increase in comprehensive loss due to after-tax amounts of $264 million from net foreign exchange losses, and $162 million resulting from actuarial loss arising during the year and amortization of net actuarial loss and prior service costs for the Company's defined benefit pension and other postretirement benefit plans.
|
|||||||||||
Retained earnings
|
15,586
|
13,242
|
2,344
|
Increase due to current year net income of $5,484 million, partly offset by share repurchases of $1,898 million and dividends paid of $1,239 million.
|
Long-term debt rating
|
Commercial paper rating
|
|
Dominion Bond Rating Service
|
A
|
R-1 (low)
|
Moody's Investors Service
|
A2
|
P-1
|
Standard & Poor's
|
A
|
A-1
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
Variance
|
||||
Net cash provided by operating activities
|
$
|
5,516
|
$
|
5,202
|
$
|
314
|
||
Net cash used in investing activities
(1)
|
(2,738)
|
(2,682)
|
(56)
|
|||||
Net cash used in financing activities
|
(2,895)
|
(2,539)
|
(356)
|
|||||
Effect of foreign exchange fluctuations on US dollar-denominated cash, cash equivalents,
|
||||||||
restricted cash, and restricted cash equivalents
|
(2)
|
15
|
(17)
|
|||||
Net increase in cash, cash equivalents, restricted cash, and restricted cash equivalents
(1)
|
(119)
|
(4)
|
(115)
|
|||||
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period
(1)
|
672
|
676
|
(4)
|
|||||
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period
(1)
|
$
|
553
|
$
|
672
|
$
|
(119)
|
||
(1)
|
The Company adopted Accounting Standards Update 2016-18 in the first quarter of 2017 on a retrospective basis. Comparative balances have been reclassified to conform to the current presentation. Additional information is provided in the section of this MD&A entitled Recent accounting pronouncements.
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
|||
Track and roadway
(1)
|
$
|
1,927
|
$
|
1,834
|
||
Rolling stock
|
226
|
494
|
||||
Buildings
|
70
|
85
|
||||
Information technology
|
290
|
176
|
||||
Other
|
190
|
163
|
||||
Gross property additions
|
2,703
|
2,752
|
||||
Less:
Capital leases
|
30
|
57
|
||||
Property additions
(2)
|
$
|
2,673
|
$
|
2,695
|
||
(1)
|
In 2017, approximately 80% (2016 - 80%) of the Track and roadway property additions were incurred to renew the basic infrastructure. Costs relating to normal repairs and maintenance of Track and roadway properties are expensed as incurred, and amounted to approximately 12% of the Company's total operating expenses in 2017 (2016 - 13%).
|
|||||
(2)
|
Includes $417 million and $313 million associated with the U.S. federal government legislative PTC implementation in 2017 and 2016, respectively.
|
·
|
$1.6 billion on track and railway infrastructure maintenance to support safe and efficient operations; including the replacement of rail and ties, bridge improvements, as well as other general track maintenance;
|
·
|
$0.8 billion on initiatives to increase capacity and enable growth, such as track infrastructure expansion; investments in yards and intermodal terminals; and on information technology to improve safety performance, operational efficiency and customer service;
|
·
|
$0.4 billion associated with the U.S. federal government legislative PTC implementation; and
|
·
|
$0.4 billion on equipment capital expenditures, allowing the Company to tap growth opportunities and improve the quality of the fleet, and in order to handle expected traffic increase and improve operational efficiency, CN expects to take delivery of 60 new high-horsepower locomotives.
|
·
|
On November 15, 2017, repayment of US$250 million ($318 million) 5.85% Notes due 2017 upon maturity;
|
·
|
On November 14, 2017, repayment of US$250 million ($317 million) Floating Rate Notes due 2017 upon maturity;
|
·
|
On August 1, 2017, issuance of $500 million 3.60% Notes due 2047 in the Canadian capital markets, which resulted in net proceeds of $493 million;
|
·
|
Proceeds from the accounts receivable securitization program of $423 million;
|
·
|
Net issuance of commercial paper of $379 million; and
|
·
|
Repayment of debt related to capital leases of $206 million.
|
·
|
On December 15, 2016, repayment of US$300 million ($398 million) 1.45% Notes due 2016 upon maturity;
|
·
|
On August 2, 2016, issuance of US$650 million ($848 million) 3.20% Notes due 2046 in the U.S. capital markets, which resulted in net proceeds of $832 million;
|
·
|
On June 1, 2016, repayment of US$250 million ($328 million) 5.80% Notes due 2016 upon maturity;
|
·
|
On February 23, 2016, issuance of US$500 million ($686 million) 2.75% Notes due 2026 in the U.S. capital markets, which resulted in net proceeds of $677 million;
|
·
|
Repayment of debt related to capital leases of $229 million; and
|
·
|
Net issuance of commercial paper of $137 million.
|
In millions, except per share data
|
Year ended December 31,
|
2017
|
2016
|
2015
|
||||
Share purchases by Share Trusts
|
||||||||
Number of common shares
|
0.5
|
0.7
|
1.4
|
|||||
Weighted-average price per share
(1)
|
$
|
102.17
|
$
|
84.99
|
$
|
73.31
|
||
Amount of purchase
|
$
|
55
|
$
|
60
|
$
|
100
|
||
Share settlements by Share Trusts
|
||||||||
Number of common shares
|
0.3
|
0.3
|
-
|
|||||
Weighted-average price per share
|
$
|
77.99
|
$
|
73.31
|
$
|
-
|
||
Amount of settlement
|
$
|
24
|
$
|
23
|
$
|
-
|
||
(1)
|
Includes brokerage fees where applicable.
|
In millions, unless otherwise indicated
|
As at and for the year ended December 31,
|
2017
|
2016
|
2015
|
||||
Debt
|
$
|
10,828
|
$
|
10,937
|
$
|
10,427
|
||
Adjustment:
Present value of operating lease commitments
(1)
|
478
|
533
|
607
|
|||||
Adjusted debt
|
$
|
11,306
|
$
|
11,470
|
$
|
11,034
|
||
Net income
|
$
|
5,484
|
$
|
3,640
|
$
|
3,538
|
||
Interest expense
|
481
|
480
|
439
|
|||||
Income tax expense (recovery)
|
(395)
|
1,287
|
1,336
|
|||||
Depreciation and amortization
|
1,281
|
1,225
|
1,158
|
|||||
EBITDA
|
6,851
|
6,632
|
6,471
|
|||||
Adjustments:
|
||||||||
Other income
|
(12)
|
(95)
|
(47)
|
|||||
Deemed interest on operating leases
|
22
|
24
|
29
|
|||||
Adjusted EBITDA
|
$
|
6,861
|
$
|
6,561
|
$
|
6,453
|
||
Adjusted debt-to-adjusted EBITDA multiple (times)
|
1.65
|
1.75
|
1.71
|
|||||
(1)
|
The operating lease commitments have been discounted using the Company's implicit interest rate for each of the periods presented.
|
Level 1
Quoted prices for identical instruments in
active markets
|
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.
|
Level 2
Significant inputs (other than quoted prices
included in Level 1) are observable
|
The carrying amounts of Accounts receivable, Other current assets, and Accounts payable and other approximate fair value. The fair value of these financial instruments is not determined using quoted prices, but rather from market observable information. The fair value of derivative financial instruments used to manage the Company's exposure to foreign currency risk and included in Other current assets and Accounts payable and other 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 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. As at December 31, 2017, the Company's debt had a carrying amount of $10,828 million (2016 - $10,937 million) and a fair value of $12,164 million (2016 - $12,084 million).
|
|
Level 3
Significant inputs are unobservable
|
The carrying amounts of investments included in Intangible and other assets approximate fair value, with the exception of certain cost investments for which significant inputs are unobservable and fair value is estimated based on the Company's proportionate share of the underlying net assets. As at December 31, 2017, the Company's investments had a carrying amount of $73 million (2016 - $68 million) and a fair value of $225 million (2016 - $220 million).
|
Standard
|
Description
|
Impact
|
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
|
Requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
|
The Company elected to early adopt the amendments of this ASU in the first quarter of 2017 on a retrospective basis. As a result of the adoption of this ASU, changes in restricted cash and cash equivalents are no longer classified as investing activities, and the Company's Consolidated Statements of Cash Flows now explain the change during the period in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents.
|
Standard
(1)
|
Description
|
Impact
|
Effective date
(2)
|
|||
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments
|
The basis of the new standard is that an entity recognizes revenue to represent the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Additional disclosures will be required to assist users of financial statements understand the nature, amount, timing and uncertainty of revenues and cash flows arising from an entity's contracts.
The guidance can be applied using either the retrospective or modified retrospective transition method.
|
The Company completed its reviews of freight and other revenue contracts with customers and has concluded that there will be no impact on its Consolidated Financial Statements resulting from adoption of the new standard, other than for the new disclosure requirements.
The Company is finalizing required disclosures and has implemented changes to processes and internal controls necessary to meet the reporting and disclosure requirements.
The Company will adopt the new standard effective January 1, 2018, using the modified retrospective transition method applied to its contracts that were not completed as of that date.
|
December 15, 2017. Early adoption is permitted
.
|
|||
(1)
|
Other recently issued ASUs required to be applied for periods beginning on or after January 1, 2018 have been evaluated by the Company and will not have a significant impact on the Company's Consolidated Financial Statements.
|
|||||
(2)
|
Effective for annual and interim reporting periods beginning after the stated date.
|
In millions
|
December 31,
|
2017
|
2016
|
||
Pension asset
|
$
|
994
|
$
|
907
|
|
Pension liability
|
$
|
455
|
$
|
442
|
|
Other postretirement benefits liability
|
$
|
261
|
$
|
270
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||
Net periodic benefit cost (income) for pensions
|
$
|
(190)
|
$
|
(161)
|
$
|
34
|
|
Net periodic benefit cost for other postretirement benefits
|
$
|
7
|
$
|
7
|
$
|
10
|
In millions
|
December 31,
|
2017
|
2016
|
||
Projected pension benefit obligation
|
$
|
18,025
|
$
|
17,366
|
|
Accumulated other postretirement benefit obligation
|
$
|
261
|
$
|
270
|
2017
|
2016
|
2015
|
2014
|
2013
|
||
Actual
|
9.2%
|
4.4%
|
5.5%
|
10.1%
|
11.2%
|
|
Market-related value
|
9.1%
|
8.2%
|
7.0%
|
7.6%
|
7.3%
|
|
Expected
|
7.00%
|
7.00%
|
7.00%
|
7.00%
|
7.00%
|
In millions
|
2017
|
2016
|
2015
|
||||||
Beginning of year
|
$
|
183
|
$
|
191
|
$
|
203
|
|||
Accruals and other
|
38
|
24
|
17
|
||||||
Payments
|
(38)
|
(32)
|
(29)
|
||||||
End of year
|
$
|
183
|
$
|
183
|
$
|
191
|
|||
Current portion - End of year
|
$
|
40
|
$
|
39
|
$
|
27
|
In millions
|
2017
|
2016
|
2015
|
||||||
Beginning of year
|
$
|
118
|
$
|
105
|
$
|
95
|
|||
Accruals and other
|
46
|
51
|
22
|
||||||
Payments
|
(41)
|
(34)
|
(30)
|
||||||
Foreign exchange
|
(7)
|
(4)
|
18
|
||||||
End of year
|
$
|
116
|
$
|
118
|
$
|
105
|
|||
Current portion - End of year
|
$
|
25
|
$
|
37
|
$
|
24
|
In millions
|
2017
|
2016
|
2015
|
||||||
Beginning of year
|
$
|
86
|
$
|
110
|
$
|
114
|
|||
Accruals and other
|
16
|
6
|
81
|
||||||
Payments
|
(23)
|
(29)
|
(91)
|
||||||
Foreign exchange
|
(1)
|
(1)
|
6
|
||||||
End of year
|
$
|
78
|
$
|
86
|
$
|
110
|
|||
Current portion - End of year
|
$
|
57
|
$
|
50
|
$
|
51
|
·
|
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.
|
·
|
expand the Governor in Council's powers to make regulations requiring major railway companies to provide to the Minister and the Agency information relating to rates, service and performance;
|
·
|
clarify the factors that must be applied in determining whether railway companies are fulfilling their service obligations;
|
·
|
enable shippers to obtain terms in their contracts dealing with amounts to be paid in relation to a failure to comply with conditions related to railway companies' service obligations;
|
·
|
create a new remedy for shippers who have access to the lines of only one railway company at the point of origin or destination of the movement of traffic in circumstances where interswitching is not available, also called "long-haul interswitching";
|
·
|
change the process for the transfer and discontinuance of railway lines to, among other things, require railway companies to make certain information available to the Minister and the public and establish a remedy for non-compliance with the process; and
|
·
|
change provisions respecting the maximum revenue entitlement for the movement of Western grain and require certain railway companies to provide to the Minister and the public information respecting the movement of grain.
|
·
|
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.
|
·
|
Gamma ray screening of cargo entering the U.S. from Canada, and potential security and agricultural inspections at the Canada/U.S. border.
|
*
CPA
auditor, CA, public accountancy permit No. A123145
|
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.
|
KPMG Canada provides services to KPMG LLP. |
*
CPA
auditor, CA, public accountancy permit No. A123145
|
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.
|
KPMG Canada provides services to KPMG LLP. |
In millions, except per share data
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||||||
Revenues
|
$
|
13,041
|
$
|
12,037
|
$
|
12,611
|
|||||
Operating expenses
|
|||||||||||
Labor and fringe benefits
|
2,221
|
2,119
|
2,406
|
||||||||
Purchased services and material
|
1,769
|
1,592
|
1,729
|
||||||||
Fuel
|
1,362
|
1,051
|
1,285
|
||||||||
Depreciation and amortization
|
1,281
|
1,225
|
1,158
|
||||||||
Equipment rents
|
418
|
375
|
373
|
||||||||
Casualty and other
|
432
|
363
|
394
|
||||||||
Total operating expenses
|
7,483
|
6,725
|
7,345
|
||||||||
Operating income
|
5,558
|
5,312
|
5,266
|
||||||||
Interest expense
|
(481)
|
(480)
|
(439)
|
||||||||
Other income
(Note 3)
|
12
|
95
|
47
|
||||||||
Income before income taxes
|
5,089
|
4,927
|
4,874
|
||||||||
Income tax recovery (expense)
(Note 4)
|
395
|
(1,287)
|
(1,336)
|
||||||||
Net income
|
$
|
5,484
|
$
|
3,640
|
$
|
3,538
|
|||||
Earnings per share
(Note 5)
|
|||||||||||
Basic
|
$
|
7.28
|
$
|
4.69
|
$
|
4.42
|
|||||
Diluted
|
$
|
7.24
|
$
|
4.67
|
$
|
4.39
|
|||||
Weighted-average number of shares
(Note 5)
|
|||||||||||
Basic
|
753.6
|
776.0
|
800.7
|
||||||||
Diluted
|
757.3
|
779.2
|
805.1
|
||||||||
See accompanying notes to consolidated financial statements.
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||||||
Net income
|
$
|
5,484
|
$
|
3,640
|
$
|
3,538
|
|||||
Other comprehensive income (loss)
(Note 15)
|
|||||||||||
Net gain (loss) on foreign currency translation
|
(197)
|
(45)
|
249
|
||||||||
Net change in pension and other postretirement benefit plans
(Note 12)
|
(224)
|
(694)
|
306
|
||||||||
Other comprehensive income (loss) before income taxes
|
(421)
|
(739)
|
555
|
||||||||
Income tax recovery (expense)
|
(5)
|
148
|
105
|
||||||||
Other comprehensive income (loss)
|
(426)
|
(591)
|
660
|
||||||||
Comprehensive income
|
$
|
5,058
|
$
|
3,049
|
$
|
4,198
|
|||||
See accompanying notes to consolidated financial statements.
|
In millions
|
December 31,
|
2017
|
2016
|
|||
Assets
|
||||||
Current assets
|
||||||
Cash and cash equivalents
|
$
|
70
|
$
|
176
|
||
Restricted cash and cash equivalents
(Note 10)
|
483
|
496
|
||||
Accounts receivable
(Note 6)
|
984
|
875
|
||||
Material and supplies
|
424
|
363
|
||||
Other current assets
|
229
|
197
|
||||
Total current assets
|
2,190
|
2,107
|
||||
Properties
(Note 7)
|
34,189
|
33,755
|
||||
Pension asset
(Note 12)
|
994
|
907
|
||||
Intangible and other assets
(Note 8)
|
256
|
288
|
||||
Total assets
|
$
|
37,629
|
$
|
37,057
|
||
Liabilities and shareholders' equity
|
||||||
Current liabilities
|
||||||
Accounts payable and other
(Note 9)
|
$
|
1,903
|
$
|
1,519
|
||
Current portion of long-term debt
(Note 10)
|
2,080
|
1,489
|
||||
Total current liabilities
|
3,983
|
3,008
|
||||
Deferred income taxes
(Note 4)
|
6,953
|
8,473
|
||||
Other liabilities and deferred credits
(Note 11)
|
590
|
593
|
||||
Pension and other postretirement benefits
(Note 12)
|
699
|
694
|
||||
Long-term debt
(Note 10)
|
8,748
|
9,448
|
||||
Shareholders' equity
|
||||||
Common shares
(Note 13)
|
3,780
|
3,730
|
||||
Common shares in Share Trusts
(Note 13)
|
(168)
|
(137)
|
||||
Additional paid-in capital
(Note 13)
|
242
|
364
|
||||
Accumulated other comprehensive loss
(Note 15)
|
(2,784)
|
(2,358)
|
||||
Retained earnings
|
15,586
|
13,242
|
||||
Total shareholders' equity
|
16,656
|
14,841
|
||||
Total liabilities and shareholders' equity
|
$
|
37,629
|
$
|
37,057
|
||
See accompanying notes to consolidated financial statements.
|
||||||
On behalf of the Board of Directors:
|
||||||
(s) Robert Pace
|
(s) Luc Jobin
|
|||||
Director
|
Director
|
|||||
Number of
|
Common
|
Accumulated
|
|||||||||||||||||
common shares
|
shares
|
Additional
|
other
|
Total
|
|||||||||||||||
Share
|
Common
|
in Share
|
paid-in
|
comprehensive
|
Retained
|
shareholders'
|
|||||||||||||
In millions
|
Outstanding
|
Trusts
|
shares
|
Trusts
|
capital
|
loss
|
earnings
|
equity
|
|||||||||||
Balance at December 31, 2014
|
809.4
|
-
|
$
|
3,718
|
$
|
-
|
$
|
439
|
$
|
(2,427)
|
$
|
11,740
|
$
|
13,470
|
|||||
Net income
|
3,538
|
3,538
|
|||||||||||||||||
Stock options exercised
|
2.5
|
91
|
(17)
|
74
|
|||||||||||||||
Settlement of equity settled awards
|
4
|
(8)
|
(4)
|
||||||||||||||||
Stock-based compensation expense
|
|||||||||||||||||||
and other
|
61
|
(3)
|
58
|
||||||||||||||||
Repurchase of common shares
(Note 13)
|
(23.3)
|
(108)
|
(1,642)
|
(1,750)
|
|||||||||||||||
Share purchases by Share Trusts
(Note 13)
|
(1.4)
|
1.4
|
(100)
|
(100)
|
|||||||||||||||
Other comprehensive income
(Note 15)
|
660
|
660
|
|||||||||||||||||
Dividends ($1.25 per share)
|
(996)
|
(996)
|
|||||||||||||||||
Balance at December 31, 2015
|
787.2
|
1.4
|
3,705
|
(100)
|
475
|
(1,767)
|
12,637
|
14,950
|
|||||||||||
Net income
|
3,640
|
3,640
|
|||||||||||||||||
Stock options exercised
|
1.6
|
73
|
(12)
|
61
|
|||||||||||||||
Settlement of equity settled awards
|
79
|
(138)
|
(59)
|
||||||||||||||||
Stock-based compensation expense
|
|||||||||||||||||||
and other
|
62
|
(3)
|
59
|
||||||||||||||||
Repurchase of common shares
(Note 13)
|
(26.4)
|
(127)
|
(1,873)
|
(2,000)
|
|||||||||||||||
Share purchases by Share Trusts
(Note 13)
|
(0.7)
|
0.7
|
(60)
|
(60)
|
|||||||||||||||
Share settlements by Share Trusts
(Note 13)
|
0.3
|
(0.3)
|
23
|
(23)
|
-
|
||||||||||||||
Other comprehensive loss
(Note 15)
|
(591)
|
(591)
|
|||||||||||||||||
Dividends ($1.50 per share)
|
(1,159)
|
(1,159)
|
|||||||||||||||||
Balance at December 31, 2016
|
762.0
|
1.8
|
3,730
|
(137)
|
364
|
(2,358)
|
13,242
|
14,841
|
|||||||||||
Net income
|
5,484
|
5,484
|
|||||||||||||||||
Stock options exercised
|
1.2
|
68
|
(10)
|
58
|
|||||||||||||||
Settlement of equity settled awards
|
84
|
(166)
|
(82)
|
||||||||||||||||
Stock-based compensation expense
|
|||||||||||||||||||
and other
|
78
|
(3)
|
75
|
||||||||||||||||
Repurchase of common shares
(Note 13)
|
(20.4)
|
(102)
|
(1,898)
|
(2,000)
|
|||||||||||||||
Share purchases by Share Trusts
(Note 13)
|
(0.5)
|
0.5
|
(55)
|
(55)
|
|||||||||||||||
Share settlements by Share Trusts
(Note 13)
|
0.3
|
(0.3)
|
24
|
(24)
|
-
|
||||||||||||||
Other comprehensive loss
(Note 15)
|
(426)
|
(426)
|
|||||||||||||||||
Dividends ($1.65 per share)
|
(1,239)
|
(1,239)
|
|||||||||||||||||
Balance at December 31, 2017
|
742.6
|
2.0
|
$
|
3,780
|
$
|
(168)
|
$
|
242
|
$
|
(2,784)
|
$
|
15,586
|
$
|
16,656
|
|||||
See accompanying notes to consolidated financial statements.
|
In millions Year ended December 31,
|
2017
|
2016
|
2015
|
||||
Operating activities
|
|||||||
Net income
|
$
|
5,484
|
$
|
3,640
|
$
|
3,538
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||
Depreciation and amortization
|
1,281
|
1,225
|
1,158
|
||||
Deferred income taxes
(Note 4)
|
(1,195)
|
704
|
600
|
||||
Gain on disposal of property
(Note 3)
|
|
-
|
(76)
|
-
|
|||
Changes in operating assets and liabilities:
|
|||||||
Accounts receivable
|
(125)
|
(3)
|
188
|
||||
Material and supplies
|
(70)
|
(2)
|
4
|
||||
Accounts payable and other
|
418
|
(51)
|
(282)
|
||||
Other current assets
|
(80)
|
21
|
46
|
||||
Pensions and other, net
|
(197)
|
(256)
|
(112)
|
||||
Net cash provided by operating activities
|
5,516
|
5,202
|
5,140
|
||||
Investing activities
|
|||||||
Property additions
|
(2,673)
|
(2,695)
|
(2,706)
|
||||
Disposal of property
(Note 3)
|
-
|
85
|
-
|
||||
Other, net
|
(65)
|
(72)
|
(61)
|
||||
Net cash used in investing activities
(1)
|
(2,738)
|
(2,682)
|
(2,767)
|
||||
Financing activities
|
|||||||
Issuance of debt
(Note 10)
|
916
|
1,509
|
841
|
||||
Repayment of debt
(Note 10)
|
(841)
|
(955)
|
(752)
|
||||
Net issuance of commercial paper
(Note 10)
|
379
|
137
|
451
|
||||
Settlement of foreign exchange forward contracts on long-term debt
|
(15)
|
(21)
|
-
|
||||
Issuance of common shares for stock options exercised
(Note 14)
|
58
|
61
|
79
|
||||
Withholding taxes remitted on the net settlement of equity settled awards
(Note 14)
|
(57)
|
(44)
|
(2)
|
||||
Repurchase of common shares
(Note 13)
|
(2,016)
|
(1,992)
|
(1,742)
|
||||
Purchase of common shares for settlement of equity settled awards
|
(25)
|
(15)
|
(2)
|
||||
Purchase of common shares by Share Trusts
(Note 13)
|
(55)
|
(60)
|
(100)
|
||||
Dividends paid
|
(1,239)
|
(1,159)
|
(996)
|
||||
Net cash used in financing activities
|
(2,895)
|
(2,539)
|
(2,223)
|
||||
Effect of foreign exchange fluctuations on US dollar-denominated cash, cash
|
|||||||
equivalents, restricted cash, and restricted cash equivalents
|
(2)
|
15
|
11
|
||||
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash
|
|||||||
equivalents
(1)
|
(119)
|
(4)
|
161
|
||||
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning
|
|||||||
of year
(1)
|
672
|
676
|
515
|
||||
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end
|
|||||||
of year
(1)
|
$
|
553
|
$
|
672
|
$
|
676
|
|
Cash and cash equivalents, end of year
|
$
|
70
|
$
|
176
|
$
|
153
|
|
Restricted cash and cash equivalents, end of year
|
483
|
496
|
523
|
||||
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end
|
|||||||
of year
(1)
|
$
|
553
|
$
|
672
|
$
|
676
|
|
Supplemental cash flow information
|
|||||||
Interest paid
|
$
|
(477)
|
$
|
(470)
|
$
|
(432)
|
|
Income taxes paid
(Note 4)
|
$
|
(712)
|
$
|
(653)
|
$
|
(725)
|
|
(1) The Company adopted Accounting Standards Update 2016-18 in the first quarter of 2017 on a retrospective basis. Comparative balances have been reclassified to conform to the current presentation. See Note 2 – Recent accounting pronouncements for additional information.
See accompanying notes to consolidated financial statements.
|
Contents | |
1 Summary of significant accounting policies
|
62
|
2 Recent accounting pronouncements
|
66
|
3 Other income
|
68
|
4 Income taxes
|
68
|
5 Earnings per share
|
70
|
6 Accounts receivable
|
71
|
7 Properties
|
71
|
8 Intangible and other assets
|
72
|
9 Accounts payable and other
|
72
|
10 Long-term debt
|
73
|
11 Other liabilities and deferred credits
|
75
|
12 Pensions and other postretirement benefits
|
75
|
13 Share capital
|
83
|
14 Stock-based compensation
|
84
|
15 Accumulated other comprehensive loss
|
89
|
16 Major commitments and contingencies
|
90
|
17 Financial instruments
|
94
|
18 Segmented information
|
95
|
19 Subsequent event
|
96
|
·
|
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 5 or more ties per 39 feet; and
|
·
|
ballast:
installation of 171 cubic yards of ballast per mile.
|
·
|
the cost of pension benefits provided in exchange for employees' services rendered during the year;
|
·
|
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.
|
Standard
|
Description
|
Impact
|
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
|
Requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
|
The Company elected to early adopt the amendments of this ASU in the first quarter of 2017 on a retrospective basis. As a result of the adoption of this ASU, changes in restricted cash and cash equivalents are no longer classified as investing activities, and the Company's Consolidated Statements of Cash Flows now explain the change during the period in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents.
|
Standard
(1)
|
Description
|
Impact
|
Effective date
(2)
|
ASU 2017-07 Compensation –Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
|
Requires employers that sponsor defined benefit pension plans and/or other postretirement benefit plans to report the service cost component in the same line item or items as other compensation costs. The other components of net periodic benefit cost are required to be presented in the statement of income separately from the service cost component and outside a subtotal of income from operations. The new guidance allows only the service cost component to be eligible for capitalization.
The guidance must be applied retrospectively for the presentation of the service cost component and other components of net periodic benefit cost in the statement of income and prospectively for the capitalization of the service cost component of net periodic benefit cost.
|
The amendments will affect the classification of the components of pension and postretirement benefit costs other than service cost which will be shown outside of income from operations in a separate caption in the Company's Consolidated Statements of Income.
Had the ASU been applicable for the year ended December 31, 2017, Operating income would have been reduced by approximately $315 million (2016 - $280 million; 2015 - $111 million) with a corresponding increase presented in a new caption below Operating income with no impact on Net income.
The guidance allowing only the service cost component to be eligible for capitalization is not expected to have a significant impact on the Company's Consolidated Financial Statements.
CN will adopt the requirements of the ASU effective January 1, 2018.
|
December 15, 2017. Early adoption is permitted.
|
Standard
(1)
|
Description
|
Impact
|
Effective date
(2)
|
|||
ASU 2016-02, Leases (Topic 842)
|
Requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet for all leases greater than twelve months. The lessor accounting model under the new standard is substantially unchanged.
The new standard also requires additional qualitative and quantitative disclosures.
The guidance must be applied using the modified retrospective method.
|
The Company is evaluating the effects that the adoption of the standard will have on its Consolidated Financial Statements and related disclosures, systems, processes and internal controls.
The Company is implementing a new lease management system and has identified and begun implementing changes to processes and internal controls necessary to meet the reporting and disclosure requirements.
The Company is assessing contractual arrangements to see if they qualify as leases under the new standard and has already reviewed a significant portion of its commitments under operating leases. The Company expects that the standard will have a significant impact on its Consolidated Balance Sheets due to the recognition of new right-of-use assets and lease liabilities for leases currently classified as operating leases with a term over twelve months.
CN expects to adopt the requirements of the ASU effective January 1, 2019.
|
December 15, 2018. Early adoption is permitted.
|
|||
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments
|
The basis of the new standard is that an entity recognizes revenue to represent the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Additional disclosures will be required to assist users of financial statements understand the nature, amount, timing and uncertainty of revenues and cash flows arising from an entity's contracts.
The guidance can be applied using either the retrospective or modified retrospective transition method.
|
The Company completed its reviews of freight and other revenue contracts with customers and has concluded that there will be no impact on its Consolidated Financial Statements resulting from adoption of the new standard, other than for the new disclosure requirements.
The Company is finalizing required disclosures and has implemented changes to processes and internal controls necessary to meet the reporting and disclosure requirements.
The Company will adopt the new standard effective January 1, 2018, using the modified retrospective transition method applied to its contracts that were not completed as of that date.
|
December 15, 2017. Early adoption is permitted.
|
|||
(1)
|
Other recently issued ASUs required to be applied for periods beginning on or after January 1, 2018 have been evaluated by the Company and will not have a significant impact on the Company's Consolidated Financial Statements.
|
|||||
(2)
|
Effective for annual and interim reporting periods beginning after the stated date.
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||||
Gain on disposal of property
|
$
|
-
|
$
|
76
|
$
|
-
|
|||
Gain on disposal of land
|
22
|
17
|
52
|
||||||
Other
(1)
|
(10)
|
2
|
(5)
|
||||||
Total other income
|
$
|
12
|
$
|
95
|
$
|
47
|
|||
(1)
|
Includes foreign exchange gains and losses related to foreign exchange forward contracts and the re-measurement of other US dollar-denominated monetary assets and liabilities. See Note 17 – Financial instruments.
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||
Income before income taxes
|
|||||||
Domestic
|
$
|
3,964
|
$
|
3,726
|
$
|
3,437
|
|
Foreign
|
1,125
|
1,201
|
1,437
|
||||
Total income before income taxes
|
$
|
5,089
|
$
|
4,927
|
$
|
4,874
|
|
Current income tax expense
|
|||||||
Domestic
|
$
|
758
|
$
|
568
|
$
|
640
|
|
Foreign
|
42
|
15
|
96
|
||||
Total current income tax expense
|
$
|
800
|
$
|
583
|
$
|
736
|
|
Deferred income tax expense (recovery)
|
|||||||
Domestic
|
$
|
349
|
$
|
450
|
$
|
328
|
|
Foreign
|
(1,544)
|
254
|
272
|
||||
Total deferred income tax expense (recovery)
|
$
|
(1,195)
|
$
|
704
|
$
|
600
|
In millions
|
December 31,
|
2017
|
2016
|
|||
Deferred income tax assets
|
||||||
Pension liability
|
$
|
121
|
$
|
130
|
||
Personal injury and legal claims
|
50
|
66
|
||||
Environmental and other reserves
|
128
|
166
|
||||
Other postretirement benefits liability
|
70
|
83
|
||||
Unrealized foreign exchange losses
|
-
|
58
|
||||
Net operating losses and tax credit carryforwards
(1)
|
32
|
23
|
||||
Total deferred income tax assets
|
$
|
401
|
$
|
526
|
||
Deferred income tax liabilities
|
||||||
Properties
|
$
|
6,975
|
$
|
8,673
|
||
Pension asset
|
268
|
243
|
||||
Unrealized foreign exchange gains
|
34
|
-
|
||||
Other
|
77
|
83
|
||||
Total deferred income tax liabilities
|
$
|
7,354
|
$
|
8,999
|
||
Total net deferred income tax liability
|
$
|
6,953
|
$
|
8,473
|
||
Total net deferred income tax liability
|
||||||
Domestic
|
$
|
3,677
|
$
|
3,334
|
||
Foreign
|
3,276
|
5,139
|
||||
Total net deferred income tax liability
|
$
|
6,953
|
$
|
8,473
|
||
(1)
|
Net operating losses and tax credit carryforwards will expire between the years 2018 and 2036.
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
2015
|
||||
Gross unrecognized tax benefits at beginning of year
|
$
|
61
|
$
|
27
|
$
|
35
|
||
Increases for:
|
||||||||
Tax positions related to the current year
|
13
|
16
|
4
|
|||||
Tax positions related to prior years
|
2
|
24
|
8
|
|||||
Decreases for:
|
||||||||
Settlements
|
(1)
|
(2)
|
(14)
|
|||||
Lapse of the applicable statute of limitations
|
(1)
|
(4)
|
(6)
|
|||||
Gross unrecognized tax benefits at end of year
|
$
|
74
|
$
|
61
|
$
|
27
|
||
Adjustments to reflect tax treaties and other arrangements
|
(5)
|
(7)
|
(8)
|
|||||
Net unrecognized tax benefits at end of year
|
$
|
69
|
$
|
54
|
$
|
19
|
In millions, except per share data
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||
Net income
|
$
|
5,484
|
$
|
3,640
|
$
|
3,538
|
|
Weighted-average basic shares outstanding
|
753.6
|
776.0
|
800.7
|
||||
Dilutive effect of stock-based compensation
|
3.7
|
3.2
|
4.4
|
||||
Weighted-average diluted shares outstanding
|
757.3
|
779.2
|
805.1
|
||||
Basic earnings per share
|
$
|
7.28
|
$
|
4.69
|
$
|
4.42
|
|
Diluted earnings per share
|
$
|
7.24
|
$
|
4.67
|
$
|
4.39
|
|
Units excluded from the calculation as their inclusion would not have a dilutive effect:
|
|||||||
Stock options
|
0.4
|
1.2
|
0.8
|
||||
Performance share units
|
0.1
|
0.2
|
-
|
In millions
|
December 31,
|
2017
|
2016
|
|||
Freight
|
$
|
828
|
$
|
752
|
||
Non-freight
|
172
|
151
|
||||
Gross accounts receivable
|
1,000
|
903
|
||||
Allowance for doubtful accounts
|
(16)
|
(28)
|
||||
Net accounts receivable
|
$
|
984
|
$
|
875
|
In millions
|
December 31,
|
2017
|
2016
|
||||
Investments
(1)
|
$
|
73
|
$
|
68
|
|||
Intangible assets
|
62
|
67
|
|||||
Deferred costs
|
61
|
73
|
|||||
Long-term receivables
|
26
|
33
|
|||||
Other long-term assets
|
34
|
47
|
|||||
Total intangible and other assets
|
$
|
256
|
$
|
288
|
|||
(1)
|
As at December 31, 2017, the Company had $58 million (2016 - $54 million) of investments accounted for under the equity method and $15 million (2016 - $14 million) of investments accounted for under the cost method. See Note 17 - Financial instruments for the fair value of investments.
|
In millions
|
December 31,
|
2017
|
2016
|
|||
Trade payables
|
$
|
738
|
$
|
484
|
||
Payroll-related accruals
|
388
|
327
|
||||
Income and other taxes
|
201
|
122
|
||||
Accrued charges
|
144
|
141
|
||||
Accrued interest
|
126
|
129
|
||||
Personal injury and other claims provisions
(Note 16)
|
65
|
76
|
||||
Environmental provisions
(Note 16)
|
57
|
50
|
||||
Other postretirement benefits liability
(Note 12)
|
17
|
18
|
||||
Stock-based compensation liability
(Note 14)
|
7
|
45
|
||||
Other
|
160
|
127
|
||||
Total accounts payable and other
|
$
|
1,903
|
$
|
1,519
|
US dollar-
denominated
amount
|
|||||||||||||
In millions
|
Maturity
|
December 31,
|
2017
|
2016
|
|||||||||
Notes and debentures
(1)
|
|||||||||||||
Canadian National series:
|
|||||||||||||
-
|
3-year floating rate notes
(2)
|
Nov. 14, 2017
|
US$
|
250
|
$
|
-
|
$
|
336
|
|||||
5.85%
|
10-year notes
(3)
|
Nov. 15, 2017
|
US$
|
250
|
-
|
336
|
|||||||
5.55%
|
10-year notes
(3)
|
May 15, 2018
|
US$
|
325
|
409
|
436
|
|||||||
6.80%
|
20-year notes
(3)
|
July 15, 2018
|
US$
|
200
|
251
|
269
|
|||||||
5.55%
|
10-year notes
(3)
|
Mar. 1, 2019
|
US$
|
550
|
692
|
738
|
|||||||
2.75%
|
7-year notes
(3)
|
Feb. 18, 2021
|
250
|
250
|
|||||||||
2.85%
|
10-year notes
(3)
|
Dec. 15, 2021
|
US$
|
400
|
503
|
537
|
|||||||
2.25%
|
10-year notes
(3)
|
Nov. 15, 2022
|
US$
|
250
|
314
|
336
|
|||||||
7.63%
|
30-year debentures
|
May 15, 2023
|
US$
|
150
|
189
|
201
|
|||||||
2.95%
|
10-year notes
(3)
|
Nov. 21, 2024
|
US$
|
350
|
440
|
470
|
|||||||
2.80%
|
10-year notes
(3)
|
Sep. 22, 2025
|
350
|
350
|
|||||||||
2.75%
|
10-year notes
(3)
|
Mar. 1, 2026
|
US$
|
500
|
629
|
671
|
|||||||
6.90%
|
30-year notes
(3)
|
July 15, 2028
|
US$
|
475
|
597
|
638
|
|||||||
7.38%
|
30-year debentures
(3)
|
Oct. 15, 2031
|
US$
|
200
|
251
|
269
|
|||||||
6.25%
|
30-year notes
(3)
|
Aug. 1, 2034
|
US$
|
500
|
629
|
671
|
|||||||
6.20%
|
30-year notes
(3)
|
June 1, 2036
|
US$
|
450
|
566
|
604
|
|||||||
6.71%
|
Puttable Reset Securities PURS
SM (3)
|
July 15, 2036
|
US$
|
250
|
314
|
336
|
|||||||
6.38%
|
30-year debentures
(3)
|
Nov. 15, 2037
|
US$
|
300
|
377
|
403
|
|||||||
3.50%
|
30-year notes
(3)
|
Nov. 15, 2042
|
US$
|
250
|
314
|
336
|
|||||||
4.50%
|
30-year notes
(3)
|
Nov. 7, 2043
|
US$
|
250
|
314
|
336
|
|||||||
3.95%
|
30-year notes
(3)
|
Sep. 22, 2045
|
400
|
400
|
|||||||||
3.20%
|
30-year notes
(3)
|
Aug. 2, 2046
|
US$
|
650
|
817
|
872
|
|||||||
3.60%
|
30-year notes
(3)
|
Aug. 1, 2047
|
500
|
-
|
|||||||||
4.00%
|
50-year notes
(3)
|
Sep. 22, 2065
|
100
|
100
|
|||||||||
Illinois Central series:
|
|||||||||||||
7.70%
|
100-year debentures
|
Sep. 15, 2096
|
US$
|
125
|
157
|
168
|
|||||||
BC Rail series:
|
|||||||||||||
Non-interest bearing 90-year subordinated notes
(4)
|
July 14, 2094
|
842
|
842
|
||||||||||
Total notes and debentures
|
$
|
10,205
|
$
|
10,905
|
|||||||||
Other
|
|||||||||||||
Commercial paper
|
955
|
605
|
|||||||||||
Accounts receivable securitization
|
421
|
-
|
|||||||||||
Capital lease obligations
|
158
|
344
|
|||||||||||
Total debt, gross
|
11,739
|
11,854
|
|||||||||||
Net unamortized discount and debt issuance costs
(4)
|
(911)
|
(917)
|
|||||||||||
Total debt
(5)
|
10,828
|
10,937
|
|||||||||||
Less:
Current portion of long-term debt
|
2,080
|
1,489
|
|||||||||||
Total long-term debt
|
$
|
8,748
|
$
|
9,448
|
|||||||||
(1)
|
The Company's notes and debentures are unsecured.
|
||||||||||||
(2)
|
This floating rate note bore interest at the three-month London Interbank Offered Rate (LIBOR) plus 0.17%. The interest rate as at the date of maturity of this floating rate note was 1.48% (December 31, 2016 - 1.07%).
|
||||||||||||
(3)
|
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.
|
||||||||||||
(4)
|
As at December 31, 2017, these notes were recorded as a discounted debt of $11 million (2016 - $10 million) using an imputed interest rate of 5.75% (2016 - 5.75%). The discount of $831 million (2016 - $832 million) is included in Net unamortized discount and debt issuance costs.
|
||||||||||||
(5)
|
See Note 17 - Financial instruments for the fair value of debt.
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||
Issuances of commercial paper
|
$
|
4,539
|
$
|
3,656
|
$
|
2,624
|
|
Repayments of commercial paper
|
(4,160)
|
(3,519)
|
(2,173)
|
||||
Net issuance of commercial paper
|
$
|
379
|
$
|
137
|
$
|
451
|
In millions
|
Capital leases
|
Debt
(1)
|
Total
|
|||||
2018
(2)
|
$
|
44
|
$
|
2,036
|
$
|
2,080
|
||
2019
|
10
|
684
|
694
|
|||||
2020
|
15
|
-
|
15
|
|||||
2021
|
6
|
747
|
753
|
|||||
2022
|
2
|
308
|
310
|
|||||
2023 and thereafter
|
81
|
6,895
|
6,976
|
|||||
Total
|
$
|
158
|
$
|
10,670
|
$
|
10,828
|
||
(1) | Presented net of unamortized discounts and debt issuance costs. | |||||||
(2)
|
Current portion of long-term debt.
|
In millions
|
December 31,
|
2017
|
2016
|
||
Notes and debentures
|
US$
|
6,175
|
US$
|
6,675
|
|
Commercial paper
|
760
|
451
|
|||
Accounts receivable securitization
|
80
|
-
|
|||
Capital lease obligations
|
46
|
158
|
|||
Total amount of US dollar-denominated debt in US$
|
US$
|
7,061
|
US$
|
7,284
|
|
Total amount of US dollar-denominated debt in C$
|
$
|
8,876
|
$
|
9,780
|
In millions
|
December 31,
|
2017
|
2016
|
||||
Personal injury and other claims provisions
(Note 16)
(1)
|
$
|
234
|
$
|
225
|
|||
Stock-based compensation liability
(Note 14)
(1)
|
26
|
35
|
|||||
Environmental provisions
(Note 16)
(1)
|
21
|
36
|
|||||
Deferred credits and other
|
309
|
297
|
|||||
Total other liabilities and deferred credits
|
$
|
590
|
$
|
593
|
|||
(1)
|
See Note 9 – Accounts payable and other for the related current portion.
|
·
|
Cash and short-term investments consist primarily of highly liquid securities which ensure adequate cash flows are available to cover near-term benefit payments. Short-term investments are mainly obligations issued by Canadian chartered banks.
|
·
|
Bonds include bond instruments, issued or guaranteed by governments and corporate entities, as well as corporate notes and investments in emerging market debt funds. As at December 31, 2017, 67% (2016 - 66%) of bonds were issued or guaranteed by Canadian, U.S. or other governments. Mortgages consist of mortgage products which are primarily conventional or participating loans secured by commercial properties.
|
·
|
Equity investments include primarily publicly traded securities, well diversified by country, issuer and industry sector and participations in private equity funds, comprised of investments in diversified sectors such as energy and health care. As at December 31, 2017, the most significant allocation to an individual issuer of a publicly traded security was approximately 2% (2016 - 2%) and the most significant allocation to an industry sector was approximately 22% (2016 - 21%).
|
·
|
Real estate is a diversified portfolio of Canadian land and commercial properties and investments in real estate private equity funds.
|
·
|
Oil and gas investments include petroleum and natural gas properties and listed and non-listed securities of oil and gas companies.
|
·
|
Infrastructure investments include participations in private infrastructure funds, term loans and notes of infrastructure companies. Private debt includes participations in private debt funds focused on generating steady yields.
|
·
|
Absolute return investments are primarily a portfolio of units of externally managed hedge funds, which are invested in various long/short strategies within multi-strategy, fixed income, equities and global macro funds. Managers are monitored on a continuous basis through investment and operational due diligence.
|
·
|
Risk-factor allocation investments are a portfolio of units of externally managed funds and internally managed strategies in order to capture alternative risk premiums.
|
·
|
Risk-based allocation investments are a portfolio of units of externally managed funds where the asset class exposures are managed on a risk-adjusted basis in order to capture asset class premiums.
|
Fair value measurements at December 31, 2017
|
||||||||||
In millions
|
Total
|
Level 1
|
Level 2
|
Level 3
|
NAV
|
|||||
Cash and short-term investments
(1)
|
$
|
836
|
$
|
17
|
$
|
819
|
$
|
-
|
$
|
-
|
Bonds
(2)
|
||||||||||
Canada, U.S. and supranational
|
1,792
|
-
|
1,792
|
-
|
-
|
|||||
Provinces of Canada and municipalities
|
2,459
|
-
|
2,459
|
-
|
-
|
|||||
Corporate
|
1,587
|
-
|
1,587
|
-
|
-
|
|||||
Emerging market debt
|
530
|
-
|
530
|
-
|
-
|
|||||
Mortgages
(3)
|
97
|
-
|
97
|
-
|
-
|
|||||
Private debt
(4)
|
242
|
-
|
-
|
-
|
242
|
|||||
Equities
(5)
|
||||||||||
Canadian
|
1,867
|
1,848
|
-
|
-
|
19
|
|||||
U.S.
|
989
|
775
|
-
|
-
|
214
|
|||||
International
|
3,947
|
3,883
|
-
|
-
|
64
|
|||||
Real estate
(6)
|
410
|
-
|
-
|
332
|
78
|
|||||
Oil and gas
(7)
|
1,120
|
333
|
18
|
769
|
-
|
|||||
Infrastructure
(8)
|
682
|
-
|
84
|
-
|
598
|
|||||
Absolute return funds
(9)
|
-
|
-
|
-
|
-
|
||||||
Multi-strategy
|
897
|
-
|
-
|
-
|
897
|
|||||
Fixed income
|
224
|
-
|
-
|
-
|
224
|
|||||
Equity
|
32
|
-
|
-
|
-
|
32
|
|||||
Global macro
|
444
|
-
|
-
|
-
|
444
|
|||||
Risk-factor allocation
(10)
|
345
|
-
|
-
|
-
|
345
|
|||||
Total
|
$
|
18,500
|
$
|
6,856
|
$
|
7,386
|
$
|
1,101
|
$
|
3,157
|
Other
(11)
|
64
|
|||||||||
Total plan assets
|
$
|
18,564
|
||||||||
Fair value measurements at December 31, 2016
|
||||||||||
In millions
|
Total
|
Level 1
|
Level 2
|
Level 3
|
NAV
|
|||||
Cash and short-term investments
(1)
|
$
|
571
|
$
|
83
|
$
|
488
|
$
|
-
|
$
|
-
|
Bonds
(2)
|
||||||||||
Canada, U.S. and supranational
|
1,418
|
-
|
1,418
|
-
|
-
|
|||||
Provinces of Canada and municipalities
|
2,384
|
-
|
2,384
|
-
|
-
|
|||||
Corporate
|
1,475
|
-
|
1,475
|
-
|
-
|
|||||
Emerging market debt
|
509
|
-
|
509
|
-
|
-
|
|||||
Mortgages
(3)
|
106
|
-
|
106
|
-
|
-
|
|||||
Private debt
(4)
|
226
|
-
|
-
|
-
|
226
|
|||||
Equities
(5)
|
||||||||||
Canadian
|
1,846
|
1,670
|
-
|
-
|
176
|
|||||
U.S.
|
997
|
949
|
-
|
-
|
48
|
|||||
International
|
3,853
|
3,853
|
-
|
-
|
-
|
|||||
Real estate
(6)
|
383
|
-
|
-
|
324
|
59
|
|||||
Oil and gas
(7)
|
1,076
|
336
|
18
|
722
|
-
|
|||||
Infrastructure
(8)
|
805
|
-
|
92
|
-
|
713
|
|||||
Absolute return funds
(9)
|
||||||||||
Multi-strategy
|
1,005
|
-
|
-
|
-
|
1,005
|
|||||
Fixed income
|
304
|
-
|
-
|
-
|
304
|
|||||
Equity
|
35
|
-
|
-
|
-
|
35
|
|||||
Global macro
|
428
|
-
|
-
|
-
|
428
|
|||||
Risk-based allocation
(12)
|
311
|
-
|
-
|
-
|
311
|
|||||
Total
|
$
|
17,732
|
$
|
6,891
|
$
|
6,490
|
$
|
1,046
|
$
|
3,305
|
Other
(11)
|
99
|
|||||||||
Total plan assets
|
$
|
17,831
|
||||||||
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 table follow on the next page.
|
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
|
Real estate
(6)
|
Oil and gas
(7)
|
Total
|
||||||
Balance at December 31, 2015
|
$
|
331
|
$
|
766
|
$
|
1,097
|
|||
Actual return relating to assets still held at the reporting date
|
15
|
(24)
|
(9)
|
||||||
Purchases
|
1
|
-
|
1
|
||||||
Disbursements
|
(23)
|
(20)
|
(43)
|
||||||
Balance at December 31, 2016
|
$
|
324
|
$
|
722
|
$
|
1,046
|
|||
Actual return relating to assets still held at the reporting date
|
19
|
88
|
107
|
||||||
Disbursements
|
(11)
|
(41)
|
(52)
|
||||||
Balance at December 31, 2017
|
$
|
332
|
$
|
769
|
$
|
1,101
|
|||
(1)
|
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.
|
||||||||
(2)
|
Bonds, excluding emerging market debt funds, 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. Emerging market debt funds are valued based on the net asset value which is readily available and published by each fund's independent administrator.
|
||||||||
(3)
|
Mortgages are valued based on the present value of future net cash flows using current market yields for comparable instruments.
|
||||||||
(4)
|
Private debt investments are valued based on the net asset value as reported by each fund's manager, generally using a discounted cash flow analysis.
|
||||||||
(5)
|
The fair value of equity investments categorized as Level 1 is based on quoted prices in active markets for identical assets. The fair value of Canadian equity investments categorized as NAV consist mainly of investments in energy related private equity funds and is based on the net asset value as reported by each fund's manager. The fair value of U.S. equity investments categorized as NAV consist of an investment in a U.S. private equity fund and is based on the net asset value as reported by the fund's manager.
|
||||||||
(6)
|
The fair value of real estate investments categorized as Level 3 includes land and buildings. Land is valued based on the fair value of comparable assets, and buildings are valued based on the present value of estimated future net cash flows or the fair value of comparable assets. Independent valuations of land and buildings 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.
|
||||||||
(7)
|
Oil and gas investments categorized as Level 1 are valued based on quoted prices in active markets. Investments in oil and gas equities traded on a secondary market are valued based on the most recent transaction price and are categorized as Level 2. Investments in oil and gas categorized as Level 3 consist of operating oil and gas 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 oil and gas prices and projected future annual production and costs.
|
||||||||
(8)
|
The fair value of infrastructure investments categorized as Level 2 includes term loans and notes of infrastructure companies and 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.
|
||||||||
(9)
|
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.
|
||||||||
(10)
|
Risk-factor allocation investments are valued using the net asset value as reported by each fund's independent administrator or fund manager. All funds have contractual redemptions frequencies ranging from daily to annually, and redemption notice periods varying from 5 to 60 days.
|
||||||||
(11)
|
Other consists of operating assets of $94 million (2016 - $163 million) and liabilities of $30 million (2016 - $64 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.
|
||||||||
(12)
|
Risk-based allocation investments are valued using the net asset value as reported by each fund's independent administrator. All funds have contractual redemption frequencies ranging from daily to annually, and redemption notice periods varying from 5 to 60 days.
|
Information for the pension plans with an accumulated benefit obligation in excess of plan assets
|
||||||||||||||
Pensions
|
Other postretirement benefits
|
|||||||||||||
In millions
|
December 31,
|
2017
|
2016
|
2017
|
2016
|
|||||||||
Projected benefit obligation
|
$
|
661
|
$
|
637
|
N/A
|
N/A
|
||||||||
Accumulated benefit obligation
|
$
|
601
|
$
|
574
|
N/A
|
N/A
|
||||||||
Fair value of plan assets
|
$
|
215
|
$
|
207
|
N/A
|
N/A
|
||||||||
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
|
Pensions
|
Other postretirement benefits
|
|||||||
2018
|
$
|
1,041
|
$
|
17
|
|||||
2019
|
$
|
1,046
|
$
|
17
|
|||||
2020
|
$
|
1,049
|
$
|
16
|
|||||
2021
|
$
|
1,051
|
$
|
16
|
|||||
2022
|
$
|
1,051
|
$
|
15
|
|||||
Years 2023 to 2027
|
$
|
5,178
|
$
|
72
|
·
|
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
|
In millions
|
December 31,
|
2017
|
2016
|
2015
|
||||
Issued common shares
|
744.6
|
763.8
|
788.6
|
|||||
Common shares in Share Trusts
|
(2.0)
|
(1.8)
|
(1.4)
|
|||||
Outstanding common shares
|
742.6
|
762.0
|
787.2
|
In millions, except per share data
|
Year ended December 31,
|
2017
|
2016
|
2015
|
||||
Share purchases by Share Trusts
|
||||||||
Number of common shares
|
0.5
|
0.7
|
1.4
|
|||||
Weighted-average price per share
(1)
|
$
|
102.17
|
$
|
84.99
|
$
|
73.31
|
||
Amount of purchase
|
$
|
55
|
$
|
60
|
$
|
100
|
||
Share settlements by Share Trusts
|
||||||||
Number of common shares
|
0.3
|
0.3
|
-
|
|||||
Weighted-average price per share
|
$
|
77.99
|
$
|
73.31
|
$
|
-
|
||
Amount of settlement
|
$
|
24
|
$
|
23
|
$
|
-
|
||
(1)
|
Includes brokerage fees where applicable.
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
2015
|
||||
Share Units Plan
|
||||||||
Equity settled awards
|
$
|
54
|
$
|
42
|
$
|
39
|
||
Cash settled awards
|
1
|
16
|
14
|
|||||
Total Share Units Plan expense
|
$
|
55
|
$
|
58
|
$
|
53
|
||
Voluntary Incentive Deferral Plan (VIDP)
|
||||||||
Equity settled awards
|
$
|
1
|
$
|
1
|
$
|
-
|
||
Cash settled awards
|
6
|
5
|
(3)
|
|||||
Total VIDP expense (recovery)
|
$
|
7
|
$
|
6
|
$
|
(3)
|
||
Stock option awards
|
$
|
13
|
$
|
12
|
$
|
11
|
||
Total stock-based compensation expense
|
$
|
75
|
$
|
76
|
$
|
61
|
||
Tax benefit recognized in income
|
$
|
18
|
$
|
17
|
$
|
14
|
||
Excess tax benefit recognized in income
(1)
|
$
|
13
|
$
|
5
|
N/A
|
|||
(1)
|
Effective January 1, 2016, the excess tax benefit is recognized in income in accordance with ASU 2016-09.
|
Options outstanding
|
Nonvested options
|
|||||||
Number of options
|
Weighted-average exercise price
|
Number of options
|
Weighted-average grant date fair value
|
|||||
In millions
|
In millions
|
|||||||
Outstanding at December 31, 2016
(1)
|
5.3
|
$
|
61.07
|
2.4
|
$
|
11.16
|
||
Granted
(2)
|
1.0
|
$
|
92.16
|
1.0
|
$
|
14.44
|
||
Forfeited/Cancelled
|
-
|
$
|
78.00
|
-
|
$
|
12.06
|
||
Exercised
(3)
|
(1.2)
|
$
|
48.75
|
N/A
|
N/A
|
|||
Vested
(4)
|
N/A
|
N/A
|
(1.0)
|
$
|
10.77
|
|||
Outstanding at December 31, 2017
(1)
|
5.1
|
$
|
66.78
|
2.4
|
$
|
12.62
|
||
Exercisable at December 31, 2017
(1)
|
2.7
|
$
|
54.97
|
N/A
|
N/A
|
|||
(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.
|
|||||||
(2)
|
The grant date fair value of options awarded in 2017 of $14 million is calculated using the Black-Scholes option-pricing model. As at December 31, 2017, total unrecognized compensation cost related to nonvested options outstanding was $7 million and is expected to be recognized over a weighted-average period of 2.6 years.
|
|||||||
(3)
|
The total intrinsic value of options exercised in 2017 was $62 million (2016 - $73 million; 2015 - $127 million). The cash received upon exercise of options in 2017 was $58 million (2016 - $61 million; 2015 - $74 million) and the related excess tax benefit realized in 2017 was $5 million (2016 - $5 million; 2015 - $5 million).
|
|||||||
(4)
|
The grant date fair value of options vested in 2017 was $10 million (2016 - $10 million; 2015 - $9 million).
|
Year of grant
|
2017
|
2016
|
2015
|
||||
Assumptions
|
|||||||
Grant price
($)
|
92.16
|
75.16
|
84.47
|
||||
Expected stock price volatility
(1)
|
20%
|
20%
|
20%
|
||||
Expected term
(years)
(2)
|
5.5
|
5.5
|
5.5
|
||||
Risk-free interest rate
(3)
|
1.24%
|
0.76%
|
0.78%
|
||||
Dividend rate
($)
(4)
|
1.65
|
1.50
|
1.25
|
||||
Weighted-average grant date fair value
($)
|
14.44
|
10.57
|
13.21
|
||||
.
|
|||||||
(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.
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||
Number of participants holding shares
|
19,642
|
19,108
|
19,728
|
|||
Total number of ESIP shares purchased on behalf of employees
(millions)
|
1.7
|
1.9
|
2.0
|
|||
Expense for Company contribution
(millions)
|
$
|
36
|
$
|
37
|
$
|
38
|
In millions
|
Foreign
currency
translation
adjustments
|
Pension
and other
postretirement
benefit plans
|
Total
before
tax
|
Income tax
recovery
(expense)
|
Total
net of
tax
|
|||||||||||
Balance at December 31, 2014
|
$
|
(451)
|
$
|
(2,510)
|
$
|
(2,961)
|
$
|
534
|
$
|
(2,427)
|
||||||
Other comprehensive income (loss)
|
||||||||||||||||
before reclassifications:
|
||||||||||||||||
Foreign exchange gain on translation of net
|
||||||||||||||||
investment in foreign operations
|
1,607
|
1,607
|
-
|
1,607
|
||||||||||||
Foreign exchange loss on translation of
|
||||||||||||||||
US dollar-denominated debt designated
|
||||||||||||||||
as a hedge of the net investment in
|
||||||||||||||||
foreign operations
|
(1,358)
|
(1,358)
|
181
|
(1,177)
|
||||||||||||
Actuarial gain arising during the year
|
74
|
74
|
(18)
|
56
|
||||||||||||
Prior service cost from plan
|
||||||||||||||||
amendment arising during the year
|
(1)
|
(1)
|
-
|
(1)
|
||||||||||||
Amounts reclassified from Accumulated
|
||||||||||||||||
other comprehensive loss:
|
||||||||||||||||
Amortization of net actuarial loss
|
224
|
224
|
(1)
|
(56)
|
(2)
|
168
|
||||||||||
Amortization of prior service costs
|
5
|
5
|
(1)
|
(1)
|
(2)
|
4
|
||||||||||
Settlement loss arising during the year
|
4
|
4
|
(1)
|
(1)
|
(2)
|
3
|
||||||||||
Other comprehensive income
|
249
|
306
|
555
|
105
|
660
|
|||||||||||
Balance at December 31, 2015
|
$
|
(202)
|
$
|
(2,204)
|
$
|
(2,406)
|
$
|
639
|
$
|
(1,767)
|
||||||
Other comprehensive income (loss)
|
||||||||||||||||
before reclassifications:
|
||||||||||||||||
Foreign exchange loss on translation of net
|
||||||||||||||||
investment in foreign operations
|
(310)
|
(310)
|
-
|
(310)
|
||||||||||||
Foreign exchange gain on translation of
|
||||||||||||||||
US dollar-denominated debt designated
|
||||||||||||||||
as a hedge of the net investment in
|
||||||||||||||||
foreign operations
|
265
|
265
|
(35)
|
230
|
||||||||||||
Actuarial loss arising during the year
|
(881)
|
(881)
|
235
|
(646)
|
||||||||||||
Amounts reclassified from Accumulated
|
||||||||||||||||
other comprehensive loss:
|
||||||||||||||||
Amortization of net actuarial loss
|
172
|
172
|
(1)
|
(47)
|
(2)
|
125
|
||||||||||
Amortization of prior service costs
|
5
|
5
|
(1)
|
(1)
|
(2)
|
4
|
||||||||||
Settlement loss arising during the year
|
10
|
10
|
(1)
|
(4)
|
(2)
|
6
|
||||||||||
Other comprehensive income (loss)
|
(45)
|
(694)
|
(739)
|
148
|
(591)
|
|||||||||||
Balance at December 31, 2016
|
$
|
(247)
|
$
|
(2,898)
|
$
|
(3,145)
|
$
|
787
|
$
|
(2,358)
|
||||||
(1)
|
Reclassified to Labor and fringe benefits in the Consolidated Statements of Income and included in components of net periodic benefit cost. See Note 12 - Pensions and other postretirement benefits.
|
|||||||||||||||
(2)
|
Included in Income tax recovery (expense) in the Consolidated Statements of Income.
|
In millions
|
Foreign
currency
translation
adjustments
|
Pension
and other
postretirement
benefit plans
|
Total
before
tax
|
Income tax
recovery
(expense)
|
Total
net of
tax
|
|||||||||||
Balance at December 31, 2016
|
$
|
(247)
|
$
|
(2,898)
|
$
|
(3,145)
|
$
|
787
|
$
|
(2,358)
|
||||||
Other comprehensive income (loss)
|
||||||||||||||||
before reclassifications:
|
||||||||||||||||
Foreign exchange loss on translation of net
|
||||||||||||||||
investment in foreign operations
|
(701)
|
(701)
|
-
|
(701)
|
||||||||||||
Foreign exchange gain on translation of
|
||||||||||||||||
US dollar-denominated debt designated
|
||||||||||||||||
as a hedge of the net investment in
|
||||||||||||||||
foreign operations
|
504
|
504
|
(67)
|
437
|
||||||||||||
Actuarial loss arising during the year
|
(408)
|
(408)
|
110
|
(298)
|
||||||||||||
Amounts reclassified from Accumulated
|
||||||||||||||||
other comprehensive loss:
|
||||||||||||||||
Amortization of net actuarial loss
|
179
|
179
|
(1)
|
(47)
|
(2)
|
132
|
||||||||||
Amortization of prior service costs
|
5
|
5
|
(1)
|
(1)
|
(2)
|
4
|
||||||||||
Other comprehensive loss
|
(197)
|
(224)
|
(421)
|
(5)
|
(426)
|
|||||||||||
Balance at December 31, 2017
|
$
|
(444)
|
$
|
(3,122)
|
$
|
(3,566)
|
$
|
782
|
$
|
(2,784)
|
||||||
(1)
|
Reclassified to Labor and fringe benefits in the Consolidated Statements of Income and included in components of net periodic benefit cost. See Note 12 - Pensions and other postretirement benefits.
|
|||||||||||||||
(2)
|
Included in Income tax recovery (expense) in the Consolidated Statements of Income.
|
In millions
|
Operating
|
Capital
|
||||
2018
|
$
|
139
|
$
|
52
|
||
2019
|
109
|
17
|
||||
2020
|
77
|
21
|
||||
2021
|
59
|
12
|
||||
2022
|
38
|
7
|
||||
2023 and thereafter
|
139
|
132
|
||||
Total
|
$
|
561
|
241
|
|||
Less:
|
Imputed interest on capital leases at rates ranging from approximately 1.0% to 6.8%
|
83
|
||||
Present value of minimum lease payments included in debt (Note 10)
|
$
|
158
|
In millions
|
2017
|
2016
|
2015
|
||||||
Beginning of year
|
$
|
183
|
$
|
191
|
$
|
203
|
|||
Accruals and other
|
38
|
24
|
17
|
||||||
Payments
|
(38)
|
(32)
|
(29)
|
||||||
End of year
|
$
|
183
|
$
|
183
|
$
|
191
|
|||
Current portion - End of year
|
$
|
40
|
$
|
39
|
$
|
27
|
In millions
|
2017
|
2016
|
2015
|
||||||
Beginning of year
|
$
|
118
|
$
|
105
|
$
|
95
|
|||
Accruals and other
|
46
|
51
|
22
|
||||||
Payments
|
(41)
|
(34)
|
(30)
|
||||||
Foreign exchange
|
(7)
|
(4)
|
18
|
||||||
End of year
|
$
|
116
|
$
|
118
|
$
|
105
|
|||
Current portion - End of year
|
$
|
25
|
$
|
37
|
$
|
24
|
In millions
|
2017
|
2016
|
2015
|
||||||
Beginning of year
|
$
|
86
|
$
|
110
|
$
|
114
|
|||
Accruals and other
|
16
|
6
|
81
|
||||||
Payments
|
(23)
|
(29)
|
(91)
|
||||||
Foreign exchange
|
(1)
|
(1)
|
6
|
||||||
End of year
|
$
|
78
|
$
|
86
|
$
|
110
|
|||
Current portion - End of year
|
$
|
57
|
$
|
50
|
$
|
51
|
·
|
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.
|
Level 1
Quoted prices for identical instruments in
active markets
|
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.
|
Level 2
Significant inputs (other than quoted prices
included in Level 1) are observable
|
The carrying amounts of Accounts receivable, Other current assets, and Accounts payable and other approximate fair value. The fair value of these financial instruments is not determined using quoted prices, but rather from market observable information. The fair value of derivative financial instruments used to manage the Company's exposure to foreign currency risk and included in Other current assets and Accounts payable and other 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 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. As at December 31, 2017, the Company's debt had a carrying amount of $10,828 million (2016 - $10,937 million) and a fair value of $12,164 million (2016 - $12,084 million).
|
|
Level 3
Significant inputs are unobservable
|
The carrying amounts of investments included in Intangible and other assets approximate fair value, with the exception of certain cost investments for which significant inputs are unobservable and fair value is estimated based on the Company's proportionate share of the underlying net assets. As at December 31, 2017, the Company's investments had a carrying amount of $73 million (2016 - $68 million) and a fair value of $225 million (2016 - $220 million).
|
·
|
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
|
·
|
the Company and its subsidiaries, not its regions, are subject to regulatory regimes in both Canada and the U.S.
|
In millions
|
Year ended December 31,
|
2017
|
2016
|
2015
|
|||||
Revenues
|
|||||||||
Canada
|
$
|
8,794
|
$
|
7,971
|
$
|
8,283
|
|||
U.S.
|
4,247
|
4,066
|
4,328
|
||||||
Total revenues
|
$
|
13,041
|
$
|
12,037
|
$
|
12,611
|
Net income
|
|||||||||
Canada
|
$
|
2,857
|
$
|
2,708
|
$
|
2,469
|
|||
U.S.
|
2,627
|
932
|
1,069
|
||||||
Total net income
|
$
|
5,484
|
$
|
3,640
|
$
|
3,538
|
|||
In millions
|
December 31,
|
2017
|
2016
|
||||||
Properties
|
|||||||||
Canada
|
$
|
18,305
|
$
|
17,445
|
|||||
U.S.
|
15,884
|
16,310
|
|||||||
Total properties
|
$
|
34,189
|
$
|
33,755
|
This report has been printed on 30% post-consumer recycled content. Additional copies of this report are available from: La version française du présent rapport est disponible à ladresse suivante : CN Public Affairs 935 de La Gauchetière Street West Montreal, Quebec H3B 2M9 Telephone: 1-888-888-5909 Email: contact@cn.ca Affaires publiques du CN 935, rue de La Gauchetière Ouest Montréal (Québec) H3B 2M9 Téléphone : 1 888 888-5909 Courriel : contact@cn.ca
935 de La Gauchetière Street West Montreal, Quebec H3B 2M9 www.cn.ca
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