Consolidated Statements of Income – unaudited

	Three months ended September 30				Nine months ended September 30
In millions, except per share data	2021		2020		2021		2020
Revenues(Note 4)	$	3,591	$	3,409	$	10,724	$	10,163
Operating expenses
Labor and fringe benefits	728		662		2,205		1,968
Purchased services and material	502		491		1,578		1,587
Fuel	350		262		1,094		849
Depreciation and amortization	405		391		1,215		1,187
Equipment rents	82		123		254		335
Casualty and other	99		114		381		385
Loss (recovery) on assets held for sale (Note 5)	—		—		(137)		486
Transaction-related costs (Note 3)	84		—		84		—
Total operating expenses	2,250		2,043		6,674		6,797
Operating income	1,341		1,366		4,050		3,366
Interest expense	(197)		(137)		(485)		(420)
Other components of net periodic benefit income (Note 6)	96		79		288		237
Merger termination fee (Note 3)	886		—		886		—
Other income (loss)	(27)		(1)		22		6
Income before income taxes	2,099		1,307		4,761		3,189
Income tax expense (Note 7)	(414)		(322)		(1,068)		(648)
Net income	$	1,685	$	985	$	3,693	$	2,541
Earnings per share (Note 8)
Basic	$	2.38	$	1.39	$	5.21	$	3.57
Diluted	$	2.37	$	1.38	$	5.19	$	3.56
Weighted-average number of shares (Note 8)
Basic	708.7		711.0		709.5		711.3
Diluted	710.4		712.8		711.3		713.0
Dividends declared per share	$	0.615	$	0.575	$	1.845	$	1.725

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Comprehensive Income – unaudited

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Net income	$	1,685	$	985	$	3,693	$	2,541
Other comprehensive income (loss) (Note 13)
Net gain (loss) on foreign currency translation	104		(102)		(34)		146
Net change in pension and other postretirement benefit plans (Note 6)	72		59		217		180
Other comprehensive income (loss) before income taxes	176		(43)		183		326
Income tax recovery (expense)	7		(36)		(57)		(23)
Other comprehensive income (loss)	183		(79)		126		303
Comprehensive income	$	1,868	$	906	$	3,819	$	2,844

See accompanying notes to unaudited consolidated financial statements.

10CN| 2021 Quarterly Review – Third Quarter

Consolidated Balance Sheets – unaudited

	September 30		December 31
In millions	2021		2020
Assets
Current assets
Cash and cash equivalents	$	2,194	$	569
Restricted cash and cash equivalents (Note 9)	493		531
Accounts receivable	1,210		1,054
Material and supplies	622		583
Other current assets (Note 10)	418		365
Total current assets	4,937		3,102
Properties	40,753		40,069
Operating lease right-of-use assets (Note 11)	444		435
Pension asset	1,197		777
Intangible assets, goodwill and other	431		421
Total assets	$	47,762	$	44,804
Liabilities and shareholders' equity
Current liabilities
Accounts payable and other	$	2,328	$	2,364
Current portion of long-term debt	1,224		910
Total current liabilities	3,552		3,274
Deferred income taxes	8,695		8,271
Other liabilities and deferred credits	451		534
Pension and other postretirement benefits	751		767
Long-term debt	12,332		11,996
Operating lease liabilities (Note 11)	321		311
Shareholders' equity
Common shares	3,727		3,698
Common shares in Share Trusts (Note 9)	(104)		(115)
Additional paid-in capital	381		379
Accumulated other comprehensive loss (Note 13)	(3,346)		(3,472)
Retained earnings	21,002		19,161
Total shareholders' equity	21,660		19,651
Total liabilities and shareholders' equity	$	47,762	$	44,804

See accompanying notes to unaudited consolidated financial statements.

CN| 2021 Quarterly Review – Third Quarter 11

Consolidated Statements of Changes in Shareholders' Equity – unaudited

	Number of common shares		Common shares			Common shares in Share Trusts			Additional paid-in capital			Accumulated other comprehensive loss			Retained earnings			Total shareholders' equity
In millions	Outstanding	Share Trusts
Balance at June 30, 2021	707.9	1.1		$	3,709		$	(97)		$	379		$	(3,529)		$	19,876		$	20,338
Net income																1,685			1,685
Stock options exercised	0.2			22						(3)									19
Settlement of equity settled awards	—	—					—			(13)						(18)			(31)
Stock-based compensation expense and other										18						(1)			17
Repurchase of common shares (Note 9)	(0.8)			(4)												(105)			(109)
Share purchases by Share Trusts	—	—					(7)												(7)
Other comprehensive income (Note 13)													183						183
Dividends																(435)			(435)
Balance at September 30, 2021	707.3	1.1		$	3,727		$	(104)		$	381		$	(3,346)		$	21,002		$	21,660

	Number of common shares		Common shares			Common shares in Share Trusts			Additional paid-in capital			Accumulated other comprehensive loss			Retained earnings			Total shareholders' equity
In millions	Outstanding	Share Trusts
Balance at December 31, 2020	710.3	1.3		$	3,698		$	(115)		$	379		$	(3,472)		$	19,161		$	19,651
Net income																3,693			3,693
Stock options exercised	0.5			48						(7)									41
Settlement of equity settled awards	0.3	(0.3)					32			(51)						(39)			(58)
Stock-based compensation expense and other										60						(2)			58
Repurchase of common shares (Note 9)	(3.7)			(19)												(504)			(523)
Share purchases by Share Trusts	(0.1)	0.1					(21)												(21)
Other comprehensive income (Note 13)													126						126
Dividends																(1,307)			(1,307)
Balance at September 30, 2021	707.3	1.1		$	3,727		$	(104)		$	381		$	(3,346)		$	21,002		$	21,660

See accompanying notes to unaudited consolidated financial statements.

12CN| 2021 Quarterly Review – Third Quarter

Consolidated Statements of Changes in Shareholders' Equity – unaudited

	Number of common shares		Common shares			Common shares in Share Trusts			Additional paid-in capital			Accumulated other comprehensive loss			Retained earnings			Total shareholders' equity
In millions	Outstanding	Share Trusts
Balance at June 30, 2020	709.8	1.4		$	3,667		$	(124)		$	357		$	(3,101)		$	17,976		$	18,775
Net income																985			985
Stock options exercised	0.3			25						(3)									22
Settlement of equity settled awards	0.1	(0.1)					6			(12)						(4)			(10)
Stock-based compensation expense and other										25						—			25
Share purchases by Share Trusts	—	—					3												3
Other comprehensive loss (Note 13)													(79)						(79)
Dividends																(408)			(408)
Balance at September 30, 2020	710.2	1.3		$	3,692		$	(115)		$	367		$	(3,180)		$	18,549		$	19,313

	Number of common shares		Common shares			Common shares in Share Trusts			Additional paid-in capital			Accumulated other comprehensive loss			Retained earnings			Total shareholders' equity
In millions	Outstanding	Share Trusts
Balance at December 31, 2019	712.3	1.8		$	3,650		$	(163)		$	403		$	(3,483)		$	17,634		$	18,041
Net income																2,541			2,541
Stock options exercised	0.7			59						(8)									51
Settlement of equity settled awards	0.6	(0.6)					56			(76)						(37)			(57)
Stock-based compensation expense and other										48						(2)			46
Repurchase of common shares (Note 9)	(3.3)			(17)												(362)			(379)
Share purchases by Share Trusts	(0.1)	0.1					(8)												(8)
Other comprehensive income (Note 13)													303						303
Dividends																(1,225)			(1,225)
Balance at September 30, 2020	710.2	1.3		$	3,692		$	(115)		$	367		$	(3,180)		$	18,549		$	19,313

See accompanying notes to unaudited consolidated financial statements.

CN| 2021 Quarterly Review – Third Quarter 13

Consolidated Statements of Cash Flows – unaudited

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Operating activities
Net income	$	1,685	$	985	$	3,693	$	2,541
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	405		391		1,215		1,187
Pension income and funding	(49)		(40)		(208)		(178)
Amortization of bridge financing and other fees (Note 3)	65		—		97		—
Deferred income taxes	108		93		357		372
Loss (recovery) on assets held for sale (Note 5)	—		—		(137)		486
Changes in operating assets and liabilities:
Accounts receivable	21		(96)		(157)		90
Material and supplies	17		28		(37)		—
Accounts payable and other	82		(208)		(140)		(500)
Other current assets	40		19		59		25
Other operating activities, net	84		48		143		134
Net cash provided by operating activities	2,458		1,220		4,885		4,157
Investing activities
Property additions	(836)		(691)		(1,977)		(2,008)
Advance for acquisition and other transaction-related costs (Note 3)	—		—		(908)		—
Refund of advance for acquisition (Note 3)	886		—		886		—
Acquisition, net of cash acquired	—		(8)		—		(8)
Other investing activities, net	(8)		(23)		(14)		(62)
Net cash provided by (used in) investing activities	42		(722)		(2,013)		(2,078)
Financing activities
Issuance of debt (Note 9)	—		—		403		1,757
Repayment of debt	(568)		(11)		(842)		(1,191)
Change in commercial paper, net (Note 9)	164		(160)		1,080		(839)
Bridge financing and other fees (Note 3)	(4)		—		(97)		—
Settlement of foreign exchange forward contracts on debt	25		(22)		1		39
Issuance of common shares for stock options exercised	19		22		41		51
Withholding taxes remitted on the net settlement of equity settled awards (Note 12)	(5)		(4)		(32)		(48)
Repurchase of common shares (Note 9)	(72)		—		(486)		(379)
Purchase of common shares for settlement of equity settled awards	(25)		(6)		(25)		(9)
Purchase of common shares by Share Trusts	(7)		3		(21)		(8)
Dividends paid	(435)		(408)		(1,307)		(1,225)
Net cash used in financing activities	(908)		(586)		(1,285)		(1,852)
Effect of foreign exchange fluctuations on cash, cash equivalents, restricted cash and restricted cash equivalents	1		—		—		1
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents	1,593		(88)		1,587		228
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of period	1,094		904		1,100		588
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period	$	2,687	$	816	$	2,687	$	816
Cash and cash equivalents, end of period	$	2,194	$	285	$	2,194	$	285
Restricted cash and cash equivalents, end of period	493		531		493		531
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of period	$	2,687	$	816	$	2,687	$	816
Supplemental cash flow information
Interest paid	$	(174)	$	(186)	$	(433)	$	(461)
Income taxes paid	$	(201)	$	(371)	$	(582)	$	(360)

See accompanying notes to unaudited consolidated financial statements.

14CN| 2021 Quarterly Review – Third Quarter

Notes to Unaudited Consolidated Financial Statements

1 – Basis of presentation

In these notes, the "Company" or "CN" refers to Canadian National Railway Company, together with its wholly-owned subsidiaries.

The accompanying unaudited Interim Consolidated Financial Statements, expressed in Canadian dollars, have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial statements. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Interim operating results are not necessarily indicative of the results that may be expected for the full year.

These unaudited Interim Consolidated Financial Statements have been prepared using accounting policies consistent with those used in preparing CN's 2020 Annual Consolidated Financial Statements and should be read in conjunction with such statements and Notes thereto.

2 – Recent accounting pronouncements

The following recent Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB) came into effect in 2020, was amended in 2021 and has not been adopted by the Company:

ASU 2020-04 Reference rate reform (Topic 848): Facilitation of the effects of reference rate reform on financial reporting and related amendments

London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity.

The ASU was effective starting on March 12, 2020, and is available to be adopted on a prospective basis no later than December 31, 2022, when the reference rate replacement activity is expected to be completed. The Company currently has outstanding loans referencing LIBOR totaling approximately US$580 million that would be affected by the provisions of this ASU. The Company also has a revolving credit facility that references LIBOR (See Note 9- Financing activities). The Company had no outstanding borrowings under this credit facility as at September 30, 2021. The Company is evaluating the effects that the adoption of the ASU will have on its Consolidated Financial Statements and related disclosures, and whether it will elect to apply any of the optional expedients and exceptions provided in the ASU.

Other recently issued ASUs required to be applied on or after September 30, 2021 have been evaluated by the Company and are not expected to have a significant impact on the Company's Consolidated Financial Statements.

3 – Acquisition

Termination of CN Kansas City Southern ("KCS") merger agreement

On September 15, 2021, Kansas City Southern (“KCS”) notified CN that it terminated the previously announced May 21, 2021 definitive merger agreement (the “CN Merger Agreement") under which CN would have acquired KCS for an implied total transaction value of US$33.6 billion, including the assumption of US$3.8 billion of debt.

On August 31, 2021, the Surface Transportation Board ("STB") rejected the joint motion by CN and KCS to approve a proposed voting trust agreement. On September 15, 2021, KCS and its Board of Directors announced that the revised acquisition proposal of September 12, 2021 from Canadian Pacific Railway Limited (“CP”) constituted a "Company Superior Proposal" as defined in the CN Merger Agreement. Consequently, KCS entered into a waiver letter agreement with CN under which KCS agreed to terminate the CN Merger Agreement and enter into a merger agreement with CP. As a result, CN received from KCS a merger termination fee of US$700 million ($886 million), recorded in Merger termination fee within the Company’s Consolidated Statements of Income and reflected in Operating activities within the Consolidated Statements of Cash Flows. In addition, KCS also refunded Brooklyn US Holdings, Inc. ("Holdco"), a wholly owned subsidiary of the Company, US$700 million ($886 million) that CN had previously paid as an advance to KCS of US$700 million ($845 million) in connection with KCS’s payment of the termination fee to CP under KCS’s original merger agreement with CP that was terminated on May 21, 2021. The refund received in the third quarter has been recorded in Transaction-related costs within the Consolidated Statements of Income and is reflected in

CN| 2021 Quarterly Review – Third Quarter 15

Notes to Unaudited Consolidated Financial Statements

Investing activities within the Consolidated Statements of Cash flows. The US$700 million ($845 million) advance had been recorded in Advance to KCS and other transaction costs within the Consolidated Balance Sheets in the second quarter of 2021 and has been expensed to Transaction-related costs within the Consolidated Statements of Income in the third quarter. This advance, along with $63 million of transaction-related costs paid in the second quarter, have been reflected in Investing activities within the Consolidated Statements of Cash flows.

The Company incurred $84 million of transaction-related costs for the nine months ended September 30, 2021 recorded in Transaction-related costs within the Consolidated Statements of Income. This includes $125 million of transaction-related costs, consisting of a $76 million expense for costs previously capitalized to Advance to KCS and other transaction costs within the Consolidated Balance Sheets in the second quarter of 2021 in accordance with the expected application of equity method accounting and $49 million of additional transaction-related costs incurred in the third quarter of 2021; partially offset by $41 million of income generated as a result of the applicable foreign exchange rates prevailing at the time of payment of the US dollar denominated advance to KCS and receipt of the related refund.

The Company also paid $97 million of bridge financing and other fees (See Note 9 - Financing activities) of which $65 million and $97 million were recorded in Interest expense within the Consolidated Statements of Income for the three and nine months ended September 30, 2021, respectively.

For the nine months ended September 30, 2021, after accounting for all direct and incremental expenses as well as income generated from the merger termination fee, CN recorded additional income of $705 million ($616 million after-tax), as a result of its strategic decision to bid for KCS.

4 – Revenues

The following table provides disaggregated information for revenues for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Freight revenues
Petroleum and chemicals	$	715	$	591	$	2,061	$	1,967
Metals and minerals	410		342		1,155		1,055
Forest products	425		421		1,305		1,267
Coal	169		118		453		401
Grain and fertilizers	510		608		1,832		1,867
Intermodal	1,061		992		3,066		2,715
Automotive	137		177		430		439
Total freight revenues	3,427		3,249		10,302		9,711
Other revenues	164		160		422		452
Total revenues (1)	$	3,591	$	3,409	$	10,724	$	10,163
Revenues by geographic area
Canada	$	2,433	$	2,346	$	7,428	$	7,064
United States (U.S.)	1,158		1,063		3,296		3,099
Total revenues (1)	$	3,591	$	3,409	$	10,724	$	10,163

(1)As at September 30, 2021, the Company had remaining performance obligations related to freight in-transit, for which revenues of $91 million ($102 million as at September 30, 2020) are expected to be recognized in the next period.

Contract liabilities

Contract liabilities represent consideration received from customers for which the related performance obligation has not been satisfied. Contract liabilities are recognized into revenues when or as the related performance obligation is satisfied. The Company includes contract liabilities within Accounts payable and other and Other liabilities and deferred credits on the Consolidated Balance Sheets.

16CN| 2021 Quarterly Review – Third Quarter

Notes to Unaudited Consolidated Financial Statements

The following table provides a reconciliation of the beginning and ending balances of contract liabilities for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Beginning balance	$	188	$	202	$	200	$	211
Revenue recognized included in the beginning balance	(72)		(3)		(150)		(16)
Increase due to consideration received, net of revenue recognized	3		1		69		5
Ending balance	$	119	$	200	$	119	$	200
Current portion - End of period	$	112	$	112	$	112	$	112

5 – Assets held for sale

In the second quarter of 2020, the Company committed to a plan and began to actively market for sale for on-going rail operations, certain non-core lines in Wisconsin, Michigan and Ontario ("non-core lines") representing approximately 850 miles and had met the criteria for classification of the related assets as assets held for sale. Accordingly, a $486 million loss ($363 million after-tax) was recorded to adjust the carrying amount of these track and roadway assets to their then estimated net selling price. The carrying amount of assets held for sale was included in Other current assets in the Consolidated Balance Sheets. See Note 10 - Other current assets.

On March 30, 2021, CN entered into an agreement with a short line operator, for the sale of the non-core lines plus an additional 50 miles of track and roadway assets not originally included within assets held for sale, subject to various conditions including regulatory authorization by the STB. The carrying amount of assets held for sale was adjusted in the first quarter of 2021 to $260 million ($90 million as at December 31, 2020), to reflect the contractual selling price net of estimated transaction costs and the additional track and roadway assets included as part of the agreement. The increase of $170 million included a $137 million recovery of the loss ($102 million after-tax) on the non-core lines and $33 million for the additional track and roadway assets.

As at September 30, 2021, the criteria for the classification of assets held for sale continued to be met, there was no change to the carrying amount of assets held for sale, and the transaction is still pending regulatory authorization by the STB.

6 – Pensions and other postretirement benefits

The Company has various retirement benefit plans under which substantially all of its employees are entitled to benefits at retirement age, generally based on compensation and length of service and/or contributions. Additional information relating to the retirement benefit plans is provided in Note 17 – Pensions and other postretirement benefits to the Company's 2020 Annual Consolidated Financial Statements.

The following table provides the components of net periodic benefit cost (income) for defined benefit pension and other postretirement benefit plans for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30								Nine months ended September 30
	Pensions				Other postretirement benefits				Pensions				Other postretirement benefits
In millions	2021		2020		2021		2020		2021		2020		2021		2020
Current service cost	$	52	$	44	$	—	$	—	$	157	$	132	$	1	$	1
Other components of net periodic benefit cost (income)
Interest cost	93		133		1		2		279		399		3		5
Expected return on plan assets	(262)		(273)		—		—		(787)		(821)		—		—
Amortization of prior service cost	—		1		—		—		—		2		—		—
Amortization of net actuarial loss (gain)	73		60		(1)		(2)		220		182		(3)		(4)
Total Other components of net periodic benefit cost (income)	(96)		(79)		—		—		(288)		(238)		—		1
Net periodic benefit cost (income) (1)	$	(44)	$	(35)	$	—	$	—	$	(131)	$	(106)	$	1	$	2

(1)In the second quarters of 2021 and 2020, the Company revised its estimate of full year net periodic benefit cost (income) for pensions to reflect updated plan demographic information.

CN| 2021 Quarterly Review – Third Quarter 17

Notes to Unaudited Consolidated Financial Statements

Pension contributions

Pension contributions for the nine months ended September 30, 2021 and 2020 of $95 million and $89 million, respectively, primarily represent contributions to the Company's main pension plan, the CN Pension Plan, for the current service cost as determined under the Company's applicable actuarial valuations for funding purposes. In 2021, the Company now expects to make total cash contributions of approximately $140 million for all of the Company's pension plans.

7 – Income taxes

Income tax expense was $414 million and $1,068 million for the three and nine months ended September 30, 2021, respectively, compared to $322 million and $648 million, respectively, for the same periods in 2020. Income tax expense for the nine months ended September 30, 2020 included a current income tax recovery of $141 million in the first quarter resulting from the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

On March 27, 2020, the U.S. government enacted the CARES Act, a tax-and-spending package aimed at providing additional stimulus to address the economic impact of the COVID-19 pandemic. The CARES Act corporate income tax measures allow for U.S. federal net operating losses (NOLs) arising in tax years 2018, 2019, and 2020 to be fully carried back to each of the five tax years preceding the tax year of the NOL. As a result of the CARES Act, the Company reclassified its 2019 deferred income tax asset of $213 million on the NOL that arose in 2019, to a current income tax receivable and recorded a current income tax recovery of $141 million in 2020 to reflect an amount recoverable at the higher U.S. federal corporate income tax rate of 35% applicable to pre-2018 tax years.

8 – Earnings per share

The following table provides a reconciliation between basic and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30				Nine months ended September 30
In millions, except per share data	2021		2020		2021		2020
Net income	$	1,685	$	985	$	3,693	$	2,541
Weighted-average basic shares outstanding	708.7		711.0		709.5		711.3
Dilutive effect of stock-based compensation	1.7		1.8		1.8		1.7
Weighted-average diluted shares outstanding	710.4		712.8		711.3		713.0
Basic earnings per share	$	2.38	$	1.39	$	5.21	$	3.57
Diluted earnings per share	$	2.37	$	1.38	$	5.19	$	3.56
Units excluded from the calculation as their inclusion would not have a dilutive effect
Stock options	0.4		0.2		0.6		0.9
Performance share units	0.1		0.2		0.1		0.3

9 – Financing activities

Shelf prospectus and registration statement

Under its current shelf prospectus with Canadian securities regulators and registration statement with the United States Securities and Exchange Commission (SEC), the Company may issue up to $6.0 billion of debt securities in the Canadian and U.S. capital markets over the 25 months from the filing date, February 11, 2020.

As at September 30, 2021, the remaining capacity of this shelf prospectus and registration statement was $5.2 billion. Access to the Canadian and U.S. capital markets under the shelf prospectus and registration statement is dependent on market conditions.

18CN| 2021 Quarterly Review – Third Quarter

Notes to Unaudited Consolidated Financial Statements

Notes and debentures

For the nine months ended September 30, 2021, the Company repaid the following:

•On September 15, 2021, early redemption of US$400 million ($506 million) 2.85% Notes due 2021; and

•On January 18, 2021, early redemption of $250 million 2.75% Notes due 2021.

For the nine months ended September 30, 2020, the Company issued and repaid the following:

•On May 1, 2020, issuance of US$600 million ($837 million) 2.45% Notes due 2050 in the U.S. capital markets, which resulted in net proceeds of $810 million; and

•On February 3, 2020, repayment of US$300 million ($397 million) 2.40% Notes due 2020 upon maturity.

Revolving credit facility

The Company has an unsecured revolving credit facility with a consortium of lenders which is available for general corporate purposes including backstopping the Company's commercial paper programs. On June 22, 2021, the Company upsized its existing revolving credit agreement from $2.0 billion to $2.5 billion and amended certain provisions. On March 31, 2021, the Company's revolving credit facility agreement had been amended to extend the term of the credit facility by approximately two years and to adopt a sustainability linked loan structure whereby its applicable margins are adjusted upon achievement of certain sustainability targets, starting in 2022. The amended credit facility of $2.5 billion consists of a $1.25 billion tranche maturing on March 31, 2024 and a $1.25 billion tranche maturing on March 31, 2026. Subject to the consent of the individual lenders, the Company has the option to increase the facility by an additional $500 million during its term and to request an extension once a year to maintain the tenors of three year and five year of the respective tranches. The credit facility provides for borrowings at various benchmark interest rates, such as LIBOR, plus applicable margins, based on CN's credit ratings and sustainability targets.

As at September 30, 2021 and December 31, 2020, the Company had no outstanding borrowings under this revolving credit facility and there were no draws during the nine months ended September 30, 2021.

The revolving credit facility agreement has one financial covenant, which limits debt as a percentage of total capitalization. The Company is in compliance as of September 30, 2021.

Credit facilities

During the second quarter of 2021, in connection with the proposed KCS transaction, the Company obtained commitments for a US$14.3 billion 364-day senior unsecured bridge loan facility and for a US$5 billion term loan credit agreement.

On September 15, 2021, upon termination of the CN Merger Agreement with KCS, the bridge loan facility and the term loan credit agreement were terminated. There were no draws during the nine months ended September 30, 2021.

Equipment loans

The Company had a non-revolving term loan credit facility for financing or refinancing the purchase of equipment, where US$300 million was available to be drawn upon through March 31, 2020 and US$310 million was available to be drawn upon through March 31, 2021.The equipment loans made under the non-revolving credit facility have a tenor of 20 years, bear interest at a variable rate, are repayable in equal quarterly installments, are prepayable at any time without penalty, and are secured by rolling stock.

On March 31, 2021, the Company issued a US$310 million ($389 million) equipment loan under this facility and repaid US$19 million ($24 million) in the first nine months of 2021.

As at September 30, 2021, the Company had outstanding borrowings of US$580 million ($736 million), at a weighted-average interest rate of 0.75% and had no further amount available under this non-revolving term loan facility. As at December 31, 2020, the Company had outstanding borrowings of US$289 million ($368 million), at an interest rate of 0.87% and had US$310 million available under this non-revolving term loan facility.

Commercial paper

The Company has a commercial paper program in Canada and in the U.S. Both programs are backstopped by the Company's revolving credit facility. The maximum aggregate principal amount of commercial paper that can be issued is $2 billion, or the US dollar equivalent, on a combined basis.

As at September 30, 2021 and December 31, 2020, the Company had total commercial paper borrowings of US$924 million ($1,171 million) and US$44 million ($56 million), respectively, at a weighted-average interest rate of 0.11% and 0.13%, respectively, presented in Current portion of long-term debt on the Consolidated Balance Sheets.

CN| 2021 Quarterly Review – Third Quarter 19

Notes to Unaudited Consolidated Financial Statements

The following table provides a summary of cash flows associated with the issuance and repayment of commercial paper for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Commercial paper with maturities less than 90 days
Issuance	$	1,688	$	1,656	$	4,983	$	4,475
Repayment	(1,618)		(1,578)		(4,104)		(4,806)
Change in commercial paper with maturities less than 90 days, net	$	70	$	78	$	879	$	(331)
Commercial paper with maturities of 90 days or greater
Issuance	$	215	$	37	$	353	$	704
Repayment	(121)		(275)		(152)		(1,212)
Change in commercial paper with maturities of 90 days or greater, net	$	94	$	(238)	$	201	$	(508)
Change in commercial paper, net	$	164	$	(160)	$	1,080	$	(839)

Accounts receivable securitization program

The Company has an agreement, expiring on February 1, 2023, to sell an undivided co-ownership interest in a revolving pool of accounts receivable to unrelated trusts for maximum cash proceeds of $450 million.

As at September 30, 2021, and December 31, 2020 the Company had no borrowings under the accounts receivable securitization program and there were no activities for the nine months ended September 30, 2021.

Bilateral letter of credit facilities

The Company has a series of committed and uncommitted bilateral letter of credit facility agreements. On March 31, 2021, the Company extended the maturity date of the committed bilateral letter of credit facility agreements to April 28, 2024. The agreements are held with various banks to support the Company's requirements to post letters of credit in the ordinary course of business. Under these agreements, the Company has the option from time to time to pledge collateral in the form of cash or cash equivalents, for a minimum term of one month, equal to at least the face value of the letters of credit issued.

As at September 30, 2021, the Company had outstanding letters of credit of $387 million ($421 million as at December 31, 2020) under the committed facilities from a total available amount of $491 million ($492 million as at December 31, 2020) and $165 million ($165 million as at December 31, 2020) under the uncommitted facilities.

As at September 30, 2021, included in Restricted cash and cash equivalents was $386 million ($424 million as at December 31, 2020) and $100 million ($100 million as at December 31, 2020) which were pledged as collateral under the committed and uncommitted bilateral letter of credit facilities, respectively.

Repurchase of common shares

The Company may repurchase its common shares pursuant to a Normal Course Issuer Bid (NCIB) at prevailing market prices plus brokerage fees, or such other prices as may be permitted by the Toronto Stock Exchange. After pausing its share repurchases at the end of March 2020 due to the economic circumstances resulting from the COVID-19 pandemic, the Company resumed its share repurchases in the first quarter of 2021 under the current NCIB. The current NCIB allows the Company to repurchase up to 14.0 million common shares between February 1, 2021 and January 31, 2022. In connection with the proposal to combine with KCS, the Company had suspended share repurchases. Since the CN Merger Agreement was terminated, the Company recommenced share repurchases under the current NCIB on September 20, 2021. As at September 30, 2021, the Company had repurchased 3.7 million common shares for $523 million under its current NCIB.

The Company repurchased 2.0 million common shares under its previous NCIB effective between February 1, 2020 and January 31, 2021, which allowed for the repurchase of up to 16.0 million common shares.

20CN| 2021 Quarterly Review – Third Quarter

Notes to Unaudited Consolidated Financial Statements

The following table provides the information related to the share repurchases for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30				Nine months ended September 30
In millions, except per share data	2021		2020		2021		2020
Number of common shares repurchased	0.8		—		3.7		3.3
Weighted-average price per share (1)	$	147.46	$	—	$	142.79	$	116.97
Amount of repurchase (1)	$	109	$	—	$	523	$	379

(1)Includes brokerage fees.

Share Trusts

The Company's Employee Benefit Plan Trusts ("Share Trusts") purchase CN common shares on the open market, which are used to deliver common shares under the Share Units Plan and the Employee Share Investment Plan (ESIP) (see Note 12 –Stock-based compensation). Shares purchased by the Share Trusts are retained until the Company instructs the trustee to transfer shares to participants of the Share Units Plan or the ESIP. Additional information relating to Share Trusts is provided in Note 18 –Share capital to the Company's 2020 Annual Consolidated Financial Statements.

10 – Other current assets

The following table provides a breakdown of Other current assets as at September 30, 2021 and December 31, 2020:

	September 30		December 31
In millions	2021		2020
Assets held for sale (Note 5)	$	260	$	90
Prepaid expenses	103		148
Income taxes receivable	8		85
Other	47		42
Total other current assets	$	418	$	365

11 – Leases

The Company engages in short and long-term leases for rolling stock including locomotives and freight cars, equipment, real estate and service contracts that contain embedded leases.

The following table provides the Company’s lease costs for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Finance lease cost
Amortization of right-of-use assets	$	2	$	3	$	9	$	10
Interest on lease liabilities	—		1		1		3
Total finance lease cost	2		4		10		13
Operating lease cost	34		39		97		110
Short-term lease cost	6		8		20		32
Variable lease cost (1)	15		17		43		47
Total lease cost (2)	$	57	$	68	$	170	$	202

(1)Mainly relates to leases of trucks for the Company's freight delivery service contracts.

(2)Includes lease costs from purchased services and material and equipment rents in the Consolidated Statements of Income.

CN| 2021 Quarterly Review – Third Quarter 21

Notes to Unaudited Consolidated Financial Statements

The following table provides the Company's lease right-of-use assets and lease liabilities, and their classification on the Consolidated Balance Sheets as at September 30, 2021 and December 31, 2020:

		September 30		December 31
In millions	Classification	2021		2020
Lease right-of-use assets
Finance leases	Properties	$	412	$	477
Operating leases	Operating lease right-of-use assets	444		435
Total lease right-of-use assets		$	856	$	912
Lease liabilities
Current
Finance leases	Current portion of long-term debt	$	8	$	70
Operating leases	Accounts payable and other	109		107
Noncurrent
Finance leases	Long-term debt	4		4
Operating leases	Operating lease liabilities	321		311
Total lease liabilities		$	442	$	492

The following table provides the remaining lease terms and discount rates for the Company's leases as at September 30, 2021 and December 31, 2020:

	September 30	December 31
	2021	2020
Weighted-average remaining lease term (years)
Finance leases	1.8	0.8
Operating leases	6.4	6.8
Weighted-average discount rate (%)
Finance leases	2.86	3.10
Operating leases	2.49	2.79

The following table provides additional information for the Company's leases for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from operating leases	$	34	$	34	$	96	$	109
Operating cash outflows from finance leases	$	—	$	1	$	1	$	3
Financing cash outflows from finance leases	$	51	$	6	$	60	$	34
Right-of-use assets obtained in exchange for lease liabilities
Operating lease	$	77	$	18	$	102	$	29
Finance lease	$	—	$	—	$	—	$	—

22CN| 2021 Quarterly Review – Third Quarter

Notes to Unaudited Consolidated Financial Statements

The following table provides the maturities of lease liabilities for the next five years and thereafter as at September 30, 2021:

In millions	Finance leases			Operating leases (1)
2021		$	7		$	33
2022		1			109
2023		1			86
2024		1			59
2025		1			48
2026 and thereafter		2			134
Total lease payments		13			469
Less: Imputed interest		1			39
Present value of lease payments		$	12		$	430

(1)Includes $70 million related to renewal options that are reasonably certain to be exercised.

12 – Stock-based compensation

The Company has various stock-based compensation plans for eligible employees. A description of the major plans is provided in Note 19 –Stock-based compensation to the Company's 2020 Annual Consolidated Financial Statements.

The following table provides the Company’s total stock-based compensation expense for awards under all employee plans, as well as the related tax benefit and excess tax benefit recognized in income, for the three and nine months ended September 30, 2021 and 2020:

	Three months ended September 30				Nine months ended September 30
In millions	2021		2020		2021		2020
Share Units Plan (1)	$	8	$	18	$	29	$	17
Voluntary Incentive Deferral Plan (VIDP) (2)	1		3		1		4
Stock option awards	3		2		9		8
Employee Share Investment Plan (ESIP)	5		5		14		18
Total stock-based compensation expense	$	17	$	28	$	53	$	47
Income tax impacts of stock-based compensation
Tax benefit recognized in income	$	4	$	7	$	12	$	11
Excess tax benefit recognized in income	$	—	$	1	$	9	$	15

(1)Performance share unit (PSU) awards are granted under the Share Units Plan.

(2)Deferred share unit (DSU) awards are granted under the Voluntary Incentive Deferral Plan.

CN| 2021 Quarterly Review – Third Quarter 23

Notes to Unaudited Consolidated Financial Statements

Share Units Plan

The following table provides a summary of the activity related to PSU awards for the nine months ended September 30, 2021:

	Equity settled
	PSUs-ROIC (1)				PSUs-TSR (2)
	Units	Weighted-average grant date fair value			Units	Weighted-average grant date fair value
	In millions				In millions
Outstanding at December 31, 2020	0.9		$	65.06	0.3		$	131.57
Granted	0.2		$	64.50	0.2		$	148.02
Settled (3)	(0.3)		$	51.28	(0.1)		$	105.26
Forfeited	—		$	68.49	—		$	145.29
Outstanding at September 30, 2021	0.8		$	69.82	0.4		$	144.39

(1)The grant date fair value of equity settled PSUs-ROIC granted in 2021 of $17 million is calculated using a lattice-based valuation model. As at September 30, 2021, total unrecognized compensation cost related to all outstanding awards was $16 million and is expected to be recognized over a weighted-average period of 1.7 years.

(2)The grant date fair value of equity settled PSUs-TSR granted in 2021 of $20 million is calculated using a Monte Carlo simulation model. As at September 30, 2021, total unrecognized compensation cost related to all outstanding awards was $17 million and is expected to be recognized over a weighted-average period of 1.7 years.

(3)Equity settled PSUs-ROIC granted in 2018 met the minimum share price condition for settlement and attained a performance vesting factor of 111%. Equity settled PSUs-TSR granted in 2018 attained a performance vesting factor of 99%. In the first quarter of 2021, these awards were settled, net of the remittance of the participants' withholding tax obligation of $27 million, by way of disbursement from the Share Trusts of 0.2 million common shares.

Voluntary Incentive Deferral Plan

The following table provides a summary of the activity related to DSU awards for the nine months ended September 30, 2021:

	Equity settled				Cash settled
	DSUs(1)				DSUs(2)
	Units	Weighted-average grant date fair value			Units
	In millions				In millions
Outstanding at December 31, 2020	0.6		$	83.47	0.1
Granted	—		$	137.85	—
Settled (3)	(0.1)		$	82.72	—
Outstanding at September 30, 2021 (4)	0.5		$	86.98	0.1

(1)The grant date fair value of equity settled DSUs granted is calculated using the Company's stock price on the grant date. As at September 30, 2021, the aggregate intrinsic value of all equity settled DSUs outstanding amounted to $78 million.

(2)The fair value of cash settled DSUs as at September 30, 2021 is based on the intrinsic value. As at September 30, 2021, the liability for all cash settled DSUs was $11 million ($14 million as at December 31, 2020). The closing stock price used to determine the liability was $146.78.

(3)For the nine months ended September 30, 2021, the shares purchased for the settlement of equity settled DSUs were net of the remittance of the participants' withholding tax obligation of $3 million.

(4)The total fair value of equity settled DSU awards vested, the number of units outstanding that were nonvested, unrecognized compensation cost and the remaining recognition period for cash and equity settled DSUs have not been quantified as they relate to a minimal number of units.

24CN| 2021 Quarterly Review – Third Quarter

Notes to Unaudited Consolidated Financial Statements

Stock option awards

The following table provides the activity of stock option awards for options outstanding and the weighted-average exercise price for the nine months ended September 30, 2021:

	Options outstanding
	Number of options	Weighted-average exercise price
	In millions
Outstanding at December 31, 2020 (1)	3.6	$	97.15
Granted (2)	0.7	$	133.56
Exercised	(0.5)	$	85.25
Forfeited	—	$	125.85
Outstanding at September 30, 2021 (1) (2) (3)	3.8	$	104.56
Exercisable at September 30, 2021 (1) (3)	2.0	$	89.35

(1)Stock options with a US dollar exercise price have been translated into Canadian dollars using the foreign exchange rate in effect at the balance sheet date.

(2)The grant date fair value of options granted in 2021 of $14 million ($20.50 per option) is calculated using the Black-Scholes option-pricing model. As at September 30, 2021, total unrecognized compensation cost related to all outstanding awards was $14 million and is expected to be recognized over a weighted-average period of 2.7 years.

(3)The weighted-average term to expiration of options outstanding was 6.7 years and the weighted-average term to expiration of exercisable stock options was 5.2 years. As at September 30, 2021, the aggregate intrinsic value of in-the-money stock options outstanding amounted to $160 million and the aggregate intrinsic value of stock options exercisable amounted to $114 million.

Employee Share Investment Plan

The following table provides a summary of the activity related to the ESIP for the nine months ended September 30, 2021:

	ESIP
	Number of shares	Weighted-average share price
	In millions
Unvested contributions, December 31, 2020	0.2	$	122.07
Company contributions	0.2	$	138.07
Forfeited	(0.1)	$	136.42
Vested (1)	(0.1)	$	116.17
Unvested contributions, September 30, 2021 (2)	0.2	$	138.21

(1)As at September 30, 2021 the total fair value of units purchased with Company contributions that vested in 2021 was $11 million.

(2)As at September 30, 2021, total unrecognized compensation cost related to all outstanding awards was $14 million and is expected to be recognized over the next twelve months.

Directors’ Deferred Share Unit Plan

The non-executive directors may elect to receive all or part of their director, committee member, Board Chair, and committee chair cash retainers either in cash, common shares of the Company purchased on the open market or Directors’ Deferred Share Units (DDSUs). They may also elect to receive their common share grant retainer in DDSUs. Each DDSU entitles the beneficiary thereof to receive upon resignation, retirement or death, one common share of the Company purchased on the open market, plus additional DDSUs reflecting dividend equivalents.

In the third quarter of 2021, eligible awards were settled net of the remittance of the directors' withholding tax obligation by purchasing $22 million worth of common shares on the open market. These settlements resulted in an excess tax benefit recognized in income of $4 million for the three and nine months ended September 30, 2021.

CN| 2021 Quarterly Review – Third Quarter 25

Notes to Unaudited Consolidated Financial Statements

13 – Accumulated other comprehensive loss

The following tables present the changes in accumulated other comprehensive loss by component for the three and nine months ended September 30, 2021 and 2020:

In millions	Foreign  currency  translation adjustments		Pension  and other postretirement benefit plans		Total  before tax			Income tax recovery (expense) (1)			Total  net of tax
Balance at June 30, 2021	$	(517)	$	(4,016)	$	(4,533)		$	1,004		$	(3,529)
Other comprehensive income (loss) before reclassifications:
Foreign exchange gain on translation of net investment in foreign operations	298				298			—			298
Foreign exchange loss on translation of US dollar-denominated debt designated as a hedge of the net investment in foreign operations (2)	(194)				(194)			26			(168)
Amounts reclassified from Accumulated other comprehensive loss:
Amortization of net actuarial loss			72		72		(3)	(19)		(4)	53
Amortization of prior service cost			—		—		(3)	—		(4)	—
Other comprehensive income	104		72		176			7			183
Balance at September 30, 2021	$	(413)	$	(3,944)	$	(4,357)		$	1,011		$	(3,346)

In millions	Foreign  currency  translation adjustments		Pension  and other postretirement benefit plans		Total  before tax			Income tax recovery (expense) (1)			Total  net of tax
Balance at December 31, 2020	$	(379)	$	(4,161)	$	(4,540)		$	1,068		$	(3,472)
Other comprehensive income (loss) before reclassifications:
Foreign exchange loss on translation of net investment in foreign operations	(39)				(39)			—			(39)
Foreign exchange gain on translation of US dollar-denominated debt designated as a hedge of the net investment in foreign operations (2)	5				5			—			5
Amounts reclassified from Accumulated other comprehensive loss:
Amortization of net actuarial loss			217		217		(3)	(57)		(4)	160
Amortization of prior service cost			—		—		(3)	—		(4)	—
Other comprehensive income (loss)	(34)		217		183			(57)			126
Balance at September 30, 2021	$	(413)	$	(3,944)	$	(4,357)		$	1,011		$	(3,346)

Footnotes to the tables follow on the next page.

26CN| 2021 Quarterly Review – Third Quarter

Notes to Unaudited Consolidated Financial Statements

In millions	Foreign  currency  translation adjustments		Pension  and other postretirement benefit plans		Total  before tax			Income tax recovery (expense)(1)			Total  net of tax
Balance at June 30, 2020	$	(49)	$	(4,200)	$	(4,249)		$	1,148		$	(3,101)
Other comprehensive income (loss) before reclassifications:
Foreign exchange loss on translation of net investment in foreign operations	(255)				(255)			—			(255)
Foreign exchange gain on translation of US dollar-denominated debt designated as a hedge of the net investment in foreign operations (2)	153				153			(20)			133
Amounts reclassified from Accumulated other comprehensive loss:
Amortization of net actuarial loss			58		58		(3)	(15)		(4)	43
Amortization of prior service cost			1		1		(3)	(1)		(4)	—
Other comprehensive income (loss)	(102)		59		(43)			(36)			(79)
Balance at September 30, 2020	$	(151)	$	(4,141)	$	(4,292)		$	1,112		$	(3,180)

In millions	Foreign  currency  translation adjustments		Pension  and other postretirement benefit plans		Total  before tax			Income tax recovery (expense)(1)			Total  net of tax
Balance at December 31, 2019	$	(297)	$	(4,321)	$	(4,618)		$	1,135		$	(3,483)
Other comprehensive income (loss) before reclassifications:
Foreign exchange gain on translation of net investment in foreign operations	335				335			—			335
Foreign exchange loss on translation of US dollar-denominated debt designated as a hedge of the net investment in foreign operations (2)	(189)				(189)			25			(164)
Amounts reclassified from Accumulated other comprehensive loss:
Amortization of net actuarial loss			178		178		(3)	(47)		(4)	131
Amortization of prior service cost			2		2		(3)	(1)		(4)	1
Other comprehensive income (loss)	146		180		326			(23)			303
Balance at September 30, 2020	$	(151)	$	(4,141)	$	(4,292)		$	1,112		$	(3,180)

(1)The Company releases stranded tax effects from Accumulated other comprehensive loss to Net income upon the liquidation or termination of the related item.

(2)The Company designates US dollar-denominated debt of the parent company as a foreign currency hedge of its net investment in foreign operations. Accordingly, from the dates of designation, foreign exchange gains and losses on translation of the Company's US dollar-denominated debt are recorded in Accumulated other comprehensive loss, which minimizes the volatility of earnings resulting from the conversion of US dollar-denominated debt into Canadian dollars.

(3)Reclassified to Other components of net periodic benefit income in the Consolidated Statements of Income and included in net periodic benefit cost. See Note 6 - Pensions and other postretirement benefits.

(4)Included in Income tax expense in the Consolidated Statements of Income.

CN| 2021 Quarterly Review – Third Quarter 27

Notes to Unaudited Consolidated Financial Statements

14 – Major commitments and contingencies

Purchase commitments

As at September 30, 2021, the Company had fixed and variable commitments to purchase information technology services and licenses, wheels, rail, locomotives, engineering services, railroad cars, rail ties as well as other equipment and services with a total estimated cost of $1,510 million. Costs of variable commitments were estimated using forecasted prices and volumes.

Contingencies

In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party personal injuries, occupational disease and property damage, arising out of harm to individuals or property allegedly caused by, but not limited to, derailments or other accidents.

As at September 30, 2021, the Company had aggregate reserves for personal injury and other claims of $333 million, of which $79 million was recorded as a current liability ($347 million as at December 31, 2020, of which $109 million was recorded as a current liability).

Although the Company considers such provisions to be adequate for all its outstanding and pending claims, the final outcome with respect to actions outstanding or pending as at September 30, 2021, or with respect to future claims, cannot be reasonably determined. When establishing provisions for contingent liabilities the Company considers, where a probable loss estimate cannot be made with reasonable certainty, a range of potential probable losses for each such matter, and records the amount it considers the most reasonable estimate within the range. However, when no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. For matters where a loss is reasonably possible but not probable, a range of potential losses cannot be estimated due to various factors which may include the limited availability of facts, the lack of demand for specific damages and the fact that proceedings were at an early stage. Based on information currently available, the Company believes that the eventual outcome of the actions against the Company will not, individually or in the aggregate, have a material adverse effect on the Company's financial position. However, due to the inherent inability to predict with certainty unforeseeable future developments, there can be no assurance that the ultimate resolution of these actions will not have a material adverse effect on the Company's results of operations, financial position or liquidity.

Environmental matters

A description of the Company's environmental matters is provided in Note 21 – Major commitments and contingencies to the Company's 2020 Annual Consolidated Financial Statements.

The Company's provision for specific environmental sites is undiscounted and includes costs for remediation and restoration of sites, as well as monitoring costs. Costs related to any unknown existing or future contamination will be accrued in the period in which they become probable and reasonably estimable.

As at September 30, 2021, the Company had aggregate accruals for environmental costs of $61 million, of which $37 million was recorded as a current liability ($59 million as at December 31, 2020, of which $46 million was recorded as a current liability).

The Company anticipates that the majority of the liability at September 30, 2021 will be paid out over the next five years. Based on the information currently available, the Company considers its accruals to be adequate.

Guarantees and indemnifications

A description of the Company's guarantees and indemnifications is provided in Note 21 – Major commitments and contingencies to the Company's 2020 Annual Consolidated Financial Statements.

As at September 30, 2021, the Company had outstanding letters of credit of $387 million ($421 million as at December 31, 2020) under the committed bilateral letter of credit facilities and $165 million ($165 million as at December 31, 2020) under the uncommitted bilateral letter of credit facilities, and surety and other bonds of $145 million ($168 million as at December 31, 2020), all issued by financial institutions with investment grade credit ratings to third parties to indemnify them in the event the Company does not perform its contractual obligations.

As at September 30, 2021, the maximum potential liability under these guarantee instruments was $697 million ($754 million as at December 31, 2020), of which $654 million ($688 million as at December 31, 2020) related to other employee benefit liabilities and workers' compensation and $43 million ($66 million as at December 31, 2020) related to other liabilities. The guarantee instruments expire at various dates between 2021 and 2025.

As at September 30, 2021, the Company had not recorded a liability with respect to guarantees and indemnifications as the Company did not expect to make any payments under its guarantees and indemnifications.

28CN| 2021 Quarterly Review – Third Quarter

Notes to Unaudited Consolidated Financial Statements

15 – Financial instruments

Derivative financial instruments

The Company uses derivative financial instruments from time to time in the management of its foreign currency and interest rate exposures. The Company has limited involvement with derivative financial instruments in the management of its risks and does not hold or issue them for trading or speculative purposes. As at September 30, 2021, the Company had outstanding foreign exchange forward contracts with a notional value of US$1,879 million (US$397 million as at December 31, 2020). Changes in the fair value of foreign exchange forward contracts, resulting from changes in foreign exchange rates, are recognized in Other income in the Consolidated Statements of Income as they occur.

For the three and nine months ended September 30, 2021, the Company recorded gains of $28 million and $2 million, respectively, related to foreign exchange forward contracts compared to a loss of $30 million and a gain of $36 million, respectively, for the same periods in 2020. These gains and losses were largely offset by the re-measurement of US dollar-denominated monetary assets and liabilities recorded in Other income.

As at September 30, 2021, the fair value of outstanding foreign exchange forward contracts included in Other current assets and Accounts payable and other was $10 million and $2 million, respectively ($nil and $18 million, respectively, as at December 31, 2020).

Fair value of financial instruments

The financial instruments that the Company measures at fair value on a recurring basis in periods subsequent to initial recognition are categorized into the following levels of the fair value hierarchy based on the degree to which inputs are observable:

•Level 1: Inputs are quoted prices for identical instruments in active markets

•Level 2: Significant inputs (other than quoted prices included in Level 1) are observable

•Level 3: Significant inputs are unobservable

The carrying amounts of Cash and cash equivalents and Restricted cash and cash equivalents approximate fair value. These financial instruments include highly liquid investments purchased three months or less from maturity, for which the fair value is determined by reference to quoted prices in active markets.

The carrying amounts of Accounts receivable, Other current assets and Accounts payable and other approximate fair value due to their short maturity, unless otherwise specified. The fair value of derivative financial instruments, included in Other current assets and Accounts payable and other is classified as Level 2 and is used to manage the Company's exposure to foreign currency risk. The fair value is measured by discounting future cash flows using a discount rate derived from market data for financial instruments subject to similar risks and maturities.

The carrying amount of the Company's debt does not approximate fair value. The fair value is estimated based on quoted market prices for the same or similar debt instruments, as well as discounted cash flows using current interest rates for debt with similar terms, company rating, and remaining maturity. The Company classifies debt as Level 2. As at September 30, 2021, the Company's debt, excluding finance leases, had a carrying amount of $13,544 million ($12,832 million as at December 31, 2020) and a fair value of $15,434 million ($16,046 million as at December 31, 2020).

CN| 2021 Quarterly Review – Third Quarter 29