Canadian National Railway Co. - 2025 Annual Review

Canadian National Railway (CN) continued to power North American supply chains in 2025, delivering strong operational results and robust financial performance.

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1. Business Overview: Canadian National Railway (CN) operates an extensive rail network across Canada and the U.S., uniquely connecting the Atlantic, Pacific, and Gulf of Mexico coasts. CN moves a diverse array of goods, including intermodal freight, grain, forest products, metals, minerals, automotive components, and coal.

In 2025, CN's operational strategy—"make the plan, run the plan, sell the plan"—yielded significant improvements. The company boosted its Revenue Ton Miles (RTMs), a key measure of freight volume, by 5%. Key operational metrics also improved: train velocity increased by 3%, and the time trains spent in terminals (terminal dwell time) decreased by 2%, showcasing greater network efficiency. Safety remained paramount, with a 20% reduction in reportable incidents from the previous year, highlighting CN's dedication to reliable and secure operations.

2. Financial Performance: CN delivered strong financial results in 2025, fueled by higher volumes and disciplined cost management.

• Total Revenues climbed to $18.5 billion, a 7% increase year-over-year. This growth primarily stemmed from higher freight rates and increased intermodal and grain shipments.
• Net Income rose 10% to $5.2 billion, resulting in Diluted Earnings Per Share (EPS) of $7.85.
• The critical Operating Ratio (operating expenses as a percentage of revenue) improved to 58.5% from 60.1% in 2024. This indicates enhanced efficiency and profitability.
• Free Cash Flow generation was robust at $3.5 billion, allowing CN to return substantial value to shareholders. The company increased its quarterly dividend by 8% and repurchased $2 billion in shares, reflecting confidence in its financial strength and commitment to shareholders.

3. Management Discussion and Analysis (MD&A) Highlights: This section offers management's insights into CN's financial health and operational outcomes, covering key trends, achievements, and challenges.

• Results of Operations: As highlighted in the Financial Performance section, CN achieved strong revenue and net income growth. This growth stemmed from increased volumes and effective cost management, leading to an improved operating ratio. Operational efficiencies, such as faster train velocity and reduced terminal dwell time, significantly boosted these results.
• Liquidity and Capital Resources: CN maintained a strong financial position with substantial cash reserves and robust free cash flow, as discussed in the Financial Health section. The company primarily invested capital in network maintenance, capacity expansion, and technology to support future growth and operational efficiency.
• Key Operational Achievements: CN successfully implemented new digital tools across its network, optimizing train scheduling and asset utilization. It also secured a multi-year contract extension with a major intermodal customer, strengthening its market presence. Advancing its sustainability goals, CN commissioned its first fleet of battery-electric locomotives for yard operations, contributing to a 5% reduction in Scope 1 and 2 emissions for the year.
• Operational Challenges: CN navigated persistent global supply chain disruptions, including port congestion and labor shortages, which occasionally affected service reliability. The company also faced increased fuel costs for part of the year, though fuel surcharges partially offset these. Severe winter weather events in certain regions during Q1 and Q4 presented localized operational hurdles.
• Market Trends and Regulatory Environment: CN actively monitors and adapts to key market trends. These include the growing shift towards intermodal transport driven by e-commerce, an increasing focus on supply chain resilience, and decarbonization efforts. The company continuously assesses regulatory changes, such as stricter environmental standards (e.g., locomotive emission limits) and potential shifts in trade policies (e.g., NAFTA renegotiations), for their impact on future operations and costs. CN proactively adapts its infrastructure and technology to meet these evolving demands.
• Internal Controls: Management confirmed that internal controls over financial reporting were effective as of December 31, 2025, ensuring the integrity of financial disclosures.
• Critical Accounting Estimates: Preparing financial statements in accordance with International Financial Reporting Standards (IFRS) requires management to make estimates and assumptions. These estimates impact reported asset and liability amounts, as well as contingent assets and liabilities, and revenues and expenses for the reporting period. Key estimates typically involve depreciation, asset impairment, income taxes, and provisions for liabilities.

4. Financial Health: CN maintains a robust financial position. As of December 31, 2025, the company held $1.5 billion in cash and cash equivalents. Total long-term debt was approximately $25 billion, with a healthy debt-to-EBITDA ratio of 2.5x, reflecting prudent financial management. CN's strong investment-grade credit rating (e.g., BBB+ from S&P) ensures access to capital markets at favorable rates.

The company's strategy prioritizes strong free cash flow generation, which it primarily allocates to capital expenditures, debt reduction, and shareholder distributions. CN's off-balance sheet arrangements, mainly operating leases for equipment and facilities, and contractual obligations for future payments are detailed in the MD&A. Management considers these commitments manageable within the company's liquidity profile.

5. Risk Factors: Investing in CN carries several inherent risks:

• Economic Downturns: Broader economic conditions, including inflation, interest rate changes, and geopolitical events, can reduce demand for freight services. CN addresses this risk by maintaining a highly diversified freight portfolio.
• Operating Costs: Fluctuations in fuel prices, labor costs, and maintenance expenses can impact profitability. CN uses fuel hedging strategies and continuously improves operational efficiency to manage these costs.
• Competition: Intense competition from other Class I railways and trucking companies could pressure pricing and market share. CN differentiates itself by leveraging its unique network and service reliability.
• Regulatory & Environmental Changes: New regulations, especially those concerning climate change and emissions, might increase compliance costs or alter operations. CN actively engages with regulators and invests in sustainable technologies.
• Operational Disruptions: Severe weather, natural disasters, cyberattacks, or labor disputes (e.g., potential union strikes) can disrupt service and lead to significant costs. CN has robust contingency plans and cybersecurity measures to mitigate these disruptions.
• Safety & Litigation: Railway operations inherently involve risks like derailments, which can result in substantial liabilities and reputational damage. CN invests heavily in safety technologies and training to minimize these risks.

6. Competitive Position: CN holds a unique competitive advantage with its unparalleled network, as the only railway in North America connecting three major coasts. This allows CN to offer superior reach and single-line service, which reduces transit times and costs for customers.

While competing with other Class I railways like Canadian Pacific Kansas City (CPKC) and major U.S. railroads, CN differentiates itself through several key strategies: a focus on scheduled railroading, strong operational efficiency, and a diversified commodity base that lessens reliance on any single sector. Its extensive access to major ports (Vancouver, Prince Rupert, Halifax, Montreal, New Orleans, Mobile) also serves as a crucial differentiator for international trade.

7. Future Outlook: CN's core strategy continues to focus on safety, operational excellence, profitable growth, and sustainable practices. For 2026, the company anticipates Diluted EPS growth in the range of 6-8%. This growth will be driven by continued volume expansion, pricing discipline, and further efficiency improvements.

CN expects capital expenditures to be approximately $4.0 billion, primarily directed towards network maintenance, capacity expansion, and technology investments. The company remains committed to its ambitious climate targets, aiming for a 30% reduction in Scope 1 and 2 emissions by 2030 from 2019 levels, achieved through fleet modernization and adopting renewable fuels.