JP Morgan Case Study

This document is being provided for the exclusive use of CHIRANSHU KUMAR at GOVERNING COUNCIL OF
UNIV OF TORONT
North America Equity Research
23 February 2015
Initiation
Neutral
Canadian National Railway
CNR.TO, CNR CN
Initiating with a Neutral Rating. Premium Operator with

a Premium Price Tag
We are initiating coverage of Canadian National Railway (CNR) with a Neutral rating
and $88 December 2015 price target. In our view, a number of aspects about CNR are
best in class operating margins, network reach, service metrics, and ability to
interchange and move traffic around, rather than into, the congested Chicago gateway.
However, our end market analysis suggesting average to below average volume
growth in 2015, combined with a premium valuation given the historical CNR and
market multiples, are the primary drivers of our rating and price target. Fundamentally
we maintain a positive view on CNR's balanced volume mix, long-term leverage to
heavy Canadian crude, and potential for higher yields through a review of the bottom
of CNRs revenue book. Despite our preference for a lower valuation on CNR in
absolute and relative terms, we recognize the stock consistently traded at a lower P/E
based on actual forward earnings compared to estimates over the last several years,
which could suggest the market consistently underestimates CNR's earnings power.
A balanced mix with long-term options. The volume mix of Canadian National is
the most balanced of the Class I rails despite a period of consistent volume growth,
capped by the best in class 8% expansion in 2014. Our deep-dive into all end
markets of the rails confirmed CNR's favorable exposure to long-term growth trends
such as increasing production of Canadian oil sands. In addition, we expect CNR's
long reach and low cost will improve the economics of intermodal via greater inland
access and potential to bring previously empty containers back full to the port.
Price: C$87.68
Price Target: C$88.00
Airfreight and Surface

Transportation
Brian P. Ossenbeck, CFA
AC
(1-212) 622-1023
brian.p.ossenbeck@jpmorgan.com
Bloomberg JPMA OSSENBECK <GO>
Anahita Arora
(1-212) 622-9654
anahita.arora@jpmorgan.com
J.P. Morgan Securities LLC
Price Performance
90
80
C$
70
60
Feb-14
May-14
Aug-14
Nov-14
Feb-15
CNR.TO share price (C$)

S&P500 (rebased)
Abs
Rel
YTD
9.3%
6.8%
1m
8.3%
4.0%
3m
8.1%
5.3%
12m
41.8%
27.1%
Premium valuation for premier operator. The companys record of increasing

dividends, stable and improving operating performance and network efficiency,
combined with consistent pricing discipline all merit a premium valuation to the
group, in our view. In addition, structural earnings improvements also merit a
premium to the historical average of CNR. In our view, with CNR trading at 21x and
18x our 2015 and 2016 estimates and above its average premium to the broader
index (3.0x vs 1.0x), it fairly reflects CNR's network strengths and future growth.
Neutral. Our $88 December 2015 price target reflects an 18x multiple applied to our
2016E EPS. The target multiple reflects a 3.0x premium to the 15.0x historical
average; we believe a re-rating is appropriate considering the sustainable
improvements in CNR's profitability detailed in our return on equity component
analysis combined with visibility into longer-term growth potential.
Canadian National Railway Company (CNR.TO;CNR CN)

FYE Dec
2012A
2013A
2014A
EPS Recurring (C$)
Q1 (Mar)
0.59
0.61
0.66
Q2 (Jun)
0.75
0.81
1.03
Q3 (Sep)
0.76
0.86
1.04
Q4 (Dec)
0.71
0.76
1.03
FY
2.81
3.03
3.76
Bloomberg EPS FY (C$)
2.80
3.06
3.70
2015E
2016E
0.80
1.19
1.14
1.11
4.24
4.24
0.94
1.34
1.31
1.31
4.90
4.76
Source: Company data, Bloomberg, J.P. Morgan estimates.
Company Data
Price (C$)
Date Of Price
52-week Range (C$)
Market Cap (C$ mn)
Fiscal Year End
Shares O/S (mn)
Price Target (C$)
Price Target End Date
87.68
20 Feb 15
88.89-59.66
72,213.25
Dec
824
88.00
31-Dec-15
See page 26 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
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23 February 2015
Table of Contents
Investment Thesis ....................................................................3
Risks to Rating and Price Target ............................................4
Company Description ..............................................................5
CNR Investment Framework Summary ..................................6
Network Operations Review ....................................................7
CNR Operating Dashboard......................................................................................9
Peak Capacity Analysis .........................................................................................10
End Market Outlook................................................................13

Risks to Growth ....................................................................................................15
Potential Catalysts.................................................................................................16
Financial Outlook ...................................................................17

Income Statement..................................................................................................17
Balance Sheet and Cash Flow................................................................................18
Valuation .................................................................................20
Summary ..............................................................................................................20
Structure and Considerations .................................................................................20
Details on Valuation..............................................................................................21
Canadian National Railway Financial Models ......................23
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23 February 2015
Investment Thesis
Canadian National
Railway (CNR)
Neutral
Leveraging a unique network, with defensive capabilities when needed

CNR operates the only network that touches both coasts and the Gulf of Mexico
directly, making backhauling empty containers across the system more productive
with a greater number of potential stops before reaching Vancouver. Moreover, this
reach from Western Canada inland has also helped international intermodal volumes
grow. In addition, CNR's assets around Chicago facilitate interchanging with other
carriers outside and around the often congested gateway while a high
origination/termination ratio gives CNR more control of the traffic flow.
Tailwind from a weaker CAD/USD
CNR generates roughly 31% of revenues from global markets, mostly Asia, along
with another 33% from cross-border traffic to and from the U.S. All else equal a
weaker CAD/USD relationship benefits Canadian producers in oil, coal, potash, and
grain shipping into global markets priced in USD, lowering their effective cost base
and maintaining competitiveness in a volatile FX market. CNR net income benefits
from a weaker CAD/USD (effectively short USD) and we also believe some crossborder rail traffic will increase into the U.S. with the FX tailwind.
For further details on each

category of rail volumes
including sub-groups like
Canadian heavy crude, please
see our industry outlook
published this morning
Favorable crude oil exposure for the long term

CNR is well positioned in Western Canada, hauling crude by rail for oil sands
customers generally less sensitive to price fluctuations because of multi-decade asset
lives with a high degree of sunk costs. We favor heavy crudes for this inherent
production support but also for a natural demand pull to the Gulf of Mexico, a longterm source for cokers other than declining supply from Mexico and Venezuela.
Highest margin, balanced mix do not come cheap
The companys record of increasing dividends, stable and improving operating
performance and network efficiency, combined with consistent pricing discipline all
merit a premium valuation, in our view. We quantified and reviewed these factors as
part of our return on equity component analysis on page 21. However, while we
acknowledge the structural earnings improvements merit a premium to the historical
average, CNR also trades above its average premium to the broader index, which, in
our view, fairly reflects the network strengths and future growth potential.
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23 February 2015
Risks to Rating and Price Target

A weaker CAD/USD rate could
move some forest products
cross-border into the U.S.
Muted lumber leverage if U.S. single home starts rebound

During the last housing cycle, CNR generated nearly a quarter of consolidated
revenues from Forest Products based on proximity to lumber in the Pacific
Northwest and network reach to move far into the U.S. However, the destruction
wrought by the pine beetle on timber assets in Western Canada will cap the
shipments of lumber from the region should demand return, limiting the leverage
CNR once had to U.S. single family starts.
Active assessment of bottom tier customers could drive yields higher
In an environment of tight rail capacity, CNR is actively assessing contributions of
its lowest margin customers, which could still be good considering the companys
margin profile. Through a systematic evaluation of each account down to the
contribution margin per car, a string of renegotiated contracts could drive revenues
and EPS higher than what we presently include in our model.
Exposure to coal one of the lowest, hit from mine closure coming in 2015
In the dramatic decline from peak seaborne met coal prices during 2011, miners
made production cuts, shelved expansions and cut costs. However, financial leverage
and a longer than expected decline in prices triggered closures around the world,
including three on CNR's line in Western Canada. Despite having one of the lowest
coal exposures in the group, revenues are expected to be down in 2015.
For certain groups of

employees, a union strike is
often called off quickly by the
government citing the resulting
economic damage
High percentage of unionized employees can lead to disruptions

CNRs collective labor agreements typically run for several years with unionized
employees, which represent over 70% of the workforce. Although the two parties
typically begin negotiations well before the contracts expire, a strike or a lockout
remains a possibility until the final terms are ratified. Both CP and CNR had multiple
agreements expire at the end of 2014 with the same unions but encountered
difficulties with different groups in early 2015. CNR is working through negotiations
and potential strike with Unifor, which represents shop, clerical and intermodal
employees. Although management can deploy some non-union staff as replacements
in the event of a strike, the impact can still be damaging on CNR given the large
number of employees management cannot replace and deterioration in service.
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23 February 2015
Company Description
Canadian National Railway Company is headquartered in Montreal, Quebec in
Canada. The company was a Crown corporation, and hence, government owned
since being founded in 1918 until its privatization and subsequent public offering in
1995. The company transports a wide range of resources across a ~20,000 mile rail
network spanning three coasts: the Atlantic, the Pacific and the Gulf of Mexico.
Canadian National Railways rail network is the largest in Canada and the company
employs over 25,000 people, of which more than 18,000 are unionized.
The companys shares trade on the New York Stock Exchange (NYSE) under the
ticker CNI and on the Toronto Stock Exchange (TSX) under the ticker CNR, with a
current market cap of CAD $71B. CNRs revenues in 2014 were CAD $12.1 billion,
and can be divided into seven business units representing various commodity groups,
and the fastest growing group in 2014 was grain and fertilizers (16% of revenues),
and the largest was intermodal (23% of revenues). Geographically, in 2014, 17% of
revenues were attributable to United States (U.S.) domestic traffic, 33% transborder
traffic, 19% Canadian domestic traffic and 31% overseas traffic.
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23 February 2015
CNR Investment Framework Summary

Neutral: 0% upside
$88 December 2015 price target
In our view, the fundamental value drivers for any railroad are the operating network,
potential growth across all end markets, capacity to handle the growth, and threats to
network performance or risks to expected volume growth. Our multi-step framework
below walks through each driver in greater detail, including stock recommendation.
Network operations and capacity are the earnings engine of the railroad
The core of our framework rests on an analysis of each end market that generates
meaningful traffic for North American railroads; the full analysis is part of our
separate industry outlook. However, before layering on expected growth we evaluate
capacity and efficiency of the underlying operations.
CNR continues to set new peak

volumes, including in 2014
Operations consistent since
early impact and recovery from
2013/2014 winter
*CNR operations: steady* We believe no one metric accurately depicts the full
health and momentum of a railroad so we utilize several to assess capabilities,
efficiency, and capacity. See page 9 for full details, highlights include:
Capability: CNR the only network to reach two coasts and Gulf of Mexico
Efficiency: longtime leader of industry leading margins, continues improving
Capacity: more productive employees, more trains than the last peak
End market analysis indicates potential volume growth and mix
We leverage our comprehensive deep-dive into each end market to inform our CNR
growth forecasts. We also pay particular attention to volume mix in order to assess
potential need for additional investment and shifting margin profiles.
JPMe Industry traffic growth:

3-5% in 2015, 2-4% in 2016
JPM estimate for CNR: 3-4%
*CNRs volume growth: in line to below average* Our systematic analysis of

CNRs markets highlights negative comps in agriculture after an easy 1Q15 as well
as a drag from met coal mine closures working through inventories. Crude oil from
Canadian oil sands stands out from the group as well as sentiment. The end market
snapshot for CNR and industry comparison is found on page 14.
Neutral recommendation a balance of growth, risks, and valuation
Equally important to prospects for rail volume growth are the potential risks, which
can significantly impact earnings momentum, depending on the railroad.
*Shale oil risk: average* After the precipitous oil price drop in 2H14, we believe
the focus in 2015 will be on shale drilling activities such as crude by rail, frac sands
and other products. CNRs 2014E mix in this group was above peers, (see page 15).
*FX exposure: positive* CNR benefits from a weaker CAD/USD (net short), crossborder traffic into the U.S. for certain products becomes more attractive, see page 16.
We believe CNRs network is positioned well to maintain leading diversity,
disciplined to control costs and improve price, and has the capacity to target growth
in the strongest markets. However, we believe these trends are fairly reflected at
current valuations and await a more attractive entry point on CNR. See page 20 for
further details on valuation.
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23 February 2015
Network Operations Review

CNR is the only one to touch three coasts of North America
Canadian Nationals 20,000 route miles run across Canada and straight down
"middle America" to the Gulf of Mexico. In addition, the railroad has a significant
asset in the EJE line, which facilitates connections with other carriers around, instead
of in, Chicago. Note route miles represent a simplified measure of capacity; we use
track miles in the peak capacity analysis on page 10 that represent double/triple
tracks and other enhancements such as sidings.
CP's network runs south of
CNR's but does not have the
same extensive reach in the U.S.
Figure 1: Canadian National's network runs coast to coast in Canada and down to the Gulf
Source: Canadian National
Origination/Termination
CNR
CP
CSX
KSU
NSC
UNP
Average
70%
25%
65%
20%
60%
60%
50%
Source: Company Reports, JPM estimates
CNRs origination/termination ratio best in the group

All else equal, we favor rails that can control their own destiny by originating and
terminating a high percentage of traffic on their own network. This feature yields
operational and routing flexibility, slows inefficiencies of other rails from
encroaching into the network, and typically generates the maximum length of haul.
CNR's leading origination/termination ratio is in part a function of expansive
network reach, but also the 2009 purchase of the EJE railroad that helps bypass
Chicago for CNR's own routes, and interconnections outside the city, which faced
considerable congestion issues during the 2013/2014 winter storms.
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See Figure 9 for further details

on CNRs volume mix in the 2006
industry peak and 2009 trough

23 February 2015
CNR's network features the most balanced mix of traffic in the group
Canadian National's reach facilitates access to a wide range of freight opportunities
with a high degree of options and flexibility for delivery; as previously noted, CNR's
leading origination/termination ratio provides one measure of control on the network
and all else equal, more consistent and manageable service. During 2014, total rail
traffic growth was the best amongst Class Is, up 8% in part from new contracts/wins
in intermodal (+11%) and automotive (+3%) while another strong harvest boosted
agriculture (+17%) and crude by rail continued driving the broader chemicals &
petroleum category higher (+7%). The only two categories down YoY were forest
products (-3%) and metallic ores & metals (-3%).
Figure 2: CNR traffic mix by volume in 2014 remained well balanced
37% Intermodal
15% Metallic Ores & Metals
13% Chemicals & Petroleum
9%
Agricultural & Food Products
9%
Coal
7%
Forest Products
5%
Non-Metallic Minerals
4%
Motor Vehicles & Parts
1%
Other
Source: AAR
Note: North American railroads submit weekly traffic reports to the industry trade
group, the Association of American Railroads, utilizing Standard Transportation
Commodity Code (STCC) reporting, which facilitates comparability across all
railroads. Detailed revenue categories beyond intermodal, merchandise and coal are
not widely comparable given each railroad reports separate markets, which may or
may not be consistent with our peers or the rest of the industry.
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CNR Operating Dashboard

The six measures below provide a one page snapshot of operating efficiency and
approximate service levels (terminal dwell and train speed), employee productivity
and asset utilization (carloads per employee and cars online), while gross ton miles
(GTMs) per train mile and train hour disaggregate speed into proxies for train length
and overall network fluidity. See CNR specific comments below.
CNRs 2014 operating metrics

were a positive result, in our
view, considering tough winter
weather and 8% volume growth
Figure 3: Dwell up on weather, high traffic volumes

YoY Change (LHS)
24%
Figure 4: Network speed recovered well after 2014 winter
Dwell in hours (RHS)
18%
22
15%
20
10%
18
5%
16
0%
14
(5%)
12
(10%)
10
(15%)
YoY Change (LHS)
Speed in MPH (RHS)
30
29
28
12%
6%
0%
(6%)
27
26
25
24
(12%)
(18%)
(24%)
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
23
22
Jan-12
Jan-15
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Source: Company reports. Data through February 18, 2015
Source: Company reports, AAR. Data through February 18, 2015
Figure 5: Carloads per employee
Figure 6: Carloads and average cars online (in 000s)
Jan-15
70
150,000
65
140,000
1,400
60
130,000
1,300
55
120,000
1,200
50
110,000
1,100
45
100,000
1,000
40
90,000
Total Cars Online (LHS)
1,500
Total Carloads (RHS)
900
80,000
35
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q06
1Q14
800
1Q07
1Q08
1Q09
1Q10
Source: Company reports. Data through 4Q14
Source: Company reports. Data through 4Q14
Figure 7: GTM per train mile
Figure 8: GTM per train hour
7,500
180
7,300
170
7,100
160
6,900
150
6,700
1Q11
1Q12
1Q13
1Q14
140
6,500
130
6,300
120
6,100
110
5,900
100
5,700
90
5,500
2002
2003
2004
2005
2006
Source: Surface Transportation Board
2007
2008
2009
2010
2011
2012
2013
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Surface Transportation Board
Note: GTMs represent total weight hauled by the train including cars, locomotives, and revenue generating contents (commodity carloads, other freight)
9
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23 February 2015
Peak Capacity Analysis

After topping Class I growth in 2014, CNR now 17% above the 2006 peak
Canadian National first topped peak 2006 volumes back in 2011 followed by a string
of low-single digit growth rates capped by an 8% surge in 2014. The most notable
shift in mix from 2006 to present is the drop in forest products (-35%) as demand
from the U.S. housing market dried up, which was more than offset by the growth of
intermodal containers (+59%). As noted earlier, we believe the EJE acquisition 2009
helped improve network fluidity although we understand there was not an immediate
increase in volumes since CNR already handled the traffic from U.S. Steel.
Figure 9: CNR above peak with strong growth, EJE acquisition in 2009
Total carloads
6,000,000
5,000,000
Other
Motor Vehicles & Parts
4,000,000
Non-metallic Minerals
Coal
3,000,000
Agricultural & Food

Forest Products
2,000,000
Chemicals & Petroleum

Metallic Ores & Metals
1,000,000
Intermodal
2006
2009
2014
Source: AAR
CNR power and productivity up since 2006, positioned for further growth
We believe four things create capacity for a railroad power, people, productivity
and the physical plant (the 4Ps). More specifically, the efficient and optimized
interaction of these capacity factors produces better results than just purchasing
locomotives and overpowering every train, hiring an excess number of employees, or
double tracking every route mile.
In order to effectively compare current capacity with the last industry peak in 2006, we selected
three measurements we believe have a high degree of consistency over time to facilitate an
accurate comparison of capacity across the 4Ps. See
Figure 10 for a summary table of the differences between the three metrics followed
by further details and analysis.
10
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23 February 2015
Figure 10: CNRs network now higher powered, more productive

Summary of Capacity Measures
Locomotives
GTM / Employee (in mm)
GTM / track mile (in mm)
2006
2014
2,013
2,087
+/74
4%
17.0
18.1
1.1
7%
2006
2013
23.8
21.8
+/-
in %
in %
(2.0)
-8%
Source: Company reports and J.P. Morgan estimates.

Note: Latest available track miles are from 2013, GTMs and track miles available for U.S. based network only.
Number of locomotives (power): an indicator of the sheer ability to move

freight across the network, also includes those in road service and at switching
yards. We previously analyzed measures of train productivity in Figure 7 and
Figure 8, gross ton miles (GTM) per train mile and GTMs per train hour. CNRs
locomotives were up 3% YoY in 2014 and we expect ~4% growth through 2016.
Figure 11: CNR locomotive additions slated for growth, to surpass prior peak of 2006
Locomotives (LHS)
2,500
Locomotive Additions (LHS)
YoY % Growth (RHS)
8%
6%
2,000
4%
2%
1,500
0%
1,000
(2%)
(4%)
500
(6%)
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E*
(8%)
Source: Company reports and J.P. Morgan estimates for 2016 additions. Figure includes leased and owned locomotives.
GTMs per employee, average number of employees (people & productivity):

monitors efficiencies and a railroads ability to maintain them with a larger
workforce. We calculated freight moved per employee compared to the average
number of employees for the period. We opted for GTMs instead of cars switched
per yard hour for more accurate comparison over time as product mix shifts,
some of which would naturally require a higher degree of car switching.
11
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23 February 2015
Figure 12: Employee productivity gained steadily from 2009 trough to new peak in 2014
30,000
Average Employees (LHS)
6.0
GTM/Employee in mm (RHS)
28,000
5.5
26,000
5.0
24,000
22,000
4.5
20,000
4.0
18,000
3.5
16,000
3.0
14,000
2.5
12,000
10,000
2.0
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
Source: Company reports
Track miles include siding and

double tracking
GTM per track mile (physical plant): brings everything together by comparing
track miles, which reflects the full complement of network track including sidings
and double tracking, compared to densities across the entire network. In addition,
we split the track miles into high and low density brackets defined as above or
below 20mm GTMs/track mile. We believe this segmented view on density
provides a rough measure to gauge potential capacity improvements on existing
track miles with moderate plant investment compared to new infrastructure.
Figure 13: Densities consistently improving since the depth of the 2009 recession
Track miles
GTM/track mile (in mm)

Low Traffic (LHS)
12,000
High Traffic (LHS)
Density
26
24
10,000
22
8,000
20
6,000
18
4,000
16
2,000
14
2005
2006
2007
2008
2009
2010
Source: Surface Transportation Board. Note: represents track miles, GTMs in the U.S. only
12
2011
2012
2013
12
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23 February 2015
End Market Outlook

For details of our accompanying
top-down framework, refer to our
industry outlook
CNRs balance mix expected to yield in-line to slightly below average growth
Overall, we expect North American rail traffic growth of 3-5% in 2015 and 2-4% in
2016. Our forecasts are based on a combination of rigorous bottoms-up research of
every major commodity that moves by rail, and a top-down framework that accounts
for broader economic trends and competing transportation modes. One of the final
products of this exercise is shown in Figure 14, a snapshot of both the industry
outlook by freight category as well as further details on specific drivers for CNR.
The other is our forecast of total carload and intermodal unit volume growth for 2015
and 2016 (Figure 17), which we expect to average between 3-4% per year.
Highlights and further analysis
We also provide highlights of the best and most challenged end markets for CNR
below; please refer to our industry outlook for a comprehensive analysis of all end
markets by covered railroads. In addition, we also review one of the most topical
risks, energy exposure, along with one we believe goes largely unnoticed outside of a
few key freight categories FX volatility on international trade (page 16). Potential
catalysts are also reviewed in this section including the benefit of cross-border trade
with the U.S.
Crude oil share of volumes were

an estimated 2% in 2014
1) Best growth story = Crude oil: CNR's access to heavy Canadian oil sands
production should increase the carloads originating on the network as new
terminals finish ramping up or come online in 2015. Heavy crude oil is
increasingly moving to the U.S. Gulf Coast as a natural fit and alternate supply
source for imports from Mexico and Venezuela. CNR has the benefit of working
with integrated oil companies at origination and termination in the oil sands.
2) Biggest potential challenge = Agriculture: two consecutive bumper crops later
we expect after an easy 1Q15 comp, grain and other ag product volumes will
decline. Although CNR has less grain and more farm product exposure than CP,
the two sub-groups move together and we expect the secondary impact of a
normal grain harvest will still adversely impact CNRs and CPs volumes.
Figure 14: CNR volume growth forecasted at or below average based on end market outlook
Total carloads
7,000
6,000
5,000
3.8%
2.6%
2012
2013
3.7%
3.8%
8.4%
4,000
3,000
2,000
1,000
0
Petroleum and chemicals
Metals and Minerals
2014
Forest Products
2015E
Coal
Grain and Fertilizers
2016E
Intermodal
Automotive
Source: J.P. Morgan estimates, Company data.
13
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Figure 15: J.P. Morgan fundamental assessment of CNR end markets implies traffic growth at or slightly below industry average
North American Railroad Industry
Outlook
Average Mix
2014 Mix
2015-2016
Outlook
Favorable
46%
37%
Average
Coming off significant growth, in part from maket

share gain from an international contract win
Unfavorable
17%
9%
Negative
Met coal declining modestly after working through

inventories remaining after a Western Canada
mine closures and lower export coal interchanged
Neutral
9%
13%
Positive
Volumes building at terminals online in 2H14, long

haul possible to the Gulf Coast from oil sands
Unfavorable
8%
9%
Negative
Negative grain comps after an easy 1Q15, offset

depends on carryover/new crop year upside
Metals
Neutral
6%
15%
Average
Non-ferrous ore and metal shipments likely flat,

some volume risk from lower ferrous prices
Non-Metallic Minerals
Neutral
6%
5%
Positive
Growing frac sands franchise likely up in 1H15,

also a substantial shipper of Canadian potash
Favorable
4%
4%
Average
Reach to three coasts manages shifting origination

to Mexico, cross-border from Canada could bump
up with weaker C$ versus the U.S. dollar
Forest Products
Neutral
3%
7%
Negative
International intermodal backhaul potential and

weaker C$ help near term but the Western
Canadian forests face a long recovery
Other
Neutral
1%
1%
Average
No visible drivers to move category
Category
Intermodal
Coal
Chemicals & Petroleum
Agriculture
Automotive
Industry Mix by Outlook
25%
Trends, Themes, Catalysts
CNR Mix by Growth Potential
25%
18%
49%
26%
Favorable
57%
Neutral
Unfavorable
Source: AAR, J.P. Morgan estimates, Company data.
14
Positive
Average
Negative
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23 February 2015
Risks to Growth
Crude and sand exposure above group average, expected to increase in 2015
Carloads tied to hydraulic fracking span the entire shale basin infrastructure:
products generally classified as other including drill pipe, cement and aggregates,
well casings, clay and drilling mud materials; frac sand or other proppants; and crude
oil along with other natural gas liquids. CNR's growth in shale-related exposure
increased since the acquisition of the Wisconsin Central in 2003 to fill in a network
need, but ultimately yielded a robust frac sand franchise.
In addition, growing infrastructure and demand for heavy Canadian crude oil out of
the oil sands will also drive growth on CNR the rail ships very little shale oil.
Importantly, we view Canadian heavy crude as structurally better positioned than
shale oil (Bakken) and earlier in its development cycle. In addition, although frac
sand is tied to shale oil and gas production, new completion techniques maximize
production and recoveries using sometimes 2-3x more sand per well than just a few
years ago. However, E&P companies initial 2015 outlooks in recent weeks are
indicating fewer well completions, which all else equal leads to less sand demand.
CNR still expects to grow sand carloads YoY in 2015 but we expect the second half
of the year is at risk of turning in negative comps based on the JPM forward oil price
forecast and E&P well completion plans.
Figure 16: CNRs leverage above the group and growing long term
% of 2014 volume
CNR
CP
CSX
KSU
NSC
UNP
Average
Crude Oil
Frac Sand
Other
Total
2.3%
1.6%
1.0%
4.9%
3.0%
3.5%
6.5%
2.0%
1.0%
1.0%
4.0%
0.6%
1.4%
0.8%
2.8%
1.0%
3.0%
5.0%
1.5%
1.5%
1.8%
1.5%
2.5%
2.5%
4.4%
Source: Company reports and presentations, J.P. Morgan estimates
FX increases volatility of international trade and rail traffic trends in 2015

In our view, North American railroads are often over simplified as pure play
proxies for the U.S. economy given rail assets are at the heart of economic activity
and sales are typically priced in US$. Even broadening the definition to include all of
North America, we caution against following this heuristic especially in 2015, with
the US$ index at a ten-year high, the Fed expected to raise rates by year end 2015
(JPMe June 2015), and the Eurozone facing deflation. Our simple FX view suggests
trade flows will be more dynamic in 2015 relative to the last volume peak in North
America during 2006.
The amount of traffic exposed to stronger US$ for any given rail is largely unknown,
as US$ priced exports become more expensive with the greatest impact on volume
experienced where the U.S. is a high cost producer such as metallurgical coal.
Cheaper imports purchased with a stronger US$ can also disrupt domestic rail traffic,
through shorter length of haul from the ports.
15
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23 February 2015
CNRs split of 2014 revenues included 33% cross-border between the U.S. and
Canada along with 31% tied to international markets. Although we expect the crossborder volumes will be a net positive for CNR and CP with the lower C$ (see page
16), there are little details in the international revenue mix. We assume the vast
majority goes to the Asia Pacific region through West coast ports and expect the
weaker C$ vs. the US$ will help Canadian exporters by lowering their cost basis
relative to global commodities traded in US$. Although we do not have a good line
of sight into the net impact of shifting currencies, we identified the following areas to
monitor with direct exposure to export markets, imported products are much more
difficult to track. See below for further details of export commodities and crossborder trade worth monitoring in an environment of volatile FX and diverging global
economic growth.
For further details on each
carload category including subgroups like export coal, please
see our industry report and
outlook
Figure 17: CNR exports to watch in a strong US$ world, exposure to cross-border trade
Key Export Commodities
Grain
Metallurgical coal
Thermal Coal
Potash
Autos
Grain products
Forest products
Scrap steel
Soda Ash
Sulfur
Phosphates
Mexican steel
CNR
Canadian Cross-Border trade

Mexican Cross-Broder trade
CP
CSX
KSU
NSC
UNP
Source: J.P. Morgan estimates
Potential Catalysts
In strong US$ environment, Canadian rails have an edge
As noted in the prior section on FX, the relative cost structure and revenue base of
global commodity exporters in coal, oil, potash, and grain. The same impact
translates to both CP and CNR, which disclose positive sensitivities to a weaker
CAD/USD exchange rate. In addition, cross-border traffic is a potential third benefit
for CP and CNR at 30% and 33% of revenue, respectively. The companies do not
split the cross-border data into directional flows or net exposure but based on trade
data from the U.S. Census Bureau we determined the U.S. (ex-energy) was a net
exporter to Canada. All else equal we would expect a stronger US$ would slow
traffic flow into Canada on a net basis given the trade data. However, we believe
select activities exist for rails to ship cheaper Canadian goods into the U.S. will help
offset the broader headwind especially if CP or CNR can originate and deliver the
freight on their own line. Pulp and paper would be a prime example of a Canadian
product pulled south across the border for U.S. consumption.
Overall, we believe the Canadian rails at these FX levels can expect a modest
positive across these three areas and will monitor future traffic flow for any
indication of standout freight categories ramping up cross-border activity.
16
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23 February 2015
Financial Outlook
Income Statement
Coming down off a strong year, double digit EPS growth appears achievable
CNR had a solid year financially by just about any measure with volumes up 8% and
strong revenue growth as well. As contract wins lap in 2015 and the growth in frac
sands and crude oil increases at a slower rate, we expect CNR will continue to
maintain a balanced mix of price and volume; combined with the industry's highest
margins, we expect CNR will continue to grow EPS in the double digits over the
next two years. See the figure below for our estimated split of yearly revenue growth
(ex-other) into the three primary components: volume, mix and implied price.
CNR can drive further upside
through the multi-year process
of evaluating the bottom tier of
its book of business
Figure 18: CNR revenue growth easing as contract wins lap in 2015
YoY revenue change
YoY EPS change
18.0%
30.0%
16.0%
25.0%
14.0%
12.0%
20.0%
10.0%
8.0%
15.0%
6.0%
10.0%
4.0%
2.0%
5.0%
0.0%
(2.0%)
2012
Volume
2013
Mix Shift
2014
Implied Price
2015E
2016E
0.0%
EPS Growth YoY (RHS)
Source: J.P. Morgan estimates, excludes other revenue
No real OR target everyone else chasing CNR

Canadian National has been North America's best operating railroad as measured by
operating ratio (OR), with a commanding lead throughout most of the last 10 years.
As shown in Figure 19, CNR maintained OR while pursuing consistent pricing above
inflation and growing faster than GDP although CP is rapidly approaching CNR's
level of performance. As this occurs there might be some business that shifts back to
CP, or more legacy contracts going to CNR, but overall there appears to be only a
modest amount of overlap and outright competition between the two save grain in
Western Canada under recently expanded interswitching agreements.
17
UNIV OF TORONT
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23 February 2015
Figure 19: CP is forecasted to close the OR gap with CNR in 2015

95%
90%
85%
80%
75%
70%
65%
60%
55%
2005
2006
2007
2008
2009
2010
CNR
2011
2012
2013
2014
2015E
2016E
CP
Source: Bloomberg
Fuel surcharges add timing differences and some confusion

In our view, one reason not to use OR as the single benchmark for rail performance
is that falling fuel surcharges actually improve OR by removing revenue passed
through at zero margin (100% OR). CNRs fuel surcharge program is 20% tied to
WTI and 80% to on-highway diesel so there will be dislocations between the two and
CNRs fuel cost, but we expect the impact will be relatively minor.
A weaker C$ helps CNR and most customers
As noted earlier, we expect a weaker C$ versus the US$ will help drive more crossborder trade into the U.S. while also expanding & protecting margins of commodity
exporters with a heavy C$ cost base. CNR discloses the impact of FX on various line
items during the quarter (as does CP) and also provides net income sensitivity based
on the actual impact to CNR. Specifically for 2015, every $0.01 decline in the
Canadian dollar versus the U.S. dollar benchmarked to the prior year exchange rate
increases EPS by $0.02.
Balance Sheet and Cash Flow

Overall, we believe Class I railroads have limited options for how they allocate
capital beyond network maintenance, regulatory issues, select track expansions and
power additions. With capex running between 17-19% of revenues (ex-KSU) and an
OR below 60 at times, CNR maintains consistent growth in the dividend while also
keeping a share repurchase plan in place.
Solid balance sheet could fuel more buybacks at CNR
Canadian National maintains the second lowest leverage of any covered railroad
(behind UNP) at 1.5x gross debt to trailing EBITDA, providing a large amount of
potential capital for repurchases. Management maintains a regular program, subject
to limitations on the Toronto exchange, but has also publicly stated they are aiming
for a 35% payout ratio.
For consistency with the rest of the group, we ran sensitivities on the amount of CNR
shares the company could repurchase relative to the current shares outstanding under
differing leverage scenarios. In addition, to better reflect expected growth and
18
UNIV OF TORONT
23 February 2015
positive free cash flow from 2015 and 2016 operations, we also ran the same analysis
using consensus forecasts for those periods. For example, at the end of 2015 the new
trailing EBITDA rolls-forward and equals 2015 estimates, assuming growth hits the
target. Please see the full industry outlook for a comparison of all rails using the
same methodology.
Note the company has one of the largest amounts of share repurchase firepower
currently but this gap narrows in 2015 and 2016 as other railroads are expected to
continue to grow at a faster relative pace than CNR, which provides them with more
headroom for share buybacks. Figure 20 illustrates the potential power for CNR; our
estimate of actual purchases is included in Figure 27 and when combined with
dividends we expect returns of $5.7B over the course of 2015 and 2016, or 8% of
current market cap.
Figure 20: Canadian Nationals share buyback power fueled by low leverage
Shares Repurchased (% of Outstanding)

(1-212) 622-1023
TTM
10%
2015 Consensus
2016 Consensus
8%
6%
4%
2%
0%
1.6x
1.7x
1.8x
1.9x
2.0x
2.1x
2.2x
Total Debt to EBITDA

Source: J.P. Morgan estimates, Company data.
If bonus depreciation ends in 2015, expect an offset from lower PTC spend
Bonus depreciation has been around in some shape or form since 2008, with the last
iteration coming as part of the "extenders" signed toward the end of 2014.
Management expects the cash impact will be neutral in 2015 from the late adoption
of bonus depreciation assuming no further extensions. We completed a simple
analysis for each rail to better frame the potential impact should bonus depreciation
end during 2015 and deferred taxes revert to the average level experienced in 20002007. As expected, CP and CNR did not get the same benefit as the other U.S.centric rails and accordingly will not likely see the same reduction if and when the
program ends.
19
UNIV OF TORONT
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23 February 2015
Figure 21: Deferred taxes +$94mm/year on average with bonus depreciation or 4% of 2014 capex
$600
$500
Bonus
$400
Pre-Bonus
$300
$200
$100
$$(100)
$(200)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Company reports.
Valuation
Summary
We rate CNR Neutral with an $88 December 2015 price target, which reflects an
18x multiple applied to our 2016 EPS forecast of $4.90. Our target multiple utilizes a
3x premium to the 15x historical average; we believe a re-rating is appropriate
considering the sustainable improvements in CNR's profitability detailed in our ROE
component analysis combined with visibility into longer-term growth potential.
Structure and Considerations

We expect rising U.S. interest
rates will be a headwind on
railroad valuations; see industry
outlook here for further details
Our December 2015 price targets reflect a one year ahead P/E multiple applied to our
2016 EPS forecasts, which are primarily driven by previously covered factors
including: specific end market opportunities and potential risks, expected share
repurchases, as well as capacity and capability to efficiently sustain growth.
The framework we use for selecting a target P/E multiple considers several factors
including:
20
Long-term trends identified in end market analysis, beyond earnings projections

(i.e., a new project coming on the network in 2017 or 2018)
Changes to current trends beyond our forecast period such as the likelihood of
more Bakken crude traveling through pipelines and not railcars
Comparison to the stocks historical forward average and the actual multiple
paid assuming perfect hindsight (cheap or expensive vs. estimates)
Relative valuation amongst peers, historical average, and the broader market
Consideration of the trends of and components within return on equity related to

proven operation results and consistent shareholder value creation
UNIV OF TORONT
(1-212) 622-1023

23 February 2015
Details on Valuation
CNR has good options for growth ahead
Looking beyond our 2016E EPS used as a point estimate in our valuation, we believe
Canadian National's outlook is generally positive and supported by the balanced
nature of its earnings base and disciplined approach to evaluating the current book of
business. Although we do not expect some former growth areas to come back with
the same strength, such as forest products, prospective growth in areas such as
Canadian oil sands with multi-decade project lives are also equally compelling.
We believe the historical

tendency of the market to miss
railroad earnings momentum
generates more value for our
end market analysis
Stock historically trades cheap on forward estimates versus actual earnings

The resurgence in North American freight traffic following the financial crisis took
many by surprise, including the railroads themselves, which struggled through 2014
to maintain adequate staffing, power, and service levels. In our view, the disbelief in
a recovering economy and railroads earnings momentum is evident in how a stock
traded in hindsight on actual forward earnings versus estimates at the time; all else
equal, estimates that were too conservative made shares look too expensive.
As shown in Figure 22, this bias appeared well rooted in 2009 at the depths of the
recession as stocks were "cheap" by our metric but as the recovery began and CNR's
earnings and volumes recovered. One takeaway from the analysis is that while the
stock never really became expensive, it also became increasingly "cheap" in
hindsight (actual P/E < apparent P/E purchased) after finishing a strong year in
volume while remaining disciplined on pricing.
Figure 22: CNR traded cheap during the recovery and recently before delivering top-tier growth
3.0x
Expensive vs. Estimates
2.0x
1.0x
0.0x
-1.0x
-2.0x
Cheap vs. Estimates
-3.0x
3Q05
3Q06
3Q07
3Q08
3Q09
3Q10
3Q11
3Q12
3Q13
CNR (Cheap)/Expensive vs. Estimates

Source: Bloomberg
An above average P/E multiple merited by sustainable improvements in ROE

CNR currently trades at 20.7x and 18.4x consensus 2015 and 2016 P/E relative to the
stock's historical, one year average forward multiple of 15.0x. Overall, we believe
CNR should trade above its average historical forward P/E on 2016 earnings. In our
view, for a stock to have re-rated above its historical average we expect to see a
structural improvement in operating margins, asset utilization, minimal tax burden
and balanced growth with an appropriate capital structure. Although structural shifts
in underlying end markets (export coal) can also affect operating performance and
21
UNIV OF TORONT
23 February 2015

(1-212) 622-1023
asset utilization, the normal fluctuations of commodity freight traffic are already
reflected in our earnings forecasts and other valuation considerations. As shown in
Figure 23, CNRs return on equity components have all improved over the last
several years, reflecting strong operating results (operating margin and asset
turnover), prudent usage of the capital structure (equity multiplier and interest
expense rate) and tax efficient planning (tax retention rate); these factors justify a
premium to the stocks historical average, in our view.
Figure 23: CNRs components of ROE stabilized in 2012-2013, improved again last year
80%
30%
60%
25%
40%
20%
20%
15%
0%
10%
(20%)
5%
(40%)
2000
2001
2002
2003
2004
2005
2006
2007
2008
Operating Profit Margin
Asset Turnover
Equity Multiplier
Tax Retention Rate
2009
2010
2011
2012
2013
2014
0%
Interest Expense Rate

Return on Equity (RHS)
Source: Company data
Figure 24: Condensed comp sheet sorted by relative rankings

JPM
Company
Dec '15
2016 Trading Multiples
Target
Primary Growth
(2015 & 2016)
Potential Catalysts
Key Exposure
22.7x
Auto, cross-border,
heavy crude
Mexico energy reform,

low cost U.S. natural gas
Mexico
18.1x
22.0x
Domestic
Intermodal
Merchandise expands
profitably
Energy
14.7x
14.3x
16.5x
Intermodal,
Merchandise
3.5%
16.5x
16.7x
17.3x
Automotive/Mexico
Increased competition,
ethanol mandate, west
coast port recovery
West of
Mississippi
$88.00
0.3%
18.4x
17.9x
18.0x
Balanced mix
Cross-border activity on
weaker CAD/USD
Balanced mix
$107.00
(4.2%)
14.6x
16.0x
15.4x
Intermodal,
Merchandise
Falling U.S. met coal

exports, slowing network Export met coal
velocity post restart
Ticker
Rating
Target
Return
Consensus
JPM
P/E
KSU
OW
$148.00
26.9%
18.9x
17.9x
CP CN
OW
$290.00
21.8%
18.5x
CSX Corp
CSX
OW
$41.00
15.3%
Union Pacific Corp
UNP
$128.00
CNR CN
NSC
UW
Kansas City Southern
Canadian Pacific Railway
Norfolk Southern Corp
Source: J.P. Morgan estimates, Bloomberg. Note: price targets for CNR and CP shown in Canadian dollars
22
Group leading increase of Export thermal

locomotive power
coal
UNIV OF TORONT
23 February 2015

(1-212) 622-1023
Canadian National Railway Financial Models

Figure 25: Forecasted Income Statement for CNR
CAD$ millions, except EPS data
2015 Quarterly Estimates
Full Year
Full Year
Revenues
1Q15E
$ 2,857
2Q15E
$ 3,308
3Q15E
$ 3,256
4Q15E
$ 3,316
2015E
$ 12,737
1Q16E
$ 3,113
2Q16E
$ 3,653
3Q16E
$ 3,615
4Q16E
$ 3,645
2016E
14,025
Labor and Fringe Benefits

Purchased Services and Materials
Depreciation and Amortization
Equipment Rents
Fuel
Casualty and Other
Total Operating Expense
$
$
$
$
$
$
$
660
429
271
71
387
100
1,919
$
$
$
$
$
$
$
625
430
298
89
416
93
1,951
$
$
$
$
$
$
$
634
456
293
91
399
91
1,965
$
$
$
$
$
$
$
653
464
298
96
416
99
2,027
$
$
$
$
$
$
$
2,572
1,779
1,161
348
1,619
383
7,861
$
$
$
$
$
$
$
660
436
280
78
413
109
1,976
$
$
$
$
$
$
$
630
475
329
99
446
102
2,081
$
$
$
$
$
$
$
640
506
307
101
423
101
2,079
$
$
$
$
$
$
$
660
510
319
109
435
109
2,143
$
$
$
$
$
$
$
2,591
1,927
1,235
387
1,717
422
8,278
Operating Income
938
1,357
1,291
1,289
4,876
1,137
1,572
1,536
1,502
5,747
Interest Expense
Other Income (Loss)
Income before Taxes
$
$
$
(100) $
6 $
844 $
(416)
22
4,481
$
$
$
(103) $
5 $
1,039 $
Provision for (benefit from) taxes
236
1,255
Effective tax rate
28%
(104) $
6 $
1,258 $
352
28%
(105) $
6 $
1,191 $
333
28%
(106) $
6 $
1,188 $
333
28%
28%
291
28%
(108) $
5 $
1,469 $
411
28%
(106) $
5 $
1,435 $
402
28%
(107) $
5 $
1,400 $
392
(424)
20
5,342
1,496
28%
28%
Reported net income
608
906
858
856
3,227
748
1,058
1,033
1,008
3,847
Diluted EPS
Non-run rate items, net of tax
Continuing EPS
$
$
$
0.80
0.80
$
$
$
1.19
1.19
$
$
$
1.14
1.14
$
$
$
1.11
1.11
$
$
$
4.24
4.24
$
$
$
0.94
0.94
$
$
$
1.34
1.34
$
$
$
1.31
1.31
$
$
$
1.31
1.31
$
$
$
4.90
4.90
Dividend per share

WA shares outstanding - diluted
0.30
811.6
0.30
806.6
0.30
801.6
0.30 $
796.6
1.20
804.1
0.33
791.6
0.33
786.6
0.33
781.6
0.33
776.6
1.31
784.1
Key Financial Metrics

Revenue growth YoY
6.1%
6.2%
4.4%
3.4%
5.0%
8.9%
10.4%
11.0%
9.9%
10.1%
Revenue growth YoY (ex-other items)

Carload volumes
Mix shift on reported carloads
Estimated impact from price
7.5%
3.5%
0.2%
3.7%
9.2%
4.8%
0.6%
3.8%
6.6%
3.7%
0.2%
2.7%
5.0%
3.2%
-0.5%
2.4%
7.0%
3.8%
0.1%
3.1%
8.1%
4.4%
-0.4%
4.1%
7.1%
3.9%
0.0%
3.2%
8.5%
3.3%
-0.1%
5.3%
7.9%
3.1%
-0.4%
5.2%
7.9%
3.7%
-0.2%
4.4%
67%
59%
60%
61%
62%
63%
57%
58%
59%
59%
EPS growth YoY

Attributable to lower share count
21.0%
16.0%
9.6%
7.8%
12.9%
17.8%
12.1%
15.3%
17.3%
15.4%
0.3%
0.3%
0.3%
0.3%
1.4%
0.3%
0.3%
0.3%
0.3%
1.5%
FCF Margin
FCF to Net Income Conversion
21.1%
93%
19.2%
66%
18.8%
67%
19.5%
73%
19.6%
73%
23.8%
99%
12.0%
42%
19.9%
70%
19.3%
69%
18.5%
68%
FCF Return on Invested Capital

Return on invested capital
11%
12%
11%
17%
11%
16%
11%
16%
11%
15%
13%
14%
7%
19%
12%
18%
11%
18%
11%
17%
Operating Ratio
23
UNIV OF TORONT
23 February 2015

(1-212) 622-1023
Figure 26: Forecasted Balance Sheet for CNR

CAD$ millions, year-end 31 December
Full Year
Cash and Cash Equivalents

Accounts Receivable - Net
Materials and Supplies
Deferred Income Taxes
Other
Total Current Assets
1Q15E
$
472
$
800
$
307
$
163
$
588
$ 2,330
2Q15E
$
427
$
926
$
312
$
163
$
588
$ 2,416
3Q15E
$
359
$
912
$
314
$
163
$
588
$ 2,335
4Q15E
$
325
$
929
$
345
$
163
$
588
$ 2,350
Properties
Intangible and Other Assets
Total Assets
$ 28,814
$ 1,212
$ 32,356
$ 29,178
$ 1,212
$ 32,806
$ 29,569
$ 1,212
$ 33,116
Accounts payable and other

Current portion of long term debt
Total Current Liabilities
$
$
$
$
$
$
$
$
$
Deferred income taxes

Other liabilities and deferred credits
Long-term debt
Total Liabilities
$ 6,967
$ 1,354
$ 8,365
$ 18,918
Shareholders' equity
Total Liabilities & Shareholders' Equity
Key Credit & Leverage Metrics
Total Debt
Net Debt
Full Year
$
$
$
$
$
$
1Q16E
$
833
$
747
$
237
$
163
$
588
$ 2,568
2Q16E
$
305
$
877
$
395
$
163
$
588
$ 2,328
3Q16E
$
293
$
868
$
437
$
163
$
588
$ 2,348
4Q16E
$
447
$
875
$
364
$
163
$
588
$ 2,437
$
$
$
$
$
$
$ 29,966
$ 1,212
$ 33,528
$
$
$
29,966
1,212
33,528
$ 30,278
$ 1,212
$ 34,058
$ 30,643
$ 1,212
$ 34,183
$ 31,023
$ 1,212
$ 34,583
$ 31,396
$ 1,212
$ 35,045
$ 31,396
$
1,212
$ 35,045
$
$
$
1,946
544
2,490
$
$
$
1,946
544
2,490
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ 7,162
$ 1,354
$ 8,365
$ 19,371
$
$
$
$
7,162
1,354
8,365
19,371
$ 7,227
$ 1,354
$ 8,865
$ 19,887
$ 7,292
$ 1,354
$ 8,631
$ 19,694
$ 7,357
$ 1,354
$ 8,631
$ 19,798
$ 7,422
$ 1,354
$ 8,812
$ 19,975
$
7,422
$
1,354
$
8,812
$ 19,975
$ 13,438 $ 13,716 $ 13,948 $ 14,157 $

$ 32,356 $ 32,806 $ 33,116 $ 33,528 $
-0.4
-0.3
-0.4
-0.4
14,157
33,528
$ 14,171
$ 34,057
$ 14,489
$ 34,183
$ 14,784
$ 34,582
$ 15,070
$ 35,045
$ 15,070
$ 35,045
$
$
$
$
$
$
$
$
$
$
$
$
Net Debt/EBITDA
EBITDA/Interest expense
2015E
325
929
345
163
588
2,350
1,688
544
2,232
8,909
8,437
1,795
544
2,339
$ 7,032
$ 1,354
$ 8,365
$ 19,090
$
$
8,909
8,482
1.7x
12.1x
1.3x
15.8x
1,807
544
2,351
$ 7,097
$ 1,354
$ 8,365
$ 19,167
$
$
8,909
8,550
$
$
1.3x
15.0x
8,909
8,584
1.4x
14.9x
$
$
8,909
8,584
1.4x
14.5x
1,897
544
2,441
9,409
8,576
1.5x
13.8x
1,873
544
2,417
9,175
8,870
1.2x
17.6x
1,912
544
2,456
9,175
8,882
1.2x
17.3x
1,843
544
2,387
9,356
8,909
1.2x
17.0x
2016E
447
875
364
163
588
2,437
1,843
544
2,387
9,356
8,909
1.3x
16.5x
Figure 27: Forecasted Cash Flow Statement for CNR

CAD$ millions
Acquisitions/divestitures
Capital expenditures
Cash Flow from Investments
$
$
$
$
(571) $
(571) $
$
(662) $
(662) $
$
(684) $
(684) $
$
(696) $
(696) $
(2,613)
(2,613)
$
$
$
$
(591) $
(591) $
$
(694) $
(694) $
Net change in debt

Diviend payments
Share repurchases
Cash Flow from Financing
$
$
$
$
500
(243)
(440)
(183)
$
$
$
$
(242)
(440)
(682)
(240)
(440)
(680)
(239)
(440)
(679)
500
(965)
(1,760)
(2,225)
$
$
$
$
500
(259)
(475)
(234)
$
$
$
$
(234)
(257)
(475)
(966)
Net change in cash & equivalents
420
(45) $
(69) $
(33) $
273
508
(528) $
Free Cash Flow
604
637
612
646
2,498
741
438
Shareholder Capital Returned
683
682
680
679
2,725
734
732
24
3Q15E
$
913
$
293
$
65
$
25
$ 1,296
$
$
$
$
4Q15E
$
887
$
298
$
65
$
91
$ 1,342
$
$
$
$
$
$
$
$
$
$
$
$
$
2015E
3,412
1,161
260
279
5,111
Net income
Depreciation & amortization
Other
Change in working capital
Cash Flow from Operations
2Q15E
$
960
$
298
$
65
$
(25)
$ 1,298
Full Year
1Q15E
$
651
$
271
$
65
$
187
$ 1,175
1Q16E
$
748
$
280
$
65
$
240
$ 1,333
2Q16E
$ 1,050
$
329
$
65
$ (312)
$ 1,132
3Q16E
$ 1,026
$
307
$
65
$
8
$ 1,405
Full Year
$
$
$
$
$
2016E
3,839
1,235
260
(69)
5,265
$
(687) $
(687) $
$
(692) $
(692) $
(2,665)
(2,665)
(256)
(475)
(731)
181
(254)
(475)
(548)
$
$
$
$
447
(1,026)
(1,900)
(2,479)
(12) $
154
122
719
702
2,600
731
729
2,926
$
$
$
$
4Q16E
$ 1,015
$
319
$
65
$
(4)
$ 1,395
$
$
$
$
UNIV OF TORONT
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23 February 2015
Canadian National Railway: Summary of Financials

Income Statement - Annual
Revenues
Total operating expenses
Operating income
Operating ratio
Margin improvement (bps)
Interest expense
Other income - net
Total other income
Income tax expense
Effective tax rate
Net income - continuing
Net income - GAAP
Diluted shares outstanding
EPS - continuing
EPS - GAAP
Volume growth
Yield growth
D&A
EBITDA
Balance Sheet and Cash Flow Data
Cash and cash equivalents
Accounts receivable
Materials and supplies
Other current assets
Current assets
PP&E
Other assets
Total assets
FY14A
12,134
(7,510)
4,624
100.0%
0
(371)
27
(344)
(1,185)
27.7%
3,095
3,167
824
3.76
3.85
8.4%
7.2%
(1,050)
5,674
FY14A
52
928
335
751
2,066
28,514
1,212
31,792
FY15E
12,737
(7,861)
4,876
100.0%
0
(416)
207
(209)
(1,255)
26.9%
3,412
3,412
804
4.24
4.24
3.8%
3.1%
(1,161)
6,036
FY15E
325
929
345
751
2,350
29,966
1,212
33,528
FY16E
14,025
(8,278)
5,747
100.0%
0
(424)
13
(412)
(1,496)
28.0%
3,839
3,839
784
4.90
4.90
3.7%
4.1%
(1,235)
6,982
FY16E
447
875
364
751
2,437
31,396
1,212
35,045
Total debt
Total liabilities
Shareholders' equity
Net income
D&A
Change in working capital
Other (incl. deferred taxes)
Cash flow from operations
8,409
18,322
13,470
3,167
1,050
(105)
416
4,381
8,909
19,371
14,157
3,412
1,161
279
260
5,111
9,356
19,975
15,070
3,839
1,235
(69)
260
5,265
Capex
(2,297) (2,613)
Free cash flow
2,525
2,802
Cash flow from investing activities
(2,176) (2,613)
Cash flow from financing activities
(2,370) (2,225)
Dividends
(818)
(965)
Share repurchase
(1,505) (1,760)
Note: C$ in millions (except per-share data).Fiscal year ends Dec
(2,665)
2,906
(2,665)
(2,479)
(1,026)
(1,900)
Income Statement - Quarterly

Revenues
Total operating expenses
Operating income
Operating ratio
Margin improvement (bps)
Interest expense
Other income - net
Total other income
Income tax expense
Effective tax rate
Net income - continuing
Net income - GAAP
Diluted shares outstanding
EPS - continuing
EPS - GAAP
Volume growth
Yield growth
D&A
EBITDA
Ratio Analysis
Sales growth
EBITDA growth
EPS growth - recurring
1Q15E
2,857
(1,919)
938
100.0%
0
(100)
49
(51)
(236)
26.6%
651
651
812
0.80
0.80
3.5%
3.8%
(271)
1,210
FY14A
14.7%
16.9%
23.9%
2Q15E
3,308
(1,951)
1,357
100.0%
0
(104)
60
(44)
(352)
26.8%
960
960
807
1.19
1.19
4.8%
4.2%
(298)
1,655
FY15E
5.0%
6.4%
12.9%
3Q15E
3,256
(1,965)
1,291
100.0%
0
(105)
61
(45)
(333)
26.8%
913
913
802
1.14
1.14
3.7%
2.8%
(293)
1,584
FY16E
10.1%
15.7%
15.4%
EBIT margin
38.1%
38.3%
41.0%
EBITDA margin
Total debt/total capital
Net debt/total capital
46.8%
38.4%
38.3%
47.4%
38.6%
37.7%
49.8%
38.3%
37.2%
147.3%
15.3
142.2%
14.5
127.6%
16.5
10.0%
23.4%
10.4%
24.7%
11.2%
26.3%
3.07
3.48
3.71
Net Debt / EBITDA

Interest coverage
Return on assets (ROA)
Return on equity (ROE)
Free cash flow / share
4Q15E
3,316
(2,027)
1,289
100.0%
0
(106)
37
(69)
(333)
27.3%
887
887
797
1.11
1.11
3.2%
1.8%
(298)
1,588
25
UNIV OF TORONT
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23 February 2015
Other Companies Discussed in This Report (all prices in this report as of market close on 20 February 2015)
Canadian Pacific Railway (CP.TO/C$237.93/Overweight)
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expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
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intervention.
Important Disclosures
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Pacific Railway within the past 12 months.
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Canadian National
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26
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(1-212) 622-1023
Canadian National Railway (CNR.TO, CNR CN) Price Chart
138
N C$75 UW C$39
115
N C$40 UW C$38.5
N C$38
92
UW C$48
UW C$44.5
N C$38.5 UW C$40.5 UW C$43.5
N C$54
N C$55
N C$66
Price(C$)
69
46
23
0
Dec
10
Sep
11
Jun
12
Date
Rating Share Price Price Target

(C$)
(C$)
27-Apr-11
35.50
38.00
26-Jul-11
36.02
40.00
13-Sep-11 N
34.44
75.00
26-Oct-11
37.56
38.50
13-Jan-12
UW
39.65
38.50
25-Jan-12
UW
37.93
39.00
24-Apr-12
UW
39.70
40.50
23-Oct-12
UW
43.14
43.50
23-Jan-13
UW
46.80
44.50
03-Apr-13
UW
50.24
48.00
31-May-13 N
52.98
55.00
23-Jul-13
52.53
54.00
23-Oct-13
54.88
61.50
31-Jan-14
59.61
66.00
Date
Rating Share Price Price Target

(C$)
(C$)
26-Oct-11
UW
59.83
60.00
04-Jan-12
70.60
74.00
27-Jan-12
71.65
82.00
03-Feb-12 OW
73.47
92.00
10-Apr-12
OW
74.66
95.00
23-Apr-12
OW
76.45
96.00
25-Oct-12
OW
93.18
115.00
06-Dec-12 OW
99.28
120.00
30-Jan-13
OW
116.22
140.00
07-Mar-13 OW
130.99
148.00
16-May-13 OW
138.75
153.00
25-Jul-13
OW
131.26
148.00
24-Oct-13
OW
147.95
184.00
30-Jan-14
OW
171.00
200.00
N C$61.5
Mar
13
Dec
13
Sep
14
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Apr 27, 2011.
Canadian Pacific Railway (CP.TO, CP CN) Price Chart
396
N C$82
OW C$96
330
264
Price(C$)
OW C$140
N C$74OW C$95
UW C$60
OW C$92
OW C$148
OW C$120 OW C$153
OW C$115OW C$148
OW C$200
OW C$184
198
132
66
0
Sep
11
Dec
11
Mar
12
Jun
12
Sep
12
Dec
12
Mar
13
Jun
13
Sep
13
Dec
13
Mar
14
Jun
14
Sep
14
Dec
14
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Oct 26, 2011.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
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27
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23 February 2015
J.P. Morgan Equity Research Ratings Distribution, as of January 1, 2015

J.P. Morgan Global Equity Research Coverage
IB clients*
JPMS Equity Research Coverage
IB clients*
Overweight
(buy)
45%
56%
45%
75%
Neutral
(hold)
43%
49%
48%
67%
Underweight
(sell)
12%
33%
7%
52%
*Percentage of investment banking clients in each rating category.

For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
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This document is being provided for the exclusive use of CHIRANSHU KUMAR at GOVERNING COUNCIL OF

Canadian National Railway

Initiating with a Neutral Rating. Premium Operator with

Airfreight and Surface

CNR.TO share price (C$)

Premium valuation for premier operator. The companys record of increasing

Canadian National Railway Company (CNR.TO;CNR CN)

Source: Company data, Bloomberg, J.P. Morgan estimates.

See page 26 for analyst certification and important disclosures.

North America Equity Research

End Market Outlook................................................................13

Financial Outlook ...................................................................17

Canadian National Railway Financial Models ......................23

North America Equity Research

Leveraging a unique network, with defensive capabilities when needed

For further details on each

Favorable crude oil exposure for the long term

North America Equity Research

Risks to Rating and Price Target

Muted lumber leverage if U.S. single home starts rebound

For certain groups of

High percentage of unionized employees can lead to disruptions

North America Equity Research

North America Equity Research

CNR Investment Framework Summary

CNR continues to set new peak

JPMe Industry traffic growth:

*CNRs volume growth: in line to below average* Our systematic analysis of

North America Equity Research

Network Operations Review

Source: Canadian National

Source: Company Reports, JPM estimates

CNRs origination/termination ratio best in the group

See Figure 9 for further details

North America Equity Research

Agricultural & Food Products

Motor Vehicles & Parts

Brian P. Ossenbeck, CFA

CNR Operating Dashboard

CNRs 2014 operating metrics

Figure 3: Dwell up on weather, high traffic volumes

Figure 4: Network speed recovered well after 2014 winter

Dwell in hours (RHS)

YoY Change (LHS)

Speed in MPH (RHS)

Source: Company reports. Data through February 18, 2015

Source: Company reports, AAR. Data through February 18, 2015

Figure 5: Carloads per employee

Figure 6: Carloads and average cars online (in 000s)

Total Cars Online (LHS)

Total Carloads (RHS)

Source: Company reports. Data through 4Q14

Source: Company reports. Data through 4Q14

Figure 7: GTM per train mile

Figure 8: GTM per train hour

Source: Surface Transportation Board

Source: Surface Transportation Board

North America Equity Research

Peak Capacity Analysis

Agricultural & Food

Chemicals & Petroleum

North America Equity Research

Figure 10: CNRs network now higher powered, more productive

CNRs volume growth: in line to below average Our systematic analysis of