Securities
and Exchange Commission
Washington, D.C. 20549
Form 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2005
CANADIAN NATIONAL RAILWAY COMPANY
UNION SAVINGS PLAN FOR U.S. OPERATIONS
Financial Statements
and Supplemental Schedule
As of December 31, 2005 and 2004
(With Report of Independent Registered Public Accounting Firm Thereon)
CANADIAN
NATIONAL RAILWAY COMPANY
UNION SAVINGS PLAN FOR U.S. OPERATIONS
INDEX
| Report of Independent Registered Public Accounting Firm | 1 | |
| Statements of Net Assets Available for Benefits as of | ||
| December 31, 2005 and 2004 | 2 | |
| Statements of Changes in Net Assets Available for Benefits for | ||
| the years ended December 31, 2005 and 2004 | 3 | |
| Notes to Financial Statements | 4 | |
| Schedule H, Line 4i – Schedule of Assets (Held at End of Year) | 10 |
Report of Independent Registered Public Accounting Firm
The Administrative
Committee
Canadian National Railway Company
Union Savings Plan for U.S. Operations:
We have audited the accompanying statements of net assets available for benefits of Canadian National Railway Company Union Savings Plan for U.S. Operations (the Plan) as of December 31, 2005 and 2004, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Plan’s management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Canadian National Railway Company Union Savings Plan for U.S. Operations as of December 31, 2005 and 2004, and the changes in net assets available for benefits for the years then ended in conformity with U.S. generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The Supplemental Schedule H, Line 4i – Schedule of Assets (Held at End of Year) as of December 31, 2005 is presented for the purpose of additional analysis and is not a required part of the basic financial statements but is supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
(signed)
KPMG LLP
Chicago, Illinois
June 27, 2006
1
CANADIAN
NATIONAL RAILWAY COMPANY
UNION SAVINGS PLAN FOR U.S. OPERATIONS
STATEMENTS
OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 2005
AND 2004
| 2005 | 2004 | |||||
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| Investments at fair value | $ | 168,388,836 | $ | 152,041,938 | ||
| Receivables: | ||||||
| Participants’ contributions | 814,470 | 813,546 | ||||
| Employer’s contributions | 72,661 | 81,767 | ||||
| Other | - | 92,168 | ||||
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| Total receivables | 887,131 | 987,481 | ||||
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| Net
assets available for benefits |
$ | 169,275,967 | $ | 153,029,419 | ||
See accompanying Notes to Financial Statements.
2
CANADIAN
NATIONAL RAILWAY COMPANY
UNION SAVINGS PLAN FOR U.S. OPERATIONS
STATEMENTS
OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEARS
ENDED DECEMBER 31, 2005 AND 2004
| 2005 | 2004 | ||||||
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|
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|
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| Additions to net assets: | |||||||
| Investment income: | |||||||
| Dividends and interest | $ | 6,282,453 | $ | 3,313,453 | |||
| Net appreciation in fair value of investments (note 5) | 5,137,966 | 8,185,472 | |||||
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| Total investment income | 11,420,419 | 11,498,925 | |||||
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| Contributions: | |||||||
| Participants | 14,869,871 | 10,830,531 | |||||
| Employer | 1,330,941 | 1,074,268 | |||||
| Rollover contributions and other | 31,171 | 251,623 | |||||
| |
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||||
| Total contributions | 16,231,983 | 12,156,422 | |||||
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| Transfer in (out) of plan assets, net (note 3) | (574,024 | ) | 54,607,435 | ||||
| Total additions | 27,078,378 | 78,262,782 | |||||
| Deductions from net assets: | |||||||
| Participants’ distributions | 10,800,601 | 8,617,578 | |||||
| Administrative expenses | 31,229 | 24,494 | |||||
| |
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| Total deductions | 10,831,830 | 8,642,072 | |||||
| |
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| Net increase | 16,246,548 | 69,620,710 | |||||
| Net assets available for benefits, beginning of year | 153,029,419 | 83,408,709 | |||||
| Net assets available for benefits, end of year | $ | 169,275,967 | $ | 153,029,419 | |||
See accompanying Notes to Financial Statements.
3
1. THE COMPANY
Canadian National Railway Company (CN or the Company), directly and through its subsidiaries, is engaged in the rail and related transportation business. CN spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans and Mobile, Alabama, and the key cities of Toronto, Buffalo, Chicago, Detroit, Duluth, Minnesota/Superior, Wisconsin, Green Bay, Wisconsin, Minneapolis/St. Paul, Memphis, St. Louis and Jackson, Mississippi, with connections to all points in North America. CN’s revenues are derived from the movement of a diversified and balanced portfolio of goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive.
2. DESCRIPTION OF PLAN
The following brief description of the Canadian National Railway Company Union Savings Plan for U.S. Operations (the “Plan”) provides only general information. Participants should refer to the summary plan description for a more complete description of the Plan's provisions.
GENERAL
The Plan, as amended
through July 1, 2005, covers certain union employees of the Illinois Central
Railroad Company (ICR), Grand Trunk Western Railroad Incorporated (GTW), Chicago,
Central and Pacific Railroad Company (CC&P), Duluth, Winnipeg and Pacific
Railway Company, Wisconsin Central Limited (WCL), Sault Ste. Marie Bridge Company
(SSM), Bessemer and Lake Erie Railroad Company (BLE), Duluth, Missabe and Iron
Range Railway Company (DMIR), and Pittsburgh and Conneaut Dock Company (PCD).
These companies are direct or indirect subsidiaries of CN. Prior to November
1, 2000, ICR maintained the Illinois Central Railroad Company Retirement Savings
Plan (the “IC Plan”), GTW maintained the Grand Trunk Western Railroad
Union Employee Savings Plan (the “Grand Trunk Plan”) and CC&P
maintained the Chicago, Central and Pacific Company Bargaining Employees’ 401(k)
Plan (the “CC&P Plan”). The Plan is a result of the merger of
the IC Plan, the Grand Trunk Plan and the CC&P Plan. On July 1, 2003, certain
employees of the WCL and SSM covered by the Wisconsin Central Transportation
Corporation 401K Savings Plan (the WC Plan) became members of the Plan. On
June 30, 2004, the remaining WCL and SSM union employees covered by the WC
Plan also became members of the Plan. On December 31, 2004, the Bessemer Savings
Plan for Represented Employees, which covered union employees of the BLE, DMIR
and PCD was merged into the Plan; the employees’ benefit participation
in the Plan commenced January 1, 2005. Eligible employees may enroll in the Plan upon date of hire.
This Plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974 (ERISA).
Effective July 1, 2004, Fidelity Investments Trust Company (the “Trustee”) was the appointed trustee and recordkeeper of the Plan. Until June 30, 2004, American Express Trust Company was the trustee of the Plan under a trust agreement with the Company and also performed administrative services including participant accounting.
There were 8,459 and 6,469 participants in the Plan at December 31, 2005 and 2004, respectively.
CONTRIBUTIONS
Participants may
elect to make contributions to the Plan through periodic payroll deductions
in amounts ranging from 1% to 100% (up to 20% prior to July 1, 2002) of their
eligible earnings. The total pre-tax contributions by a participant were limited
to $14,000 in 2005 and $13,000 in 2004 (the limit will increase to $15,000
in 2006, after which the limit will be subject to adjustments to reflect increases
in the cost of living pursuant to Section 402(g) of
4
Contributions to the Plan on behalf of employees who are members of participating unions are made by the Company in lieu of an equal amount of salary, in accordance with such unions’ respective collective bargaining agreements. The contributions amount to 25% of each participant’s contributions up to the first 4% of eligible earnings (a maximum Company contribution of 1% of eligible earnings). The Company does not match the participants’ “Catch-up” contributions.
INVESTMENT
OF CONTRIBUTIONS
The Plan permits
participants to invest their own contributions, the Company’s matching
contributions and the supplemental contributions in various investment funds.
Effective December 31, 2005, the funds were as follows:
Fidelity
Managed Income Portfolio II
This stable value
fund is a commingled pool of the Fidelity Group Trust for Employee Benefit
Plans. The portfolio invests in investment contracts issued by insurance companies
and other financial institutions, fixed income securities, and money market
funds to provide daily liquidity. Some investment contracts are structured
solely as a general debt obligation of the issuer. Other investment contracts
(“wrap contracts”) are purchased in conjunction with an investment by the portfolio
in fixed income securities, which may include, but are not limited to, U.S.
Treasury and agency bonds, corporate bonds, mortgage-backed securities, asset-backed
securities and bond funds. The portfolio may also invest in futures contracts,
option contracts and swap agreements.
Fidelity
Capital Appreciation Fund
This mutual fund
invests primarily in common stocks (either growth or value) of domestic and
foreign issuers. In selecting instruments, it uses fundamental analysis of
each issuer’s financial condition and industry position and market and
economic conditions.
Fidelity
Spartan U.S. Equity Index Fund
This mutual fund
invests primarily in securities related with the price and yield performance
of the S&P 500 Index.
Fidelity
Spartan International Index Fund
This mutual fund
invests a minimum of 80% of the fund’s assets in stocks that are included
in the Morgan Stanley Capital International Europe, Australia, and Far East
(MSCI EAFE) Index, which represents the performance of foreign stock markets,
excluding emerging market countries. It aims to track the performance of the
MSCI EAFE Index.
ICM
Small Company Portfolio
This mutual
fund invests a minimum of 80% of the fund’s assets in equity securities
of smaller companies, primarily those with low price to earnings, price to
cash flow or price to book ratios.
American
Funds Investment Company of America
This mutual
fund invests primarily in high quality equity securities of larger companies.
American
Funds EuroPacific Growth Fund
This mutual
fund invests a minimum of 65% of the fund’s assets in stocks of companies
located overseas, primarily in Europe and the Pacific Basin, with a maximum
of 20% in securities of companies located in developing countries. In addition,
the fund may purchase American depository receipts.
5
PIMCO
Total Return Fund
This mutual
fund invests a minimum of 65% of assets in debt securities, including U.S.
Government securities, corporate bonds, and mortgage-related securities, with
an average maturity of three to six years. It may invest a maximum of 20% of
the fund’s assets in foreign-currency denominated securities.
CNR
Stock Fund
This stock
fund invests in the common stock of the Canadian National Railway Company and
short-term investments.
Dodge & Cox
Balanced Fund
This mutual
fund invests in a diversified mix of common stocks and fixed-income instruments.
It may invest from 40% to 70% of the fund’s assets in common stocks and
convertible securities.
Dodge & Cox
Stock Fund
This mutual
fund invests primarily in a broadly diversified portfolio of common stock of
companies which, in its opinion, appear to be temporarily undervalued by the
stock market but have a favorable outlook for long-term growth.
Calamos
Growth Fund
This mutual fund
invests in companies with above-average, sustainable earnings growth potential.
Fidelity
Retirement Money Market Portfolio
This mutual
fund invests in short-term, high quality debt securities which include certificates
of deposit of highly rated banks, U.S. Treasury notes and bills and Agency
issues, and top rated commercial paper.
Fidelity
Freedom Funds
These mutual
funds invest in a combination of Fidelity equity, fixed-income and money market
mutual funds, with the allocation among the three varying with the number of
years until the Freedom funds reach their target retirement date (the Fidelity
Freedom 2010, 2020, 2030, and 2040 funds are targeted to investors expected
to retire around those years). Once the target dates have been met, the funds
continue to become more conservative for five to ten years until the asset
mix is approximately the same as the Freedom Income Fund at which time the
funds will merge.
PARTICIPANT
ACCOUNTS
Each participant’s
account is credited with the participant’s contributions, all of the Company’s
contributions, and an allocation of earnings and expenses based on the performance
of each investment. The allocation of each is based on the participant’s
account balances at the time of allocation. The benefit to which a participant
is entitled is the benefit that can be provided from the participant’s
account.
VESTING
Participants are
fully vested in the entire amount in their account at the time of contribution,
including the Company’s matching contribution.
PAYMENT
OF BENEFITS
Participants may
be entitled to a withdrawal in the event of financial hardship as defined in
the Plan. The Plan also allows for in-service distributions to participants
upon attaining the age of 59½.
Upon termination of service, a participant may leave their account in the Plan, or may elect to receive the value of the account in a lump-sum payment or as a direct transfer to another qualified retirement plan subject to certain conditions. However, a participant with an account balance of $5,000 or less may select from the latter two options only.
6
EXPENSES
Administrative
expenses for maintenance of plan financial records, participant statements,
service fees on insurance contracts and trustee fees are paid from plan assets.
All other administrative expenses of the Plan are paid by the Company.
LOANS
Participants may
borrow from their accounts by taking one loan (maximum of two loans if one
or both were outstanding as of June 30, 2004) with a minimum amount of $1,000,
and a total maximum amount equal to the lesser of $50,000 or 50% of their
account balance. Loans must be repaid within 5 years, or 10 years, if the funds
are used to construct or purchase a primary residence. The interest rate on
the loans is equal to the prevailing prime rate as of the beginning of the
calendar quarter in which the participant applies for the loan plus one percent.
For the second half of 2004, the interest rate on the loans, as determined
by the Pension Committee, was at least equal to the rate charged by lenders
for similar loans and was adjusted from time to time as circumstances warranted.
For the first half of 2004, the loans accrued interest at the rate of prime
plus one percent. Interest rates on loans outstanding at December 31, 2005
ranged from 4.0% to 10.5%. Upon termination of service, the unpaid balance
is deducted from the account balance to which the participant is entitled.
Loans deemed to be in default are recorded as distributions.
As at December 31, 2005, loans outstanding were $5,001,264 ($4,604,178 in 2004), net of deemed defaulted loans of $253,818 ($262,884 in 2004).
WITHDRAWALS
Withdrawals are
recorded in the period in which they are paid to participants.
PLAN TERMINATION
Although the Company
has not expressed any intent to do so, it has the right under the Plan to discontinue
its contributions at any time and to terminate the Plan subject to the provisions
of ERISA. In the event the Plan is terminated, participants will receive the
full amount of plan assets in their respective accounts.
3. TRANSFER OF PLAN ASSETS
In 2005, net transfer of plan assets amounted to $574,024, which was comprised of asset transfers to a CN-related employee plan, the Canadian National Railway Company Management Savings Plan for U.S. Operations.
In 2004, net transfer of plan assets amounted to $54,607,435, which was comprised of the following transfers from/to CN-related employee plans: $30,534,956 was transferred in by approximately 950 participants of the Wisconsin Central Transportation Corporation 401K Savings Plan on June 30, 2004; $1,596,239 was transferred from the Canadian National Railway Company Management Savings Plan for U.S. Operations; $23,260 was transferred to a CN-related union plan and on December 31, 2004, $22,499,500 was transferred in by 442 employees of the Bessemer Savings Plan for Represented Employees, whose benefit participation in the Plan commenced January 1, 2005.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS
OF ACCOUNTING
The financial
statements of the Plan are prepared under the accrual method of accounting.
USE OF
ESTIMATES
The preparation
of the financial statements in conformity with U.S. generally accepted accounting
principles
7
requires the plan administrator to make estimates and assumptions that affect the reported amounts of assets, liabilities, and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
INVESTMENT
VALUATION AND INCOME RECOGNITION
Investments are
stated at fair value whereby stocks are valued using the quoted market prices
and mutual funds are valued at the redemption price established by the mutual
fund administrator.
Purchases and sales of securities are recorded on a trade-date basis. Contributions and interest income are recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
CASH AND
CASH EQUIVALENTS
The Plan considers
all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
5. INVESTMENTS
Investments that represent 5% or more of net assets available for benefits at December 31, 2005 and 2004 are as follows:
| 2005 | 2004 | |||||
| |
|
|
|
|
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| Fidelity Spartan U.S. Equity Index Fund | $ | 34,493,992 | $ | 36,393,110 | ||
| American Funds Investment Co. of America | 30,153,388 | 30,398,477 | ||||
| PIMCO Total Return Fund | 16,818,361 | 16,281,858 | ||||
| Fidelity Managed Income Portfolio II | 13,513,258 | - | ||||
| Stable Value Fund | - | 13,467,706 | ||||
| American Funds EuroPacific Growth Fund | 12,077,474 | 8,028,113 | ||||
| CNR Stock Fund | 9,589,677 | - | ||||
| Fidelity Capital Appreciation Fund | 9,550,874 | 8,877,128 | ||||
| Dodge & Cox Balanced Fund | 9,363,276 | - | ||||
| Fidelity Retirement Money Market Portfolio | 8,980,910 | 7,747,481 | ||||
| |
|
|
|
|
During the years ended December 31, 2005 and 2004, the Plan’s investments (including gains and losses on investments bought and sold, as well as held during the year) appreciated in value by $5,137,966 and $8,185,472, respectively, as follows:
| 2005 | 2004 | |||||
| |
|
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|
|
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| Mutual Funds | $ | 2,954,455 | $ | 6,493,412 | ||
| Common Stock | 2,183,511 | 1,556,462 | ||||
| Collective Investment Funds | - | 135,598 | ||||
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| $ | 5,137,966 | $ | 8,185,472 | |||
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8
The Plan has received a favorable determination letter from the Internal Revenue Service (IRS), dated April 21, 2003, indicating that it is qualified under Section 401(a) of the Internal Revenue Code (the “Code”) and, therefore, the related trust is exempt from tax under Section 501(a) of the Code. The plan administrator is not aware of any activity or transactions that may adversely affect the qualified status of the Plan.
7. RELATED PARTY TRANSACTIONS
Fidelity Investments Trust Company, the Trustee of the Plan for the year ended December 31, 2005, managed certain plan investments and therefore, these transactions qualify as party-in-interest transactions.
9
CANADIAN
NATIONAL RAILWAY COMPANY
UNION SAVINGS PLAN FOR U.S. OPERATIONS
Schedule H,
Line 4i – Schedule of Assets (Held at End of Year)
DECEMBER 31, 2005
| Identity
of issue, borrower, lessor or similar party |
Description
of investment, including maturity date, rate of interest, collateral, par or maturity value |
Current Value |
||
| * Fidelity Spartan U.S. Equity Index Fund | Mutual fund, 781,114 shares | $ 34,493,992 | ||
| American Funds Investment Co. of America | Mutual fund, 961,524 shares | 30,153,388 | ||
| PIMCO Total Return Fund | Mutual fund, 1,601,749 shares | 16,818,361 | ||
| * Fidelity Managed Income Portfolio II | Mutual fund, 13,513,258 shares | 13,513,258 | ||
| American Funds EuroPacific Growth Fund | Mutual fund, 293,927 shares | 12,077,474 | ||
| CNR Stock Fund | Common Stock of Canadian National | |||
| Railway Company, 297,260 shares | 9,589,677 | |||
| * Fidelity Capital Appreciation Fund | Mutual fund, 380,513 shares | 9,550,874 | ||
| Dodge & Cox Balanced Fund | Mutual fund, 115,113 shares | 9,363,276 | ||
| * Fidelity Retirement Money Market Portfolio | Mutual fund, 8,980,910 shares | 8,980,910 | ||
| ICM Small Company Portfolio | Mutual fund, 189,439 shares | 6,863,383 | ||
| Calamos Growth Fund | Mutual fund, 109,194 shares | 6,012,192 | ||
| Dodge & Cox Stock Fund | Mutual fund, 7,683 shares | 1,054,303 | ||
| * Fidelity Spartan International Index Fund | Mutual fund, 7,089 shares | 253,298 | ||
| * Fidelity Freedom Income Fund | Mutual fund, 79,535 shares | 904,312 | ||
| * Fidelity Freedom 2010 Fund | Mutual fund, 94,261 shares | 1,324,364 | ||
| * Fidelity Freedom 2020 Fund | Mutual fund, 90,691 shares | 1,334,068 | ||
| * Fidelity Freedom 2030 Fund | Mutual fund, 42,044 shares | 631,502 | ||
| * Fidelity Freedom 2040 Fund | Mutual fund, 53,108 shares | 468,940 | ||
| Plan participants | Participant loans, interest ranging from | |||
| 4.0% - 10.5%, maturing January 2006 | ||||
| through November 2015 | 5,001,264 | |||
| $168,388,836 | ||||
| |
|
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| * Party-in-interest transaction | ||||
| See accompanying report of independent registered public accounting firm. | ||||
10
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.
| Canadian National
Railway Company Union Savings Plan for U.S. Operations |
|
| (Name of Plan) | |
| Date: June 28, 2006 | /s/ Ardyth A. Cutler |
| Plan Administrator | |