SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-7092
ILLINOIS CENTRAL RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-2728842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 755-7500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
As of September 30, 1995, 100 common shares were outstanding.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF ILLINOIS CENTRAL
CORPORATION AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
(1)(a) AND (b) OF THE FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
FORM 10-Q
Three Month and Nine Month Periods Ended September 30, 1995
CONTENTS
Part I - Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions, except share date)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
Revenues $ 161.0 $ 146.7 $ 484.7 $ 439.4
Operating expenses:
Labor and fringe
benefits 49.9 46.0 144.2 137.9
Leases and car hire 18.7 15.9 47.0 48.7
Diesel fuel 8.2 7.7 25.3 23.1
Materials and supplies 8.8 9.2 27.4 28.0
Depreciation and
amortization 7.1 6.2 21.8 18.1
Casualty, insurance
and losses 3.5 6.1 11.1 16.7
Other taxes 3.0 4.5 13.5 12.9
Other 10.4 7.2 27.7 18.4
Operating expenses 109.6 102.8 318.0 303.8
Operating income 51.4 43.9 166.7 135.6
Other income, net 0.7 2.2 2.2 4.3
Interest expense, net (6.0) (6.2) (20.4) (19.1)
Income before income
taxes and extraordinary
item, net 46.1 39.9 148.5 120.8
Provision for income
taxes 17.3 14.7 55.7 45.0
Income before
extraordinary item 28.8 25.2 92.8 75.8
Extraordinary item, net - - (11.4) -
Net income $ 28.8 $ 25.2 $ 81.4 $ 75.8
The following notes are an integral part of the consolidated
financial statements.
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
September 30, 1995 December 31, 1994
ASSETS
Current assets:
Cash and temporary cash
investments $ 9.2 $ 12.2
Receivables, net of allowance
for doubtful accounts of $1.9
in 1995 and $2.1 in 1994 58.0 43.6
Materials and supplies, at
average cost 17.0 15.7
Assets held for disposition 8.2 9.1
Deferred income taxes - current 22.3 21.8
Other current assets 3.7 3.1
Total current assets 118.4 105.5
Investments 31.4 13.3
Properties:
Transportation:
Road and structures, including
land 1,033.0 994.9
Equipment 139.6 114.6
Other, principally land 40.6 40.8
Total properties 1,213.2 1,150.3
Accumulated depreciation (31.3) (25.9)
Net properties 1,181.9 1,124.4
Other assets 15.4 15.2
Total assets $ 1,347.1 $ 1,258.4
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-
term debt $ 15.0 $ 9.7
Accounts payable 64.7 55.6
Dividends payable 25.0 60.0
Income taxes payable 4.3 0.5
Casualty and freight claims 24.9 24.9
Employee compensation and
vacations 13.9 16.5
Taxes other than income taxes 13.2 16.2
Accrued redundancy reserves 6.1 6.8
Other accrued expenses 39.0 31.6
Total current liabilities 206.1 221.8
Long-term debt 347.6 297.6
Deferred income taxes 232.0 213.9
Other liabilities and reserves 124.0 132.7
Contingencies and commitments
Stockholder's equity:
Common stock authorized, issued and
outstanding 100 shares, $1 par
value - -
Additional paid - in capital 129.4 129.1
Retained income 308.0 263.3
Total stockholder's equity 437.4 392.4
Total liabilities and
stockholder's equity $ 1,347.1 $ 1,258.4
The following notes are an integral part of the consolidated financial
statements.
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Nine Months Ended September 30
1995 1994
Cash flows from operating activities:
Net income $ 81.4 $ 76.7
Reconciliation of net income to
net cash provided by (used for)
operating activities:
Extraordinary item, net 11.4 -
Depreciation and amortization 21.8 18.1
Deferred income taxes 24.5 3.4
Equity in undistributed earnings
of affiliates,net of dividends
received (0.5) (0.4)
Net gains on sales of real estate (0.3) (2.0)
Cash changes in working capital (2.8) 51.5
Changes in other assets (2.5) (0.8)
Changes in other liabilities and
reserves (7.3) (4.6)
Net cash provided by
operating activities 125.7 141.9
Cash flows from investing activities:
Additions to properties: (71.7) (61.9)
Proceeds from sales of line segment
and real estate 2.1 3.6
Proceeds from equipment sales 2.2 3.9
Proceeds from sales of investments .6 0.3
Loan to affiliate (18.2) -
Other (2.4) (1.5)
Net cash (used for)
investing activities (87.4) (55.6)
Cash flows from financing activities:
Proceeds from issuance of debt 250.0 210.6
Payments on debt (234.4) (253.5)
Net proceeds (payments) in commercial
paper 15.0 -
Dividends paid (71.8) (33.2)
Purchase of subsidiary's common stock (0.1) (2.5)
Net cash (used for)
financing activities (41.3) (78.6)
Changes in cash and temporary cash
investments (3.0) 7.7
Cash and temporary cash investments at
beginning of period 12.2 8.1
Cash and temporary cash investments at
end of period $ 9.2 $ 15.8
Supplemental disclosure of cash flor information :
Cash paid during the year for:
Interest (net of amount capitalized) $ 20.3 $ 21.7
Income taxes $ 28.7 $ 37.5
The following notes are an integral part of the consolidated financial
statements.
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
Except as described below, the accompanying unaudited
consolidated financial statements have been prepared in
accordance with accounting policies described in the 1994 Annual
Report on Form 10-K and should be read in conjunction with the
disclosures therein.
In the opinion of management, these interim financial statements
reflect all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. Interim
results are not necessarily indicative of results for the full
year. Certain 1994 amounts have been reclassified to conform
with the presentation used in the 1995 financial statements.
Income Per Share
Income per share data has been omitted as the Railroad is a
wholly-owned subsidiary of the Illinois Central Corporation
("IC").
2. Sale of Accounts Receivable
In 1994, the Railroad entered into a revolving agreement to sell
undivided percentage interests in certain of its accounts
receivable, with recourse, to a financial institution. The
agreement allows for sales of accounts receivable up to a
maximum of $50 million at any one time. The Railroad services
the accounts receivable sold under the agreement and retains the
same exposure to credit loss as existed prior to the sale.
During June 1995, the agreement was extended one year and now
expires in June 1998. At September 30, 1995, the maximum had
been sold pursuant to the agreement. Costs related to the
agreement fluctuate with changes in prevailing interest rates.
These costs, which are included in Other Income (Expense), Net,
were $2.3 million and $1.5 million for the nine month periods
ended September 30, 1995 and 1994, respectively.
3. Common Stock and Dividends
Covenants specifically restricting dividend payments by the
Railroad were eliminated when the Senior Notes were prepaid (see
Note 4). Covenants of the Railroad's New Revolver require
specific levels of tangible net worth. At September 30, 1995,
the Railroad exceeded the requirement by $63 million. On October
3, 1995, the Railroad declared and paid a $10.9 million regular
dividend to IC. In 1994, the Railroad declared a special $60
million dividend to IC, which will be paid as requested in 1995
for IC's stock repurchase plan, such amount is excluded from the
aforementioned covenant calculations. As of October 3, 1995,
$36.1 million has been paid.
4. Prepayment of Senior Notes
On May 4, 1995, the Railroad prepaid the holders of its $160
million Senior Notes at face value plus accrued interest and a
prepayment penalty. The monies used to fund the prepayment were
provided by commercial paper, the net proceeds of the recently
issued $100 million 7.75% 10 year-notes due May 2005 and $40
million from existing lines of credit. The prepayment resulted
in an extraordinary charge of $18.4 million, $11.4 million after-
tax ($.27 per share). In connection with the prepayment, the
Railroad amended and restated its revolver with its bank lending
group (the "New Revolver"). The New Revolver was increased to
$250 million and expires in the year 2000. The $40 million
borrowed to help fund the prepayment was replaced with the
proceeds of Medium-Term Notes ("MTN"). The MTN's expire as
follows: $30 million (coupon 6.83%) in 2000, $20 million (coupon
6.27%) in 1998 and $50 million (coupon 6.98%) in 2007.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion below takes into account the financial condition
and results of operations of the Railroad for the periods presented in
the consolidated financial statements.
Results of Operations
Three Months Ended September 30, 1995 Compared to Three Months Ended
September 1994
Revenues for 1995 increased from the prior year quarter by $14.3
million or 9.7% to $161.0 million. The increase was a result of a 4.3%
increase in the number of carloads coupled with an increase of 4.5% in
gross freight revenue per carload. For the quarter, the Railroad
experienced carloading increases in intermodal (17.9%), grain and
grain mill and food products (12.0%), paper (9.1%) and chemicals
(3.9%), partially offset by decreased coal loads (9.4%).
Operating expenses for 1995 were $6.8 million (6.6%) higher than
1994. Increases in fuel, labor, leases and car hire and
depreciation were offset by decreased casualty, insurance and losses
and other tax expense. Casualty, insurance and losses benefited from
improved safety performance resulting in lower accruals. Temporary
traffic congestion experienced in July and August and the high
movements of export grain and grain mill products had a negative
impact on labor costs and car hire expense. Leases and car hire expense
on a combined basis reflects the $6.2 million increase in car hire costs
incurred in the quarter which was partially offset by a $3.4 million
decline in lease expense primarily as a result of the Railroad's shift
from leasing to ownership of its fleet. Marketing and other costs
associated with the rise in business levels ($.6 million) and miscellaneous
quipment and maintenance charges ($1.1 million) were primarily responsible
for the shift in Other operating expense between quarters.
Operating income for 1995 increased 17.1% ($7.5 million) to
$51.4 million from $43.9 million in 1994, primarily as a result of
increased revenues offset by increased expenses cited above.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended
September 30, 1994
Revenues for 1995 increased from the prior year by $45.3 million
or 10.3% to $484.7 million. The increase was a result of a 7.6% increase in
the number of carloads coupled with an increase of 3.0% in gross freight
revenue per carload. For the nine month period, the Railroad
experienced carloading increases in intermodal (41.4%), grain and grain
mill and food products (24.1%), chemicals (6.9%) and paper (8.0%),
partially offset by decreased coal loads (13.0%).
Operating expenses for 1995 were $14.2 million (4.7%) higher than
1994. For the nine months ended September 30, 1995, strong carloadings
of export grain and grain mill products contributed to car hire costs
exceeding 1994 by $15.7 million. The Railroad's lease conversion
program reduced lease expense by $12.3 million to offset the car hire
increase. The conversion program and higher capital expenditures
contributed to the increase in depreciation expense for the nine
months. Casualty, insurance and losses reflects the benefits of a
litigation insurance settlement of $2.8 million and safety performance.
Operating income for 1995 increased 22.9% ($31.1 million) to
$166.7 million from $135.6 million in 1994, primarily as a result of
increased revenue partially offset by increased expenses, as cited
above.
In the second quarter of 1995, the Railroad recorded an
extraordinary item of $11.4 million, net of $7.0 million for taxes.
The extraordinary item covers costs associated with prepaying the
Railroad's $160 million Senior Notes (i.e., premium on repurchase, the
write-off of unamoritized financing fees and costs associated with
calling the Notes).
Liquidity and Capital Resources
Operating Data:
Nine Months Ended September 30,
1995 1994
($ in millions)
Cash flows provided by (used for):
Operating activities $ 125.7 $ 141.9
Investing activities (87.4) (55.6)
Financing activities (41.3) (78.6)
Net change in cash and
temporary cash investments $ (3.0) $ 7.7
Operating activities in 1995 provided $125.7 million in cash,
primarily from net income before depreciation, deferred taxes and
extraordinary item.
During 1995, additions to property of $71.7 million included
approximately $34.9 million for track and bridge rehabilitation and
approximately $24.1 million for equipment upgrades. In February 1995,
the Railroad placed a $25.8 million order for 20 new SD70 locomotives
to be delivered in the fourth quarter of 1995, to update the locomotive
fleet. For the full year 1995, the Railroad expects capital spending
including locomotive purchases and lease conversions will be approximately
$125 million. These expenditures are expected to be met from current
operations and other available sources.
In 1994, the Railroad entered into a revolving agreement to sell
undivided percentage interests in certain of its accounts receivable,
with recourse, to a financial institution. The agreement allows for
sales of accounts receivable up to a maximum of $50 million at any one
time. The Railroad services the accounts receivable sold under the
agreement and retains the same exposure to credit loss as existed prior
to the sale. During June 1995, the agreement was extended one year
and now expires in June 1998. At September 30, 1995, the maximum had
been sold pursuant to the agreement. Costs related to the agreement
fluctuate with changes in prevailing interest rates. These costs,
which are included in Other Income (Expense), Net, were $2.3 million,
and $1.5 million for the nine month periods ended September 30, 1995
and 1994, respectively.
Under the Railroad's expanded commercial paper program a total of
$150 million can be issued and outstanding. The program is supported
by the revolver with the Railroad's bank lending group (see below).
At September 30, 1995, $30.0 million was outstanding. For the nine
months then ended the rates ranged from 5.90% to 6.60%. The Railroad
views this program as a significant long-term funding source and
intends to issue replacement notes as each existing issue matures.
Therefore, commercial paper borrowings are classified as long-term.
In connection with the Railroad's prepayment of its $160 million
Senior Notes (see below), the Railroad and its bank lending group
renegotiated the Railroad's $150 million revolver which had been
amended and restated in November 1994. The New Revolver is for $250
million and expires in 2000. Fees and interest rates are predicated on
the Railroad's long-term credit ratings. Currently, the annual fee is
17 basis points and borrowings under this agreement are at LIBOR plus
32.5 basis points. The New Revolver will be used primarily for backup
for the Railroad's commercial paper program but can be used for general
corporate purposes. The available amount is reduced by the outstanding
amount of commercial paper borrowings and any letters of credit issued
on behalf of the Railroad under the facility. At September 30, 1995,
$30.0 million in commercial paper was outstanding and $.9 million in
letters of credit had been issued thereby reducing the amount available
under the New Revolver. No amounts had been drawn under the New
Revolver or any prior revolving agreements with its bank lending
group.
On May 4, 1995, the Railroad prepaid its then outstanding $160
million Senior Notes at fair market value plus accrued interest and a
prepayment penalty of $16.4 million. The prepayment resulted in an
extraordinary charge of $18.4 million ( $11.4 million after-tax or $.27
per share) recorded in the second quarter of 1995. The prepayment was
funded by Commercial Paper, the net proceeds of the recently issued $100
million 7.75% 10-year notes due 2005 (the "New Notes") and $40 million
borrowed from various institutions under uncommitted lines of credit at
interest ranging from 6.36% to 6.4%. The $40 million was replaced with
the proceeds from the Railroad's Medium-Term Note ("MTN") program.
The MTN's expire as follows: $30 million (coupon 6.83%) in 2000, $20
million (coupon 6.27%) in 1998 and $50 million (coupon 6.98%) in 2007.
The New Notes pay interest semi-annually in May and November and were
issued pursuant to an indenture. The MTN's pay interest semi-annually
in January and July.
At September 30, 1995, the Railroad's public debt was rated Baa2
by Moody's and BBB by S&P and the Railroad's commercial paper program
was rated A2 by S&P, P2 by Moody's and F2 by Fitch.
The Railroad believes that its available cash, cash generated by
its operations and cash available from the facilities described above
will be sufficient to meet foreseeable liquidity requirements.
Various borrowings of the Railroad's subsidiaries are governed by
agreements which contain financial and operating covenants. All
entities were in compliance with these covenant requirements at
September 30, 1995, and management does not anticipate any difficulty
in maintaining such compliance.
The Railroad has entered into various hedge agreements designed
to mitigate significant changes in fuel prices. At September 30, 1995,
agreements covering 60% of the Railroad's short term diesel fuel
requirements through June 1996 to protect against significant price
changes.
The Railroad anticipates that in addition to the $3.8 million
paid through September 30, 1995, an additional $1.5 million will be
required in 1995 related to all previously signed labor agreements.
These requirements are expected to be met from current operating
activities or other available sources. At September 30, 1995, eight of
the eleven unions representing 42% of the Railroad's represented
workforce have reached agreements covering wages and work rules through
1999. Each agreement provides for salary increases of 3% - 4% in each
year. As the Railroad continues to negotiate with its three operating
unions on a local level, agreements may be reached that could require
significant lump sum payments. The Railroad can not determine whether
separate agreements will be reached but management believes available
funding sources will be sufficient to meet any required payments.
Environmental Liabilities
The Railroad's operations are subject to comprehensive
environmental regulation by federal, state and local authorities.
Compliance with such regulation requires the Railroad to modify its
operations and expend substantial manpower and financial resources.
Under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("Superfund"), and similar state
and federal laws, the Railroad is potentially liable for the cost of
clean-up of various contaminated sites. The Railroad has been
notified that it is a potentially responsible party at sites ranging
from those with hundreds of potentially responsible parties to sites at
which the Railroad is primarily responsible. The Railroad generally
participates in the clean-up at sites where other substantial parties
share responsibility through cost-sharing arrangements, but under
Superfund and other similar laws the Railroad can be held jointly and
severally liable for all environmental costs associated with such
sites.
The Railroad is aware of approximately 25 contaminated sites and
various fueling facilities at which it is probably liable for some
portion of the clean-up. The Railroad anticipates annual costs
covering the investigation and remediation of those sites to be
approximately $3 million. Additionally, remediation of environmental
spills resulting from derailments and day-to-day operations are
expensed currently. For the nine months ended September 31, 1995, a total
of $4.3 million has been paid for all environmental sites or situations.
Furthermore, recent amendments to the Clean Air Act require the Environmental
Protection Agency to promulgate regulations restricting the level of
pollutants in locomotive emissions which could impose significant
retrofitting requirements, operational inefficiencies or capital
expenditures in the future.
For all known sites of environmental contamination where Railroad
loss or liability is probable, the Railroad has recorded an estimated
liability at the time when a reasonable estimate of remediation cost
and Railroad liability can first be determined. Adjustments to initial
estimates are recorded as necessary based upon additional information
developed in subsequent periods. Estimates of the Railroad`s potential
financial exposure for environmental claims or incidents are
necessarily imprecise because of the difficulty of determining in
advance the nature and extent of contamination, the varying costs of
alternative methods of remediation, the regulatory clean-up standards
which will be applied, and the appropriate allocation of liability
among multiple responsible parties. At September 30, 1995, the
Railroad estimated the probable range of its estimated liability to be
$13 million to $50 million and in accordance with SFAS No. 5 had a
reserve of $13 million for environmental contingencies. This amount
has not been reduced for potential insurance recoveries or third-party
contribution where the Railroad is primarily liable.
The risk of incurring environmental liability in connection with
both past and current activities is inherent in railroad operations.
Decades-old railroad housekeeping practices were not always consistent
with contemporary standards, historically the Railroad leased
substantial amounts of property to industrial tenants, and the Railroad
continues to haul hazardous materials which are subject to occasional
accidental release. Because the ultimate cost of known contaminated
sites cannot be definitively established and because additional
contaminated sites yet unknown may be discovered or future operations
may result in accidental releases, no assurance can be given that the
Railroad will not incur material environmental liabilities in the
future. However, based on its assessments of the facts and
circumstances now known, management believes that it has recorded
adequate reserves for known liabilities and does not expect future
environmental charges or expenditures to have a material adverse effect
on the Railroad`s financial position, results of operations, cash flow
or liquidity.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 121 - Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" (SFAS 121). SFAS 121 requires that long-lived assets and
certain identifiable intangibles to be held or used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. The statement is
effective for fiscal year beginning after December 15, 1995. The
Railroad is reviewing this statement to determine its impact, if any.
Early adoption is not anticipated.
In October 1995, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards N0. 123 - Accounting for
Stock - Based Compensation" (SFAS 123). SFSA 123 requires that an
employer's financial statements include certain disclosures about stock -
based compensation arrangements. The requierd disclosures are effective
for financial statements for fiscal years beginning after December 15,
1995. Disclosures for fiscal years beginning after December 15, 1994 will
also be requierd if such year is presented with a later fiscal year.
Early adoption of SFAS 123 is not anticipated.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
ILLINOIS CENTRAL RAILROAD COMPANY
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Railroad has duly caused this report to be signed on
its behalf by the undersigned hereto duly authorized.
ILLINOIS CENTRAL RAILROAD COMPANY
/s/ Dale W. Phillips
Dale W. Phillips
Vice President & Chief Financial
Officer
/s/ John V. Mulvaney
John V. Mulvaney
Controller
Date: November 2, 1995
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