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 March 31, 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 March 31, 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
H(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 Months Ended March 31, 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 12
Signatures 13
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions)
(Unaudited)
Three Months
Ended March 31,
1995 1994
Revenues $167.5 $147.5
Operating expenses:
Labor and fringe benefits 46.8 46.9
Leases and car hire 16.0 15.8
Diesel fuel 8.8 7.8
Materials and supplies 10.1 10.3
Depreciation and amortization 6.8 5.9
Casualty and insurance, net 4.4 3.7
Other taxes 5.1 4.6
Other 8.4 3.9
Operating expenses 106.4 98.9
Operating income 61.1 48.6
Other income, net 0.3 1.0
Interest expense, net (6.7) (6.9)
Income before income taxes 54.7 42.7
Provision for income taxes 20.5 15.7
Net income $ 34.2 $ 27.0
The following notes are an integral part of the consolidated financial
statements.
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
ASSETS March 31, 1994 December 31,1994
Current assets:
Cash and temporary cash investments $25.3 $12.2
Receivables, net of allowance for
doubtful accounts of $1.9 in 1995 and
$2.1 in 1994 43.9 43.6
Materials and supplies, at average cost 17.4 15.7
Assets held for disposition 8.2 9.1
Deferred income taxes - current 21.3 21.8
Other current assets 4.2 3.1
Total current assets 120.3 105.5
Investments 13.4 13.3
Properties:
Transportation:
Road and structures, including land 1,006.4 994.9
Equipment 119.1 114.6
Other, principally land 40.8 40.8
Total properties 1,166.3 1,150.3
Accumulated depreciation (28.2) (25.9)
Net properties 1,138.1 1,124.4
Other assets 15.5 15.2
Total assets $1,287.3 $1,258.4
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 13.3 $ 9.7
Accounts payable 54.6 55.6
Dividends payable 51.0 60.0
Income taxes payable 15.5 0.5
Casualty and freight claims 24.9 24.9
Employee compensation and vacations 12.9 16.5
Taxes other than income taxes 13.7 16.2
Accrued redundancy reserves 6.5 6.8
Other accrued expenses 28.6 31.6
Total current liabilities 221.0 221.8
Long-term debt 300.8 297.6
Deferred income taxes 218.1 213.9
Other liabilities and reserves 133.8 132.7
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 284.2 263.3
Total stockholder's equity 413.6 392.4
Total liabilities and stockholder's
equity $1,287.3 $1,258.4
The following notes are an integral part of the consolidated financial
statements.
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Three Months Ended March 31,
1995 1994
Cash flows from operating activities :
Net income $34.2 $26.9
Reconciliation of net income to net cash
provided by (used for) operating activities :
Depreciation and amortization 6.8 5.9
Deferred income taxes 4.7 5.9
Equity in undistributed earnings of affiliates,
net of dividends received (0.2) (0.2)
Net gains on sales of real estate 0.2 0.1
Cash changes in working capital 0.9 30.2
Changes in other assets (0.4) (0.4)
Changes in other liabilities and reserves 2.0 (4.7)
Net cash provided by (used for) operating
activities 48.2 63.7
Cash flows from investing activities :
Additions to properties (21.1) (12.5)
Proceeds from real estate sales 1.3 0.2
Proceeds from equipment sales 0.6 0.3
Proceeds from sales of investments 0.1 0.1
Other (0.4) 0.2
Net cash provided by (used for)
investing activities (19.5) (11.7)
Cash flows from financing activities :
Proceeds from issuance of debt - 48.6
Principal payments on debt (3.2) (59.7)
Net proceeds (payments) in commercial paper 10.0 (25.1)
Dividends paid (22.3) (15.0)
Purchase of subsidiary's common stock (0.1) (0.1)
Net cash provided by (used for)
financing activities (15.6) (51.3)
Changes in cash and temporary cash investments 13.1 0.7
Cash and temporary cash investments at
beginning of period 12.2 8.1
Cash and temporary cash investments at
end of period $ 25.3 $ 8.8
Supplemental disclosure of cash flow information :
Cash paid during the year for:
Interest (net of amount capitalized) $ 9. 0 $ 9.1
Income taxes $ 0.7 $ 3.1
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 has been omitted as the Railroad is a wholly-
owned subsidiary of 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, which expires March 1997, 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. At March 31, 1995, $50 million in accounts
receivable had been sold pursuant to the agreement. The Railroad
retains the same exposure to credit loss as existed prior to the
sale. Costs related to the agreement will vary generally in
correlation with changes in prevailing interest rates. These
costs, which are included in Other Income, Net, were $.8 million
and $.4 million for the quarters ended March 31, 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.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. To date, $9 million has been paid.
On April 6, 1995, the Railroad declared and paid a $13.0 million
dividend to IC.
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 to fund the prepayment were
provided by commercial paper, the 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, $11.5 million after-tax,
which will be recorded in the second quarter of 1995. 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.
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 March 31, 1995 Compared to Three Months Ended March
31, 1994
Revenues for 1995 increased from the prior year quarter by $20.0
million or 13.6% to $167.5 million. The increase was a result of a
12.8% increase in the number of carloads coupled with an increase of
2.0% in gross freight revenue per carload. For the quarter, the
Company experienced carloading increases in intermodal (68.9%), grain
and grain mill and food products (35.4%), paper (6.9%) and chemicals
(13.8%), offset by decreased coal loads (9.4%).
Operating expenses for 1995 increased $7.5 million, or 7.6% as
compared to 1994. Unfavorable variances in fuel, depreciation, lease
and car hire expense were the main cause of the increase. Lease and
car hire expense reflects the increase in car hire costs as increased
export grain and grain mill traffic resulted in higher costs.
Marketing and other costs associated with the rise in business levels
($1.2 million) and environmental charges ($1.1 million) were primarily
responsible for the shift in other operating expense between quarters.
Operating income for 1995 increased 25.7% ($12.5 million) to
$61.1 million from $48.6 million in 1994, primarily as a result of
increased revenues cited above.
Liquidity and Capital Resources
Operating Data:
Three Months Ended March 31,
1995 1994
($ in millions)
Cash flows provided by (used for):
Operating activities $ 48.2 $ 63.7
Investing activities (19.5) (11.7)
Financing activities (15.6) (51.3)
Net change in cash and
temporary cash investments $ 13.1 $ .7
Operating activities in 1995 provided $48.2 million in cash,
primarily from net income before depreciation and deferred taxes.
During 1995, additions to property of $21.1 million included
approximately $11.8 million for track and bridge rehabilitation and
approximately $7.2 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 continues to expect base
capital spending (expenses for track and track structures) to be
approximately $65 million, with the locomotive purchases and lease
conversions the total capital spending could be approximately $100
million to $110 million. These expenditures are expected to be met
from current operations and other available sources.
In the first quarter of 1994, the Railroad entered into a
receivables purchase agreement to sell undivided percentage interests
in certain of its accounts receivable, with recourse, to a financial
institution. The agreement, which expires March 1997, 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.
At March 31, 1995, $50 million in accounts receivable had been sold
pursuant to the agreement. The Railroad retains the same exposure to
credit loss as existed prior to the sale. Costs related to the
agreement vary in correlation with changes in prevailing interest
rates. These costs, which are included in Other Income, Net, were $.8
million, and $.4 million for the three month periods ended March 31,
1995 and 1994, respectively.
Under the Railroad's commercial paper program a total of $100
million can be issued and outstanding. The program is supported by the
revolver with the Railroad's bank lending group (see below). At March
31, 1995, $25.0 million was outstanding. For the three months then
ended the rates ranged from 3.365% to 6.25%. 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 March 31, 1995, $25.0
million in commercial paper was outstanding and $2.4 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 ($11.5 million after-tax) to be
recorded in the second quarter of 1995. 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 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% which
may be refinanced by the Railroad's new Medium Term Note Program ("MTN").
The New Notes and any MTN's issued are covered by under a $200 million
shelf registration filed with the Securities and Exchange Commission on
April 12, 1995. The New Notes pay interest semi-annually in May and
November and were issued pursuant to an indenture.
At March 31, 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 are governed by agreements
which contain financial and operating covenants. All entities were in
compliance with these covenant requirements at March 31, 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. As a result,
approximately 46% of the Railroad's short-term diesel fuel requirements
through June 1995 are protected against significant price changes.
Covenants specifically restricting dividend payments by the
Railroad were eliminated when the Senior Notes were prepaid. Covenants
of the Railroad's New Revolver require specific levels of tangible net
worth. 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. To date, $9 million has been paid. On April 6, 1995, the Railroad
declared and paid a $13.0 million dividend to IC.
The Railroad anticipates that in addition to the $1.4 million
paid through March 31, 1995, an additional $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. As the Railroad continues to negotiate
with its 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 20 contaminated sites and
various fueling facilities at which it is probably liable for some
portion of the clean-up. The Railroad has paid approximately $.2
million in 1995 toward the investigation and remediation of those
sites, and anticipates annual expenditures of $3.0 million. During the
quarter, the Railroad spent an additional $1.4 million remediating
environmental spills resulting from derailments and other operating
activities. 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 March 31, 1995 the Railroad
estimated the probable range of its estimated liability to be $13
million to $48 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.
PART II - OTHER INFORMATION
Item 5. Exhibits and 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: May 9, 1995
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