UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class so registered: each class is registered:
Illinois Central Railroad Company New York Stock Exchange
6-3/4% Notes,
due May 15, 2003
Gulf, Mobile and Ohio Railroad Company New York Stock Exchange
5% Income Debentures,
Series A, due December 1, 2056
Securities registered pursuant to Section 12(g) of the Act:
None
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 14, 1997, there were 100 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF ILLINOIS CENTRAL
CORPORATION (SEC FILE NO. 1-10720) AND MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION J(1)(a) and (b) of form 10-K AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
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ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
FORM 10-K
Year Ended December 31, 1996
INDEX
PART I 10-K Page
Item 1. Business....................................................... 3
Item 2. Properties.....................................................10
Item 3. Legal Proceedings..............................................14
Item 4. Submission of Matters to a Vote of Security Holders (A).......15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................16
Item 6. Selected Financial Data (A)....................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................17
Item 8. Financial Statements and Supplementary Data....................27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.........................27
PART III
Item 10. Directors and Executive Officers of the Registrant (A).........28
Item 11. Executive Compensation (A).....................................28
Item 12. Security Ownership of Certain Beneficial Owners and
Management (A).................................................28
Item 13. Certain Relationships and Related Transactions (A).............28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................28
SIGNATURES...................................................................29
(A) Omitted or amended as the registrant is a wholly-owned subsidiary of
Illinois Central Corporation and meets the conditions set forth in
General Instruction J(1)(a) and (b) of Form 10-K and is, therefore,
filing this Form with the reduced disclosure format.
2
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PART I
Item 1. Business
Background
Illinois Central Railroad Company ("ICRR") traces its origin to 1851,
when ICRR was incorporated as the nation's first land grant railroad. ICRR
operates 2,600 miles of main line track between Chicago and the Gulf of Mexico,
primarily transporting chemicals, coal, paper, grain and milled grain, and
intermodal trailers and containers. ICRR is a wholly-owned subsidiary and a
principal asset of Illinois Central Corporation ("IC").
The principal executive office of ICRR is located at 455 North Cityfront
Plaza Drive, Chicago, Illinois 60611-5504 and its telephone number is (312)
755-7500.
Plan 2000
In the spring of 1995, IC developed and announced Plan 2000. This new
plan is designed to build on the success of the 1992 plan and position IC for
the next century. Plan 2000 calls for (i) revenue to grow from the 1994 base of
$595 million to $800 million by the end of 1999, (ii) the continued reduction of
the operating ratio to below 60%, and (iii) a Long-Term Equity Enhancement
Program of increased dividends and share repurchases. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Significant Developments."
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Commodities and Customers
ICRR's customers are engaged in a wide variety of businesses and ship a
number of different products that can be classified into commodity groups:
chemicals, coal, grain, paper, grain mill and food products, intermodal and
other commodities. In 1996, a customer accounted for approximately 8% of
revenues (two other customers exceeded 5%, no other customer exceeded 5%) and
the ten largest customers accounted for approximately 37% of revenues.
In order to address the diversity of IC's customer base, ICRR's marketing
department is organized into two major groups - Bulk and Consumer Products. The
Bulk group is responsible for coal, chemicals and grain related products. The
Consumer group covers forest products, intermodal and metals. These units work
with current and prospective customers to develop customized shipping solutions.
The principal elements of these commodity groupings are as follows:
Chemicals ................... A wide variety of chemicals and related
products such as chlorine, caustic soda,
potash, soda ash, vinyl chloride monomer,
carbon dioxide, synthetic resins, alcohols,
glycols, styrene monomer, plastics, sulfuric
acid, muriatic acid, anhydrous ammonia,
phosphates, mixed fertilizer compounds and
carbon blacks.
Coal......................... Bituminous and metallurgical coal.
Grain........................ Corn, wheat, soybeans, sorghum, barley and
oats.
Paper........................ Pulpboard, fiberboard, woodpulp, printing
paper, newsprint and scrap or waste paper.
Grain Mill & Food
Products................... Products obtained by processing grain and
other farm products such as feed, soybean
meal, corn syrup, flour and middlings, animal
packinghouse by-products (tallow), canned
food, corn oil, soybean oil, vegetable oils,
malt liquors, sugar and molasses.
Intermodal................... A wide variety of products shipped either in
containers or trailers on specially designed
cars.
Other........................ Pulpwood and chips, lumber and other wood
products; sand, gravel and stone, coke and
petroleum products, metallic ores and other
bulk commodities; primary and scrap metals,
machinery and metal products, appliances,
automobiles and parts, transportation
equipment and farm machinery; glass and clay
products, ordnance and explosives, rubber and
plastic products, and general commodities.
The respective percentage contributions by principal commodity group to
ICRR's freight revenues and revenue ton miles during the past five years are set
forth below:
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Contributions to Total Freight Revenues by Commodity Group
Commodity
Group 1996 1995 1994 1993 1992
--------- ---- ---- ---- ---- ----
Chemicals.................. 27.6% 26.4 % 24.8% 25.0% 24.3%
Coal....................... 14.1 13.5 15.2 12.8 15.3
Grain...................... 10.3 14.1 10.2 14.0 12.2
Paper...................... 12.6 12.6 12.2 12.4 12.1
Grain mill & food products. 8.6 8.9 8.5 9.8 8.8
Intermodal................. 8.7 7.6 6.6 5.4 5.4
All other.................. 18.1 16.9 22.5 20.6 21.9
------ ----- ----- ----- -----
Total...................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Contribution to Revenue Ton Miles by Commodity Group
Commodity
Group 1996 1995 1994 1993 1992
--------- ---- ---- ---- ---- ----
Chemicals................. 16.6% 14.6% 15.8% 15.9% 15.1%
Coal...................... 24.1 20.8 24.0 15.1 18.2
Grain..................... 18.3 26.8 20.0 27.9 27.3
Paper..................... 9.3 9.0 9.8 9.6 9.0
Grain mill & food products 9.3 9.8 9.3 9.9 9.0
Intermodal................ 6.5 5.5 5.5 3.7 3.1
All other................. 15.9 13.5 15.6 17.9 18.3
----- ----- ----- ----- ------
Total..................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
In 1996, approximately 68% of ICRR's freight traffic originated on its
own lines, of which approximately 21% was forwarded to other carriers.
Approximately 17% of ICRR's freight traffic was received from other carriers for
final delivery by ICRR, and the balance of approximately 15% represented bridge
or through traffic.
Terminal Operations
ICRR currently has a "transload" facility located in Harvey, Illinois.
This facility stores cars of plastic pellets which are loaded subsequently into
tanker trucks (i.e., transload) for distribution to smaller, non-rail served
manufacturers. During 1997, ICRR plans to double the size of this facility.
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Operating Statistics
Set forth below is certain information relating to ICRR's freight
traffic during the past five years:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Carloads (in thousands) 927 957 915 848 852
Freight train miles
(in thousands)1............. 7,950 7,758 7,179 5,659 5,149
Revenue ton miles of freight
traffic (in millions)2...... 22,132 24,635 21,160 20,334 18,734
Revenue tons per carload 71.7 74.7 76.3 79.1 76.6
Average length of haul
(in miles).................. 309 328 286 293 284
Gross freight revenue per
ton mile3................... $.026 $ .025 $ .027 $ .027 $ .029
Net freight ton miles per
average route mile
(in millions)............... 8.4 9.3 7.9 7.5 6.8
Gallons per ton mile4......... .00236 .00234 .00248 .00251 .00269
Active locomotives............ 331 333 328 322 331
Track resurfacing (miles) 1,360 1,360 1,397 1,293 1,465
Percent resurfaced............ 33.7% 32.2% 33.0% 29.8% 32.0%
Ties laid in replacement
(including switch ties).....425,999 408,760 346,994 323,764 296,536
Slow order miles.............. 100.00 209.76 275.79 152.32 135.42
1 Freight train miles equals the total number of miles traveled by all trains
in the movement of freight.
2 Revenue ton miles of freight traffic equals the product of the weight in
tons of freight carried for hire and the distance in miles between origin
and destination.
3 Revenue per ton mile equals net freight revenue divided by revenue ton
miles of freight traffic.
4 Gallons per ton mile equals the amount of fuel required to move one ton of
freight one mile.
The following tables summarize operating expense-to-revenue ratios of ICRR
for each of the past five years, excluding the effect of the $8.9 million pretax
special charge in 1992. The first table analyzes the various components of
operating expenses based on the line items appearing on the income statements,
whereas the second table is based on Surface Transportation Board ("STB")
functional groupings.
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Ratio 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ----
Operating1..................... 64.4% 65.6% 67.7% 68.6% 70.9%
Labor and fringe benefits...... 29.5 30.2 30.9 31.2 32.0
Leases and car hire............ 9.2 9.1 10.0 12.5 13.0
Diesel fuel.................... 5.6 5.1 5.3 5.4 5.5
Materials and supplies......... 5.1 5.4 6.0 6.2 5.8
Depreciation and amortization.. 5.0 4.8 4.2 4.0 4.3
Casualty, insurance and losses. 1.8 2.7 4.0 3.8 4.8
Other taxes.................... 2.7 2.8 2.9 2.9 2.3
Other.......................... 5.5 5.5 4.4 2.6 3.2
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating1..................... 64.4% 65.5% 67.6% 68.6% 70.9%
Transportation2................ 27.9 28.0 28.9 29.6 31.6
Maintenance of way3............ 7.2 7.8 7.7 7.2 7.1
Maintenance of equipment4...... 18.5 20.3 20.6 21.3 22.9
1 Operating ratio means the ratio of operating expenses before special charge
over operating revenues.
2 Transportation ratio means the ratio of transportation expenses (such as
expenses of operating, servicing, inspecting, weighing, assembling and
switching trains) over operating revenues.
3 Maintenance of way ratio means the ratio of maintenance of way expenses
(such as the expense of repairing, maintaining, leasing, depreciating and
retiring right-of-way and trackage structures, buildings and facilities)
over operating revenues.
4 Maintenance of equipment ratio means the ratio of maintenance of equipment
expenses (such as the expense of repairing, maintaining, leasing,
depreciating and retiring transportation and other operating equipment)
over operating revenues.
Employees; Labor Relations
Labor relations in the railroad industry are subject to extensive
governmental regulation under the Railway Labor Act. Employees in the railroad
industry are covered by the Railroad Retirement System instead of Social
Security. Employer contribution rates under the Railroad Retirement System are
currently more than double those in other industries and may rise further as the
proportion of retired employees receiving benefits increases relative to the
number of working employees. Railroad employees are also covered by the Federal
Employer's Liability Act ("FELA") rather than by state no-fault workmen's
compensation systems. FELA is a fault-based system, with compensation for
injuries determined by individual negotiation or litigation.
Approximately 90% of all employees are represented by one of eleven
unions. The general approach to labor negotiations by Class I railroads is to
bargain on a collective national basis. For several years now, one of
management's guiding principles is that local -- rather than national,
industry-wide -- negotiations will result in labor agreements that better
address both employees' concerns and preferences and ICRR's actual operating
environment. Therefore, beginning in late 1994, ICRR began negotiating separate
distinct agreements with each of its eleven unions. To date, ten of ICRR's
eleven bargaining units, representing 85% of ICRR's represented workforce, have
ratified local agreements that resolve wage and work-rule issues through 1999
for shop crafts and
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through the year 2000 for trainmen. The latter agreement is similar to the
national agreement, except that the timing of various rate increases and lump
sum payments has been changed. ICRR continues to negotiate with the Brotherhood
of Locomotive Engineers, its only unsigned union.
There are risks associated with negotiating locally. Presidents and
Congress have repeatedly demonstrated they will step in to avoid national
strikes, while a local dispute may not generate federal intervention, making a
work stoppage potentially more likely. ICRR's management believes the potential
mutual benefits of local bargaining outweigh the risk.
The following table shows the average annual employment levels for the
last five years:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total employees 3,238 3,268 3,250 3,306 3,421
Management believes that over the next several years attrition and
retirements will be the primary source of future declines in employment levels.
Increases in employment levels, particularly in train operations, are possible
in response to growth of business in accordance with Plan 2000.
Regulatory Matters; Freight Rates; Environmental Considerations
ICRR is subject to significant governmental regulation by the STB and
other federal, state and local regulatory authorities with respect to rates,
service, safety and operations.
The jurisdiction of the STB encompasses, among other things, rates
charged for certain transportation services, assumption of certain liabilities
by railroads, mergers or the acquisition of control of one carrier by another
carrier and extension or abandonment of rail lines or services.
The Federal Railroad Administration, the Occupational Safety and Health
Administration and certain state transportation agencies have jurisdiction over
railroad safety matters. These agencies prescribe and enforce regulations
concerning car and locomotive safety equipment, track safety standards, employee
work conditions and other operating practices.
ICRR currently transports a significant volume of Southern Illinois
coal. Much of the coal from mines in that area will not meet the environmental
standards of the Clean Air Act without blending with compliance coal or
installation of air scrubbers at point of use. As a result, this source of
traffic is expected to decline. On the other hand, ICRR expects to participate
in additional movements of Western coal and certain Southern Illinois coal which
does comply. Overall, management believes that implementation of the Clean Air
Act is unlikely to have a material adverse effect on the results of ICRR.
Currently, the utility industry is undergoing deregulation. Some
analysts have suggested that utility deregulation will significantly reduce rail
revenue. However, the impact of utility deregulation on ICRR should be less than
the effect on other railroads because there are no captive utilities served by
ICRR. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Outlook" for additional comments.
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ICRR is and will continue to be subject to extensive regulation under
environmental laws and regulations concerning, among other things, discharges
into the environment and the handling, storage, transportation and disposal of
waste and hazardous materials. Inherent in the operations and real estate
activities of ICRR and other railroads is the risk of environmental liabilities.
See Item 2. "Properties - Environmental Conditions" for discussion of sites on
which the ICRR currently or formerly conducted operations that are subject to
governmental action in connection with environmental degradation. The EPA is
expected to propose regulations limiting locomotive emissions which may
significantly increase the purchase price or operating expense of locomotives.
Additional expenditures by ICRR may be required in order to comply with existing
and future environmental and health and safety laws and regulations or to
address contaminated sites which may be discovered.
Competition
ICRR faces intense competition for freight traffic from motor, water,
and pipeline carriers and from other railroads. Competition is generally based
on the rates charged and the quality and reliability of the service provided.
Low fuel prices disproportionately benefit trucking operations over railroad
operations since fuel costs are a relatively larger cost component for trucking
companies. The trucking industry frequently is more cost and transit-time
competitive than railroads, particularly for distances of less than 300 miles.
While deregulation of freight rates under the Staggers Act has greatly increased
the ability of railroads to compete with each other and alternate modes of
transportation, changes in governmental regulations (particularly changes to the
Staggers Act) could significantly affect ICRR's competitive position. At
December 31, 1996, there were 10 railroads in the United States and Canada
classified by revenues as Class I railroads. ICRR is ninth in revenues and has
the best operating ratio.
To a greater degree than other rail carriers, ICRR is vulnerable to
barge competition because its main routes are parallel to the Mississippi River
system. The use of barges for some commodities, particularly coal and grain,
sometimes represents a lower cost mode of transportation. As a result, ICRR's
revenue per ton-mile has generally been lower than industry averages for these
commodities. Barge competition and barge rates are affected by navigational
interruptions from ice, floods and droughts. These interruptions cause widely
fluctuating rates. ICRR's ability to maintain its market share of the available
freight has traditionally been affected by the navigational conditions on the
river. However, it appears to ICRR that worn-out barges are coming off the
Mississippi at a faster rate than new barge capacity is being added. A net
reduction of barge capacity could lead to firmer, less variable barge pricing
than has been the case over the last 15 years or so. If this trend develops,
ICRR may benefit.
Most of ICRR's operations are conducted between points served by one or
more competing carriers. The consolidation in recent years of major rail systems
has resulted in strong competition in the service territory of ICRR. The
mega-carriers could use their size and pricing power to block shippers' access
to efficient gateways and routing options that are currently and have been
historically available.
To date, mergers have not had a material adverse impact on the results
or financial condition of ICRR. In fact, ICRR has capitalized on new
opportunities that have developed out of the consolidation in the West by
providing services to other carriers, some of which address the issue of
maintaining routing options.
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While there may be risks from future mergers, ICRR believes those risks
are manageable. See "Managements Discussion and Analysis of Financial Condition
and Results of Operations."
Liens on Properties
ICRR's equipment is not subject to liens.
Liability Insurance
ICRR is self-insured for the first $5 million of each loss. ICRR
carries $245 million of liability insurance per occurrence, subject to an annual
cap of $335 million in the aggregate for all losses. This coverage is considered
by ICRR's management to be adequate in light of ICRR's safety record and claims
experience.
Item 2. Properties
Physical Plant and Equipment
System. As of December 31, 1996, ICRR's total system consisted of
approximately 4,500 miles of track comprised of 2,600 miles of main line, 200
miles of secondary main line and 1,700 miles of passing, yard and switching
track. ICRR owns all of the track except for 190 miles operated by agreements
over track owned by other railroads.
Track and Structures. The following amounts have been spent during the
five years ended December 31, 1996, on track and structure to construct and
maintain rail lines and related signal equipment, and other facilities ($ in
millions):
Capital
Expenditures Maintenance Total
1996............. $ 91.2 $ 23.7 $114.9
1995............. 66.9 33.5 100.4
1994............. 63.2 29.1 92.3
1993............. 50.3 25.1 75.4
1992............. 46.4 23.0 69.4
------ ------ ------
Total. $318.0 $134.4 $452.4
====== ====== ======
These expenditures have concentrated primarily on the rehabilitation of
the track roadway and bridges. Approximately, 1,400 miles of roadway ballast was
resurfaced in each of the last three years.
In 1996 a total of $20.1 million was spent to construct an intermodal
terminal facility for the Canadian National Railroad ("CN Terminal"). The
largest projects were a total of $11.4 million to complete the conversion of 198
miles of track, known as the Yazoo District, to a single track with centralized
traffic control in 1993 and 1994 and a total of $11.4 million was spent to
construct new or expanded intermodal facilities in Chicago and Memphis in 1992
and 1994. See "Management's Discussion and
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Analysis of Financial Condition and Results of Operations" for a discussion of
future capital expenditures.
Locomotives and Freight Cars. ICRR's fleet has undergone significant
rationalization and modernization since 1985 when locomotives and cars were at
their peak of 862 and 28,616, respectively. Over the last four years lease of 59
used SD-40-2's and 20-new SD-70's have enabled ICRR to replace older, lower
horsepower and less efficient locomotives. (The 20 SD-70's replaced 31 older,
smaller locomotives.) These locomotives are owned by IC's financing/leasing
subsidiaries and are leased to ICRR.
Locomotive modernization and acquisition were part of a change in
operational philosophy concerning equipment which resulted in adoption of an
equipment ownership program in 1993.
The program includes lease conversions whereby equipment is acquired
outright or leased under more favorable lease terms by ICRR. Through 1995, the
conversion program involved 118 locomotives and 4,228 freight cars. As a result
of the new lease terms, $7.1 million and $24.7 million of capital leases were
recorded in 1995 and 1994, respectively. Most of these leases contain fixed
price options whereby the equipment can be acquired at or below fair market
value at some point during the lease term.
Approximately 1,800 of the cars leased by ICRR are leased from a
separate subsidiary of IC. This subsidiary's remaining cars are leased to other
non-affiliated companies. When those leases expire, ICRR has first right of
refusal to lease the equipment. If ICRR exercises its rights, other leased
equipment will be returned to the independent and third-party lessors or
short-term car hire agreements are terminated.
The third segment of the equipment program was a significant upgrade of
the highway trailer fleet used in intermodal service. The entire fleet of old
leased trailers, approximately 880, was replaced with 800 brand new trailers.
Expanding intermodal volume necessitated the addition of another 100 trailers in
1994.
During 1994 ICRR repaired and reconditioned approximately 173 cars at a
cost of $2.9 million. This equipment is being leased on a short-term basis to
other carriers until the ICRR anticipates it will need the equipment.
In 1996, ICRR began a covered hopper fleet program under which existing
equipment was either modernized or replaced. Approximately 800 cars, operated
under short-term car hire arrangements or various leases, were returned and
replaced by 600 newly built high capacity hoppers which are being leased under
an operating lease from an unrelated third party.
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The following is the overall fleet at December 31:
Total Units: 1996 1995 1994 1993 1992
- - ------------ ---- ---- ---- ---- ----
Locomotives1...... 391 397 417 468 449
Freight cars...... 15,838 15,872 16,498 16,634 15,877
Work equipment.... 655 654 625 745 902
Highway trailers.. 889 898 898 898 203
1 Approximately 55 locomotives need repair before they can be returned to
service. This equipment is repaired if needed on an ongoing basis or sold.
ICRR sold 6, 40, 48, 23 and 66 surplus locomotives in 1996, 1995, 1994,
1993 and 1992, respectively. The active fleet is 331 as of December 31,
1996.
The components of the fleet for 1996 and in total for 1995 are shown below:
Long-Term 1996 1995
Description1 Owned2 Lease Total Total
Locomotives:
Multipurpose 212 97 309 312
Switching 60 22 82 85
------ ------ ------ ------
Total 272 119 391 397
====== ====== ====== ======
Freight Cars:
Box (general service) 224 1,220 1,444 1,481
Box (special purpose) 2,373 534 2,907 3,011
Gondola 955 600 1,555 1,428
Hopper (open top) 2,122 1,993 4,115 4,182
Hopper (covered) 2,762 1,183 3,945 3,554
Flat 230 366 596 705
Other 846 430 1,276 1,406
------ ------ ------ ------
Total 9,512 6,326 15,838 15,767
====== ===== ====== ======
Work Equipment 655 655 654
====== ====== ======
Highway trailers 889 889 898
====== ====== ======
1 In addition, approximately 1,575 freight cars were being used by ICRR under
short-term car hire agreements. 2 Includes 25 locomotives and 765 freight cars
under capital leases.
Environmental Conditions
ICRR faces potential environmental cleanup costs associated with
approximately 25 contaminated sites and various fueling facilities for which a
total of $17 million has been reserved as of December 31, 1996. The most
significant of those sites are described below.
Mobile, Alabama
ICRR owned property in Mobile prior to 1976 upon which a lessee
conducted creosoting operations. The Alabama Department of Environmental
Management has determined that the soil and groundwater are contaminated with
creosote, pentachlorophenol and possibly dioxins. ICRR has been participating in
joint cleanup efforts with the current owner and ICRR's former lessee. See Item
3.
"Legal Proceedings."
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Jackson, Tennessee
A rail yard in Jackson, Tennessee, formerly owned by ICRR has been
placed on the federal and state "superfund" list as a result of the discovery of
Trichloroethylane (TCE) in the adjacent municipal water well field. ICRR
formerly operated a shop facility at the site and TCE is a common component of
solvents similar to those believed to have been used in the shop. ICRR believes
it has demonstrated that the TCE did not come from its operation, or from this
site. See Item 3. "Legal Proceedings."
McComb, Mississippi
ICRR has conducted a site assessment of a facility where car repairs
were formerly performed to determine the nature and extent of contamination,
primarily lead from removed paint, at the site. The Railroad is now preparing a
remediation plan under the supervision of the Mississippi Bureau of Pollution
Control. Estimates of remaining clean up costs range between $2.7 million and
$8.0 million.
Kegley, Illinois
Emergency response action has been taken by ICRR at this scene of a
1994 derailment in which about 22,000 gallons of TCE were released. The spill
has been contained by construction of an impervious wall extended into the
bedrock and encircling the site. ICRR has enrolled in Illinois' Pre-Notice Site
Cleanup Program and is voluntarily remediating the site. Estimates of remaining
clean up costs range between $1.4 million and $7.0 million. ICRR believes the
shipper bears some responsibility for the release and has initiated legal
action.
East Hazel Crest, Illinois
In 1994 ICRR learned that an underground fuel line had leaked about
100,000 gallons of diesel fuel into the soil and groundwater. ICRR has replaced
the fuel tank and piping, has constructed a groundwater remediation system and
has enrolled the site in Illinois' Pre-Notice Site Cleanup Program.
See Item 3. "Legal Proceedings."
Fueling Facilities
ICRR has maintained fueling facilities at more than 20 locations at
various times from the 1950's to date. Many of those sites are or may be
contaminated with spilled fuel. Those stations currently in use are equipped
with drip pans and treatment facilities and ICRR has initiated a program of
rebuilding all fuel lines above ground.
Waste Oil Generation
ICRR has been identified as a Potentially Responsible Party ("PRP") at
a site where waste oil was allegedly processed and disposed. ICRR is alleged to
have generated some of the waste oil. ICRR believes any contribution it may have
made to the site contamination is de minimis. See Item 3.
"Legal Proceedings."
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Item 3. Legal Proceedings
State of Alabama, et al. v. Alabama Wood Treating Corporation, Inc., et al.,
S.D. Ala. No. 85-0642-C
The State of Alabama and Alabama State Docks ("ASD") filed suit in 1985
seeking damages for alleged pollution of land in Mobile, Alabama, stemming from
creosoting operations over several decades. Defendants include ICRR, which owned
the land until 1976, Alabama Wood Treating Corporation, Inc., and Reilly
Industries, Inc. ("RII"), which leased the land from ICRR and conducted creosote
operations on the site. In December 1976, ICRR sold the premises to ASD. The
complaint sought payment for the clean-up cost together with punitive and other
damages.
In 1986, ASD, RII and ICRR agreed to form a joint technical committee
to clean the site, sharing equally the cost of clean-up, and in October 1986 the
court stayed further proceedings in the suit. Under the agreement the joint
technical committee has spent approximately $6.8 million and has been authorized
to expend up to a total of $6.9 million. ICRR has contributed $2.3 million.
Further clean-up activities are anticipated, the cost of which could range from
$1.8 million to $10.7 million depending upon the clean up standards and
remediation methods ultimately required and utilized. Under the agreement,
ICRR's share of the costs would range from $600,000 to $3.6 million.
Under the agreement, if any party disagrees with the amount determined
by the joint technical committee to be expended or otherwise disagrees with any
aspect of the clean-up, such party may decline further participation and
recommence legal proceedings. However, amounts already contributed by any party
will be credited against that party's eventual liability and may not be
recovered from any other party. No party has declined further participation.
In the Matter of Illinois Central Railroad Company, et al., Tennessee Division
of Superfund No. 94-0187
The Tennessee Department of Environment and Conservation, on June 6,
1994, issued a Remedial Order requiring cleanup by ICRR and the current owners
of a site in Jackson, Tennessee. ICRR operated a rail yard and locomotive repair
facility at the site. Trichloroethylane ("TCE") has been found in several
municipal water wells near the site. TCE is a common component of solvents
similar to those believed to have been used at the shop. In addition,
concentrations of metals and organic chemicals have been identified on the
surface of the site. A preliminary remedial investigation and feasibility study
has been completed which indicates the TCE in the water wells came from an
adjacent municipal dump and not from operations on this site. Exclusive of
ground-water cleanup, ICRR estimates total clean up costs between $3.5 million
and $7.6 million and expects another PRP to share in the expense.
People of the State of Illinois v. Illinois Central Railroad Company No. 95
CH842 (Circuit Court of Cook County, Illinois)
On February 2, 1995, the State of Illinois filed a Complaint for
Injunction and Civil Penalties against ICRR relating to a release of diesel fuel
from an underground pipeline at ICRR's Markham Yard facility in East Hazel
Crest, Illinois. The Complaint alleges that ICRR violated State water pollution
statutes by allowing diesel fuel to enter waters of the State and seeks an order
compelling ICRR to take necessary corrective actions at the site and to pay a
civil penalty of $100,000. ICRR has replaced its fueling tanks and pipelines,
and expects remaining clean up costs to range between $.4 million and $3.0
million.
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South Eighth Street Landfill, West Memphis, Arkansas.
ICRR was named by the EPA as a Potentially Responsible Party in
connection with a sludge oil pit at this location. It is alleged that ICRR along
with numerous other commercial and governmental entities generated used oil
which was processed at this site and thus contributed to the contaminated sludge
on the site. ICRR has entered into an agreement with numerous other PRP's under
which ICRR's share of the clean up cost will be .2%. Based on estimates of the
likely remediation cost, ICRR's contribution under the PRP agreement is expected
to be less than $20,000.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See Index page of this report for explanation.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
All of the outstanding common stock of the ICRR (100 shares) is owned
by IC and therefore is not traded on any market. Certain covenants of ICRR's
Revolver while not specifically restricting dividends do require the ICRR to
maintain minimum levels of tangible net worth. While not anticipated, such
restrictions could limit the amount of dividends paid by the ICRR to IC. ICRR
paid cash dividends to IC of $103.2 million in 1996, $107.7 million in 1995 and
$42.5 million in 1994. At December 31, 1996, approximately $26.9 million of ICRR
equity was free of such restriction. In January 1997, ICRR declared and paid a
dividend of $17.8 million to IC.
Item 6. Selected Financial Data
Intentionally omitted. See Index page of this Report for explanation.
16
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Significant Developments
CCP Holdings, Inc. Acquisition
On June 12, 1996, ICRR used proceeds it received from the issuance of
Commercial Paper (average interest rate 5.52% and average maturity 30 days) to
pay a $50.0 million dividend to IC and to loan $59.9 million (5.625% per annum)
to IC. IC used the $109.9 million and its bank credit lines to acquire CCP
Holdings, Inc. ("CCPH"). The transaction closed June 13, 1996, following the
effective date of the approval order issued by the Surface Transportation Board
("STB").
CCPH has two principal operating subsidiaries - the Chicago Central
and Pacific Railroad ("CCPR") and the Cedar River Railroad ("CRR") - which
together comprise a Class II railroad system operating 850 miles of road. CCPR
operates from Chicago to Omaha, Nebraska, with connecting lines to Cedar Rapids
and Sioux City, Iowa. CRR runs from Waterloo, Iowa to Albert Lea, Minnesota.
1992 Four-Year Growth Plan and Plan 2000
In 1992 the IC announced its first growth plan, for the years 1993
through 1996. Since the key concepts--$100 million in revenue growth and an
operating ratio of 66.7%--were reached by the end of 1995, IC announced a second
growth plan called Plan 2000.
Plan 2000 calls for (i) revenue to grow from the 1994 base of $595
million to $800 million by the end of 1999 and (ii) the continued reduction of
the operating ratio to below 60%.
As designed, Plan 2000 is intended to focus management on increasing
operating performance and responding to general economic trends quickly. The
plan assumes that ICRR's growth, excluding coal use and worldwide grain demand,
will be between 1.2% and 1.7%. This assumption is based on internal analysis of
published economic forecasts available when the plan was developed, such as the
Blue Chip Economic Forecast, which predicted industrial production would gain
2.4% to 2.8% per year. As for grain, Plan 2000 assumes that export grain demand
will be approximately 45,000 carloads annually.
To achieve Plan 2000, ICRR will concentrate on expanding the volume
of business from current customers, seeking to locate new businesses or
expansions by existing customers on our system, and raising rates when possible
to reflect the value of the services ICRR provides. To increase business in coal
and grain, ICRR will work with shippers to develop strategies and service
schedules to permit them to participate in the increasingly competitive world
market. For example, ICRR developed a concept of moving export grain to the Gulf
in unit trains of customer-supplied cars, operating in dedicated, continuous
service approximately ten months of the year.
As stated, a key goal of Plan 2000 was revenue growth from $595
million to $800 million or approximately 6% per year or 34% in total. After
achieving revenues of $645 in 1995 (or an 8.4% increase), ICRR did not meet its
revenue objectives in 1996; in fact, ICRR's revenues declined 4.4%
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to $617.2 million. See "-Results of Operations" and "- Outlook" for the cause of
the 1996 shortfall and a discussion of 1997.
Achieving Plan 2000 is key to ICRR's incentive compensation programs
because those programs are dependent on revenue growth and return on total
capital ("ROTC") of ICRR's parent. In 1995 revenue growth of 8.4% exceeded the
revenue goal of 5% but in 1996, as stated, revenues declined 4.4% missing the 5%
goal. For 1997, the consolidated IC growth target is 7.5%.
In 1996, ROTC of 12%, was essentially threshold performance and
matched 1995's performance. For 1997, the consolidated target ROTC is 11.2%.
Results of Operations
The discussion below takes into account the financial condition and
results of operations of ICRR for the years presented in the consolidated
financial statements.
1996 Compared to 1995
Total revenues for 1996 decreased from the prior year by $28.1
million or 4.4% to $617.2 million, following a 3.1% decrease in the number of
carloadings coupled with a 1.5% decrease in the average freight revenue per
carload.
Grain and grain mill accounted for 17% of ICRR's carloads and 27% of
ton-miles in 1996. Against 1995, carloads, ton-miles and revenues were down 17%,
31% and 22% respectively. Grain was clearly the primary cause of the 1996
revenue shortfall. The comparisons were particularly difficult against a record
grain carloading year in 1995. Illinois' 1995 corn and soybean harvest was
abnormally small so that by the third quarter 1996 grain elevators were
essentially depleted and the new harvest was still weeks away. Rail rates were
higher on average this year versus last; demand for grain was strong; the
product just was not available to move. The smaller crop also affected grain
mill since domestic processors were forced to cut back on their usual
production.
Coal accounted for 22% of ICRR's carloads and 24% of ton-miles in
1996. Against 1995, carloads, ton-miles and revenues were down 6%, up 6% and
flat, respectively. A large coal contract for 25,000 carloads was not renewed in
July 1995 as a large customer wanted more aggressive pricing and went elsewhere.
Thus, loads in the first half of 1996 compared with 1995 were significantly
depressed. However, for a second year in a row, coal margins, and the return on
the assets involved, improved.
Chemicals accounted for 15% of ICRR's carloads and 17% of ton-miles
in 1996. Compared with 1995, ton-miles were down 2% while carloads and revenues
were flat. Rail rates, under pressure in the earlier months of the year, firmed
in the second half. The softness observed in the economy, especially in the
first two quarters, was reflected in the building of chemicals manufacturers'
inventories and softness in our customers' pricing. Our customers' markets
firmed in the latter half of the year so that ICRR came in essentially flat in
both chemical loads and revenues.
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Paper and Forest Products were 15% of 1996 carloads and 14% of
ton-miles. Total carloads were down 6% while ton-miles and revenues were down 3%
versus 1995. Rail rates held up reasonably well throughout the year. Paper and
forest products are economically sensitive commodities that respond to
industrial production, housing starts and other basic economic indicators. Fiber
and pulpboard were depressed all year with slight improvements only recently.
Bulk Commodities contributed 6% of carloads and ton-miles in 1996.
This represents carload and revenue growth of approximately 4% while ton-miles
were down slightly from the 1995 level. Bulk commodities are primarily stone and
other construction materials and are closely tied to state highway projects.
This smaller commodity group fluctuates with the timing of projects as well as
the availability of freight cars for this lower-margin business.
Metals accounted for 4% of ICRR's carloads and 5% of ton-miles in
1996. For 1996, versus 1995, carloads, ton-miles and revenues were up 9%, 21%
and 11%, respectively. The steel industry had another strong year, and ICRR set
another record for metals loads and revenues.
Finally, Intermodal accounted for 21% of ICRR's loads and 7% of
ton-miles. Versus 1995, carloads were up 10%, with ton-miles and revenues up 9%.
These results were achieved in an industry that saw trailer rate weakness
earlier in the year and some weakness in automotive parts traffic later in the
year.
Operating expenses overall decreased $25.7 million or 6.1% in 1996.
Labor and fringe costs include the wage increases of 3% negotiated with nine of
the ICRR's unions. The decline in this category is primarily the result of lower
traffic levels, particularly grain, and the elimination of the high overtime
caused by the congestion experienced in 1995. Leases and car hire also benefited
from the elimination of congestion to return to more normal operating levels. In
1995, favorable one-time adjustments on several capital leases were recorded.
Fuel expense reflects the increase in cost per gallon (13.8%) partially offset
by decreased usage (9.4%). The decrease in casualty, insurance and losses
reflects the emphasis on safety and improved claims experience. Other expenses
reflect the one-time reversal of non-revenue related accruals to actual ($2.5
million) and favorable performance payments in joint facilities that congestion
in 1995 prevented us from receiving ($.7 million).
Operating income for 1996 decreased by $2.4 million or 1.1% to $219.5
million for the reasons cited above.
On October 3, 1996, ICRR sold its investments in an industry-captive
insurance company, RAIL, Inc., which resulted in a one-time gain, recorded as
Other Income, Net, of approximately $7 million.
Net interest expense of $26.5 million for 1996 increased .8% compared
to $26.3 million in 1995. The 1996 expense includes $3.6 million from increased
borrowings to support the $109.9 million transferred from ICRR in June 1996 in
connection with the acquisition of CCPH. Overall in 1996, average borrowings
have been greater than 1995 and interest rates have been lower.
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<PAGE>
1995 Compared to 1994
Revenues for 1995 increased from the prior year by $50.0 million or
8.4% to $645.3 million. The increase was a result of a 4.6% increase in
carloadings coupled with a 2.1% increase in the average freight revenue per
carload. In 1995, ICRR experienced increased carloadings in intermodal (31.2%),
grain and grain mill products (13.2%), paper (6.4%) and chemicals (4.1%),
partially offset by decreased loadings in coal (11.9%).
Operating expenses for 1995 increased $20.5 million or 5.1%. Labor
and fuel expenses increased reflecting the increased loadings experienced in
1995 over 1994. Depreciation expense was higher in 1995 because of ICRR's
increased ownership of equipment. Other expenses, which include joint
facilities, net and equipment related expenses, increased $9.0 million.
Partially offsetting the increased expenses was a $.5 million decrease in lease
and carhire expense and decreased casualty, insurance and loss expense ($6.3
million) reflecting ICRR's emphasis on safety and improved claims experience.
Operating income for 1995 increased $29.5 million or 15.3% to $221.9
million for the reasons cited above.
Net interest expense of $26.3 million for 1995 increased 1.2%
compared to $26.0 million in 1994. Increased debt burden primarily associated
with equipment additions account for the increase in interest expense. Results
for 1995, also reflect the issuance of lower coupon debt in connection with the
prepayment of ICRR's $160 million Senior Notes at face value, plus accrued
interest and a prepayment penalty. The prepayment resulted in an extraordinary
loss of $18.4 million, $11.4 million after tax. See "- Liquidity and Capital
Resources."
Net income was further affected by a $4.3 million after tax gain on
the resolution of prior period tax issues.
Outlook
- NOTE -
This section is intended to provide an understanding of factors that
will impact ICRR in 1997 and beyond. This discussion contains "forward looking
statements" within the meaning of the federal securities laws including
statements of expectations, beliefs, plans, and similar expressions concerning
matters that are not historical facts. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements. These risks and uncertainties affecting ICRR are
discussed in greater detail in a separate exhibit to ICRR's Form 10-K for 1996.
On a commodity basis:
GRAIN: Following a disappointing 1996, the good news is that 1996
corn and soybean harvests in both Illinois and Iowa were excellent. The strong
harvests did not immediately translate into improved traffic as farmers withheld
product for better pricing. Also, export demand for U.S. wheat has fallen in
competition with other wheat exporting countries. However, world grain
stockpiles have been at historic lows and will take several consistently good
growing seasons
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worldwide to fully replenish. Iowa and Illinois together account for more than
35% of all the corn produced in the U.S.; ICRR runs through some of the richest
and most productive farmland in the country. We believe the fundamental grain
outlook over the next several years is very positive for us, even as we
recognize the vagaries of the weather and that export demand for U.S. grains,
from year-to-year, will always be more volatile than domestic demand, subject to
the expansions and contractions of world supply as well as international
agricultural and trade policies.
COAL: Based on our current projections, dependent on stockpiles and
weather in the service territories of the utilities we serve, ICRR expects to
move approximately the same number of loads in 1997 as 1996.
The subject of coal often evolves to the utility deregulation issue
and its impact on ICRR. Since coal transportation represents a large cost factor
for coal-fired plants, some believe more intense competition among utilities,
including "power-wheeling" and "coal-by-wire," may cause the pattern of coal
movements to shift and rail rates to come under pressure. While this may turn
out to be the impact on the industry as a whole (reflecting the effects on the
dominant coal-hauling railroads), applying the same logic to a niche player like
ICRR is probably overly simplistic. ICRR doesn't have captive utilities. We
compete with low-cost barge transportation on the Mississippi and Ohio rivers.
At this point, there are too many variables to know if utility
deregulation will have a neutral, modestly positive or modestly negative effect
on ICRR long term. However, it is worth noting that today we enjoy better
margins on coal than we did five years ago.
CHEMICALS: Based on the improved economy experienced in late 1996
growth of base chemical in 1997 should be consistent with the solid growth rates
seen in the last few months of 1996. Growth beyond 1997 will come through
expansions of current facilities on our line (for example, Shell and Fina) and
through the addition of new manufacturing capability. In this latter category,
Shintech, a subsidiary of Shin-Etsu Chemical Co., has announced construction of
a major production complex on our line near Geismar, Louisiana, which is
expected to begin operation in 1998.
Two years ago we built in the Chicago area a facility to store
plastic pellets in bulk and load them for customers into trucks for delivery to
non-rail served sites. That facility has proven so successful, it will be
expanded in 1997 to approximately double its size.
PAPER AND FOREST PRODUCTS: Following strong demand in 1994 and 1995,
producers increased production capacity in 1995 and early 1996. Now producers
must struggle with the excess capacity in the industry. Therefore, we are not
expecting a rapid turnaround in this commodity group, although longer term we
believe we are well-positioned for modest growth.
One of our largest customers has been re-tooling a major mill to
shift to long-log input. Re-tooling has not been completed as quickly as
expected, however, the conversion will benefit us longer term as we will be able
to carry the raw material into the mill in addition to hauling the finished
product.
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Georgia Pacific has completed a major distribution center on our line
in northern Illinois. As the facility grows additional inbound and outbound
carloads will add to the paper volume.
METALS: We expect 1997 metals volumes to approximate this year's very
strong performance. In late 1997, Birmingham Steel will complete a mini-mill in
Memphis. This mill represents significant new manufacturing on our line and
enhances the industrial park for potential future development.
Metals will benefit from both this new mini-mill in Memphis and the
IC RailMarine Terminal, another subsidiary of IC, being constructed south of
Baton Rouge. RailMarine's anchor customer is a joint venture between Birmingham
Steel and GS Industries. The venture was formed to construct and operate a $200
million direct-reduced iron (DRI) plant which will be adjacent to and served by
our facility.
The joint venture will import iron ore through our terminal into
their facility to produce DRI. The output will supply Birmingham Steel's and GS
Industries' own mills. Much if not all of Birmingham Steel's share of the output
will become input to their Memphis mill.
INTERMODAL: This class of traffic is expected to continue its growth
in 1997. The marketplace has already begun to respond to this new service with
higher levels of traffic moving via rail.
In August, the Burlington Northern Santa Fe ("BNSF") began
interchanging with us at Memphis in a traffic corridor that stretches from the
West Coast to the Southeast. The business originates and terminates in Mobile
and the arrangement creates a sufficient base of business to allow us to re-open
our previously underutilized Mobile intermodal ramp. In addition to serving the
BNSF, re-opening the Mobile ramp allows us to market our own Mobile-to-Chicago
service offering.
Recently we began a partnership with Conrail which efficiently links
the southern half of our system to their northeast markets.
OTHER GROWTH OPPORTUNITIES: One of ICRR's strengths is its diverse
customer base including chemical, grain, coal, forest products, metals and
intermodal shippers. In addition to our traditional customers, ICRR actively
markets its services and facilities to other railroads so that today many of the
major railroads are customers. Two of the most recent examples are the 75-acre
Gateway Intermodal Terminal we built for the Canadian National Railway and a
service and joint marketing agreement with BNSF (the "BNSF Agreement") to move
traffic, originating primarily in Texas, north over our line.
OTHER ISSUES:
CONSOLIDATIONS: The American railroad system has seen accelerated
consolidation in the last few years and pending transactions suggest the trend
will continue. Each rail merger presents a risk that rail traffic will be
diverted around ICRR. In the most extreme circumstances rail mergers could have
a material adverse impact on revenues. However, we believe that ICRR could
adjust its operations to retain current levels of profitability. Management
expects to continue to
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monitor developments and take actions to mitigate the impact of rail
consolidations. Of course, no assurances can be given that such consolidations
will not have a material adverse affect on ICRR.
ICRR also believes that consolidations are not necessarily
problematic. As is evident in the evolution of ICRR over the last several years,
ICRR is inclined to see a changing landscape as a source of potential new
opportunity for us. And ICRR has done well in capitalizing on new opportunities
that have developed out of the consolidation in the West as reflected by the
BNSF Agreement.
Liquidity and Capital Resources
Operating Data ($ in millions):
1996 1995 1994
---- ---- ----
Cash flows provided by (used for):
Operating activities................... $168.9 $168.2 $195.6
Investing activities................... (230.0) (122.8) (77.0)
Financing activities................... 104.4 (54.6) (114.5)
------ ------- --------
Net change in cash and
temporary cash investments. $ 43.3 $ (9.2) $ 4.1
====== ======== =======
Cash from operating activities in 1996, 1995 and 1994 was primarily net
income before depreciation, deferred taxes and extraordinary item and 1994 was
also affected by the sales of accounts receivable.
Investing Data
Additions to property were as follows ($ in millions):
1996 1995 1994
---- ---- ----
Communications and signals.. $ 12.1 $ 10.7 $ 13.8
Equipment/rolling stock..... 27.7 30.3 22.5
Track and bridges........... 53.9 47.0 44.7
Other....................... 25.2 9.6 5.4
------- -------- --------
Total $118.9 $ 97.6 $ 86.4
====== ====== ======
For 1996, Track and Bridges and Other include $3.3 million and $16.8
million, respectively, for the CN Terminal. In 1995, Equipment includes $25.9
million for 20 new SD-70 locomotives placed in service in the fourth quarter. In
1996, 1995 and 1994 capital expenditures exceeded original estimates as several
opportunities to acquire equipment were acted upon in accordance with ICRR's
strategy of owning more of its equipment. Property retirements and removals
generated proceeds of $6.0 million, $5.4 million, and $8.2 million in 1996, 1995
and 1994, respectively.
ICRR anticipates that capital expenditures for 1997 will be
approximately $93 million. Base expenditures of $79 million will concentrate on
track maintenance, bridges and freight car upgrades. These expenditures are
expected to be met from current operations or other available sources.
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In June 1996, following the effectiveness of the order by the STB, IC
acquired the stock of CCPH Holdings Inc. (See Note 17.) IC used its own bank
credit lines and funds received from ICRR (a loan of $59.9 million and a $50
million dividend) to complete the $147 million transaction.
Financing Activities
IC's financing/leasing subsidiaries lease equipment to ICRR.
Certain covenants of ICRR's revolver require specific levels of
tangible net worth but not a specific dividend restriction. ICRR paid dividends
to IC of ($103.2 million in 1996, $107.7 million in 1995 and $42.5 million in
1994). Included in the 1996 dividends to IC is the March 1996 transfer by ICRR
of its ownership in the Chicago Intermodal Company ("CIC") via a dividend of CIC
stock. The book value of the CIC investment was $5.7 million. In January 1997,
ICRR declared and paid a dividend of $17.8 million to IC.
ICRR has a commercial paper program whereby a total of $200 million can
be issued and outstanding at any one time. The program is supported by a $250
million Revolver with the Railroad's lending group (see below). At December 31,
1996, Standard & Poor's Corporation ("S&P"), Moody's Investor Services
("Moody's") and Fitch Investors Service ("Fitch") have rated the commercial
paper A2, P2 and F2, respectively, and $20.0 million was outstanding. The
average interest rate on commercial paper for the year ended December 31, 1996,
was 5.61% with a range of 5.41% to 6.06%. ICRR 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. ICRR's public debt is rated Baa2 by Moody's and BBB by
S&P.
In 1994, ICRR 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 in June 1998, allows for
sales of accounts receivable up to a maximum of $50 million at any one time.
ICRR services the accounts receivable sold under the agreement and retains the
same exposure to credit loss as existed prior to the sale. At December 31, 1996,
$48 million 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 $2.9 million and $3.2
million and $2.2 million for the years ended December 31, 1996,1995 and 1994,
respectively. ICRR's accounting for the sale of accounts receivable is impacted
by SFAS No. 125. As a result, the agreement is expected to be modified to comply
with this new standard so that the accounting and reporting for the sale of
accounts receivables will remain unchanged.
In April 1996, ICRR concluded negotiations with its bank lending group
whereby the Railroad's $250 million Revolver was amended and restated. The
amendment reduced various facility fees and borrowing spreads, lowered the
tangible net worth requirement beginning in the second quarter of 1996 and
extended the expiration date to 2001. Fees and borrowing spreads are predicated
on ICRR's long-term credit ratings. Currently, the annual facility fee is 15
basis points and borrowings under this agreement are at Eurodollar offered rate
plus 22.5 basis points. The Revolver is used primarily for backup for ICRR'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 ICRR under the
facility.
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No amounts have been drawn under the Revolver. At December 31, 1996, the $250
million was limited to $230.0 million because $20.0 million in commercial paper
was outstanding.
Certain covenants of ICRR's debt agreements require among others
specific levels of tangible net worth but not a specific dividend restriction.
At December 31, 1996, ICRR exceeded its tangible net worth covenant by $26.9
million. ICRR was in compliance with all covenants at December 31, 1996, and
does not contemplate any difficulty maintaining such compliance.
Throughout 1996 and 1995, ICRR has been active in the public debt
market issuing bonds and medium-term notes ("MTN's"). In December 1996, ICRR
issued $125 million aggregate amount of 100-year 7.7% debentures, due September
15, 2096. These bonds may not be redeemed until 2026 and then only at a premium
which declines to par in 2056. In 1995, $100 million 7.75% non-callable 10-year
notes due May 2005 ("2005 Notes") were issued. (See below.) A total of $230
million in MTN's were issued over the two years as follows ($ in millions):
Principle Year
Amount Coupon Issued Matures
------ ------ ------ -------
$20 6.27% 1995 1998
30 6.83 1995 2000
50 6.98 1996 2007
50 7.12 1996 2001
30 6.85 1996 1999
50 6.72 1996 2001
The shelf registration from 1995 has been fully used. A shelf
registration from 1996 can be used to issue an additional $70 million in MTN's
or other debt until 2000. Currently, there are no plans to issue additional debt
but capital investments, other ventures and labor settlements could necessitate
use.
In 1995, ICRR 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
2005 Notes and $40 million from existing lines of credit. The prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
line of credit borrowings were replaced with the proceeds of MTN's.
ICRR 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. Additionally, ICRR believes it has
access to the public debt market if needed.
Miscellaneous
ICRR has entered into various diesel fuel collar agreements designed to
mitigate significant changes in fuel prices. As a result, approximately 17% of
ICRR's short-term diesel fuel requirements through June 1997 are protected
against significant price changes.
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ICRR has paid approximately $3 million in 1996 and $6 million in each
of 1995 and 1994 for severance, lump sum signing awards and other costs
associated with various labor agreements. Under the terms of local bargaining
agreements wages will rise 3%-4% per year.
In October 1996, the Brotherhood of Maintenance of Way Employees
membership ratified a new agreement which settles wage and work rules through
1999. In January 1997, the United Transportation Union ("UTU") ratified a new
agreement which settles wage and work rule issues through 2000. The UTU
agreement is similar to the nationally negotiated agreement in effect with other
Class I carriers. The main distinction is timing of the various lump sum payouts
and scheduled wage increases. ICRR continues to negotiate with its remaining
operating union on a local level. While no agreement is pending, an agreement
may be reached that requires significant lump sum payment. It is too early to
determine if a separate agreement will be reached but management believes
available funding sources will be sufficient to meet any required payment.
Environmental Liabilities
ICRR's operations are subject to comprehensive environmental regulation
by federal, state and local authorities. Compliance with such regulation
requires ICRR 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,
ICRR is potentially liable for the cost of clean-up of various contaminated
sites. ICRR 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 ICRR can be held jointly and severally
liable for all environmental costs associated with such sites.
ICRR is aware of approximately 25 contaminated sites at which it is
probably liable for some portion of any required clean-up. Of these, 17 involve
contamination primarily by diesel fuel which can be remediated without material
cost. Five other sites are expected to require more than $1 million in clean-up
costs. At four of these sites other parties are expected to contribute the
majority of the costs incurred. ICRR paid approximately $2.8 million toward the
investigation and remediation at all sites in 1996, and anticipates similar
expenditures annually.
For all known sites of environmental contamination where ICRR loss or
liability is probable, ICRR has recorded an estimated liability at the time when
a reasonable estimate of remediation cost and ICRR liability can first be
determined. Adjustments to initial estimates are recorded as necessary based
upon additional information developed in subsequent periods. Estimates of the
ICRR`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
December 31, 1996, ICRR estimated the probable range of its liability to be $17
million to $53 million, and in accordance with the provisions of SFAS No. 5 had
a reserve of $17 million for environmental contingencies. This amount is not
reduced for potential insurance recoveries or third-party contribution.
26
<PAGE>
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 ICRR leased substantial amounts of property to
industrial tenants, and ICRR 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 ICRR 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, based on these known facts and
circumstances, to have a material adverse effect on ICRR`s financial position,
results of operations, cash flow or liquidity.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS No. 125"), issued by the Financial Accounting Standards Board in 1996 and
effective for 1997, provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities. The
accounting for the ICRR's sales of accounts receivable agreement is impacted by
this standard. As a result, the agreement is expected to be modified to comply
with the SFAS No. 125 requirements so that the accounting and reporting for the
sale of the ICRR's accounts receivable will remain unchanged.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on page 31 of this Report.
Item 9. Changes in and Disagreement with Accountants in Accounting
Financial Disclosures
NONE
27
<PAGE>
PART III
Items 10, 11, 12 and 13
Intentionally omitted. See the Index page of this Report for
explanation.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
See Index to Consolidated Financial Statements on page 31 of this
Report.
2. Financial Statement Schedules:
See Index to Financial Statement Schedules on page F-27 of this
Report.
3. Exhibits:
See items marked with "*" on the Exhibit Index beginning on page E-1
of this Report. Items so marked identify management contracts or
compensatory plans or arrangements as required by Item 14.
(b) 1. Reports on Form 8-K:
During the fourth quarter of 1996 the Registrant filed with the
Securities and Exchange Commission the following reports on Form 8-K
on the dates indicated to report the events described:
On December 4, 1996, a current report on Form 8-K was filed
announcing the signing of an agreement with the United
Transportation Union subject to a January ratification vote by UTU
membership.
(c) Exhibits:
The response to this portion of Item 14 is submitted as a separate
section of this Report. See Exhibit Index beginning on page E-1.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a separate
section of this Report.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, there unto duly authorized.
ILLINOIS CENTRAL RAILROAD COMPANY
By: /s/ DALE W. PHILLIPS
Dale W. Phillips
Vice President and Chief Financial Officer
Date: March 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title(s) Date
/s/ GILBERT H. LAMPHERE Chairman of the Board and Director March 19, 1997
- - ------------------------
Gilbert H. Lamphere
/s/ E. HUNTER HARRISON President and Chief Executive Officer March 19, 1997
E. Hunter Harrison (principal executive officer), Director
/s/ DALE W. PHILLIPS Vice President March 19, 1997
- - --------------------
Dale W. Phillips and Chief Financial Officer
(principal financial officer)
/s/ JOHN V. MULVANEY Controller March 19, 1997
- - --------------------
John V. Mulvaney (principal accounting officer)
/s/ RONALD A. LANE Director March 19, 1997
- - -------------------
Ronald A. Lane
/s/ JOHN D. MCPHERSON Director March 19, 1997
- - ---------------------
John D. McPherson
/s/ DONALD H. SKELTON Director March 19, 1997
- - ---------------------
Donald H. Skelton
29
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENTS
SUBMITTED IN RESPONSE TO ITEM 8
30
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants................................... F-1
Consolidated Statements of Income for the three years ended
December 31, 1996........................................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1995.................. F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996........................................................ F-4
Consolidated Statements of Stockholder's Equity and Retained
Income for the three years ended December 31, 1996....................... F-5
Notes to Consolidated Financial Statements for the three years
ended December 31, 1996.................................................. F-6
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Illinois Central Railroad Company:
We have audited the accompanying consolidated balance sheets of
Illinois Central Railroad Company (a Delaware corporation) and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
income, cash flows and stockholder's equity and retained income for each of the
three years in the period ended December 31, 1996. These financial statements
and the schedules referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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
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 financial position of Illinois Central
Railroad Company and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
financial statement schedules herein are presented for purposes of complying
with the Securities and Exchange Commission's rules and are not part of the
basic financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 20, 1997
F1
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions)
Years Ended December 31,
1996 1995 1994
Revenues $617.2 $ 645.3 $ 595.3
Operating expenses:
Labor and fringe benefits 181.9 194.8 184.2
Leases and car hire 56.7 58.8 59.3
Diesel fuel 34.6 33.2 31.5
Materials and supplies 31.2 35.0 35.6
Depreciation and amortization 31.0 30.9 25.0
Casualty, insurance and losses 11.4 17.4 23.7
Other taxes 16.9 18.2 17.6
Other 34.0 35.1 26.0
Operating expenses 397.7 423.4 402.9
Operating income 219.5 221.9 192.4
Other income, net 9.9 2.7 4.5
Interest expense, net (26.5) (26.3) (26.0)
Income before income taxes and extra-
ordinary item 202.9 198.3 170.9
Provision for income taxes 76.3 67.1 58.2
Income before extraordinary item 126.6 131.2 112.7
Extraordinary item, net - (11.4) -
Net income $126.6 $ 119.8 $ 112.7
The following notes are an integral part of the consolidated financial
statements.
F2
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
December 31, December 31,
ASSETS 1996 1995
Current assets:
Cash and temporary cash investment $ 46.3 $ 3.0
Receivables, net of allowance for
doubtful accounts of $1.3 in
1996 and $2.0 in 1995 84.4 79.3
Loans to affiliates 14.9 11.7
Materials and supplies, at average cost 17.3 14.9
Assets held for disposition - 7.7
Deferred income taxes - current 18.1 19.1
Other current assets 7.8 2.5
Total current assets 188.8 138.2
Investments 11.7 13.5
Loans to affiliates 138.2 26.9
Properties:
Transportation:
Road and structures, including land 1,118.0 1,052.1
Equipment 165.2 143.5
Other, principally land 41.5 41.0
Total properties 1,324.7 1,236.6
Accumulated depreciation (38.4) (37.1)
Net properties 1,286.3 1,199.5
Other assets 20.9 14.7
Total assets $ 1,645.9 $ 1,392.8
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 2.8 $ 10.7
Accounts payable 56.3 52.1
Dividends payable - -
Income taxes payable 1.2 6.9
Casualty and freight claims 20.9 24.9
Employee compensation and vacations 18.4 16.9
Taxes other than income taxes 15.4 16.3
Accrued redundancy reserves 4.3 4.3
Other accrued expenses 72.6 61.7
Total current liabilities 191.9 193.8
Long-term debt 590.3 373.9
Deferred income taxes 263.5 235.7
Other liabilities and reserves 117.5 124.4
Contingencies and commitments (Note 13)
Stockholder's equity:
Common stock authorized, issued and outstanding
100 shares, $1 par value - -
Additional paid-in capital 129.6 129.6
Retained income 353.1 335.4
Total stockholder's equity 482.7 465.0
Total liabilities and stockhol $ 1,645.9 $ 1,392.8
The following notes are an integral part of the consolidated financial
statements.
F3
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBS
Consolidated Statements of Cash Flows
($ in millions)
Years Ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from operating activities :
Net income $ 126.6 $ 119.8 $ 112.7
Reconciliation of net income to net cash
provided by (used for) operating
activities :
Extraordinary item, net - 11.4 -
Depreciation and amortization 31.0 30.9 25.0
Deferred income taxes 31.5 24.5 14.3
Equity in undistributed earnings of
affiliates, net of dividends
received (0.5) (0.8) (0.4)
Net gains on sales of real estate (1.6) (0.1) (2.0)
Cash changes in working capital (9.0) (8.3) 51.0
Changes in other assets (6.4) (2.0) (4.3)
Changes in other liabilities and
reserves (6.6) (7.2) (0.7)
Net cash provided by operating
activities 165.0 168.2 195.6
Cash flows from investing activities :
Additions to properties (118.9) (97.6) (86.4)
Proceeds from sales of real estate 3.0 2.5 3.8
Proceeds from equipment sales 3.0 2.9 4.4
Proceeds from sales of investments 2.3 0.7 1.6
Loans to affiliated company (114.5) (26.9) -
Other (1.0) (4.4) (0.4)
Net cash (used for) investing
activities (226.1) (122.8) (77.0)
Cash flows from financing activities :
Proceeds from issuance of debt 255.0 250.0 113.0
Principal payments on debt (9.6) (238.7) (159.2)
Net proceeds (payments)
- Commercial Paper (37.0) 42.0 (23.1)
Dividends paid (103.3) (107.7) (42.5)
Purchase of subsidiary's common stock (0.7) (0.2) (2.7)
Net cash provided by (used for)
financing activities 104.4 (54.6) (114.5)
Changes in cash and temporary cash
investments 43.3 (9.2) 4.1
Cash and temporary cash investments
at beginning of year 3.0 12.2 8.1
Cash and temporary cash investments at
end of year $ 46.3 $ 3.0 $ 12.2
Supplemental disclosure of cash flow
information :
Cash paid during the year for:
Interest (net of amount capitalized) $ 28.5 $ 30.8 $ 26.8
Income taxes $ 53.2 $ 31.0 $ 46.9
The following notes are an integral part of the consolidated financial
statements.
F4
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES Consolidated
Statements of Stockholder's Equity and Retained Income
Shares Equity ($ in millions)
------ ----------------------
Total
Additional Stock-
Common Common Paid-in Retained holder's
Share Stock Capital Income Equity
----- ----- ------- ------ ------
Balance December 31, 1993 100 $ - $ 128.6 $ 238.2 $ 366.8
Capital contribution 0.5 0.5
Dividends (87.6) (87.6)
Net income 112.7 112.7
Balance December 31, 1994 100 - 129.1 263.3 392.4
Capital contribution 0.5 0.5
Dividends (47.7) (47.7)
Net income 119.8 119.8
Balance December 31, 1995 100 - 129.6 335.4 465.0
Dividends (108.9) (108.9)
Net income 126.6 126.6
Balance December 31, 1996 100 $ - $ 129.6 $ 353.1 $ 482.7
The following notes are an integral part of the consolidated financial sta
F5
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ICRR
Illinois Central Corporation ("IC"), a holding company, was
incorporated under the laws of Delaware. IC, through its wholly-owned
subsidiaries, including the Illinois Central Railroad Company ("ICRR"), is
principally engaged in the rail freight transportation business. ICRR operates
2,700 miles of main line track between Chicago and the Gulf of Mexico, primarily
transporting chemicals, grain and milled grain, coal, paper and intermodal
commodities.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the ICRR
and its subsidiaries. Significant investments in affiliated companies are
accounted for by the equity method. Transactions between consolidated companies
have been eliminated in the accompanying consolidated financial statements.
Properties
Depreciation is computed by the straight-line method and includes
depreciation on properties under capital leases. ICRR uses the composite method
of depreciation for track structure, other road property, and equipment. In the
case of routine retirements, removal cost less salvage recovery is charged to
accumulated depreciation. Expenditures for maintenance and repairs are charged
to operating expense.
The approximate ranges of annual depreciation rates for major property
classifications are as follows:
Road properties.............................1% - 8%
Transportation equipment....................1% - 7%
ICRR's rates were approved by the predecessor of the Surface
Transportation Board ("STB"), an independent agency of the Department of
transportation.
F-6
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenues
Revenues are recognized based on services performed and include
estimated amounts relating to movements in progress for which the settlement
process is not complete. Estimated revenue amounts for movements in progress are
not significant.
Income Taxes
Deferred income taxes are accounted for on the asset and liability
method by applying enacted statutory tax rates to differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. The resulting deferred tax liabilities and assets represent taxes
to be paid or collected in the future when the related assets and liabilities
are recovered and settled, respectively.
Cash and Temporary Cash Investments
Cash in excess of operating requirements is invested in certain funds
having original maturities of three months or less. These investments are stated
at cost, which approximates market value.
Income Per Share
Income per common share has been omitted as ICRR is a wholly-owned
subsidiary of IC.
Derivative Financial Instruments
ICRR has only limited involvement with derivative financial instruments
and does not use them for trading purposes. ICRR has entered into various diesel
fuel collar agreements with the objective of mitigating significant fluctuations
in fuel prices. Premiums paid for the purchase of these agreements are amortized
to fuel expense over the terms of the agreements. Unamortized premiums are
included in Other Assets in the Consolidated Balance Sheets. Amounts receivable
or payable under the collar agreements are accrued as increases or decreases to
Diesel Fuel Expense. See Note 6.
Casualty Claims
ICRR accrues for injury and damage claims based on actuarially
determined estimates of the ultimate costs associated with asserted claims and
claims incurred but not reported. As a result of significant improvements in
safety performance and enhancements in claim and settlement approaches, ICRR has
experienced continuing reductions in its final claim settlement amounts. It is
reasonably possible that future actuarial valuations will reflect additional
improvements that could result in a reduction in the near term to casualty costs
and related expenses.
F-7
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock-Based Compensation
ICRR has elected to adopt SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), for disclosure purposes only.
ICRR accounts for compensation under its Long-Term Incentive Plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 17.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain items relating to prior years have been reclassified to conform
to the presentation in the current year.
3. Extraordinary Item
In 1995, ICRR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
loss resulted from the premium paid, the write-off of unamortized financing fees
and costs associated with the prepayment. The monies used to fund the prepayment
were provided by commercial paper, the net proceeds of the 7.75% Notes and $40
million from existing lines of credit. See Note 8.
F-8
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4. Other Income (Expense), Net
Other Income (Expense), Net consisted of the following ($ in millions):
Years Ended December 31,
1996 1995 1994
---- ---- ----
Rental income, net.............................. $2.3 $3.5 $ 3.3
Net gains (losses) on sales of real estate..... 1.6 (.1) 2.0
Equity in undistributed
earnings of affiliates....................... .8 .9 .7
Sales of accounts receivable (see Note 9).... (2.9) (3.2) (2.2)
Sale of RAIL (see below)........................ 7.3 - -
Other, net...................................... .8 1.6 .7
---- ------ -----
Other Income (Expense), Net.................. $9.9 $ 2.7 $ 4.5
==== ====== =====
On October 3, 1996, ICRR sold its investment in an industry captive
insurance company.
5. Supplemental Cash Flow Information
Cash changes in components of working capital, exclusive of Current
Maturities of Long-Term Debt, included in the Consolidated Statements of Cash
Flows were as follows ($ in millions):
Years Ended December 31,
1996 1995 1994
---- ---- ----
Receivables, net...................... $ (5.1) $(14.1) $41.1
Materials and supplies................ (2.4) .8 4.4
Other current assets.................. (5.3) .6 .4
Accounts payable...................... 4.9 (3.5) 6.6
Income taxes payable.................. (8.4) 13.3 (3.0)
Accrued redundancy reserve............ - (2.5) -
Other current liabilities............. 7.3 (2.9) 1.5
-------- -------- -----
Cash Changes in Working Capital....... $ (9.0) $ (8.3) $51.0
======= ========= =====
ICRR entered into capital leases of $7.1 million covering 328 freight
cars in 1995 and $24.7 million covering 65 locomotives and 1,623 freight cars in
1994. See Note 7 for the present value of the minimum lease payments.
F-9
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. Materials and Supplies
Materials and Supplies, valued using the average cost method, consist of
track material, switches, car and locomotive parts and fuel.
As of December 31, 1996, ICRR was party to one diesel fuel collar
agreement under which the Company receives or makes monthly payments based on
the monthly average near-by contract price for Heating Oil #2 traded on the New
York Mercantile Exchange (the "Contract Price"), which was $.722 per gallon for
December 1996. Under the agreement, ICRR receives or makes monthly payments on
800,000 notional gallons based on the excess or deficiency of the Contract Price
over or under $.55 or $.43 per gallon, respectively.
7. Leases
As of December 31, 1996, ICRR leased 6,325 of its cars and 119 of its
locomotives. These leases generally have original terms of 15 years and expire
between 1997 and 2003. Under the terms of the majority of its lease agreements,
ICRR has the right of first refusal to purchase, at the end of the lease term,
certain cars and locomotives at or below fair market value. ICRR also leases
office facilities, computer equipment and vehicles.
Net obligations under capital leases at December 31, 1996 and 1995,
included in the Consolidated Balance Sheets were $14.4 million and $23.2
million, respectively. The gross assets under capitalized leases were $30.0
million and $40.8 million at December 31, 1996 and 1995, respectively, and are
included in Properties in the Consolidated Balance Sheets.
F-10
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1996, minimum rental payments under capital and
operating leases that have initial or remaining noncancellable terms in excess
of one year were as follows ($ in millions):
Capital Operating
Leases Leases
1997..................................... $ 3.7 $ 38.2
1998..................................... 3.3 34.7
1999..................................... 3.3 30.6
2000..................................... 2.7 16.0
2001..................................... 2.6 14.3
Thereafter............................... 3.2 65.9
------- --------
Total minimum lease payments......... 18.8 $199.7
======
Less: Imputed interest................... 4.4
-------
Present value of minimum payments.... $14.4
=====
Total rent expense applicable to noncancellable operating leases
amounted to $38.8 million in 1996, $32.4 million in 1995 and $48.8 million in
1994. Most of the leases provide that the Company pay taxes, maintenance,
insurance and certain other operating expenses.
8. Long-Term Debt and Interest Expense
Long-Term Debt at December 31, consisted of the following ($ in
millions):
1996 1995
---- ----
Debentures and other debt, due 1997 to 2056, 4.5%
to 10.89%.... $ 9.9 $ 10.2
Debentures, due 2096, 7.7%................................ 125.0 -
Commercial Paper, at average interest rate 5.61% in
1996 and 6.19% in 1995....... ...................... 20.0 57.0
Notes, due 2003, 6.75%.................................... 100.0 100.0
Notes, due 2005, 7.75%.................................... 100.0 100.0
Medium term notes, due 1998 to 2007, 6.27% to 7.12%....... 230.0 100.0
Capitalized leases (see Note 7)........................... 11.9 12.8
Unamortized discount, net .......................... ....... (6.5) (6.1)
------- ------
Total Long-Term Debt......................... $590.3 $373.9
====== ======
At December 31, 1996, the aggregate annual maturities and sinking fund
requirements for debt payments for 1997 through 2002 and thereafter were $2.8
million, $42.5 million, $32.5 million, $32.1
F-11
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
million, $102.2 million, $1.7 million and $379.3 million, respectively. The
weighted-average interest rate for 1996 and 1995 on total debt excluding the
effect of discounts, premiums and related amortization was 7.1% and 8.0%,
respectively.
In December 1996, ICRR issued $125 million aggregate amount of 100-year,
7.7% debentures due September 15, 2096. These bonds may not be redeemed until
2026 and then only at a premium which declines to par in 2056.
In 1995, ICRR 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
$100 million 7.75% 10-year notes due May 2005 and $40 million from existing
lines of credit. In connection with the prepayment, ICRR amended and restated
its revolver with its bank lending group (the "Revolver").
ICRR has a commercial paper program whereby a total of $200 million can
be issued and outstanding at any one time. The commercial paper is rated A2 by
S&P, P2 by Moody's and F2 by Fitch and is supported by the Revolver. ICRR views
commercial paper as a significant long-term funding source and intends to issue
replacement debt as maturities occur. Therefore, the $20 million outstanding at
December 31, 1996, has been classified as long-term.
ICRR has a $250 million Revolver that expires in 2001. ICRR pays an
annual fee of 15 basis points on the Revolver and the Eurodollar offered rate
plus 22.5 basis points for any borrowings. The Revolver may be used as backup
for commercial paper and 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 ICRR under the facility. No amounts have been
drawn under the Revolver. At December 31, 1996, the Revolver was limited to $230
million because $20 million in commercial paper was outstanding.
Various borrowings of ICRR are governed by agreements which contain
certain affirmative and negative covenants customary for facilities of this
nature including restrictions on additional indebtedness, investments,
guarantees, liens, distributions, sales and leasebacks, and sales of assets and
capital stock. Some also require satisfaction of certain financial tests,
including a leverage ratio, an earnings before interest and taxes to interest
charges ratio, and minimum consolidated tangible net worth requirements. See
Note 12.
F-12
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest Expense, Net consisted of the following ($ in millions):
Years Ended December 31,
1996 1995 1994
---- ---- ----
Interest expense........................ $34.3 $30.4 $28.9
Less:
Interest capitalized ................ 1.7 1.3 1.4
Interest income...................... 6.1 2.8 1.5
------ ------- ------
Interest Expense, Net................... $26.5 $26.3 $26.0
===== ===== =====
9. Sales of Accounts Receivable
In 1994, ICRR 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. ICRR 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 December 31, 1996, $48 million 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 $2.9 million, $3.2 million and $2.2 million for
1996, 1995 and 1994, respectively.
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
issued by the Financial Accounting Standards Board in 1996 and effective for
1997, provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. The accounting for the
ICRR's sales of accounts receivable agreement is impacted by this standard. As a
result, the agreement is expected to be modified to comply with the SFAS No. 125
requirements so that the accounting and reporting for the sale of the ICRR's
accounts receivable will remain unchanged.
10. Benefit Plans
All employees of ICRR are covered under the Railroad Retirement System
instead of Social Security. Additionally, various retirement plans,
postemployment benefits and postretirement benefits are provided.
Retirement Plans.
ICRR has two qualified plans permitting participants to make "pre-tax"
contributions of their salary up to Internal Revenue Code limitations and each
contains a company match provision. The union plan, which started in mid-1995,
allows union employees covered by local contracts to participate. ICRR matches
25% of the first 4% of employee contributions. The management plan's
F-13
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
matching provisions are 50% of the first 6% of salary deferral. The management
plan also contains a separate defined contribution portion of 2% of each
employee's salary. Expenses related to both plans were $1.2 million, $1.1
million, and $1.0 million in 1996, 1995 and 1994, respectively. All ICRR
contributions are fully vested upon contribution.
ICRR also has a supplemental executive retirement plan ("SERP") which
covers officers and certain other management employees. The SERP provides for a
monthly benefit equal to 35% of a participant's final average compensation as
defined in the plan. The monthly benefit is subject to offsets such as employer
contributions to the 401(k) plan. The plan was adopted in 1994. The cost was not
material in the three years ended December 31, 1996.
Salary Deferral Plans. In addition to the 401(k) plan, all officers and
certain other management employees may elect to defer up to 50% of base salary
and 100% of annual bonus. Participant deferrals are fully vested and earn
interest at a specified, variable rate. Approximately $1.1 million, $.5 million
and $.3 million were deferred in 1996, 1995 and 1994 respectively.
Unfunded Plan. ICRR has an unfunded plan whereby 10% of an officer's
combined salary and bonus in excess of a wage offset factor ($104,500 in 1996)
is accrued and earns interest. Amounts accrued are paid when the employee leaves
ICRR, normally at retirement. Expenses for this plan were $.4 million, $.4
million and $.3 million in 1996, 1995 and 1994, respectively.
Postemployment Benefit Plans. ICRR provides certain postemployment
benefits such as long-term salary continuation and waiver of medical and life
insurance co-payments while on long-term disability.
Postretirement Plans. In addition to retirement plans, ICRR has three
benefit plans which provide some postretirement benefits to most former
full-time salaried employees and selected former union-represented employees.
The medical plan for salaried retirees is contributory, with retiree
contributions adjusted annually if expected medical cost inflation rate exceeds
9.5%, and contains other cost sharing features such as deductibles and
co-payments. ICRR's contribution will be fixed at the 1999 year end rate for all
subsequent years. Salaried retirees are covered by a life insurance plan which
provides a nominal death benefit and is non-contributory. The medical plan for
locomotive engineers who retired under a special early retirement program in
1987 provides non-contributory coverage until age 65. All benefits under this
plan terminate in 1998. There are no plan assets and ICRR funds these benefits
as claims are paid.
F-14
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The accumulated postretirement benefit obligations ("APBO") of the
postretirement plans were as follows ($ in millions):
December 31,
1996 1995
Medical Life Total Total
Accumulated postretirement benefit
obligation:
Retirees.................... $13.0 2.1 $15.1 $16.4
Fully eligible active
plan participants ............ .7 - .7 .9
Other active plan participants.... 3.3 - 3.3 3.4
----- --- ----- -----
Total APBO.............. $17.0 2.1 19.1 20.7
====== === ===== ====
Unrecognized net gain............. 18.3 18.4
---- ----
Accrued liability for
postretirement benefits......... $37.4 $39.1
===== =====
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1995. As a result of
the change in general interest rates on high quality fixed rate investments in
1996, the ICRR increased the weighted-average discount rate to 7.75% as of
December 31, 1996. The change in rates resulted in approximately $.7 million
actuarial gain. The actuarial gains and losses along with actual experience
gains, primarily fewer claims and lower medical rate inflation, resulted in a
total $18.3 million unrecognized net gain as of December 31, 1996. In accordance
with SFAS No. 106, the excess gain is subject to $1.2 million annual
amortization based on an amortization period of approximately 13 years. The
components of the net periodic postretirement benefits cost were as follows ($
in millions):
Years Ending December 31,
1996 1995
----- -----
Service costs.......................... $ .1 $ .1
Interest costs......................... 1.4 1.7
Net amortization of excess gain........ (1.2) (1.2)
------ ------
Net periodic postretirement
benefit costs........................ $ .3 $ .6
===== =======
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (e.g., health care cost trend rate) for the medical
plans is 11.0% for 1997 and is assumed to decrease gradually to 6.25% by 2002
and remain at that level thereafter. The health care cost trend rate assumption
normally has a significant effect on the amounts reported; however, the plan
limits annual inflation for ICRR's portion of such costs to 9.5% each year and
caps ICRR's contribution at the actual 1999 level. Therefore, an increase in the
assumed health care cost trend rates by one percentage point in each year would
have no impact on ICRR's accumulated postretirement benefit
F-15
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
obligation for the medical plans as of December 31, 1996, or the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense in future years.
11. Provision for Income Taxes
The Provision for Income Taxes for continuing operations consisted of
the following ($ in millions):
Years Ended December 31,
1996 1995 1994
---- ---- ----
Current income tax:
Federal................................. $39.9 $38.1 $39.9
State................................... 4.9 4.5 4.0
Deferred income taxes..................... 31.5 24.5 14.3
----- ----- ------
Provision for Income Taxes............... $76.3 $67.1 $58.2
===== ===== =====
The effective income tax rates for the years ended December 31, 1996,
1995 and 1994, were 38%, 34% and 34%, respectively. See Note 3 for the tax
benefits associated with the 1995 extraordinary loss.
At December 31, 1996, ICRR for tax or financial reporting purposes had
no Federal net operating loss carryovers.
In 1996, 1995 and 1994 tax benefits of $1.8 million, $4.3 million and
$5.0 million, respectively, were recorded to reflect the favorable resolution of
prior-period tax issues.
The items which gave rise to differences between the income taxes
provided for continuing operations in the Consolidated Statements of Income and
the income taxes computed at the statutory rate are summarized below ($ in
millions):
Years Ended December 31,
1996 1995 1994
---- ---- ----
Expected tax expense computed
at statutory rate............. $71.0 35% $69.4 35% $59.8 35%
Dividends received exclusion.... (.1) - (.1) - (.3) -
State income taxes, net
of Federal tax effect......... 5.9 3 5.4 3 3.6 2
Favorable resolution of
prior period tax issues....... (1.8) (1) (4.3) (2) (5.0) (3)
Other items, net................ 1.3 1 (3.3) (2) .1 -
----- --- ----- --- ---- ----
Provision for Income Taxes...... $76.3 38% $67.1 34% $58.2 34%
===== === ===== === ===== ===
F-16
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Temporary differences between book and tax income arise because the tax
laws require that certain items of income and expense be treated differently
than under generally accepted accounting principles. As a result, the book
provisions for taxes differ from the actual taxes reported on the income tax
returns. The net results of such differences are included in Deferred Income
Taxes in the Consolidated Balance Sheets.
Deferred Income Taxes consisted of the following ($ in millions):
December 31,
1996 1995
---- ----
Deferred tax assets................................ $ 71.7 $ 79.5
Less: Valuation allowance.......................... (1.5) (1.8)
-------- ---------
Deferred tax assets,
net of valuation allowance....................... 70.2 77.7
Deferred tax liabilities........................... (315.6) (294.3)
-------- --------
Deferred Income Taxes.............................. $(245.4) $ (216.6)
======== ========
The valuation allowance is comprised of the portion of state tax net
operating loss carryforwards expected to expire before they are utilized and
non-deductible expenses incurred with the previous merger of wholly-owned
subsidiaries.
Major types of deferred tax assets are: reserves not yet deducted for
tax purposes ($60.9 million) and safe harbor leases ($10.8 million). Major types
of deferred tax liabilities are: accelerated depreciation ($288.5 million), land
basis differences ($10.8 million) and debt marked to market ($2.1 million).
IC and its subsidiaries have a tax sharing agreement whereby each
subsidiary's federal income tax and state income tax liabilities are determined
on a separate company income tax basis as if it were not a member of IC's
consolidated group, with no benefit for net operating losses or credit
carryovers from prior years.
F-17
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
12. Equity and Restrictions on Dividends
ICRR paid dividends to IC of $103.2 million in 1996, $107.7 million in
1995 and $42.5 million in 1994. Certain covenants of ICRR's Revolver require
specific levels of tangible net worth but not a specific dividend restriction.
At December 31, 1996, ICRR's tangible net worth exceeded the required level by
approximately $26.9 million. In January 1997, ICRR declared and paid a dividend
of $17.8 million to IC.
For the years ended December 31, 1995 and 1994, IC made capital
contributions of $.5 million and $.5 million, respectively, to ICRR which was
equivalent to the vested portion of the restricted IC common stock granted to
various ICRR employees.
13. Contingencies, Commitments and Concentration of Risks
ICRR is self-insured for the first $5 million of each loss. ICRR carries
$245 million of liability insurance per occurrence, subject to an annual cap of
$335 million in the aggregate for all losses. This coverage is considered by
ICRR's management to be adequate in light of ICRR's safety record and claims
experience.
ICRR has guaranteed repayment of certain indebtedness of a jointly owned
company aggregating $7.8 million. ICRR's primary share is $1.0 million; the
remainder is a primary obligation of other unrelated owner companies.
There are various regulatory proceedings, claims and litigation pending
against ICRR. While the ultimate amount of liability that may result cannot be
determined, in the opinion of the ICRR's management, based on present
information, adequate provisions for liabilities have been recorded.
Environmental Contingencies. ICRR is aware of approximately 25
contaminated sites at which it is probably liable for some portion of any
required clean up. Of these, 17 involve contamination primarily by diesel fuel
which can be remediated without material cost. Five other sites are expected to
require more than $1 million in clean-up costs. At four of these sites other
parties are expected to contribute the majority of the costs incurred.
For all known sites of environmental contamination where ICRR loss or
liability is probable, ICRR has recorded an estimated liability at the time when
a reasonable estimate of remediation cost and ICRR liability can first be
determined. Adjustments to initial estimates are recorded as necessary based
upon additional information developed in subsequent periods. Estimates of ICRR`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
December 31, 1996, ICRR estimated the probable range of its liability to be $17
million to $53 million, and in accordance with the
F-18
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
provisions of SFAS No. 5 had a reserve of $17 million for environmental
contingencies. This amount is not reduced for potential insurance recoveries or
third-party contributions.
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 ICRR leased substantial amounts of property to
industrial tenants, and ICRR 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 ICRR 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, based on these known facts and
circumstances, to have a material adverse effect on ICRR`s financial position,
results of operations, cash flow or liquidity.
14. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Temporary Cash Investments. The carrying amount approximates
fair value because of the short maturity of those instruments. Investments in
U.S. corporate demand notes of $43.6 million and $.2 million included in Cash
and Temporary Cash Investments as of December 31, 1996 and 1995, respectively,
have been classified and accounted for as held to maturity securities.
Investments. ICRR has investments of $5.9 million in 1996 and $8.1
million in 1995 for which there are no quoted market prices. These investments
are in joint railroad facilities, railroad terminal associations, switching
railroads and other transportation companies. For these investments, the
carrying amount is a reasonable estimate of fair value. ICRR's remaining
investments ($5.8 million in 1996 and $5.4 million in 1995) are accounted for by
the equity method.
Loans to Affiliates. See Note 15.
Long-Term Debt. The fair value of ICRR's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to ICRR for debt of the same remaining maturities.
Derivative Financial Instruments. The fair value of diesel fuel collar
agreements is the estimated amount that ICRR would receive or pay to terminate
the agreements as of year end, taking into account the current credit worthiness
of the agreement counterparties.
F-19
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The estimated fair values of ICRR's financial instruments are as follows
($ in millions):
December 31,
------------
1996 1995
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and temporary cash investments $ 46.3 $ 59.2 $ 3.0 $ 3.0
Investments......................... 5.9 5.9 8.1 8.1
Fuel hedge.......................... .1 .1 - -
Loans to affiliates - short-term.... 14.9 14.9 11.7 11.7
Loans to affiliates - long-term..... 138.2 138.2 26.9 26.9
Debt................................ (593.1) (586.6) (384.6) (420.5)
15. Related Party Transactions and Intercompany Advances
IC and its subsidiaries maximize the consolidated group's borrowing
power and minimize the group's interest costs. If an entity requires funds for
operations or capital expenditures, the lowest cost source provides the cash.
The company that needs the funds pays interest at the borrowed rate with no mark
up or add-on fees.
The amounts outstanding at December 31, consisted of the following ($
in millions):
1996 1995
---- ----
Advance due from:
- CCPH $ 4.4 $ -
- IC - 11.7
Loans due from:
- IC Financial Services 1.5 -
- IC Leasing III 9.0 -
--------- --------
Total Short-Term Intercompany $ 14.9 $11.7
========== ========
Advances due from:
IC $112.9 $ -
Loans due from:
IC Financial Services 22.5 -
IC Leasing III 2.8 26.9
--- ----
Total Long-Term Intercompany $138.2 $ 26.9
====== ========
The amount due from IC includes $59.9 million used to acquire CCPH and
$25 million used by IC repay a portion of CCPH's revolver. Because of the nature
of the assets acquired these advances
F-20
<PAGE>
are considered long-term. The loan to IC Financial Services is due in 1999 and
bears interest at LIBOR +50 basis points. The loan to IC Leasing III is due in
1998 and bears interest at LIBOR +.625%.
Interest paid to ICRR for 1996 and 1995 was $5.3 million and $1.6
million, respectively.
16. Acquisition of CCP Holdings, Inc.
On June 12, 1996, ICRR used proceeds it received from the issuance of
Commercial Paper (average interest rate 5.52% and average maturity 30 days) to
pay a $50.0 million dividend to IC and to loan $59.9 million (5.625% per annum)
to IC. IC used the $109.9 million and its bank credit lines to acquire CCP
Holdings, Inc. ("CCPH"). The transaction closed June 13, 1996, following the
effective date of the approval order issued by the STB.
17. Stock Based Compensation
IC grants stock options to employees of ICRR under IC's 1990 Long-Term
Incentive Plan and the employees of ICRR also participate in two stock purchase
plans to acquire IC Common Stock. ICRR accounts for these plans under APB
Opinion 25 under which no compensation cost has been recognized.
Under the IC Long-Term Incentive Plan employees of ICRR can receive
incentive options, award stock appreciation rights, resticted stock and
restricted stock units, dividend equivalents and other stock-based awards.
The exercise price of an option to employees is limited to fair market value.
Awards, vest ratably over four years and expire 10 years from date of grant.
Employees of ICRR were awarded 22,500 shares and 37,500 shares of
restricted stock in 1994 and 1993, respectively. No cash payments
are required by the individuals. Shares awarded may not be sold, transferred, or
used as collateral by the holders until the shares awarded become free of the
restrictions. Restrictions lapse over a four-year period. All shares still
subject to restrictions will be forfeited and returned to the plan if the
employee's relationship with ICRR is terminated. No shares were forfeited in
1996. A total of 4,125 shares and 150 shares were forfeited in 1995 and 1994,
respectively. If the employee becomes disabled, or dies, or a change in control
occurs during the vesting period, the restrictions lapse at that time. In
connection with early retirements, 43 and 7,632 shares vested in 1996 and 1995,
respectively. The compensation expense resulting from the award of restricted
stock is valued at the closing market price of IC's Common Stock on the date of
the award, recorded as a reduction of Stockholders' Equity, and charged to
expense evenly over the vesting period. Compensation expense, recorded by ICRR,
was $.8 million, $1.2 million and $.9 million in 1996, 1995 and 1994,
respectively.
IC has two stock purchase programs. The basic program is open to
all ICRR employees and permits them to acquire IC common stock via
payroll deductions. The other plan is the Discounted Stock Purchase Plan
("Discounted Plan"). Only ICRR management employees are eligible to
participate in the Discounted Plan which provides for the investment of up to
15% of an eligible employee's salary in the common stock of IC at a 15%
discount. A participant must continue employment with IC or its subsidiaries for
two years to retain the 15% discount, and, during that period, the shares will
be held by the plan's administrator. If the employee withdraws shares or directs
the sale of shares within two years, the discount must be repaid in cash or
relinquished shares. No such repayment is required in the event of death,
retirement, disability or change of control of IC. Costs associated with these
programs have been immaterial to date.
F22
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes changes in shares under options, after
giving effect to the 3-for-2 stock split declared by IC in January 1996:
Weighted Weighted Weighted
Average Average Fair Average
Exercise Value On Exercisable Exercise
Options Price Grant Date At Year End Price
Outstanding 12-31-94 780,000 $18.790 195,000 $18.790
Granted 515,024 23.167 $9.109
Forfeited (a) (11,250) 20.833
Outstanding 12-31-95 1,283,774 20.528 531,131 $19.886
Granted 530,250 25.250 $9.016
Exercised (b) (4,125) 21.257
Forfeited (c) (3,375) 22.389
Outstanding 12-31-96 1,806,524 21.909 961,105 $20.821
(a) Pre-1995 option awards
(b) Includes 3,375 pre-1995 option awards
(c) Includes 1,125 pre-1995 option awards
The last date exercisable for options above is March 8, 2006.
Had ICRR adopted the compensation cost recognition methods outlined in
FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"),
ICRR's 1996 and 1995 net income would have been as follows - on a pro forma
basis - ($ in millions):
1996 1995
As Reported Pro Forma Actual Pro Forma
Income before Extraordinary Item $126.6 $125.4 $131.2 $130.7
Net Income $126.6 $125.4 $119.8 $119.3
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Of the options outstanding at December 31, 1996, 961,105 have exercise
prices between $16.583 and $25.250, with a weighted average exercise price of
$20.821, a weighted average remaining contractual life of 8 years and all are
exercisable. The remaining 845,418 options, which
F23
are not exercisable, have exercise prices between $16.583 and $25.250 with a
weighted average price of $23.146 and a weighted average remaining contractual
life of 8 years.
The fair value of each option is estimated on the grant date using the
Black-Scholes option pricing models with the following weighted-average
assumptions:
1996 1995
Risk-free interest rate(s) 6.7% 7.2%
Dividend yields 3.2% 2.9%
Days to expiration 3652 3652
Volatility 31.4% 33.1%
18. Selected Quarterly Financial Data - (Unaudited) ($ in millions):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues.................... $162.6 $149.4 $150.8 $154.4
Operating Income............ 57.8 52.3 54.9 54.5
Net income.................. 30.2 29.5 30.2 36.7
1995
Revenues.................... $168.0 $156.5 $161.3 $159.5
Operating income............ 61.1 54.2 51.4 55.2
Income before extraordinary
item, net.................. 34.2 29.8 28.8 38.4
Net income.................. 34.2 18.4 28.8 38.4
1994
Revenues.................... $147.8 $145.6 $147.0 $154.9
Operating income............ 48.6 44.1 43.8 55.9
Net income.................. 26.9 24.7 25.1 36.0
F-25
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
F26
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
I N D E X
T O
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
Schedules for the three years ended December 31, 1996:
II-Valuation and qualifying accounts...........................F-28
Pursuant to Rule 5.04 of General Rules of Regulation S-X, all other schedules
are omitted because they are not required or because the required information is
set forth in the financial statements or related notes thereto.
F27
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING
($ in millions)
Year Ended December 31, 1996
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve..........$ 33.9 $ 2.1 $ 5.8 $ 30.2
Casualty and other reserves.......... 55.7 8.8 20.8 43.7
Environmental........................ 12.9 1.9 (2.3) 17.1
Bad debt reserve..................... 2.0 1.8 2.5 1.3
Taxes................................ 1.8 - 0.3 1.5
Total.........................$106.3 $ 14.6 $ 27.1 $ 93.8
Year Ended December 31, 1995
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve..........$ 38.2 $ 3.0 $ 7.3 $ 33.9
Casualty and other reserves.......... 61.7 14.3 20.3 55.7
Environmental........................ 13.3 5.3 5.7 12.9
Bad debt reserve..................... 2.1 1.9 2.0 2.0
Taxes................................ 1.8 - - 1.8
Total.........................$117.1 $ 24.5 $ 35.3 $ 106.3
Year Ended December 31, 1994
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve..........$ 43.6 $ 1.8 $ 7.2 $ 38.2
Casualty and other reserves.......... 62.3 16.9 17.5 61.7
Environmental........................ 11.9 4.4 3.0 13.3
Bad debt reserve..................... 3.1 1.9 2.9 2.1
Taxes................................ 2.2 - 0.4 1.8
Total.........................$123.1 $ 25.0 $ 31.0 $ 117.1
F-28
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
3.1 Articles of Incorporation of Illinois Central Railroad
Company, as amended. (Incorporated by reference to Exhibit
3.1 to the Registration Statement of Illinois Central
Railroad Company on Form S-1 dated as of September 26, 1989.
(SEC File No. 33- 29269))
3.2 By-Laws of Illinois Central Railroad Company, as amended.
(Incorporated by reference to Exhibit 3.2 to the
Registration Statement of Illinois Central Railroad Company
on Form S-1 dated as of September 26, 1989. (SEC File No.
33-29269))
3.3 Restated Articles of Incorporation of Illinois Central
Corporation. (Incorporated by reference to Exhibit 3.1 to
the Current Report of the Illinois Central Corporation on
Form 8-K dated July 29, 1994. (SEC File No. 1-10720))
3.4 By-Laws of Illinois Central Corporation, as amended.
(Incorporated by reference to Exhibit 3.4 to the
Registration Statement of Illinois Central Corporation and
Illinois Central Railroad Company on Form S-1 dated as of
August 21, 1990. (SEC File Nos. 33-36321 and 33-36321-01))
3.5 Certificate of Retirement of Illinois Central Corporation
(Incorporated by reference to Exhibit 3.3 to the
Registration Statement of Illinois Central Corporation and
Illinois Central Railroad Company on Form S-1, as amended
dated as of August 21, 1990. (SEC File No. 33-40696 and
Post-Effective Amendments to Registration Statement Nos.
33-36321 and 33- 36321-01))
* Used herein to identify management contracts or compensation plans or
arrangements as required by Item 14 of Form 10-K.
E-1
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.1 Form of 14-1/8% Senior Subordinated Debenture Indenture
dated as of September 15, 1989 (the "Senior Subordinated
Debenture Indenture") between Illinois Central Railroad
Company and United States Trust Company of New York, Trustee
(including the form of 14-1/8% Senior Subordinated Debenture
included as Exhibit A therein). (Incorporated by reference
to Exhibit 4.1 to the Registration Statement of Illinois
Central Railroad Company on Form S-1, as amended dated as of
September 26, 1989. (SEC File No. 33-29269))
4.3 Form of Pledge Agreement dated as of September 22, 1989, and
amended and restated as of July 23, 1991, among Illinois
Central Corporation and the Banks named therein that are or
may become parties to the Amended and Restated Revolving
Credit and Term Loan Agreement dated as of September 22,
1989, and amended and restated as of July 23, 1991, among
the Illinois Central Railroad Company and the Banks named
therein and the Senior Note Purchasers that are parties to
the Note Purchase Agreement dated as of July 23, 1991.
(Incorporated by reference to Exhibit 4.4 to the Quarterly
Report of Illinois Central Corporation on Form 10-Q for the
three months ended September 30, 1991. (SEC File No.
1-10720))
4.4 Form of Note Purchase Agreement dated as of July 23, 1991,
among Illinois Central Railroad Company, as issuer, and
Illinois Central Corporation, as guarantor, for 10.02%
Guaranteed Senior Secured Series A Notes due 1999 and for
10.4% Guaranteed Senior Secured Series B Notes due 2001
(including the Form of Series A Note and Series B Note
included as Exhibits A-1 and A- 2, respectively, therein).
(Incorporated by reference to Exhibit 4.3 to the Quarterly
Report of the Illinois Central Railroad Company on Form 10-Q
for the three months ended September 30, 1991. (SEC File No.
1-7092))
4.10 Form of Commercial Paper Dealer Agreement between Illinois
Central Railroad Company and Lehman Commercial Paper, Inc.
dated as of November 19, 1993. (Incorporated by reference to
Exhibit 4.10 to the Annual Report on Form 10-K for the year
ended December 31, 1993 for Illinois Central Railroad
Company filed March 16, 1994. (SEC File No. 1-7092))
E-2
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.11 Form of Issuing and Paying Agency Agreement of the Illinois
Central Railroad Company related to the Commercial Paper
Program between Illinois Central Railroad Company and Bank
America National Trust Company dated as of November 19,
1993, (including Exhibit A the Form of Certificated
Commercial Paper Note included therein). (Incorporated by
reference to Exhibit 4.11 to the Annual Report on Form 10-K
for the year ended December 31, 1993 for Illinois Central
Railroad Company filed March 16, 1994. (SEC File No.
1-7092))
4.14 Toronto Dominion Credit Agreement (Incorporated by reference
to Exhibit 4.1 to the Quarterly Report of the Illinois
Central Railroad Company on Form 10-Q for the three months
ended March 31, 1994. (SEC File No. 1-7092))
4.15 Form of Receivables Purchase Agreement dated as of March 29,
1994, between Illinois Central Railroad Company and Golden
Gate Funding Corporation. (Incorporated by reference to
Exhibit 4.2 to the Quarterly Report of the Illinois Central
Railroad Company on Form 10-Q for the three months ended
March 31, 1994. (SEC File No. 1-7092))
4.17 Form of Note Purchase Agreement dated as of May 1, 1993,
between Illinois Central Railroad Company and The First
National Bank of Boston (Incorporated by reference to
Exhibit 4.1 to the Registration Statement of Illinois
Central Railroad Company on Form S-3. (SEC File No.
33-61410))
4.18 Form of Second Amended and Restated Revolving Credit
Agreement dated as of April 2, 1993, amended and restated as
of October 27, 1993 and further amended and restated as of
November 1, 1994, among Illinois Central Railroad Company
and the Banks named therein (Incorporated by reference to
Exhibit 4.14 to the Annual Report of Illinois Central
Railroad Company on Form 10-K for the year ended December
31, 1994. (SEC File No. 1-7092))
E-3
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.19 Form of Lease Agreement dated as of July 1, 1994, between IC
Leasing Corporation III and Illinois Central Railroad
Company. (Incorporated by reference to Exhibit 4.10 to the
Annual Report on Form 10-K for the year ended December 31,
1994, for the Illinois Central Railroad Company. (SEC File
No. 1-7092))
4.20 Form of Lease Agreement dated as of July 1, 1994 between IC
Leasing Corporation III and Waterloo Railway Company.
(Incorporated by reference to Exhibit 4.11 to the Annual
Report on Form 10-K for the year ended December 31, 1994,
for the Illinois Central Railroad Company. (SEC File No.
1-7092))
4.21 Form of Options Agreement dated as of July 1, 1994, between
IC Leasing Corporation III and Illinois Central Railroad
Company. (Incorporated by reference to Exhibit 4.12 to the
Annual Report on Form 10-K for the year ended December 31,
1994, for the Illinois Central Railroad Company. (SEC File
No. 1-7092))
4.22 Form of Options Agreement dated as of July 1, 1994, between
IC Leasing Corporation III and Illinois Central Railroad
Company. (Incorporated by reference to Exhibit 4.13 to the
Annual Report on form 10-K for the year ended December 31,
1994, for the Illinois Central Railroad Company. (SEC File
No. 1-7092))
4.23 Third Amended and Restated Revolving Credit Agreement
between Illinois Central Railroad Company and the banks
named therein dated as of April 2, 1993, amended and
restated as of October 27, 1993, further amended and
restated as of November 1, 1994 and further amended and
restated as of April 28, 1995. (Incorporated by reference to
Exhibit 4.1 to the quarterly report of Illinois Central
Railroad Company in Form 10-Q for the three months ended
June 30, 1995. (SEC File No. 1-7092))
4.24 Form of Indenture dated as of April 1, 1995 between Illinois
Central Railroad Company and The First National Bank of
Boston. (Incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-3 of Illinois Central
Railroad Company dated April 12, 1995. (SEC File No.
33-58547))
E-4
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.25 Form of Fixed Rate Medium-Term Note dated as of May 1, 1995
between Illinois Central Railroad Company and Lehman
Brothers Inc., Salomon Brothers, Inc and Smith Barney Inc.
(Incorporated by reference to Exhibit 4.1 to the Current
Report of Illinois Central Railroad Company of Form 8-K
dated May 2, 1995. (SEC File No. 1-7092))
4.26 Form of Floating Rate Medium-Term Notes dated as of May 1,
1995 between Illinois Central Railroad Company and Lehman
Brothers Inc, Salomon Brothers Inc and Smith Barney Inc.
(Incorporated by reference to Exhibit 4.2 to the Current
Report of Illinois Central Railroad Company on Form 8-K
dated May 2, 1995. (SEC File No. 1-7092))
4.27 Amendment No. 1, dated as of April 29, 1996 to the Third
Amended and Restated Revolving Credit Agreement, between
Illinois Central Railroad Company and the First National
Bank of Boston initially dated as of April 2, 1993, amended
and restated November 1, 1994, and further amended and
restated as of April 28, 1995. (Incorporated by reference to
Exhibit 4 to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, for the Illinois Central
Railroad Company filed on August 13, 1996. (SEC File No.
1-7092))
4.29 Form of Indenture between the Illinois Central Railroad
Company and The Chase Manhattan Bank, N.A., dated as of July
25, 1996. (Incorporated by reference to Exhibit 4.1 of Form
S-3 dated as of May 15, 1996 for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
4.30 Form of Indenture between the Illinois Central Railroad
Company and The Chase Manhattan Bank, N.A., dated as of May
1996. (Incorporated by reference to Exhibit 4.2 of Form S-3
dated as of May 15, 1996 for the Illinois Central Railroad
Company. (SEC File No. 1-7092))
E-5
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.31 Form of Indenture between the Illinois Central Railroad
Company and The Chase Manhattan Bank, N.A., dated as of July
25, 1996. (Incorporated by reference to Exhibit 4.1 of Form
S-4 dated as of December 18, 1996 for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
4.32 Form of First Supplemental Indenture between the Illinois
Central Railroad Company and The Chase Manhattan Bank, N.A.
dated as of December 17, 1996. (Incorporated by reference to
Exhibit 4.2 of Form S-4 dated as of December 18, 1996 for
the Illinois Central Railroad Company. (SEC File No.
1-7092))
4.33 Form of Registration Rights Agreement among Illinois Central
Railroad Company, Lehman Brothers Inc. And Merrill Lynch,
Pierce, Fenner & Smith Incorporated dated as of December 10,
1996. (Incorporated by reference to Exhibit 4.3 of Form S-4
dated as of December 18, 1996 for the Illinois Central
Railroad Company. (SEC File No. 1-7092))
4.34 Form of fixed and floating rate Medium-Term Notes Series B
for the Illinois Central Railroad Company. (Incorporated by
reference to Exhibit 4.3 to the current report on Form 8-K
dated as of July 29, 1996 for the Illinois Central Railroad
Company (SEC File No. 1-7092))
10.1*Form of supplemental retirement and savings plan.
(Incorporated by reference to Exhibit 10C to the
Registration Statement of Illinois Central Transportation
Co. on Form 10 filed on October 7, 1988, as amended. (SEC
File No. 1-10085))
10.3*Form of IC 1990 Stock Purchase Plan. (Incorporated by
reference to Exhibit 10.6 to the Registration Statement of
Illinois Central Corporation on Form 10 filed on January 5,
1990, as amended. (SEC File No. 1-10720))
10.4*Form of IC Long-Term Incentive Option Plan. (Incorporated
by reference to Exhibit 10.17 to the Registration Statement
of Illinois Central Corporation and Illinois Central
Railroad Company on Form S-1 dated as of September 26, 1989.
(SEC File Nos. 33- 36321 and 33-36321-01))
E-6
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.5*Amendments No. 1 and No. 2 to the IC Long-Term Incentive
Plan. (Incorporated by reference to the Proxy Statement of
Illinois Central Corporation in connection with its 1992
Annual Meeting of Stockholders. (SEC File No. 1-10720))
10.6 Railroad Locomotive Lease Agreement between IC Leasing
Corporation I and Illinois Central Railroad Company dated as
of September 5, 1991. (Incorporated by reference to Exhibit
10.9 to the Annual Report on Form 10-K for the year ended
December 31, 1991 for the Illinois Central Railroad Company
filed March 12, 1992. (SEC File No. 1-7092))
10.7 Railroad Locomotive Lease Agreement between IC Leasing
Corporation II and Illinois Central Railroad Company dated
as of January 14, 1993. (Incorporated by reference to
Exhibit 10.6 to the Annual Report on Form 10-K for the year
ended December 31, 1992, for the Illinois Central Railroad
Company filed March 5, 1993. (SEC File No. 1-7092))
10.13* Form of the Illinois Central Railroad Company Executive
Performance Compensation Program (Incorporated by reference
to Exhibit 10.1 to the report on Form 8-K of the Illinois
Central Railroad Company dated as of July 29, 1994. (SEC
File No. 1- 7092))
10.14* Form of the Illinois Central Railroad Company Supplemental
Executive Retirement Plan (Incorporated by reference to
Exhibit 10.2 to the report on Form 8-K of the Illinois
Central Railroad Company dated as of July 29, 1994. (SEC
File No. 1-7092))
10.15* Form of the Illinois Central Railroad Company Executive
Deferred Compensation Plan (Incorporated by reference to
Exhibit 10.3 to the report on Form 8-K of the Illinois
Central Railroad Company dated as of July 29, 1994. (SEC
File No. 1-7092))
10.16* Form of Illinois Central Railroad Company Performance
Compensation Program (Incorporated by reference to Exhibit
10.4 to the report on Form 8-K of the Illinois Central
Railroad Company dated as of July 29, 1994. (SEC File No.
1-7092) E-7
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.17* Illinois Central Corporation Management Employee
Discounted Stock Purchase Plan. (Incorporated by reference
to Exhibit 10.7 to the report of Form 10-K of Illinois
Central Corporation for the year ended December 31, 1995.
(SEC File No. 1-10720)
10.18Form of Illinois Central Railroad Company Union Employees'
Savings Plan. (Incorporated by reference to Registration
Statement of Illinois Central Corporation on Form S-8 dated
as of July 18, 1995. (SEC File No. 33-61095))
10.20* Form of Illinois Central Railroad Company Incentive 2000
Plan (Incorporated by reference to Exhibit 10 to the
Quarterly Report on Form 10-Q for the quarter ended March
31, 1996, for the Illinois Central Railroad Company filed on
May 10, 1996. (SEC File No. 1-7092))
21 Subsidiaries of Registrant (Included at E-9)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
99 Provisions of the Private Securities Litigation Reform Act of 1995
E-8
<PAGE>
Exhibit 21
ILLINOIS CENTRAL RAILROAD COMPANY
Subsidiaries of the Registrant
as of December 31, 1996
Name Place of Incorporation
Subsidiaries that are 100% owned by Illinois Central Railroad Company:
Kensington and Eastern Railroad Company lllinois
Mississippi Valley Corporation Delaware
Waterloo Railroad Company Delaware
E-9
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
ILLINOIS CENTRAL RAILROAD COMPANY
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 20, 1997 included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, into
Illinois Central Railroad Company's previously filed Form S-3 Registration
Statements File Nos. 33-58547 and 333-03825.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 19, 1997
<PAGE>
Exhibit 99
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. ICRR
desires to take advantage of the new "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is filing this exhibit in order to
do so. The Act became law in late December 1995 and no official interpretations
of the Act's provisions have been published. Accordingly, ICRR hereby identifies
the following important factors which could cause the ICRR's actual financial
results to differ materially from any such results which might be projected,
forecast, estimated or budgeted by ICRR in forward-looking statements.
Through 1996, ICRR was behind the revenue growth rate ICRR estimated
was necessary to achieve Plan 2000.
Grain traffic, in total, is subject to the supply domestically and
internationally. A key factor affecting supply is the weather. Grain
traffic for export is further impacted by changes in world supply and
the agricultural and trade policies of both U.S. and foreign
governments.
Coal traffic depends on stockpiles and weather in utilities' service
territories. Deregulation in the utility industry may shift coal
traffic patterns and cause pressure on rail rates.
Chemical traffic and paper shipments are sensitive to the economic
cycles. Other forest products are also sensitive to industrial
production and housing starts. Chemical traffic could be affected if
other railroads decided to build new track into our current service
territories.
Market realities for new ventures, such as the terminals, may differ
from assumptions because of changes in the economy and timing of
construction/expansion.
Because ICRR's mainline track parallels the Mississippi River, barge
competition is formidable. Barge rates fluctuate partially based on
water levels and shipping conditions on the river.
The merger of SP and UP, when fully implemented could result in the
loss of the haulage moves ICRR performs for the SP.
As to expenses, the most volatile are labor costs and fuel. Negotiating
locally with the labor unions increases the risk of a strike and a
strike may not be averted via governmental intervention as is
frequently the case in national labor disputes in the transportation
industry.
The variability of fuel prices can be offset via hedging but hedging
also brings risk.
Finally, mergers in the railroad industry could create traffic
diversions if the new entity route traffic around ICRR's routes or if
it used its size to block shippers' routing options or pricing.
<PAGE>
