SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-10720
ILLINOIS CENTRAL RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
Illinois 36-2728842
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 755-7500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
As of September 30, 1998, 100 common shares were outstanding.
THE REGISTRANT IS AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF CANADIAN NATIONAL
RAILWAY COMPANY AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
H(1)(a) AND (b) OF THE FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 1998
CONTENTS
Part I - Financial Information: Page
Item 1. Financial Statements:
Consolidated Statements of Income 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE> -3-
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $ 161.4 $ 152.9 $ 486.8 $ 455.0
Operating expenses:
Labor and fringe benefits 49.4 47.1 144.7 133.9
Leaeses and car hire 13.3 13.0 40.0 39.3
Diesel fuel 6.0 7.4 20.6 24.5
Materials and supplies 9.1 8.6 26.4 24.1
Depreciation and amortization 9.0 8.3 26.5 24.7
Casualty, insurance and losses 3.6 3.9 9.8 11.2
Other taxes 5.0 4.2 15.5 14.7
Other 9.9 8.0 26.3 16.4
Special Charge - - 16.4 -
Operating expenses 105.3 100.5 326.2 288.8
----- ----- ----- -----
Operating income 56.1 52.4 160.6 166.2
Other income (expense), net 2.5 4.1 8.8 6.3
Interest expense, net (9.3) (7.3) (23.3) (21.8)
---- ---- ----- -----
Income before income taxes 49.3 49.2 146.1 150.7
Provision for income taxes 18.4 18.4 50.9 55.1
---- ---- ---- ----
Net income $ 30.9 $ 30.8 $ 95.2 $ 95.6
======= ====== ======= =======
The following notes are an integral part of the consolidated financial
statements.
<PAGE> -4-
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
ASSETS September 30, 1998 December 31, 1997
------ ------------------ -----------------
Current assets:
Cash and temporary cash investment $ 10.2 $ 28.2
Receivables, net of allowance for
doubtful accounts
of $0.5 in 1998 and $.9 in 1997 143.5 100.6
Loans to affiliates - 4.9
Materials and supplies, at average cost 19.1 15.3
Assets held for disposition 1.2 -
Deferred income taxes - current 17.5 17.5
Other current assets 6.1 5.0
--- ---
Total current assets 197.6 171.5
Investments 12.8 12.1
Loans to affiliates 209.5 160.9
Properties:
Transportation:
Road and structures, including land 1,234.8 1,193.7
Equipment 183.7 173.7
Other, principally land 41.0 41.3
---- ----
Total properties 1,459.9 1,408.7
Accumulated depreciation (53.8) (45.8)
----- -----
Net properties 1,405.7 1,362.9
Other assets 25.5 23.6
---- ----
Total assets $1,851.1 $1,731.0
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 32.7 $ 22.7
Accounts payable 48.1 53.1
Income taxes payable 13.0 -
Casualty and freight claims 12.7 12.7
Employee compensation and vacations 21.9 19.1
Taxes other than income taxes 13.5 16.4
Accrued redundancy reserves 3.7 3.9
Other accrued expenses 78.4 80.1
---- ----
Total current liabilities 224.0 208.0
Long-term debt 580.8 552.4
Deferred income taxes 324.1 302.9
Other liabilities and reserves 105.4 111.7
Contingencies and commitments
Stockholder's equity:
Common stock authorized, issued and outstanding
100 shares, $1 par value - -
Additional paid-in capital 129.7 129.6
Retained income 487.1 426.4
----- -----
Total stockholder's equity 616.8 556.0
----- -----
Total liabilities and
stockholder's equity $1,851.1 $1,731.0
======== ========
The following notes are an integral part of the consolidated financial
statements.
<PAGE> -5-
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of
Cash Flows ($ in millions)
(Unaudited)
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
Cash flows from operating activities :
Net income $ 95.2 $ 95.6
Reconciliation of net income to net cash
provided by (used for) operating activities :
Depreciation and amortization 26.5 24.7
Deferred income taxes 21.2 23.6
Equity in undistributed earnings of affiliates,
net of dividends received (0.9) (0.8)
Net gains on sales of real estate (2.4) (1.1)
Cash changes in working capital (41.8) (2.8)
Changes in other assets (1.9) (3.0)
Changes in other liabilities and reserves (6.3) (10.6)
---- -----
Net cash provided by (used for)
operating activities 89.6 125.6
Cash flows from investing activities :
Additions to properties (66.9) (66.6)
Proceeds from real estate sales 3.1 2.2
Proceeds from equipment sales 1.6 2.5
Proceeds from sales of investments 0.2 0.6
Loans to affiliated companies (43.7) (12.4)
Other (5.6) (6.1)
---- ----
Net cash provided by (used for)
investing activities (111.3) (79.8)
Cash flows from financing activities :
Proceeds from issuance of debt 20.4 -
Principal payments on debt (22.1) (2.6)
Net proceeds (payments) in commercial paper 40.0 (20.0)
Dividends paid (34.6) (48.5)
----- -----
Net cash provided by (used for)
financing activities 3.7 (71.1)
--- -----
Changes in cash and temporary cash investments (18.0) (25.3)
Cash and temporary cash investments at
beginning of period 28.2 46.3
---- ----
Cash and temporary cash investments at end of
period $ 10.2 $ 21.0
======= =======
Supplemental disclosure of cash flow information :
Cash paid during the year for:
Interest (net of amount capitalized) $ 35.6 $ 31.5
======= =======
Income taxes $ 16.5 $ 22.3
======= =======
The following notes are an integral part of the consolidated financial
statements.
<PAGE> -6-
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Merger and Special Charge
On February 10, 1998, Illinois Central Railroad Company and Subsidiaries
("ICR") parent, Illinois Central Corporation and Subsidiaries (the
"Corporation")and Canadian National Railway Company ("CN") entered into an
Agreement and Plan of Merger (as subsequently amended, the "Merger Agreement"),
pursuant to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a wholly-owned
subsidiary of CN, acquired on March 13, 1998, 46,051,761 of the outstanding
shares of the Corporation's Common Stock (the "Shares") at a price of $39.00 per
share through a cash tender offer (the "Offer"). The Corporation's Board of
Directors unanimously approved the Merger Agreement and the transactions
contemplated. On June 4, 1998, the Purchaser was merged with and into the
Corporation (the "Merger") and the remaining outstanding Corporation common
shares not purchased pursuant to the Offer were converted into a right to
receive 0.633 share of CN common stock for each share of Corporation common
stock. Pursuant to the Merger, each share of the Corporation's Common Stock,
including treasury stock held by the Corporation, was cancelled, and the
Corporation became an indirect, wholly-owned subsidiary of CN with 100 shares of
no-par Common Stock issued and outstanding. These shares were deposited in an
independent, irrevocable voting trust while CN and the Corporation await review
of the transaction by the Surface Transportation Board ("STB").
Pursuant to the Merger Agreement, subject to consultations with the
Corporation and after giving good faith consideration to the views of the
Corporation, CN shall have final authority over the development, presentation
and conduct of the STB case, including over decisions as to whether to agree to
or acquiesce in conditions. The Corporation shall take no regulatory or legal
action in connection with the STB without CN's consent. The STB could impose
conditions or restrictions as it relates to CN's acquisition of control of the
Corporation. If the STB does not approve CN's acquisition of control of the
Corporation or CN deems any conditions imposed by the STB unacceptable, CN would
have the obligation to sell all the Corporation common shares held by the voting
trust. The STB's decision is expected in the first half of 1999.
The Corporation and ICR recorded a special charge ("Special Charge") in the
first quarter of 1998 for costs associated with the CN Merger Agreement. The
Special Charge includes $16.4 million for costs relating to payments under
various ICR compensation plans payable following a change in control at the
Corporation. Included in the Special Charge is $11 million for payments under
Incentive 2000 Plan. Approximately thirty executive officers are covered by
Employment Security Agreements and will be entitled to receive between two to
three years of severance benefits if within two years after the change in
control, their employment is terminated by ICR without cause or they resign with
good reason. The amount that may be paid under such Employment Security
Agreements, if any, is not determinable and has not been recorded in the Special
Charge.
<PAGE> -7-
The Corporation's Employee Stock Purchase Plan and Management Employee
Discounted Stock Purchase Plan were terminated following the closing of the
Offer.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting policies described in the 1997 Annual
Report on Form 10-K and should be read in conjunction with the disclosures
therein.
In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flows for the
periods presented. Interim results are not necessarily indicative of results for
the full year.
Income Per Share
Income per common share has been omitted, as ICR is a wholly-owned
subsidiary of the Corporation.
3. Equity and Restrictions on Dividends
For the nine-month period ended September 30, 1998, ICR has paid cash
dividends of $34.6 million to the Corporation. At September 30, 1998,there were
no declared dividends payable to the Corporation. A covenant of the ICR Revolver
requires a minimum level of tangible net worth. At September 30, 1998, ICR
exceeded its tangible net worth covenant by $45.1 million.
4. Receivable Sales Agreement
On January 8, 1998, ICR terminated its revolving agreement to sell
undivided percentage interests in certain of its accounts receivable, with
recourse, to a financial institution.
5. Litigation
ICR is one of several defendants in a New Orleans class action in which a
jury has returned a verdict against the ICR for $125 million in punitive damages
as a result of a tank car fire. The Louisiana Supreme Court has vacated the
judgment for technical reasons and remanded the case to the trial court for
further proceedings. On June 17, 1998, the trial court re-entered judgment in
favor of the class and certified it for interlocutory appeal. The case awaits
hearing in the trial court on post-trial motions.
While the final outcome of this proceeding cannot be determined, in the
opinion of management, based on present information, the ultimate resolution of
this case is not expected to have a material adverse effect on ICR's financial
position, results of operations, cash flow or liquidity.
<PAGE> -8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Total revenues for 1998 increased from the prior year quarter by $8.5
million or 5.6% to $161.4 million.
Increased revenues from grain (corn, soybeans and wheat) resulted from
export shipments for corn, coupled with an increase in market share to domestic
poultry markets. In addition, revenue growth stemmed from milled grains (export
vegetable oils and soybean meal), and metals (new melt shop at Memphis,
Tennessee, increased steel imports and several major western pipeline projects).
Gains in agricultural commodities and metals more than offset reductions in
automotive-related shipments resulting from the General Motors Corporation
strike during July.
Operating expenses increased $4.8 million or 4.8% to $105.3 million. Labor
and fringe benefits reflected more normal levels of expense this quarter
compared to last year, which benefitted from the reduction of certain
compensation-related accruals. Fuel expense reflects an increase in usage (9.5%)
offset by lower costs (22.8%). Materials and supplies expenses have increased
from last year following a new repair program initiated in late 1997. Other
expenses were higher contrasted to last year, which benefitted from the recovery
of prior period expenses.
Other income (expense), net of $2.5 million for 1998 decreased compared to
$4.1 million in 1997 which benefitted from the pre-tax gain for the sale of
outdoor advertising rights.
Net interest expense of $9.3 million for 1998 increased 2.7% compared to
$7.3 million in 1997 primarily from the issuance of commercial paper as a result
of the termination of ICR's receivables sales program.
Provision for income taxes was $18.4 million for 1998 and 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Total revenues for 1998 increased from the prior year period by $31.8
million or 7.0% to $486.8 million.
Export shipments of corn during second and third quarters and new
initiatives to gain market share in the domestic poultry market continued to
offset weak first quarter demand for export grains. Continuing demand for milled
grains (including vegetable oils and soybean meal) and continuing revenue growth
in metals (new melt shop at Memphis, Tennessee, increased import steel, several
major western state pipeline projects, plant expansions, and special project
development) have contributed to revenue growth.
Operating expenses increased $37.4 million or 13.0% to $326.2 million. Much
of this increase is due to the $16.4 million Special Charge discussed in Note 1.
Labor and fringe benefits reflected more normal levels of expense this year
compared to last year, which benefitted from the reduction of certain
compensation related accruals. Fuel expense reflects the increase in usage
(7.0%) offset by lower costs (19.5%). Materials and supplies expense reflects
costs associated with a new repair program initiated in late 1997. Other
expenses were higher contrasted to last year, which benefitted from the recovery
of prior period expenses relating to a derailment.
Other income (expense), net of $8.8 million for 1998 increased $2.5 million
compared to $6.3 million in 1997 primarily from a gain on sale of woodchip
hopper freight cars and the elimination of fees relating to the accounts
receivable sales program.
Net interest expense of $23.3 million for 1998 increased 6.9% compared to
$21.8 million in 1997 primarily from the issuance of commercial paper as a
result of the termination of ICR's receivables sales program.
Provision for income taxes includes a benefit from additional deductions
resulting from exercise of stock options by ICR employees.
Liquidity and Capital Resources
Operating Data ($ in millions): Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
Cash flows provided by (used for):
Operating activities ......................$ 89.6 $125.6
Investing activities ......................(111.3) (79.8)
Financing activities ...................... 3.7 (71.1)
------ ------
Net change in cash and
temporary cash investments $(18.0) $(25.3)
======= =======
Cash provided by operating activities in 1998 and 1997 was primarily net
income before depreciation and deferred taxes.
Investing Data ($ in millions):
Additions to property were as follows:
Nine Months Ended September 30,
1998 1997
---- ----
Communications and signals .................. $ 7.3 $10.9
Equipment/rolling stock .................. 14.5 4.0
Track and bridges............................. 38.7 45.3
Other......................................... 6.4 6.4
----- -----
Total......................................... $66.9 $66.6
===== =====
<PAGE> -9-
Property retirements and removals generated proceeds of $4.7 million in
1998 and 1997.
ICR anticipates that capital expenditures for 1998 will be approximately
$88.6 million. Replacement expenditures of approximately $79.3 million will
concentrate on track, bridges and freight car upgrades. Productivity and
expansion expenditures will total approximately $9.3 million. ICR expects these
expenditures are expected to be met from current operations or other available
sources.
Financing Activities
In October 1998 and 1997, ICR paid $15.8 million and $14.5 million,
respectively, in cash dividends to the Corporation. Through October 1998 and
1997, ICR paid dividends of $50.4 million and $63.0 million, respectively, to
the Corporation.
ICR has a commercial paper program whereby a total of $200 million can be
outstanding at any one time. At September 30, 1998, $40.0 million was
outstanding. The average interest rate on commercial paper for the quarter ended
September 30, 1998, was 5.81% with a range of 5.80% to 5.82%. The commercial
paper program is supported by a $250 million ICR Revolver (see below). ICR's
commercial program is rated A2 by Moody's and P2 by Standard & Poors. ICR's
public debt is rated Baa2 by Moody's and BBB by Standard & Poors.
In 1994, ICR entered into a revolving agreement to sell undivided
percentage interests in certain of its accounts receivable, with recourse, to a
financial institution. This agreement was terminated on January 8, 1998. ICR
serviced the accounts receivable sold under the agreement and retained the same
exposure to credit loss as existed prior to the sale. Costs related to the
agreement fluctuated with changes in prevailing interest rates. These costs,
which are included in other income (expense), net, were $2.3 million for the
nine months ended September 30, 1997.
ICR has a $250 million Revolver with its bank lending group, which expires
in 2001. Fees and borrowing spreads are predicated on ICR'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 ICR's commercial paper program but can
be used for general corporate purposes. Outstanding commercial paper borrowings
and any letters of credit issued on behalf of ICR under the facility in reduce
the available amount. No amounts have been drawn or letters of credit issued
under the Revolver. At September 30, 1998, $210.0 million was available.
Certain covenants of ICR's debt agreements require, among others, specific
levels of tangible net worth but not a specific dividend restriction. At
September 30, 1998, ICR exceeded its tangible net worth covenants by $45.1
million. ICR was in compliance with all covenants at September 30, 1998, and
does not anticipate any difficulty maintaining such compliance in the
foreseeable future.
<PAGE> -10-
In June 1998, ICR issued $20 million in Medium Term Notes ("MTN's") from
its 1996 shelf registration to replace $20 million in MTN's that matured in June
1998. The 1996 shelf registration can be used to issue an additional $50 million
in MTN's until 2000. Currently, there are no plans to issue additional MTN debt.
ICR 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, ICR believes it has access to
the public debt market if needed.
Year 2000 Conversion
General
The Year 2000 Compliance Project includes ICR and the Corporation. ICR has
a Year 2000 Program Office to manage and oversee the Year 2000 initiative. The
program is sponsored by the Vice President & Chief Financial Officer and is
fully supported by senior management. The Year 2000 initiative includes
information technology department supported systems; user department supported
systems; personal computers and LAN; customers and electronic partners; vendors;
public utilities; subsidiaries; and process control.
ICR is committed to make its best efforts to increase the likelihood that
its rail transportation services will not be interrupted, delayed, or otherwise
affected by the Year 2000 problem. Year 2000 problems include, but are not
limited to, failures, errors, delays, or other events resulting directly or
indirectly from the inability of facilities, equipment or software to accurately
and without interruption process or handle dates both before and after January
1, 2000, and to process the year 2000 as a leap year. ICR is using its best
effort to be substantially Year 2000 compliant by the end of 1998.
However, if the Year 2000 problems are not corrected by, or are delayed
beyond the end of 1999, the Year 2000 problems could have a material adverse
impact on the financial position, results of operations and cash flows of ICR.
ICR expects to spend approximately $10.0 million between 1997 to 1999 to
modify and replace its computer systems. Of the total project cost,
approximately $3.0 million is attributable to the purchase of new software. The
total cost of the project is being funded through operating cash flows.
Maintenance or modification costs will be expensed as incurred, while the costs
of new software will be capitalized and amortized over the useful life of the
software. Accordingly, ICR does not expect the amounts required to be expensed
over the next two years to have a material effect on its financial position or
results of operations. The amount of spending to date is approximately $8.0
million.
Process Control
This category is of greatest risk to ICR based on an analysis of core
business processes and the impacts of Year 2000 failures. It includes, but is
not limited to, locomotives, traffic control systems, signal and switch
controllers, highway-rail grade crossing protection, telecommunications systems,
locomotive event recorders, and crew management systems. ICR policy is to test
safety-critical hardware, software and embedded systems regardless of whether
they have been certified Year 2000 compliant by the vendor. ICR tests indicate
that signals and crossing protection do not employ date calculations. This
finding is consistent with rail industry research.
ICR is dependent on third party vendors for Year 2000 compliancy of several
key systems. The vendor of the traffic control system provided ICR with written
Year 2000 readiness statement. ICR completed Year 2000 tests of hardware and
software in May 1998. Another third-party vendor supports the transportation
management system. This vendor formally updates ICR's information technology
steering committee on Year 2000-readiness bi-monthly. Vendor remediation of the
transportation management system is substantially complete and full integration
testing by the vendor is scheduled for completion by the end of 1998. ICR will
validate the Year 2000 readiness of the transportation management system by
performing compliance tests during March 1999.
Vendors of other process control devices and systems have provided ICR with
Year 2000 readiness statements. Completion of ICR testing is currently planned
for 1998.
Information Technology Department Supported Systems
Upon completion of an inventory in July 1997, ICR identified approximately
1.6 million lines of COBOL code in various programs as candidates for
remediation. ICR will replace approximately 200,000 lines of non-Year 2000
compliant code with new software. Remediation and replacement efforts are
utilizing both internal and external resources.
Year 2000 conversion of about 1.3 million lines of code is complete.
Approximately 1.1 million lines of code have also been unit tested and returned
to the production environment. All programs will be migrated to a Year 2000
compliant COBOL compiler. About thirty percent of ICR's programs have been
recompiled and tested. The remaining programs are on plan to be converted, unit
tested, and recompiled by December 1998. Full integration testing of mainframe
applications is scheduled for February 1999.
Installation of two modules of an enterprise software solution is expected
to be completed during the first quarter of 1999. Conversion of data from legacy
systems has commenced and parallel testing is scheduled for the entire fourth
quarter of 1998.
In addition, Year 2000 compliant versions of the mainframe computer
operating system and related system software were installed during the second
quarter of 1998.
User Department Supported Systems
This category includes mainframe, mid-range, and personal computer
applications. Mainframe systems are comprised primarily of data extraction and
analysis programs and databases. An inventory of these systems is complete. Many
of these systems are not critical or do not employ date comparisons. Remediation
is expected to be completed in 1998.
The operating system of the mid-range computer is Year 2000 ready.
Remediation of the application programs is complete and testing is expected to
be completed during the fourth quarter 1998.
The inventory and risk assessment process has determined that user
department supported personal computer applications are not critical.
Approximately eighty percent of these programs do not employ date calculations.
Repair or retirement of the remaining programs is expected to be completed no
later than the first quarter of 1999.
Personal Computers and LAN
Substantially all LAN-connected personal computers have been inventoried
and certified as Year 2000 ready. About thirty percent of freestanding personal
computers are certified, and the rest are on plan for completion in 1998.
Generally, client-server hardware and software have been designed to be
Year 2000 compliant. However, a client-server application with data feeds from
older mainframe systems using two-digit years may require building bridges or
conversion programs to use data from those mainframe systems. These bridges are
being built as part of the installation of enterprise software described above.
Customers and Suppliers
We contacted our top 165 shippers and approximately 1,500 rail and private
car interchange partners to request confirmation that they have internal
processes in place to prevent Year 2000 failures. About fifty percent of the
shippers have responded that they have Year 2000 programs. The process of
contacting non-responding shippers began in September 1998. Shippers and
essential interchange partners will be monitored during 1999 to determine
whether Year 2000 readiness was attained.
ICR uses electronic data interchange (EDI) to exchange data with customers
and other railroads. New industry standards for EDI requiring a four-digit year
will be implemented by ICR. Since some companies will continue to use two-digit
years, ICR will support older versions of EDI transaction sets and interpret
two-digit years within the appropriate century.
ICR is also taking steps to increase the likelihood that the flow of goods
and services provided by suppliers will not be interrupted by Year 2000
failures. ICR asked 1,100 suppliers to certify that their products are Year 2000
compliant and that their internal systems will work properly beyond 1999. Over
700 have responded and indicated that they have a Year 2000 project in place. In
addition, about 120 critical vendors have been identified and they will be
monitored during 1999 to determine whether Year 2000 readiness was attained. ICR
relies on a value-added network (VAN) for EDI with vendors. The VAN provider has
verified that hardware and software is Year 2000 compliant via information on
its' Internet site.
ICR asked 265 private and municipal public utility companies to certify
that their services will not be interrupted by Year 2000 failures and that their
internal business processes and systems will work properly beyond 1999.
Approximately fifty percent responded that they have a Year 2000 plan.
Business Continuity and Contingency Planning
Business continuity and contingency planning to address Year 2000-related
failure scenarios and ICR's response is an integral part of ICR's Year 2000
program. ICR is in the process of determining the risks it would face in the
event certain aspects of its Year 2000 remediation plan fail. Under a worst case
scenario, ICR operations would halt in a short time. Events likely to trigger a
worst case scenario include failure of third party supported traffic control or
transportation management systems; failure of process control hardware or
software; the loss of the public telecommunications network; or failure of the
electric power grid. Risk assessment and contingency plans are expected to be
completed by the end of the first quarter of 1999.
The costs of the remediation and testing and the dates on which ICR plans
to complete Year 2000 efforts are based on management's best estimates. The
estimates were derived utilizing numerous assumptions of future events. There
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause
material difference include, but are not limited to, the continued availability
of internal and external resources, the timetables for internal and third party
testing, the types of Year 2000 failures ICR might face, and similar
uncertainties.
Other Matters
In April 1998, the Corporation, ICR's parent, announced a 15-year marketing
alliance with CN and Kansas City Southern Railway Company. The alliance will
offer shippers new competitive options in a rail freight transportation network
linking key north-south continental freight markets. In addition, the marketing
alliance will give shippers access to Mexico's largest rail system. Under terms
of the marketing alliance, the companies will coordinate sales and marketing,
operations, fleets, and information systems, but not for traffic movements where
any two alliance members provide the only direct rail service.
ICR has entered into four diesel fuel collar agreements each covering
monthly settlement on one million notional gallons. The agreements are not
speculative, but rather are used as hedges against ICR's anticipated diesel fuel
purchases. Each agreement covers approximately 20% of ICR's anticipated diesel
fuel purchases for the twelve-month period of each agreement. At any given time,
the overlapping agreements cover no more than 80% of ICR's anticipated
purchases. If the actual monthly average of the daily per gallon spot price for
Gulf Coast heating oil, the referenced commodity, as published in Platt's
Oilgram ("Monthly Average") is greater than the cap price per gallon, ICR
receives a payment equal to the excess amount multiplied by the notional
gallons. Conversely, if the Monthly Average is below the floor price per gallon,
ICR makes a payment equal to the deficit amount multiplied by the notional
gallons. If the Monthly Average is equal to or between the cap and floor price
per gallon, no payment is received or made by ICR.
<PAGE> -11-
Environmental Liabilities
ICR's operations are subject to comprehensive environmental regulation by
federal, state and local authorities. Compliance with such regulation requires
ICR 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, ICR is
potentially liable for the cost of cleanup of various contaminated sites. ICR
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 ICR can be held jointly and severally liable for all
environmental costs associated with such sites.
ICR is aware of approximately 21 contaminated sites at which it is probably
liable for some portion of any required cleanup. Of these, 13 involve
contamination primarily by diesel fuel that are expected to be remediated
without material cost. Seven other sites are expected to require more than $1
million each in clean-up costs. At five of these sites other parties are
expected to contribute the majority of the costs incurred.
For all known sites of environmental contamination where ICR loss or
liability is probable, ICR has recorded an estimated liability at the time when
a reasonable estimate of remediation cost and ICR liability can first be
determined. Adjustments to initial estimates are recorded as necessary based
upon additional information developed in subsequent periods. Estimates of ICR`s
potential financial exposure for environmental claims or incidents are
necessarily imprecise because of the difficulty of determining in advance the
nature and extent of contamination, the varying costs of alternative methods of
remediation, the regulatory clean-up standards which will be applied, and the
appropriate allocation of liability among multiple responsible parties. At
September 30, 1998, ICR estimated the probable range of its liability to be $8.5
million to $44.1 million, and in accordance with the provisions of SFAS No. 5
had a reserve of $8.7 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 ICR leased substantial amounts of property to industrial tenants,
and ICR continues to haul hazardous materials that 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 ICR 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 ICR`s financial position, results of operations, cash
flow or liquidity.
<PAGE> -12-
Litigation
ICR is one of several defendants in a New Orleans class action in which a
jury has returned a verdict against the ICR for $125 million in punitive damages
as a result of a tank car fire. The Louisiana Supreme Court has vacated the
judgment for technical reasons and remanded the case to the trial court for
further proceedings. On June 17, 1998, the trial court re-entered judgment in
favor of the class and certified it for interlocutory appeal. The case awaits
hearing in the trial court on post-trial motions.
While the final outcome of this proceeding cannot be determined, in the
opinion of management, based on present information, the ultimate resolution of
this case will not have a material adverse effect on ICR's financial position,
results of operations, cash flow or liquidity.
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes various forward-looking statements about ICR that are
subject to risks and uncertainties. Forward-looking statements include
information concerning future results of operations of ICR. Also, statements
including the words "believes," "expects," "anticipates," "intends," "estimates"
or similar expressions are forward-looking statements. Readers should note that
many factors could materially affect the future financial results of ICR and
could cause actual results to differ materially from those expressed in
forward-looking statements contained in this document. Accordingly, ICR
identifies the following important factors that could cause ICR's actual
financial results to be materially effected. The costs of the project and the
date on which ICR plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. The variability of fuel prices can be offset
through hedging, but hedging activities may fail to achieve that purpose or may
result in expense that might not have been otherwise incurred, in the event that
ICR fails to anticipate adequately its fuel requirements or the timing,
magnitude and direction of changes in fuel prices. 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 ICR will not
incur material environmental liabilities in the future. These forward-looking
statements speak only to the date of this filing. ICR disclaims any obligation
or undertaking to disseminate any updates or revisions to any such statement to
reflect changes in ICR's expectations or any change in events, conditions or
circumstances on which any such statements are based.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Exhibit Index on page E-1
<PAGE> -13-
ILLINOIS CENTRAL RAILROAD COMPANY
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, ICR has
duly caused this report to be signed on its behalf by the undersigned hereto
duly authorized.
ILLINOIS CENTRAL RAILROAD COMPANY
John V. Mulvaney
Vice President & Chief Financial Officer
Douglas A. Koman
Controller
Date: November 13, 1998
<PAGE> -14-
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
27 Financial Data Schedule (This exhibit is
required to be submitted electronically
pursuant to the rules and regulations of
the Securities and Exchange Commission
and shall not be deemed filed for the
purposes of Section 11 of the Securities
Act of 1933 or Section 18 of the
Securities Exchange Act of 1934).
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10200
<SECURITIES> 0
<RECEIVABLES> 143500
<ALLOWANCES> 500
<INVENTORY> 19100
<CURRENT-ASSETS> 197600
<PP&E> 1459900
<DEPRECIATION> 53800
<TOTAL-ASSETS> 1851100
<CURRENT-LIABILITIES> 224000
<BONDS> 580800
<COMMON> 0
0
0
<OTHER-SE> 616800
<TOTAL-LIABILITY-AND-EQUITY> 1851100
<SALES> 486800
<TOTAL-REVENUES> 486800
<CGS> 326200
<TOTAL-COSTS> 326200
<OTHER-EXPENSES> (8800)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23300
<INCOME-PRETAX> 146100
<INCOME-TAX> 50900
<INCOME-CONTINUING> 95200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95200
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
