SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1999
[ ] 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 March 31, 1999, 100 common shares were outstanding.
THE REGISTRANT THROUGH ITS PARENT, ILLINOIS CENTRAL CORPORATION (FORMER SEC
FILE NO. 1-10720), IS AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF CANADIAN NATIONAL
RAILWAY COMPANY (SEC FILE NO. 1-2413) AND MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTIONS I(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 March 31, 1999
CONTENTS
Part I - Financial Information: Page
Item 1. Financial Statements:
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions)
(Unaudited)
Three Months
Ended March
1999 1998
Revenues $ 160.1 $ 163.0
Operating expenses:
Labor and fringe benefits 48.3 46.5
Leases and car hire 13.9 13.3
Diesel fuel 5.6 7.7
Materials and supplies 8.5 9.1
Depreciation and amortization 9.3 8.6
Casualty, insurance and losses 3.6 2.8
Other taxes 5.6 5.3
Other 13.9 8.2
Special charge - 16.4
Operating expenses 108.7 117.9
Operating income 51.4 45.1
Other income, net 1.4 2.2
Interest expense, net (7.3) (6.9)
Income before income taxes 45.5 40.4
Provision for income taxes 17.1 11.4
Net income $ 28.4 $ 29.0
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
March 31, December 31,
ASSETS 1999 1998
Current assets:
Cash and temporary cash investment $ 6.9 $ 28.8
Receivables, net of allowance for doubtful
accounts of $.7 in 1999 and $.7 in 1998 154.1 147.6
Materials and supplies, at average cost 20.3 14.9
Assets held for disposition 1.1 1.1
Deferred income taxes - current 18.6 18.6
Other current assets 6.6 6.5
Total current assets 207.6 217.5
Investments 12.9 12.9
Loans to affiliates 202.9 193.2
Properties:
Transportation:
Road and structures, including land 1,265.7 1,255.4
Equipment 196.9 189.4
Other, principally land 41.0 41.0
Total properties 1,503.6 1,485.8
Accumulated depreciation (62.2) (57.5)
Net properties 1,441.4 1,428.3
Other assets 32.7 33.2
Total assets $1,897.5 $1,885.1
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term de $ 33.1 $ 52.7
Accounts payable 43.0 54.5
Income taxes payable 32.3 25.8
Casualty and freight claims 12.3 12.7
Employee compensation 31.7 29.1
Taxes other than income taxes 8.8 15.4
Accrued redundancy reserves 3.7 3.7
Other accrued expenses 79.1 76.7
Total current liabilities 244.0 270.6
Long-term debt 548.4 544.8
Deferred income taxes 345.7 334.2
Other liabilities and reserves 104.5 109.0
Contingencies and commitments
Stockholder's equity:
Common stock authorized, issued and outstanding
100 shares, $1 par value - -
Additional paid-in capital 129.6 129.6
Retained income 525.3 496.9
Total stockholder's equity 654.9 626.5
Total liabilities and stockholder's
Equity $1,897.5 $1,885.1
The following notes are an integral part of the consolidated financial
statements.
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities :
Net income $ 28.4 $ 29.0
Reconciliation of net income to net cash
provided by (used for) operating activities :
Depreciation and amortization 9.3 8.6
Deferred income taxes 11.5 5.4
Equity in undistributed earnings of affiliates,
net of dividends received - (0.2)
Net gains on sales of real estate (0.1) (0.5)
Cash changes in working capital (19.0) (49.1)
Changes in other assets 0.5 (0.8)
Changes in other liabilities and reserves (4.5) 0.9
Net cash provided by (used for) operating
Activities 26.1 (6.7)
Cash flows from investing activities :
Additions to properties (21.8) (18.0)
Proceeds from real estate sales 0.2 0.5
Proceeds from equipment sales 1.2 0.5
Loans to affiliated companies (9.7) (8.4)
Other (1.8) (2.3)
Net cash provided by (used for) investing
Activities (31.9) (27.7)
Cash flows from financing activities :
Proceeds from issuance of debt - -
Principal payments on debt (21.1) (0.6)
Net proceeds (payments) in commercial paper 5.0 54.3
Dividends paid - (34.6)
Net cash provided by (used for) financing
Activities (16.1) 19.1
Changes in cash and temporary cash investments (21.9) (15.3)
Cash and temporary cash investments at beginning of
Period 28.8 28.2
Cash and temporary cash investments at end of period $ 6.9 $ 12.9
Supplemental disclosure of cash flow information :
Cash paid during the year
for:
Interest (net of amount capitalized) $ 13.3 $ 13.9
Income taxes $ 0.1 $ 2.6
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Merger Agreement and Special Charge
On February 10, 1998, ICR's parent, Illinois Central Corporation (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 transaction
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").
The merger of the Corporation and CN received verbal approval by the
STB on March 25, 1999 in a unanimous vote. Written STB approval is expected in
late May 1999 but may not be granted prior to the second quarter of 1999. If
written approval is not received, CN would be obligated to sell all the
Corporation common shares held by the voting trust.
The Corporation and ICR recorded a special charge (the "Special
Charge") during 1998 for costs associated with the CN Merger Agreement. The
Special Charge totaled $28.4 million at ICR for costs relating primarily to
payments under various compensation plans payable following the change in
control. Included in the $28.4 million is approximately $9.1 million for
payments under the Incentive 2000 Plan. Additionally, approximately thirty
executive officers of ICR are covered by Employment Security Agreements and are
entitled to receive either two or 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 Special Charge includes
approximately $12.0 million in connection with these agreements. Terminations
and resignations under the Employment Security Agreements have been proceeding
consistent with original estimates, thus, there is no change in estimate. If all
Employment Security Agreements were to be activated, ICR estimates it would
incur an additional liability of $14.0 million.
The Corporation's Employee Stock Purchase Plan and Management Employee
Discounted Stock Purchase Plan were terminated following completion of the
Offer.
2. Basis of Presentation
Except as described below, the accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting policies
described in the 1998 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.
Reclassification
Certain items relating to prior years have been reclassified to
conform to the presentation in the current year.
3. Equity and Restrictions on Dividends
For the three month period ended March 31, 1999, ICR did not pay or
declare any dividends to the Corporation. Covenants of the ICR Revolver require
specified levels of tangible net worth. At March 31, 1999, ICR exceeded its
tangible net worth covenant by approximately $56.0 million.
4. 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 April 8, 1999, the trial court entered judgment
concerning the punitive verdict but because the verdict addressed only the first
20 plaintiffs, the trial court allocated, punitive damages against ICR of
approximately U.S. $300,000 to those 20 plaintiffs. The judgment and finding
will be appealable upon the trial court's ruling on other post-trial motions. In
ICR's judgment the ultimate disposition of the matter will not have a material
adverse effect on ICR's financial position, results of operations, cash flow or
liquidity.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1997
Total revenues for 1999 decreased from the prior year quarter by $2.9
million or 1.8% to $160.1 million.
Decreased revenues in metals, paper, forest products and grain products
offset gains in chemical, bulk, coal and intermodal revenues. Record imports of
steel and fewer pipeline projects adversely impacted metals volumes, while
reduced demand for export pulp and increased supply of nearby wood fiber took a
toll on forest products shipments. Grain products revenues fell short of 1998
due to soft demand for export soybean oil and vegetable oils, coupled with a
weakening in soybean crush margins and reduced demand for export soybean meal
during March.
Operating expenses decreased $9.2 million or 7.8% to $108.7 million.
Labor and fringe benefits increased $1.8 million or 3.9% primarily reflecting
contract and merit increases. Fuel expense decreased $2.1 million or 27.3%
reflecting lower cost (18.9%) offset by higher usage (3.5%). The $16.4 million
Special Charge in 1998 is discussed in Note 1. Other expenses increased $5.7
million primarily from credits that were not received in 1999 compared to 1998
following the termination of joint facility agreements with another railroad.
Net interest expense of $7.3 million for 1999 increased 5.8% compared
to $6.9 million in 1998 primarily from increased interest income on loans to
affiliates recorded in 1998.
Provision for income taxes in 1998 includes a benefit from additional
deductions resulting from exercise of stock options by ICR employees.
Liquidity and Capital Resources
Operating Data ($ in millions): Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Cash flows provided by (used for):
Operating activities .................$ 26.1 $(6.7)
Investing activities ................. (31.9) (27.7)
Financing activities ................. (16.1) 19.1
------- ------
Net change in cash and
temporary cash investments $(21.9) ($15.3)
======= ======
Cash from operating activities in 1999 and 1998 was primarily net
income before depreciation and deferred taxes.
Investing Data ($ in millions):
Additions to property were as follows:
Three Months Ended March 31,
1999 1998
---- ----
Communications and signals ..............$ 1.3 $ 2.2
Equipment/rolling stock.................. 9.5 3.1
Track and bridges....................... 10.4 10.9
Other................................... 0.6 1.8
----- -----
Total............................... $21.8 $18.0
===== =====
Property retirements and removals generated proceeds of $1.4 million
and $1.0 million in 1999 and 1998, respectively.
ICR anticipates that capital expenditures for 1999 will be
approximately $91.0 million. Replacement expenditures of $78.9 million will
concentrate on track maintenance, bridges and freight car upgrades. Productivity
and expansion expenditures will total $12.4 million. These expenditures are
expected to be met from current operations or other available sources.
Financing Activities
No dividends were declared or paid during the first quarter of 1999. In
January and March 1998, ICR paid $19.0 million and $15.6 million, respectively,
in cash dividends to the Corporation.
ICR 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 ICR Revolver (see below). At March 31, 1999, $5.0 million was
outstanding. The average interest rate on commercial paper for the quarter ended
March 31, 1999, was 5.09% with a range of 5.05% to 5.11%. ICR's public debt is
rated Baa2 by Moody's and BBB by S&P.
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 reduce the available amount. At March 31, 1999, $245 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 March 31, 1999, ICR exceeded its tangible net worth covenants by
approximately $56.0 million. ICR was in compliance with all covenants at March
31, 1999, and does not contemplate any difficulty maintaining such compliance.
ICR has a shelf registration from 1996 which can be used to issue an
additional $50 million in MTN?s or other debt until 2000. Currently, there are
no plans to issue additional debt but replacing maturing MTN?s, capital
investments in the terminal facilities and other ventures could necessitate use.
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
Overview
ICR has long viewed the Year 2000 issue a serious challenge because the
safety of its employees, customers, and the public is a top priority. ICR began
to address the Year 2000 issue in 1997. As a result of those efforts, mission-
and safety-critical hardware, software, and embedded systems controlled by ICR
are substantially Year 2000 ready.
The Year 2000 Readiness Project includes ICR and the Corporation. The
Year 2000 Program Office established by ICR in 1997 to manage and oversee Year
2000 activities will continue monitoring, testing and contingency planning
throughout 1999. The Year 2000 initiative is sponsored by the Vice President &
Chief Financial Officer and is fully supported by senior management. Senior
management receives regular project updates, as does the Board of Directors at
each of its meetings. 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 expects to spend approximately $7.5 million to modify and replace
its computer systems. Of the total project cost, approximately $4.1 million is
attributable to the purchase and implementation 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 to have a
material effect on its financial position or results of operations. The amount
of spending to date, which is approximately 80 percent of total project cost, is
approximately $6.0 million.
Process Control
This category represents the greatest risk to ICR based on its analysis
of core business processes and the impacts of Year 2000 failures. It includes,
but is not limited to, locomotives, the dispatching system, signal and switch
controllers, highway-rail grade crossing protection, telecommunications systems,
locomotive event recorders, and crew management systems. ICR's policy is to test
mission- and safety-critical hardware, software and embedded systems regardless
of whether they have been certified Year 2000 ready by the vendor. ICR tests
indicate that signals and highway grade crossing devices do not employ date
calculations. This finding is consistent with research and testing experience by
other railroads and rail suppliers.
ICR is dependent on third party vendors for Year 2000 readiness of key
systems and equipment. The vendor of the dispatching system provided ICR with a
written Year 2000 readiness statement. ICR completed its own Year 2000 tests of
the hardware and software in May 1998. ICR will continue to test this system
during 1999 to confirm that vendor maintenance and software upgrades have not
affected Year 2000 readiness. Another third-party vendor supports the
transportation control system. Vendor remediation of the transportation control
system is complete and integration testing by the vendor was completed during
1998. ICR will complete acceptance testing on this system in June 1999.
IC suppliers provided Year 2000 ready versions of software for
locomotive event recorders and crew management systems during the first quarter
of 1999. A locomotive manufacturer is scheduled to install Year 2000 ready
software on 22 locomotives by June 1999. ICR will perform additional testing as
necessary throughout 1999 as suppliers provide Year 2000 ready upgrades to
hardware or software.
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. Remediation of approximately 1.4 million lines of code in more
than 2,100 programs is complete and the programs have been unit tested and
returned to the production environment. In addition, ICR migrated the programs
to a Year 2000 ready COBOL compiler. An independent validation and verification
of code changes was completed in March 1999. Integration and user acceptance
testing of mainframe applications was completed during April 1999.
<PAGE>
ICR completed installation of two modules of an enterprise software
solution during January 1999. This software replaced the remaining lines of
non-Year 2000 ready code.
ICR installed a Year 2000 ready version of the mainframe computer
operating system in April 1998. Subsequently, the vendor developed and ICR
applied more than 800 patches to the operating system software. We also
installed more than 60 system software tools during 1998.
ICR will implement a moratorium on any new applications effective
October 1, 1999 that will extend at least two months into the year 2000. This
will reduce the risk of introducing non-Year 2000 ready elements into our
systems and allow information technology specialists to promptly identify and
resolve any Year 2000 issues that might emerge.
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
was completed in 1998.
The mid-range computer and its operating system are Year 2000 ready.
Remediation of the application programs was completed during the fourth quarter
1998.
The inventory and risk assessment process determined that most user
department supported personal computer applications are not mission- or
safety-critical. Repair of the programs was completed during the first quarter
of 1999.
ICR has completed testing of systems in this category during the first
quarter of 1999.
Personal Computers and LAN
All LAN-connected personal computers have been inventoried and
certified as Year 2000 ready. About 90 percent of freestanding personal
computers are Year 2000 ready and the rest will be replaced during 1999.
Generally, client-server hardware and software have been designed to be
Year 2000 ready. 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 were
built as part of the installation of enterprise software described above.
Customers and Suppliers
ICR contacted 165 shippers and approximately 1,500 rail and private car
interchange partners to request confirmation of their internal processes in
place to prevent Year 2000 failures. About 80 percent of the shippers have
responded that they have Year 2000 programs. 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. ICR has implemented new industry standards for
EDI requiring a four-digit year. 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 confirm that their products are Year 2000
ready and that their internal systems will work properly beyond 1999. More than
700 have responded and indicated that they have a Year 2000 project in place. In
addition, ICR identified about 120 critical vendors. These vendors 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 ready via information on
its' Internet site. In addition, a forward date test was successfully executed
in April 1999.
ICR asked 265 private and municipal public utility companies to confirm
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 have responded and reported they have a Year 2000
plan. In addition, ICR monitors the Internet sites of individual utility
companies as well as electric utility and telecommunications industry forums.
Business Continuity and Contingency Planning
We have planned for normal operations on January 1, 2000. Despite our
best efforts, we recognize that it is not possible to represent that we have
achieved complete Year 2000 compliance. Therefore, 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. Our objective is to
mitigate the effects of significant risks ICR would face in the event certain
aspects of its Year 2000 remediation plan fail. ICR completed risk assessment
and developed event response strategies during the first quarter of 1999. At the
foundation of Year 2000 contingency plans are previously developed disaster
recovery plans, a communications and signals help desk currently staffed 24
hours an day, 7 days a week and other emergency and safety reporting processes.
Plans and procedures already exist to address unanticipated outages of
electricity, telecommunications and other services. The Year 2000 contingency
plan addresses, among other things, critical hardware and software, critical
vendors, and key people. Events likely to trigger a worst case scenario include
failure of third party supported dispatching or transportation control systems
or widespread loss of telecommunications or electric power. Under a worst case
scenario, ICR would conduct a safe and orderly shutdown of operations. The
maximum acceptable downtime for the dispatching and transportation control
systems is about 72 hours. We will adjust business continuity and contingency
plans throughout 1999.
Forward-Looking Information
Information concerning costs, remediation, 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 differences 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.
Quantitative and Qualitative Disclosure about Market Risk
In the ordinary course of business, ICR utilizes various financial
instruments, primarily debt obligations, that inherently have some degree of
market risk. Since December 31, 1998 there have been no material changes to the
Company's financial instruments positions.
Miscellaneous
ICR has entered into various diesel fuel collar agreements designed to
mitigate significant changes in fuel prices. ICR has hedged approximately 61% of
the estimated 1999 diesel fuel purchases. In June 1998, the Financial Accounting
Standards Board issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. Effective for fiscal periods beginning after June 15, 1999,
SFAS 133 establishes accounting and reporting standards requiring that
derivative financial instruments (including those embedded in other contracts)
be recorded on the balance sheet as either an asset or liability measured at its
fair value. Changes in the derivative's fair value are to be recognized
currently in earnings, unless certain specified criteria are met which allow the
derivative to be treated as a hedge. Special accounting for qualifying hedges
allows a derivative's gains or losses to offset related results of the hedged
item in the income statement. The effect of adopting SFAS 133 on ICR's net
income or financial position has not yet been determined; however, volatility of
earnings could be increased.
Environmental Liabilities
ICR's operations are subject to comprehensive environmental regulation
by federal, state and local authorities. Compliance with such regulation
requires the Corporation 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 clean-up 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 nine contaminated sites at which it is
probably liable for some portion of any required clean-up. Of these, three
involve contamination primarily by diesel fuel which can be remediated without
material cost. Five other sites are expected to require more than $1 million
each 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 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 March
31, 1999, ICR estimated the probable range of its liability to be $7.4 million
to $22.8 million, and in accordance with the provisions of SFAS No. 5 had a
reserve of $7.4 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 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 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.
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 April 8, 1999, the trial court entered judgment
concerning the punitive verdict but because the verdict addressed only the first
20 plaintiffs, the trial court allocated, punitive damages against ICR of
approximately U.S. $300,000 to those 20 plaintiffs. The judgment and finding
will be appealable upon the trial court's ruling on other post-trial motions. In
ICR's judgment the ultimate disposition of the matter 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>
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
/s/ John V. Mulvaney
John V. Mulvaney
Vice President & Chief Financial Officer
/s/ Douglas A. Koman
Douglas A. Koman
Controller
Date: May 11, 1999
<PAGE>
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).
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 6900
<SECURITIES> 0
<RECEIVABLES> 154100
<ALLOWANCES> 700
<INVENTORY> 20300
<CURRENT-ASSETS> 207600
<PP&E> 1503600
<DEPRECIATION> 62200
<TOTAL-ASSETS> 1897500
<CURRENT-LIABILITIES> 244000
<BONDS> 548400
<COMMON> 0
0
0
<OTHER-SE> 654900
<TOTAL-LIABILITY-AND-EQUITY> 1897500
<SALES> 160100
<TOTAL-REVENUES> 160100
<CGS> 108700
<TOTAL-COSTS> 108700
<OTHER-EXPENSES> (1400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7300
<INCOME-PRETAX> 45500
<INCOME-TAX> 17100
<INCOME-CONTINUING> 28400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28400
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
