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, 1998
Commission file number 1-7092
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class so registered: Name of each exchange on which
Illinois Central Railroad Company each class is registered:
6-3/4% Notes due May 15, 2003 New York Stock Exchange
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 26, 1999, there were 100 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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 INSTRUCTION I(1)(a) and (b) of FORM 10-K AND IS THEREFORE FILING THIS
FORM WITH THE REDUCED DISCLOSURE FORMAT.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
FORM 10-K
Year Ended December 31, 1998
INDEX
PART I 10-K Page
Item 1. Business................................................... 3
Item 2. Properties................................................. 9
Item 3. Legal Proceedings.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders (A).... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................ 14
Item 6. Selected Financial Data (A).................................14
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations...................................14
Item 8. Financial Statements and Supplementary Data.................26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................26
PART III
Item 10. Directors and Executive Officers of the Registrant (A)......27
Item 11. Executive Compensation (A)..................................27
Item 12. Security Ownership of Certain Beneficial Owners and
Management (A)..............................................27
Item 13. Certain Relationships and Related Transactions (A)..........27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................27
SIGNATURES ............................................................28
(A) Omitted or amended as 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 Instruction
I(1)(a) and (b) of Form 10-K and is, therefore, filing this Form with
the reduced disclosure format
<PAGE>
PART I
Item 1. Business
- -----------------
Background
Illinois Central Railroad Company (the "ICR") traces its origin to 1851,
when ICR was incorporated as the nation's first land grant railroad. ICR
currently operates 2,600 miles of main line track between Chicago, Illinois and
the Gulf of Mexico, primarily transporting chemicals, coal, paper, grain and
milled grain, and intermodal trailers and containers. ICR is a wholly owned
subsidiary and a principal asset of Illinois Central Corporation (the
"Corporation"). The Corporation is an indirect wholly owned subsidiary of
Canadian National Railway Company (the "CN")
The principal executive office of ICR is located at 455 North Cityfront
Plaza Drive, Chicago, Illinois 60611-5504 and its telephone number is (312)
755-7500.
Railroad Commodities and Customers
ICR's customers are engaged in a wide variety of businesses and ship a
number of different products that can be classified into seven primary commodity
groupings:
-- organic, inorganic, agricultural and other chemicals
-- grain, milled grain such as corn syrup and soybean meal, and
other agricultural/food products
-- paper, lumber, and other forest products
-- coal
-- intermodal, comprising a wide variety of primarily consumer products
shipped in containers or truck trailers on specially designed cars
-- metals, metal products such as coiled steel, and scrap metal
-- bulk commodities such as sand, stone, coke, and ores
In 1998, no customer accounted for more than 10% of revenues, two
customers exceeded 5% and the ten largest customers accounted for approximately
36% of revenues.
<PAGE>
Contributions to Total Revenues by Commodity Group
The respective percentage contributions by principal commodity group to
ICR's revenues during the past five years are set forth below:
Contributions to Total Revenues by Commodity Group
Commodity
Group 1998 1997 1996 1995 1994
----- ---- ---- ---- ---- ----
Chemicals................... 25.1% 26.7% 27.6% 25.2 % 24.8%
Grain, mill & food products. 18.4 17.4 18.9 21.9 18.7
Paper & forest products..... 16.2 16.9 12.6 16.9 18.1
Coal........................ 12.0 12.2 14.1 12.9 15.2
Intermodal.................. 8.3 8.6 8.7 7.3 6.6
All other................... 20.0 18.2 18.1 15.8 16.6
Total....................... 100.0% 100.0% 100.0% 100.0% 100.0%
In 1998, approximately 67% of ICR's freight traffic originated on its
own lines, of which approximately 21% was forwarded to other carriers.
Approximately 19% of ICR's freight was received from other carriers for final
delivery by ICR, and the balance of approximately 14% represented bridge or
through traffic.
Terminal Operations
ICR currently has facilities or terminal operations that contribute to
revenues and enhance the flow of rail traffic. Most of these facilities have
been developed since 1994. Following are descriptions of two ICR terminals.
In 1996, ICR constructed a 75-acre intermodal terminal for the
exclusive use of the Canadian National Railway Company("CN"). The facility has
an annual capacity of 250,000 intermodal "lifts." An intermodal "lift" is the
placement of a container or truck trailer on or off a railcar. ICR owns the
facility and operates it on CN's behalf. ICR is compensated through fees paid
for each lift.
In 1994, ICR constructed a transload facility in Harvey, Illinois. This
facility stores primarily railcars of plastic pellets. These pellets are
subsequently loaded into tanker trucks for distribution to smaller,
non-rail-served manufacturers. ICR spent $1.0 million to double the capacity of
this terminal in 1997.
<PAGE>
Operating Statistics
Set forth below is certain information relating to ICR's freight
traffic during the past five years.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Carloads (in thousands)....... 951 926 927 957 915
Freight train miles
(in thousands)1............. 8,102 8,078 7,950 7,758 7,179
Revenue ton miles of freight
traffic (in millions)23..... 23,359 22,156 22,511 23,773 20,582
Revenue tons per carload...... 72.8 67.6 71.7 74.7 76.3
Average length of haul
(in miles).................. 325 307 309 328 286
Gross freight revenue per
ton mile34.................. $.026 $.026 $.026 $ .026 $ .028
Net freight ton miles per
average route mile
(in millions)............... 9.0 8.4 8.2 9.0 7.6
Gallons per ton mile5.......... .00227 .00235 .00236 .00234 .00248
Active locomotives............ 301 324 331 333 328
Track resurfacing (miles)..... 1,228 1,235 1,360 1,360 1,397
Percent resurfaced............ 31.1% 31.0% 33.7% 32.2% 33.0%
Ties laid in replacement
(including switch ties)..... 243,853 329,413 425,999 408,760 346,994
Slow order miles.............. 77.85 58.78 100.00 209.76 275.79
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 Prior years have been restated to eliminate non-revenue ton-miles.
4 Revenue per ton-mile equals gross freight revenue divided by revenue
ton-miles of freight traffic. 5 Gallons per ton-mile equals the amount of
fuel required to move one ton of freight one mile.
The following table summarizes operating expense-to-revenue ratios of
ICR for each of the past five years. The table analyzes the various components
of operating expenses based on the line items appearing on the income
statements. The ratio is generally used within the railroad industry as a
measure of operating efficiency; ICR has had the lowest, i.e. best, ratio among
major railroads in the U.S. and Canada in each of the last eight years.
Ratio 1998 1997 1996 1995 1994
----- ---- ---- ---- ---- ----
Operating1....................... 63.8% 63.4% 64.4% 65.6% 67.7%
Labor and fringe benefits........ 29.2 29.8 29.5 30.2 30.9
Leases and car hire.............. 8.3 8.2 9.2 9.1 10.0
Diesel fuel...................... 4.2 5.4 5.6 5.1 5.3
Materials and supplies........... 5.2 5.3 5.1 5.4 6.0
Depreciation and amortization.... 5.5 5.3 5.0 4.8 4.2
Casualty, insurance and losses... 2.7 2.5 1.8 2.7 4.0
Other taxes...................... 3.0 3.2 2.7 2.8 2.9
Other............................ 5.7 3.7 5.5 5.5 4.4
1 Operating ratio means the ratio of operating expenses before special charge
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. Also, railroad employees are 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 ICR'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 ICR's actual operating environment. To date, all of
ICR's eleven bargaining units have ratified local agreements that resolve wage
and work-rule issues through 1999 for non-operating crafts and through the year
2000 for engineers and trainmen.
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 an
extended work stoppage potentially more likely. ICR'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:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total Employees 3,192 3,295 3,238 3,268 3,250
Management believes that over the next several years attrition and
retirements will be the primary source of declines in employment levels.
Increases in employment levels, particularly in train operations, are possible
in response to growth of business.
Regulatory Matters; Freight Rates; Environmental Considerations
ICR is subject to significant governmental regulation by the Surface
Transportation Board (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.
ICR currently transports Southern Illinois coal that will not meet the
environmental standards of Phase II of the Clean Air Act unless blended with
lower-sulfur coal or users of the coal install air scrubbers. As a result, this
source of traffic may decline in advance of or consistent with Phase II
implementation in the year 2000. On the other hand, ICR is participating in
movements of Western coal (lower-sulfur) and certain Southern Illinois coal that
is being blended with low-sulfur Eastern coal to comply with Phase II. ICR
anticipates these sources of traffic may increase. Overall, management believes
that implementation of Phase II of the Clean Air Act is unlikely to have a
material adverse effect on the results of ICR.
Currently, the utility industry is undergoing deregulation creating
enormous pressures for change, innovation, and cost control. In the face of
increased competition caused by deregulation, utilities are attempting to reduce
costs, including rail transportation costs. Methods being investigated include
"power wheeling", "coal-by-wire", and for those utilities served by a single
railroad, re-regulation of rail rates. Some analysts have suggested that utility
deregulation may significantly reduce rail revenues through a shift in the
pattern of coal movements forcing lower rail rates. At this point, there are too
many variables to know if utility deregulation will have a neutral, modestly
positive or modestly negative effect on ICR in the long-term. However,
management believes that ICR will not be materially, adversely affected because
it already provides its utility customers highly competitive rates and service
as determined through competitive bids against other railroads and river
options.
Inherent in the operations and real estate activities of railroads is
the risk of environmental liabilities. ICR is 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. See Item 2. "Properties -
Environmental Conditions" for discussion of sites on which ICR currently or
formerly conducted operations that are subject to governmental action in
connection with environmental degradation.
Railroad's Results Influenced by Economic Conditions
In any given year, ICR, like other railroads, is susceptible to changes
in the economic conditions of the industries and geographic areas that produce
and consume the freight it transports. Many of the goods and commodities carried
by ICR experience cyclicality in demand. The operations of ICR can be expected
to reflect this cyclicality because of the significant fixed costs inherent in
railroad operations. ICR's revenues are affected by prevailing economic
conditions and should an economic slowdown or recession occur in the United
States or other key markets, the volume of rail shipments carried is likely to
be reduced.
Competition
ICR faces intense competition for freight traffic from trucks, river
barges, pipeline carriers, and other railroads. Competition is generally based
on the rates charged and the quality and reliability of the service provided. At
December 31, 1998, there were 9 railroads in the United States classified by
revenues as Class I railroads. ICR is sixth in revenues and has the best
operating ratio.
To a greater degree than other rail carriers, ICR 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,
often represents a lower cost mode of transportation. Barge competition and
barge rates are affected by navigational interruptions from ice, floods and
droughts that can cause widely fluctuating barge rates. ICR's ability to
maintain its market share of the available freight has traditionally been
affected by the navigational conditions on the river. As a result, ICR's revenue
per ton-mile has generally been lower than industry averages for these
commodities.
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.
Most of ICR'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 ICR. 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. Mergers have not had a material adverse impact on the
results or financial condition of ICR. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Significant
Developments - Canadian National Tender Offer."
Adverse Factors Affecting Fuel Prices
ICR currently has hedging programs in place through November 1999, to
mitigate the effects of fuel price changes on its operating margins and overall
profitability. ICR has entered into several collar agreements to mitigate the
risk of fuel price volatility. ICR also monitors its hedging positions and
credit ratings of its counter parties and does not anticipate losses due to
counterparty nonperformance.
Liens on Properties
ICR's equipment is not subject to liens.
Liability Insurance
ICR is self-insured for the first $5 million of each loss. ICR has
available $245 million of liability insurance per occurrence, subject to an
annual cap of $385 million in the aggregate for all losses. This coverage is
considered by ICR's management to be adequate in light of ICR's safety record
and claims experience.
Item 2. Properties
- -------------------
Physical Plant and Equipment
System. As of December 31, 1998, ICR's total system consisted of
approximately 4,500 miles of track comprised of 2,600 miles of main line, 200
miles of secondary main line and 1,700 miles of passing, yard and switching
track. ICR owns all of the track except for 190 miles owned by other railroads.
ICR operates over the non-owned track by separate agreements with those
railroads.
Track and Structures. The following amounts have been spent during the
five years ended December 31, 1998, on track and structure to construct and
maintain rail lines and related signal equipment, and other facilities ($ in
millions):
Capital
Expenditures Maintenance Total
------------ ----------- -----
1998......... 76.6 23.9 100.5
1997......... 91.1 16.7 107.8
1996......... 91.2 23.7 114.9
1995......... 66.9 33.5 100.4
1994......... 63.2 29.1 92.3
---- ---- ----
Total...... $389.0 $126.9 $515.9
====== ====== ======
These expenditures have concentrated primarily on the routine
maintenance of the track roadway and bridges. Approximately 1,200, 1,200 and
1,400 miles of roadway ballast was resurfaced in 1998, 1997 and 1996,
respectively. In 1996, a total of $20.1 million was spent to construct an
intermodal terminal facility for the CN (the "CN Terminal").
Locomotives and Freight Cars. Over the last five years lease of 61 used
SD-40-2's and 20 new SD-70's have enabled ICR to replace older, lower horsepower
and less efficient locomotives. (The 20 SD-70's replaced 31 older, smaller
locomotives.)
In March and April 1999, ICR will purchase an additional 20 new SD-70
locomotives. These units will also be used to replace older, lower horsepower
and less efficient locomotives.
Approximately 1,825 freight cars and 79 locomotives leased by ICR are
leased from another subsidiary of the Corporation.
In 1998, ICR sold 230 woodchip hopper freight cars representing 24% of
that car type as a result of declining demand for that car type.
In 1996, ICR began a covered hopper fleet program under which existing
equipment was either modernized or replaced. In 1997 and 1996, approximately 800
cars, operated under short-term car hire arrangements and various leases, were
returned and replaced with 900 new high capacity hoppers which are being leased
under an operating lease from an unrelated third party.
The following is the overall fleet at December 31:
Total Units: 1998 1997 1996 1995 1994
- ------------ ---- ---- ---- ---- ----
Locomotives1 346 365 391 397 417
Freight cars.......... 14,213 15,375 15,838 15,872 16,498
Work equipment........ 641 641 655 654 625
Highway trailers...... 928 888 889 898 898
1 Approximately 28 locomotives need repair before they can be returned to
service. This equipment is either repaired, if needed on an ongoing basis,
or sold. ICR sold 16, 30, 6, 40 and 48 surplus locomotives in 1998, 1997,
1996, 1995 and 1994, respectively. The active fleet was 301 as of December
31, 1998. Also, 17 locomotives are being subleased.
The components of the fleet owned, leased and in total for 1998 and in total
for 1997 are shown below:
Long-Term 1998 1997
Description 1 Owned 2 Lease Total Total
- ------------- ------- ----- ----- -----
Locomotives:
Multipurpose 209 79 288 300
Switching 58 - 58 65
-- -- --
Total 267 79 346 365
=== == === ===
Freight Cars:
Box (general service) 214 649 863 1,430
Box (special purpose) 2,226 1,088 3,314 2,896
Gondola 989 598 1,587 1,617
Hopper (open top) 1,585 1,970 3,555 3,738
Hopper (covered) 2,661 1,709 4,370 4,612
Flat 209 366 575 579
Other 523 567 1,090 1,264
--- --- ----- -----
Total 8,407 6,947 15,354 16,136
===== ===== ====== ======
Work Equipment 641 - 641 641
--- --- ---
Highway trailers 40 888 928 888
== === === ===
1 In addition, approximately 1,117 freight cars were being used by ICR under
short-term car hire agreements. 2 Includes 53 locomotives and 760 freight
cars under capital leases.
Environmental Conditions
ICR faces potential environmental cleanup costs associated with
approximately 9 contaminated sites and various fueling facilities for which a
total of $7.2 million has been reserved as of December 31, 1998. The most
significant of those sites are described below.
Mobile, Alabama
ICR 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. ICR has been participating in joint
clean-up efforts with the current owner and ICR's former lessee. See Item 3.
"Legal Proceedings."
Jackson, Tennessee
A rail yard in Jackson, Tennessee, formerly owned by ICR has been
placed on the federal and state "superfund" list as a result of the discovery of
Trichloroethane ("TCE") in the adjacent municipal water well field. ICR 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. ICR demonstrated to the
Tennessee Department of Environmental Management's satisfaction that the TCE did
not come from its operation, or from this site. In November 1998, ICR excavated
a small volume of lead contaminated soil from the site and has now completed all
remediation required under federal and state superfund laws. ICR is currently
negotiating the scope of a clean-up plan to address petroleum contamination
discovered during the course of its superfund site investigation. See Item 3.
"Legal Proceedings."
McComb, Mississippi
ICR 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. Currently, ICR is 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 ICR 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. ICR 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.
East Hazel Crest, Illinois
In 1994, ICR learned that an underground fuel line had leaked about
100,000 gallons of diesel fuel into the soil and groundwater. ICR has replaced
the fuel tank and piping, has constructed a groundwater remediation system and
has enrolled the site in Illinois' Pre-Notice Site Clean-up Program. Estimates
of remaining clean-up costs range between $.3 million and $.7 million.
Bossier City
ICR leased land located in Bossier City, Louisiana to T. J. Moss Tie
Company and corporate successor Kerr McGee Chemical Corporation from 1928 to
1980, at which time the property was sold to Kerr McGee. Moss and Kerr McGee
operated a creosoting facility at this site from 1928 to 1988. Kerr McGee
notified ICR that it intends to hold ICR responsible for a portion of whatever
cleanup costs, if any it ultimately incurs at this site. ICR is not in
possession of any information at this time that would enable it to determine
whether any clean-up is necessary and to estimate what that clean-up might cost.
Fueling Facilities
ICR 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 ICR has initiated a program of
rebuilding all fuel lines above ground.
Waste Oil Generation
ICR has been identified as a Potentially Responsible Party ("PRP") at a
site where waste oil was allegedly processed and disposed. ICR is alleged to
have generated some of the waste oil. ICR believes any contribution it may have
made to the site contamination is de minimis.
Item 3. Legal Proceedings
- --------------------------
GATX Tank Car Explosion September 9, 1987 at New Orleans (Civil District Court,
Parish of Orleans, Louisiana No. 87-16374)
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 trail court re-entered judgment in
favor of the class and certified it for interlocutory appeal. The case awaits
hearing in the trail court on post-trial motions. The Company believes the
plaintiff's claims have no basis and intends to continue to challenge them
vigorously.
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 ICR, which owned
the land until 1976, Alabama Wood Treating Corporation, Inc., and Reilly
Industries, Inc. ("RII"), which leased the land from ICR and conducted creosote
operations on the site. In December 1976, ICR 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 ICR 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. ICR has contributed $2.3 million.
Further clean-up activities are anticipated, the cost of which could range from
$1.8 million to $5.6 million depending upon the clean-up standards and
remediation methods ultimately required and utilized.
ASD terminated the Joint Tech Agreement on August 27, 1997 and has
threatened to reinstate the 1985 litigation - ICR expects its share of remaining
clean-up cost to range between $0.6 million and $4.0 million.
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 clean up by ICR and the current owners
of a site in Jackson, Tennessee. ICR operated a rail yard and locomotive repair
facility at the site. 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. ICR demonstrated to the Tennessee Department of
Environmental Management's satisfaction that the TCE did not come from its
operation, or from this site. In November 1998, ICR excavated a small volume of
lead contaminated soil from the site and has now completed all remediation
required under federal and state superfund laws. ICR is currently negotiating
the scope of a clean-up plan to address petroleum contamination discovered
during the course of its superfund site investigation.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Intentionally omitted. See Index page of this report for explanation.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ---------------------------------------------------------------------------
Matters
-------
All of the outstanding common stock of the ICR (100 shares) is owned by
the Corporation and therefore is not traded on any market. Certain covenants of
ICR's Revolver, while not specifically restricting dividends, do require the ICR
to maintain minimum levels of tangible net worth. While not anticipated, such
restrictions could limit the amount of dividends paid by the ICR to the
Corporation. ICR paid cash dividends to the Corporation of $50.3 million in
1998, $62.9 million in 1997, $103.2 million in 1996 and $107.7 million in 1995.
At December 31, 1998, approximately $42.1 million of ICR equity was free of such
restriction.
Item 6. Selected Financial Data
- --------------------------------
Intentionally omitted. See Index page of this Report for explanation.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
-------------
Significant Developments
Canadian National Tender Offer
On February 10, 1998, the Corporation and 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 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 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
be obligated to sell all the Corporation common shares held by the voting trust.
The STB's decision is expected in the second quarter of 1999.
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. If all Employee
Security Agreements were to be activated, ICR estimates it would incur
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.
Results of Operations
The discussion below takes into account the financial condition and
results of operations of ICR for the years presented in the consolidated
financial statements.
1998 Compared to 1997
Total revenues for 1998 increased from the prior year by $28.8 million,
or 4.6%, to $651.3 million. Modest increases in the number of carloadings of
2.7% and average freight revenue per carload of 1.5%, were offset by decreases
in other revenues including switching and terminal services.
Chemical traffic losses created by the Asian economic crisis were
partially offset by strength in certain commodity lines and gain in market
share. The benefits of the service agreement with the Burlington Northern Santa
Fe Railroad ("BNSF") and effects of the newly created Alliance between ICR, CN
and Kansas City Southern Railway ("KCS") also contributed to the positive gain.
(See "Item 1. Business-Competition").
Despite a continued weakness in the U.S. export markets for whole
grains, ICR's export volumes increased slightly. This increase coupled with a
continued growth in both the domestic processor business and the traditional
poultry markets, resulted in a modest increase in both carloads and revenue in
1998. Grain mill products experienced an increase during 1998, driven by
increased shipments of oils and meals to both export markets (including river
terminals and Gulf exports) and domestic markets.
Paper and forest products remained flat year over year. The Asian market
crisis also impacted ICR's forest products business during 1998. Pulp production
was affected by extended downtime at two ICR-served mills as a result of
decreased export shipments. As these mills operated throughout the year at
reduced capacity, inbound fiber shipments were also reduced. Linerboard held
steady in spite of weak paper prices. Conversely, several mills served by other
carriers took downtime providing opportunities for ICR-served mills.
Additionally, the increased number of housing starts was reflected in increased
lumber and plywood shipments in 1998.
Coal revenues increased slightly in 1998. Early correction of production
problems at mines in the Illinois Basin and resumption of near-normal rail
operations on Western Coal movements, coupled with a hot summer and nuclear
powered electric generation plant outages, increased coal consumption in the
Midwest and Southeast.
Intermodal revenues exceeded 1997, even though volumes did not, due to
improvement in ICR's traffic mix. Union Pacific Railway haulage for 1998 fell
below 1997 levels while other trailer and container business finished strong
ahead of a record year in 1997. ICR automotive business during 1998 was at the
highest levels in six years. The addition of Volkswagen buoyed volumes during
the last quarter and strong sales for Honda continue to anchor the ICR
automotive numbers.
In the all other commodities group, metals traffic was strong for ICR,
closing out 1998 well ahead of 1997 in both carloads and revenues. The advent of
a full year of direct-reduction iron pellet shipments from Convent, LA, Stupp
Brothers' expansion at Baton Rouge, LA, several large pipe movements combined
with Birmingham Steel at Memphis, TN coming on-line. Fourth quarter 1998,
however, began to show weakness in the metals market place, first with lower
scrap prices followed by lower steel prices as a result of intense pressure from
import steel.
Excluding the $28.4 million Special Charge discussed above, operating
expenses overall increased $21.0 million or 5.3% in 1998. Labor and fringe costs
increased $4.7 million or 2.5% primarily reflecting contract and merit
increases. Lease and car hire increased $2.8 million or 5.5% in 1998 as a result
of increased business levels. Fuel expense decreased $6.2 million or 18.6%
reflecting lower cost (20.3%) offset by higher usage (1.6%). Increase in
depreciation and amortization of $2.5 million or 7.6% is the result of higher
capital spending initiatives beginning in 1996. Casualty, insurance and losses
increased $2.1 million or 13.5% primarily as a result of two fatalities that
occurred in 1998 and adverse developments in other pre-1998 occurrences. Other
expense increased a total of $14.3 million compared to 1997. Approximately $5.9
million of the change was related to recovery of expenses in 1997 for a
derailment that occurred in 1994. Additionally, $2.8 million in credits were not
received in 1998 compared to 1997 following the termination of joint facility
agreements with another railroad. Other income (expense), net increased $5.9
million in 1998 primarily from gains on sale of woodchip hopper freight cars and
settlement of contract dispute, and elimination of fees relating to ICR's
accounts receivable program.
Favorable borrowing rates for commercial paper resulted in a $0.5
million decline in interest expense, net despite increased commercial paper
issuances as the source of funds following termination of ICR's accounts
receivable sales program.
1997 Compared to 1996
Total revenues for 1997 increased from the prior year by $5.3 million,
or 0.9%, to $622.5 million. Modest decreases in the number of carloadings of
0.1% and average freight revenue per carload of 0.7%, were offset by increases
in other revenues including switching and terminal services.
Strength in chemical traffic that began in the latter part of 1996
continued as expected into 1997. Strength was across the board among most
chemicals, and rail rates were strong. Chemical loadings and revenues benefited
from a service agreement with the BNSF. Management believes that the future
annual benefit of the agreement will grow although it is taking longer than
expected for BNSF to penetrate the Union Pacific/Southern Pacific ("UPSP")
markets to which it gained access through the UPSP merger case.
Export demand for U.S. grains remained weak throughout 1997. Very strong
demand for grain in 1996, coupled with meager supply particularly of corn,
resulted in abnormally high prices paid for grain in 1996 that in turn
stimulated abnormally high plantings of grains by other countries. Consequently,
while the 1996 harvests of corn and soybeans in Illinois were good, export
demand for U.S. grains was abnormally low (including wheat for which ICR is a
residual carrier) as global buyers turned to other countries' bumper crops and
lower prices. In January 1997, management lowered its grain expectations and
cautioned that weak export grain markets were likely to curtail ICR's 1997
revenue growth.
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 as that industry found
its capacity outstripping demand following the addition of significant new
capacity in 1995/96. However, according to major manufacturers, capacity was
brought into balance with demand in the summer, leading to a stronger second
half of the year. Additionally, a plant conversion by a major ICR shipper from
short-log to long-log input took several months longer than their original
expectations, resulting in less rail service than planned.
Coal performed as expected. However, a mid-year mine fire of a major
coal producer/shipper on ICR's line and, separately, severe rail congestion in
the western U.S., which disrupted the movement of coal, resulted in ICR losing
about 18,000 loads of coal it might otherwise have carried. Underlying demand
for coal remains strong.
Base intermodal business, particularly trailer business, was very strong
throughout the year. However, a major intermodal customer UPSP, discontinued
some of their business with ICR in September. There was also some negative
impact from an approximate two-week strike against another major intermodal
customer.
As expected, metals traffic of this commodity group fell short of the
1996 all-time record year that mirrored exceptional strength in the steel
industry and included some large non-recurring spot moves. Also, as expected, a
major shipper took its plant down for several months in order to effectively
double its productive capacity, which resulted in near-term loss of business for
ICR but sets the stage for future growth with this customer. Birmingham Steel
completed construction of its new mill in Memphis in the fourth quarter of 1997
and began to take inbound product.
Operating expenses overall decreased $3.1 million or .8% in 1997.
Increased labor and fringe costs reflect contract increases and additional
management labor due to management services agreement with another subsidiary of
the Corporation partially offset by operational efficiencies. Leases and car
hire decreased $5.6 million or 9.9% in 1997 reflecting a return to more normal
operating levels and lower export grain movements. Fuel expense decreased
reflecting the decrease in usage (.4%) and by the lower cost (3.0%).
Depreciation and amortization expense was 6.8% higher due to increased capital
spending in 1996 and 1997 compared to 1995. Materials and supplies were 6.4%
higher in 1997 reflecting higher prices and increased maintenance costs for
locomotives and freight cars. Casualty expense increased 36.8% compared to 1996.
In 1996, casualty expense was lower than expected due to the write-down of
casualty reserves as a result of ICR's improving safety performance. The
increase in other taxes was primarily due to increased property tax assessments.
Other expense reflects the recovery of prior period expenses in relation to
costs related to a derailment.
Operating income for 1997 increased $8.4 million or 3.8% to $227.9
million for the reasons cited above.
Other income (expense), net, in 1997 includes a $3.3 million pre-tax
gain related to the grant of a permanent easement for the marketing of outdoor
advertising on ICR rights-of-way. On October 3, 1996, ICR sold its investments
in an industry-captive insurance company, RAIL, which resulted in a one-time
gain, recorded as other income (expense), net, of approximately $7.0 million.
Net interest expense of $28.2 million for 1997 increased 6.4% compared
to $26.5 million in 1996 caused by higher debt levels year to year.
Provision for income taxes of $70.1 million for 1997 included a $4.1
million benefit from the donation of property.
Liquidity and Capital Resources
Operating Data ($ in millions):
Cash flows provided by (used for): 1998 1997 1996
---- ---- ----
Operating activities $151.0 $184.3 $165.0
Investing activities (122.3) (117.0) (226.1)
Financing activities (28.1) (85.4) 104.4
----- ----- -----
Net change in cash and temporary
cash investments $ 0.6 $(18.1) $ 43.3
====== ====== ======
Cash from operating activities in 1998, 1997 and 1996 was primarily net
income before depreciation, deferred taxes and extraordinary item.
Investing Data
Additions to property were as follows ($ in millions):
1998 1997 1996
---- ---- ----
Communications and signals...... $10.1 $ 10.1 $ 12.1
Equipment/rolling stock......... 21.7 19.9 27.7
Track and bridges............... 53.7 65.7 53.9
Other........................... 12.7 15.2 25.2
---- ---- ----
Total................... $98.2 $110.9 $118.9
===== ====== ======
Expenditures for CN Terminal of $2.0 million was included in other for
1997 and expenditures of $3.3 million and $16.8 million were included in track
and bridges, and other, respectively, in 1996. In 1996 capital expenditures
exceeded original estimates as several opportunities to acquire equipment were
acted upon in accordance with ICR's strategy of owning more of its equipment.
Property retirements and removals generated proceeds of $6.4 million, $4.9
million, and $6.0 million in 1998, 1997 and 1996, 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. If the
merger with CN is approved, additional capital expenditures may be incurred to
implement various aspects of a combined operating plan.
Financing Activities
For the three years ended December 31, 1998, ICR has paid $222.1
million in dividends to the Corporation ($50.3 million in 1998, $62.9 million in
1997 and $108.9 million in 1996.) Included in the 1996 dividends to the
Corporation is the March 1996 transfer by ICR 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.
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 the $250
million ICR Revolver (see below). At December 31, 1998, Standard & Poor's
Corporation ("S&P") and Moody's Investor Services ("Moody's") have rated the
commercial paper A2 and P2, respectively. At December 31, 1998, no amounts were
outstanding. The average interest rate on commercial paper outstanding for the
year ended December 31, 1998, was 5.78% with a range of 5.71% to 5.82%. ICR's
public debt is rated BBB by S&P and Baa2 by Moody's.
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 which was terminated on January 8, 1998,
had permitted sales of trade accounts receivable up to a maximum of $50 million
at any one time. Costs related to the agreement fluctuated with changes in
prevailing interest rates. These costs, which are included in other income
(expense), net, were $3.0 million, and $2.9 million for the years ended December
31, 1997 and 1996, respectively.
ICR has a $250 million revolver ("ICR Revolver") with its bank lending
group that 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. The available
amount is reduced by the outstanding amount of commercial paper borrowings and
any letters of credit issued on behalf of ICR under the facility. At December
31, 1998, $20 million was drawn and outstanding, and no letters of credit were
outstanding.
Certain covenants of ICR's debt agreements require specific levels of
tangible net worth but not a specific dividend restriction. At December 31,
1998, ICR exceeded its tangible net worth covenants by $42.1 million. ICR was in
compliance with all covenants at December 31, 1998, 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 and other ventures could necessitate use.
The Company 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, the Company
believes it has access to the public debt market if needed.
Year 2000 Issues
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 $12.0 million 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 to have a material effect on
its financial position or results of operations. The amount of spending to date
is approximately $11.0 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 rail industry research.
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. This vendor provides periodic updates on Year
2000 readiness to ICR's information technology steering committee. Vendor
remediation of the transportation control system is complete and integration
testing by the vendor was completed during 1998. ICR will conduct acceptance
testing on this system during the second quarter of 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. User acceptance / integration
testing of mainframe applications is scheduled during March 1999 and is to be
completed by April 1999.
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 will complete 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 75 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. 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 has 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.
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
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. Operations managers are in the process of reviewing a draft
of a Year 2000 contingency plan that addresses, among other things,
telecommunications, critical hardware and software,critical vendors, and key
people. ICR's objective is to mitigate the effects of significant 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 about 72 hours. Events
likely to trigger a worst case scenario include failure of third party supported
dispatching or transportation control systems or wide spread loss of
telecommunication or electric power. ICR expects to complete risk assessment and
contingency plans by the end of the first quarter of 1999. We will adjust
business continuity and contingency plans throughout 1999.
<PAGE>
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.
Miscellaneous
ICR has entered into various diesel fuel collar agreements designed to
mitigate significant changes in fuel prices. At December 31, 1998, 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. (See Item 8. "Financial
Statements and Supplemental Data - Notes to Consolidated Financial Statements.")
ICR 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 February and May 1997, the United Transportation Union ("UTU") and
Brotherhood of Locomotive Engineers, respectively, ratified new agreements which
settle wage and work rule issues through 2000. The agreements are similar to the
nationally negotiated agreements in effect with other Class I carriers. The main
distinction is timing of the various lump sum payouts and scheduled wage
increases.
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 that 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 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
December 31, 1998, ICR estimated the probable range of its liability to be $7.2
million to $22.7 million, and in accordance with the provisions of SFAS No. 5
had a reserve of $7.2 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.
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 $125 million in punitive
damages as a result of a tank car fire. The Louisiana Supreme Court has vacated
the judgment for technical reasons and remanded the case to the trial court for
further proceedings. On June 17, 1998, the trial court re-entered judgment in
favor of the class and certified it for interlocutory appeal. The case awaits
hearing in the trial court on post-trial motions. While the final outcome of
this proceeding cannot be determined, in the opinion of management, based on
present information, the ultimate resolution of this case is not expected to
have a material adverse effect on ICR's financial position, results of
operations, cash flow or liquidity.
Quantitative and Qualitative Disclosure about Market Risk
In the ordinary course of business, ICR utilizes various financial
instruments, primarily debt obligations, that inherently have some degree of
market risk. The quantitative information presented below describe significant
aspects of ICR's financial instrument programs which have material market risk.
Interest Rate Sensitivity
The table below provides information about ICR's debt obligation as of December
31, 1998 that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted average interest rates by contractual
maturity dates.
Maturity Date
-------------
There- Fair
1999 2000 2001 2002 2003 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
Fixed rate debt
($ in millions) $52.7 $33.0 $102.8 $2.4 $104.6 $302.0 $597.5 $637.8
Average
interest rate 6.483% 7.007% 6.980% 9.805% 6.765% 7.442% 6.950% -
Commodity Price Sensitivity
ICR has a program to hedge against fluctuations in the price of its
diesel fuel purchases. The program consists of collar transactions that are
accounted for as hedges. See Item 8. "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements" Note 6. for information
relating to ICR's diesel fuel hedging program.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
See Index to Consolidated Financial Statements on page 30 of this Report.
Item 9. Changes in and Disagreement with Accountants in Accounting Financial
Disclosures
- ------- ---------------------------------------------------------------------
NONE
<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 30 of this
Report.
2. Financial Statement Schedules:
See Index to Financial Statement Schedules on page F-25 of this
Report.
3. Exhibits:
See 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:
None
(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.
<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/ JOHN V. MULVANEY
John V. Mulvaney
Vice President and Chief Financial Officer
Date: March 26, 1999
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/ GEORGE D. GOULD Chairman of the Board and Director March 26, 1999
George D. Gould
/s/ JOHN D. MCPHERSON President and Chief Executive Officer March 26, 1999
John D. McPherson (principal executive officer), Director
/s/ JOHN V. MULVANEY Vice President March 26, 1999
John V. Mulvaney and Chief Financial Officer
(principal financial officer)
Director
/s/ DOUGLAS A. KOMAN Controller March 26, 1999
Douglas A. Koman (principal accounting officer)
/s/ RONALD A. LANE Director March 26, 1999
Ronald A. Lane
/s/ EDWARD G. KAMMERER Director March 26, 1999
Edward G. Kammerer
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENTS
SUBMITTED IN RESPONSE TO ITEM 8
<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, 1998..............................................F-2
Consolidated Balance Sheets at December 31, 1998 and 1997..............F-3
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998..............................................F-4
Consolidated Statements of Stockholder's Equity and Retained
Income for the three years ended December 31, 1998...................F-5
Notes to Consolidated Financial Statements for the three years
ended December 31, 1998..............................................F-6
<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, 1998 and 1997, 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 31,1998. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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 schedule listed in the Index to
Financial Statement Schedules herein is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states 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 12, 1999
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions)
Years Ended Decemember 31,
--------------------------
1998 1997 1996
---- ---- ----
Revenues $651.3 $622.5 $617.2
Operating expenses:
Labor and fringe benefits 190.3 185.6 181.9
Leases and car hire 53.9 51.1 56.7
Diesel fuel 27.1 33.3 34.6
Materials and supplies 34.2 33.2 31.2
Depreciation and amortization 35.6 33.1 31.0
Casualty, insurance and losses 17.7 15.6 11.4
Other taxes 19.4 19.6 16.9
Other 37.4 23.1 34.0
Special charge 28.4 - -
---- ----- -----
Operating expenses 444.0 394.6 397.7
Operating income 207.3 227.9 219.5
Other income, net 12.5 6.6 9.9
Interest expense, net (27.7) (28.2) (26.5)
----- ----- -----
Income before income taxes 192.1 206.3 202.9
Provision for income taxes 71.3 70.1 76.3
---- ---- ----
Net income $120.8 $136.2 $126.6
====== ====== ======
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
December 31, December 31,
ASSETS 1998 1997
------ ---- ----
Current assets:
Cash and temporary cash investment $ 28.8 $ 28.2
Receivables, net of allowance for
doubtful accounts of $.7 in 1998
and $.9 in 1997 152.3 100.6
Loans to affiliates - 4.9
Materials and supplies, at average cost 14.9 15.3
Assets held for disposition 1.1 -
Deferred income taxes - current 18.6 17.5
Other current assets 6.5 5.0
--- ---
Total current assets 222.2 171.5
Investments 12.9 12.1
Loans to affiliates 193.2 160.9
Properties:
Transportation:
Road and structures, including land 1,255.4 1,193.7
Equipment 189.4 173.7
Other, principally land 41.0 41.3
---- ----
Total properties 1,485.8 1,408.7
Accumulated depreciation (57.5) (45.8)
----- -----
Net properties 1,428.3 1,362.9
Other assets 28.5 23.6
---- ----
Total assets $1,885.1 $1,731.0
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term de $ 52.7 $ 22.7
Accounts payable 54.5 53.1
Income taxes payable 25.8 -
Casualty and freight claims 12.7 12.7
Employee compensation 29.1 19.1
Taxes other than income taxes 15.4 16.4
Accrued redundancy reserves 3.7 3.9
Other accrued expenses 76.7 80.1
---- ----
Total current liabilities 270.6 208.0
Long-term debt 544.8 552.4
Deferred income taxes 334.2 302.9
Other liabilities and reserves 109.0 111.7
Contingencies and commitments (Note 13)
Stockholder's equity:
Common stock authorized, issued and
oustanding
100 shares, $1 par value - -
Additional paid-in capital 129.6 129.6
Retained income 496.9 426.4
----- -----
Total stockholder's equity 626.5 556.0
----- -----
Total liabilities and stock-
holder's equity $1,885.1 $1,731.0
======== ========
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of
Cash Flows ($ in millions)
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities :
Net income $120.8 $136.2 $126.6
Reconciliation of net income to net cash
provided by (used for) operating
activities :
Depreciation and amortization 35.6 33.1 31.0
Deferred income taxes 30.2 39.9 31.5
Equity in undistributed earnings of
affiliates, net of dividends
received (0.8) (0.9) (0.5)
Net gains on sales of real estate (3.3) (0.6) (1.6)
Gain on abnormal retirement of
equipment (1.7) - -
Settlement of contract dispute (2.0) - -
Cash changes in working capital (21.3) (15.1) (9.0)
Changes in other assets (4.9) (2.8) (6.4)
Changes in other liabilities and
reserves (2.7) (5.5) (6.6)
Net cash provided by operating
activities 149.9 184.3 165.0
Cash flows from investing activities :
Additions to properties (98.2) (110.9) (118.9)
Proceeds from sales of real estate 4.6 2.4 3.0
Proceeds from equipment sales 1.8 2.5 3.0
Proceeds from sales of investments 0.2 0.6 2.3
Loans to affiliates (27.4) (12.7) (114.5)
Other (2.4) 1.1 (1.0)
---- --- ----
Net cash (used for) investing
activities (121.4) (117.0) (226.1)
Cash flows from financing activities :
Proceeds from issuance of debt 40.4 0.9 255.0
Principal payments on debt (18.0) (3.4) (9.6)
Net proceeds (payments)-Commercial Paper - (20.0) (37.0)
Dividends paid (50.3) (62.9) (103.3)
Purchase of subsidiary's common stock - - (0.7)
---- ---- ----
Net cash provided by (used for) financing
activities (27.9) (85.4) 104.4
----- ----- -----
Changes in cash and temporary cash invest-
ments 0.6 (18.1) 43.3
Cash and temporary cash investments at
beginning 28.2 46.3 3.0
---- ---- ---
Cash and temporary cash investments at end of
year $ 28.8 $ 28.2 $ 46.3
====== ====== ======
Supplemental disclosure of cash flow
information :
Cash paid during the year for:
Interest (net of amount capitalized) $ 43.5 $ 38.1 $ 28.5
====== ====== ======
Income taxes $ 16.2 $ 32.5 $ 53.2
====== ====== ======
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity and Retained Income
Shares Equity ($ in million
------ --------------------
Total
Additional Stock-
Common Common Paid-in Retained holder
Share Stock Capital Income Equity
----- ----- ------- ------ ------
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
Dividends (62.9) (62.9)
Net income 136.2 136.2
----- -----
Balance December 31, 1997 100 - 129.6 426.4 556.0
Dividends (50.3) (50.3)
Net income 120.8 120.8
----- -----
Balance December 31, 1998 100 $ - $129.6 $496.9 $626.5
=== ====== ====== ====== ======
The following notes are an integral part of the consolidated financial
statements.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ICR
The Illinois Central Railroad Company ("ICR")an Illinois Corporation,
is principally engaged in the rail freight transportation business. ICR operates
2,600 miles of main line track between Chicago, Illinois and the Gulf of Mexico,
primarily transporting chemicals, grain and milled grain, coal, paper and
intermodal commodities. ICR, through its parent, Illinois Central Corporation
(the "Corporation"),is an indirect, wholly-owned subsidiary of Canadian National
Railway Company (the "CN").
2. Merger and Special Charge
On February 10, 1998, the Corporation and 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").
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 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
be obligated to sell all the Corporation common shares held by the voting trust.
The STB's decision is expected in the second quarter of 1999.
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. 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.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the ICR
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. ICR uses the composite method
of depreciation for track structure, other road property, and equipment. In the
case of routine retirements, removal costs less salvage recovery are charged to
accumulated depreciation. Gains and losses are recognized for abnormal
retirements. 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%-5%
Transportation equipment....................2%-5%
Revenues
Revenues are recognized based on services performed and include
estimated amounts relating to freight movements in progress for which the
settlement process is not complete. Estimated revenue amounts for freight
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 share has been omitted, as ICR is a wholly-owned subsidiary
of the Corporation.
Derivative Financial Instruments
ICR has only limited involvement with derivative financial instruments
and does not use them for trading purposes. ICR has entered into various diesel
fuel collar agreements with the objective of mitigating significant fluctuations
in fuel prices. Amounts receivable or payable under the collar agreements are
accrued as increases or decreases to Diesel Fuel Expense. 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. (See Notes 6 and 15.)
Casualty Claims
ICR 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.
Stock-Based Compensation
ICR has elected to adopt Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), for
disclosure purposes only. ICR accounts for compensation under the 1990 Long-Term
Incentive Plan under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." (See Note 13.)
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.
4. Other Income (Expense), Net
Other income (expense), net consisted of the following ($ in millions):
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Rental income, net............................$ 2.4 $2.5 $2.3
Net gains on sales of real estate............. 3.3 .6 1.6
Equity in undistributed
earnings of affiliates..................... 1.9 1.6 .8
Sales of accounts receivable (see Note 9)..... - (3.0) (2.9)
Grant of permanent easement (see below)....... - 3.3 -
Gain on abnormal retirement of equipment...... 1.7 - -
Settlement of contract dispute................ 2.0 - -
Sale of investment(see below)................. - - 7.3
Other, net ................................. 1.2 1.6 .8
--- --- --
Other income, net ......................$12.5 $6.6 $9.9
===== ==== ====
On September 30, 1997, ICR granted a permanent easement for
development of right of way property for signboard use. On October 3, 1996, ICR
sold its investment in an industry captive insurance company.
5. Supplemental Cash Flow Information
Cash changes in components of working capital, exclusive of current
maturities of long-term debt, included in the Consolidated Statements of Cash
Flows were as follows ($ in millions):
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Receivables, net............................. $(51.7) $(16.2) $ (5.1)
Materials and supplies....................... .4 1.9 (2.4)
Assets held for disposition.................. (1.1) - -
Other current assets......................... (1.5) 3.4 (5.3)
Accounts payable............................. 1.4 (3.2) 4.9
Income taxes payable......................... 25.8 (1.8) (8.4)
Accrued redundancy reserve................... (.2) (.4) -
Other current liabilities.................... 5.6 1.2 7.3
--- --- ---
Cash changes in working capital.......... $(21.3) $(15.1) $(9.0)
====== ====== =====
ICR recorded capital leases of $4.3 million covering 40 locomotives in
1997. See Note 7 for the present value of the minimum lease payments.
6. Materials and Supplies
Materials and supplies, valued using the average cost method, primarily
consist of track material, switches, car and locomotive parts and diesel fuel.
The ICR has a hedging program in place to mitigate the effects of diesel
fuel price changes on its operating margins and overall profitability. Various
collar agreements are in place to anticipate the risk of diesel fuel price
volatility for which ICR has incurred costs of $2.1 million in 1998. The
agreements are not used for trading purposes, but rather are used as hedges
against ICR's anticipated diesel fuel purchases. Hedging positions and credit
ratings of counterparties are monitored and losses due to counterparty
nonperformance are not anticipated. At December 31, 1998, ICR has four collar
agreements in place that hedge approximately 61% of the estimated 62 million
gallons of diesel fuel purchases in 1999. Unrecognized losses from ICR diesel
fuel hedging activities amounted to $2.1 mill1998. at December 31,
If the monthly average spot price for Gulf Coast heating oil, the
referenced commodity, as published in Platt's Oilgram ("Monthly Average") which
was $.2922 per gallon in December 1998, is greater than the cap price per
gallon, ranging from $.50 to $.54, 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, ranging from $.35 to $.3895, 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.
7. Leases
As of December 31, 1998, ICR leased 7,707 freight cars and 53 of its
locomotives. These leases expire between 1999 and 2007. Under the terms of many
of its lease agreements, ICR 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. ICR also leases office facilities, computer equipment and vehicles.
Net obligations under capital leases at December 31, 1998 and 1997,
included in the Consolidated Balance Sheets were $17.8 million and $15.7
million, respectively. The gross assets under capitalized leases were $28.6
million and $32.6 million at December 31, 1998 and 1997, respectively, and are
included in properties in the Consolidated Balance Sheets.
At December 31, 1998, minimum rental payments under capital and
operating leases that have initial or remaining noncancellable terms in excess
of one year were as follows ($ in millions):
Capital Operating
Leases Leases
------ ------
1999...................................... $ 4.2 $ 41.3
2000...................................... 3.7 40.3
2001...................................... 3.5 38.1
2002...................................... 2.9 37.2
2003...................................... 4.9 39.5
Thereafter................................ 3.3 81.2
--- ----
Total minimum lease payments.......... $22.5 $277.6
Less: Imputed interest.................... 4.7
---
Present value of minimum payments..... $17.8
=====
Total rent expense applicable to noncancellable operating leases
amounted to $36.1 million, $32.6 million and $38.8 million in 1998, 1997 and
1996, respectively. Most of the leases provide that ICR pay taxes, maintenance,
insurance and certain other operating expenses.
8. Long-Term Debt and Interest Expense
Long-term debt at December 31, consisted of the following ($ in
millions):
1998 1997
---- ----
Equipment obligations, due annually to 2007, 6.32% to 7.7%.... $ 1.1 $ .9
Debentures and other debt, due 2022 to 2056, 4.5% to 5.0%..... 9.6 9.6
Debentures, due 2096, 7.7%.................................... 125.0 125.0
Notes, due 2003, 6.75%........................................ 100.0 100.0
Notes, due 2005, 7.75%........................................ 100.0 100.0
Medium term notes, due 2000 to 2008, 6.63% to 7.12%........... 200.0 210.0
Capitalized leases (see Note 7)............................... 15.2 13.2
Unamortized discount, net .................................... (6.1) (6.3)
---- ----
Total long-term debt............................. $544.8 $552.4
====== ======
At December 31, 1998, the aggregate annual maturities and sinking fund
requirements for debt payments for 1999 through 2004 and thereafter were $52.7
million, $33.0 million, $102.8 million, $2.4 million, $104.6 million, $.8
million and $301.2 million, respectively. The weighted-average interest rate for
1998 and 1997 on total debt excluding the effect of discounts, premiums and
related amortization was 7.0% and 7.1%, respectively.
In December 1996, ICR 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 that declines to par in 2056.
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 Revolver(the "ICR Revolver"). At December 31, 1998, no amounts were
outstanding.
The $250 million ICR Revolver expires in 2001. ICR pays an annual fee of
15 basis points on the committed amount and the current floating Eurodollar
offered rate plus 22.5 basis points for any borrowings. The ICR Revolver may be
used as backup for commercial paper. The available amount for general corporate
services is reduced by the outstanding amount of commercial paper borrowings and
any letters of credit issued on behalf of ICR under the facility. As of December
31, 1998, $20 million was drawn under the ICR Revolver and no letters of credit
were issued.
Borrowings of ICR are governed by agreements that contain certain
affirmative and negative covenants customary for facilities of this nature,
including restrictions on additional indebtedness, investments, guarantees,
liens, distributions, sales and leaseback, and sales of assets and capital
stock. Some also require satisfaction of certain financial tests, including a
leverage ratio, an earnings before interest and taxes to interest charges ratio,
and minimum consolidated tangible net worth requirements. See Note 12.
Interest expense, net consisted of the following ($ in millions):
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Interest expense........................ $45.7 $43.1 $34.3
Less:
Interest capitalized ................ 1.3 1.5 1.7
Interest income...................... 16.7 13.4 6.1
---- ---- ---
Interest expense, net................... $27.7 $28.2 $26.5
===== ===== =====
9. Receivables
On January 8, 1998, ICR terminated its revolving agreement to sell
undivided percentage interests in certain accounts receivable, with recourse, to
a financial institution. The agreement had allowed for sales of accounts
receivable up to a maximum of $50 million at any one time. Costs related to the
agreement fluctuated with changes in prevailing interest rates. These costs,
which are included in other income (expense), net, were $3.0 million, $2.9
million for 1997 and 1996, respectively.
10. Benefit Plans
All employees of ICR are covered under the Railroad Retirement System
instead of Social Security. Additionally, various retirement plans,
postemployment benefits and postretirement benefits are provided.
Retirement Plans. ICR 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 ICR union plan,
which started in mid-1995, allows eligible union employees covered by local
contracts to participate. ICR matches 25% of the first 4% of salary deferral.
The management employee plan matches 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 $1.8 million, $1.5
million, and $1.2 million in 1998, 1997 and 1996, respectively. All ICR
contributions are fully vested upon contribution.
ICR 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 certain offsets,
including employer contributions to the 401(k) plan. The plan was adopted in
1994. Expenses for this plan were $1.5 million in 1998 by reason of immediate
vesting as a result of the change in control, see Note 2. Expenses were not
material in 1997 and 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 $.4 million, $.3 million
and $1.1 million were deferred in 1998, 1997 and 1996, respectively.
Unfunded Plan. ICR has an unfunded plan whereby 10% of an officer's
combined salary and bonus in excess of a wage offset factor ($114,000 in 1998)
is accrued and earns interest at a specified, variable rate. Amounts accrued are
paid when the employee leaves the Company, normally at retirement. Expenses for
this plan were $.4 million in each of 1998, 1997 and 1996.
Postemployment Benefit Plans. ICR provides certain postemployment
benefits such as long-term salary continuation and waiver of medical and life
insurance co-payments while on long-term disability.
Postretirement Plans. In addition to retirement plans, ICR has three
benefit plans which provide some postretirement benefits to most former
full-time salaried employees and selected former union-represented employees.
The medical plan for salaried retirees is contributory, with retiree
contributions adjusted annually if expected medical cost inflation rate exceeds
9.5%, and contains other cost sharing features such as deductibles and
co-payments. ICR's contribution will be fixed at the 1999 year end rate for all
subsequent years. Salaried retirees are covered by a life insurance plan that
provides a nominal death benefit and is non-contributory. The medical plan for
locomotive engineers who retired under a special early retirement program in
1987 provides non-contributory coverage until age 65. All benefits under this
medical plan terminate in 1998. There are no postretirement plan assets and ICR
funds these benefits as claims are paid.
The accumulated postretirement benefit obligations ("APBO") of the
postretirement plans, prepared in accordance with FAS 132, "Employer's
Disclosure about Pensions and Other Postretirement Benefits", were as follows,($
in millions):
December 31,
------------
1998 1997
---- ----
Accumulated postretirement benefit
obligation at beginning of year $19.3 $19.1
Service cost .2 .2
Interest cost 1.3 1.4
Loss (gain) due to discount rate change .9 .7
Loss (gain) due to experience 1.3 (.1)
Estimated benefits paid (2.0) (2.0)
---- ----
Accumulated postretirement benefit
obligation at end of year 21.0 19.3
---- ----
Funded status (21.0) (19.3)
Unrecognized net actuarial gain (13.3) (16.5)
----- -----
Prepaid (accrued) benefit cost $(34.3) $(35.8)
====== ======
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1997. As a result of
the change in general interest rates on high quality fixed rate investments in
1998, ICR decreased the weighted-average discount rate to 6.75% as of December
31, 1998. The change in rates resulted in approximately $.9 million actuarial
loss. The actuarial gains and losses along with actual experience gains,
primarily fewer claims and lower medical rate inflation, resulted in a total
$13.3 million unrecognized net gain as of December 31, 1998. In accordance with
SFAS No. 106, the excess gain is subject to $.8 million annual amortization
based on an amortization period of approximately 14 years. The components of the
net periodic postretirement benefits cost were as follows ($ in millions):
Years Ending December 31,
-------------------------
1998 1997 1996
---- ---- ----
Service costs..................... $ .2 $ .2 $ .1
Interest costs.................... 1.3 1.4 1.4
Net amortization of excess gain... (1.1) (1.2) (1.2)
---- ---- ----
Net periodic postretirement
benefit costs................... $ .4 $ .4 $ .3
==== ===== ======
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 9.0% for 1999 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 ICR's portion of such costs to 9.5% each year and
caps ICR's contribution at the actual 1999 level. Therefore, an increase in the
assumed health care cost trend rates by one percentage point would have no
impact on ICR's accumulated postretirement benefit obligation for the medical
plans at December 31, 1998, and no impact on the aggregate total of the service
and interest cost components of net periodic postretirement benefit expense in
future years. A one percentage point decrease in the assumed health care cost
trend rates would have no impact on ICR's accumulated postretirement benefit
obligation at December 31, 1998 and the impact on aggregate total of annual
service and interest cost components of the periodic postretirement benefit
expense would not be material.
11. Provision for Income Taxes
The Provision for Income Taxes for continuing operations consisted of
the following ($ in millions):
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Current income tax:
Federal....................... $35.8 $27.1 $39.9
State ........................ 4.3 4.9 4.5
Deferred income taxes........... 31.2 39.9 31.5
---- ---- ----
Provision for income taxes...... $71.3 $70.1 $76.3
===== ===== =====
The effective income tax rates for the years ended December 31, 1998,
1997 1996, were 37%, 34% and 38%, respectively.
At December 31, 1998, ICR had no Federal net operating loss carryovers
for tax or financial reporting purposes.
In 1998 and 1996 tax benefits of $1.0 million and $1.8 million,
respectively, were recorded to reflect the favorable resolution of prior-period
tax issues. The items which gave rise to differences between the income taxes
provided for continuing operations in the Consolidated Statements of Income and
income taxes computed at the statutory rate are summarized below ($ in
millions):
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Expected tax expense computed
at statutory rate............... $67.2 35.0% $72.2 35.0% $71.0 35.0%
Dividends received exclusion..... (.1) - (.2) - (.1) -
State income taxes, net
of federal tax effect........... 5.4 2.8 5.5 3.0 5.9 3.0
Charitable contribution of
property........................ - - (4.1) (2.0) - -
Favorable resolution of
prior period tax issues......... (1.0) (.5) - - (1.8) (1.0)
Costs associated with merger..... 4.1 2.1 - - - -
Stock options exercised.......... (3.5) (1.9) - - - -
Other items, net................. (.8) (.5) (3.3) (2) 1.3 1.0
--- --- ---- -- --- ---
Provision for income taxes....... $71.3 37.0% $70.1 34.0% $76.3 38.0%
===== ==== ===== ==== ===== ====
Temporary differences between book and tax income arise because the tax
laws require that certain items of income and expense be treated differently
than under generally accepted accounting principles. As a result, the book
provisions for taxes differ from the actual taxes reported on the income tax
returns. The net results of such differences are included in deferred income
taxes in the Consolidated Balance Sheets.
Deferred income taxes consisted of the following ($ in millions):
December 31,
------------
1998 1997
---- ----
Deferred tax assets ............. $ 62.7 $ 66.8
Less: Valuation allowance............ (1.5) (1.5)
---- ----
Deferred tax assets,
net of valuation allowance....... 61.2 65.3
Deferred tax liabilities............. (376.8) (350.7)
------ ------
Deferred income taxes ............. $(315.6) $(285.4)
======= =======
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 ($53.0 million) and safe harbor leases ($9.1 million). Major types
of deferred tax liabilities are: accelerated depreciation ($353.6 million), land
basis differences ($10.5 million) and debt marked to market ($2.1 million).
The Company 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
the Company's consolidated group, with no benefit for net operating losses or
credit carryovers from prior years.
12. Equity and Restrictions on Dividends
ICR paid dividends to the Corporation of $50.3 million in 1998, $62.9
million in 1997 and $108.9 million in 1996. Included in the 1996 dividends to
the Corporation is the March 1996 transfer by ICR of its ownership in Chicago
Intermodal Company ("CIC") via a dividend of CIC stock. The book value of the
CIC investment was $5.7 million. Certain covenants of ICR's Revolver require
specific levels of tangible net worth but not a specific dividend restriction.
At December 31, 1998, ICR's tangible net worth exceeded the required level by
$42.1 million.
13. Stock Based Compensation
Until the Merger, the Corporation made annual grants of stock options
to employees of ICR under the 1990 Long-Term Incentive Plan. Grants to employees
were at the closing market price on date of grant, vested ratably over four
years and expired 10 years from grant date.
Additionally, the Corporation sponsored two employee stock purchase
plans. One plan, open to all employees, used payroll deductions from
participating employees to acquire on the open market shares of Corporation
common stock. The other plan, open to management employees only, used funds from
payroll deductions of participants to acquire on the open market shares at a 15%
discount. Participants in the discounted plan were required to repay the
discount if they left the Corporation within two years of purchase. Repayment
was not required in the event of retirement, disability or change of control in
the Corporation.
ICR accounted for the option plan and the two stock purchase plans in
accordance with APB Opinion 25 under which no compensation cost was recognized
upon grant, vesting or exercise. ICR did reduce Stockholder's Equity and charged
expense $.1 million, $.2 million and $.8 million in 1998, 1997 and 1996,
respectively, for the vesting of restricted stock issued in 1994. The final
segment of the restricted stock vested in 1998.
Under the terms of the options outstanding at the time of the Merger,
all unvested options vested immediately upon the CN's acquisition of 75% of the
outstanding common stock of the Corporation.
Pursuant to the Merger Agreement all options outstanding on June 4,
1998, ("Merger Date") were converted into CN options. The expiration date was
not changed. The number of options and related exercise price were adjusted such
that the value of the Corporation options prior to conversion was the same as
the value of the resulting converted CN options.
The following table summarizes changes in shares under options:
Weighted Weighted
Average Average Fair Weighted
Exercise Value On Exercisable Exercise
Options Price Grant Date At Year End Price
------- ----- ---------- ----------- -----
Outstanding 12-31-95 1,283,774 20.528 531,131 $19.886
Granted 530,250 25.250 $ 9.016
Exercised (a) (4,125) 21.257
Forfeited (b) (3,375) 22.389
Outstanding 12-31-96 1,806,524 21.909 961,105 $20.821
Granted 476,050 34.125 $ 12.888
Exercised (c) (277,872) 18.193
Forfeited (19,200) 24.713
------- ------
Outstanding 12-31-97 1,985,502 25.331 1,248,872 $23.050
Granted 552,590 38.688 $ 14.138
Exercised (d) (406,762) 24.674
Converted (e) (2,131,330) 28.919
Issued (e) 1,349,262 45.681
Exercised after Merger (31,524) 38.580
Outstanding 12-31-98 1,317,738 1,317,738 $45.851
========= ========= =======
(a) Includes 3,375 pre-1995 option awards
(b) Includes 1,125 pre-1995 option awards
(c) Includes 232,498 pre-1995 option awards
(d) Includes 136,478 pre-1995 option awards
(e) Pursuant to the Merger Agreement
The last date exercisable for options above is March 14, 2008.
Had ICR adopted the compensation cost recognition methods outlined in
SFAS No. 123, ICR's 1998, 1997 and 1996 net income would have been as follows -
on a pro forma basis - ($ in millions):
1998 1997 1996
---- ---- ----
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Net income $120.8 $113.5 $136.2 $134.0 $126.6 $125.4
These pro forma results assume that the 1998 revisions to the plan
(described above) had no impact on assumptions used by ICR in its Black-Scholes
model, and that such revisions resulted in recognition in 1998 of previously
unrecognized compensation expense.
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.
All of the options outstanding at December 31, 1998, are exercisable
with exercise prices between $26.197 and $61.117, with a weighted average
exercise price of $45.851, and a weighted average remaining contractual life of
7 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:
1998 1997 1996
---- ---- ----
Risk-free interest rate(s) 5.6% 6.7% 6.7%
Dividend yields 2.4% 2.7% 3.2%
Days to expiration 3652 3652 3652
Volatility 29.35% 30.18% 31.4%
14. Contingencies, Commitments and Concentration of Risks
ICR is self-insured for the first $5 million of each loss. ICR is
covered for $245 million of liability insurance per occurrence, subject to an
annual cap of $385 million in the aggregate for all losses. This coverage is
considered by ICR's management to be adequate in light of ICR's safety record
and claims experience.
ICR has guaranteed repayment of certain indebtedness of a jointly owned
company aggregating $7.8 million. ICR's share of the guarantee is $1.0 million;
the remainder is the obligation of other unrelated owner companies.
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.
There are other various regulatory proceedings, claims and litigation
pending against ICR. While the ultimate amount of liability that may result
cannot be determined, in the opinion of ICR's management, based on present
information, adequate provisions for liabilities have been recorded.
Environmental Contingencies. 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 that 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 remediation 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
December 31, 1998, ICR estimated the probable range of its liability to be $7.2
million to $22.7 million, and in accordance with the provisions of SFAS No. 5
had a reserve of $7.2 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.
15. 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 $25.0 million and $25.4 million included in cash
and temporary cash investments as of December 31, 1998 and 1997, respectively,
have been classified and accounted for as held to maturity securities.
Investments. ICR has investments of $5.0 million in 1998 and $5.2
million in 1997 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. ICR's remaining
investments ($7.9 million in 1998 and $6.9 million in 1997) are accounted for by
the equity method.
Loans to Affiliates. See Note 16
Long-Term Debt. The fair value of ICR's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to ICR for debt of the same remaining maturities.
Derivative Financial Instruments. The fair value of diesel fuel collar
agreements is the estimated amount that ICR would receive or pay to terminate
the agreements as of year end, taking into account the current credit worthiness
of the agreement counterparties.
The estimated fair values of ICR's financial instruments are as follows
($ in millions):
December 31,
------------
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and temporary cash investments.. $28.8 $28.8 $ 28.2 $ 28.2
Investments.......................... 5.0 5.0 5.2 5.2
Fuel Hedge........................... - (2.1) - (.5)
Loans to affiliates - short-term..... - - 4.9 4.9
Loans to affiliates - long-term...... 193.2 193.2 160.9 160.9
Debt................................. (597.5) (637.8) (575.1) (604.3)
<PAGE>
16. Related Party Transactions and Intercompany Advances
The Corporation and its subsidiaries maximize the consolidated group's
borrowing power and minimize the group's interest costs. If an affiliate
requires funds for operations or capital expenditures, the lowest cost source
provides the cash. The affiliate that needs the funds pays interest at the
borrowed rate with no mark up or add-on fees. Borrowings are due one year and
one day from the date repayment is requested but may be prepaid without penalty.
The amounts outstanding at December 31, consisted of the following ($ in
millions):
1998 1997
---- ----
Loans due from:
- IC Financial Services - 1.4
- IC Leasing III - 3.5
Total Short-Term Intercompany - $ 4.9
Advances due from:
IC Corporation $ 94.6 $156.3
IC RailMarine Terminal Company 98.6 -
Loans due from IC Financial Services - 4.6
Total Long-Term Intercompany $193.2 $160.9
====== ======
In 1997, the amount due from the Corporation includes $39.8 million used
to fund construction costs for IC RailMarine Terminal Company, a subsidiary of
the Corporation. Amounts due from the Corporation bear interest at prime rate
minus 2.3%. Amounts due from the IC RailMarine Terminal Company bear interest at
prime rate.
ICR charged affiliates interest of $16.1 million and $11.6 million in
1998 and 1997, respectively.
ICR leases 79 locomotives and 1,825 freight cars from another affiliate
of the Corporation. In 1998 and 1997, lease expense incurred with respect to
this equipment was $14.4 million and $14.7 million, respectively.
ICR charges another affiliate of the Corporation for inventory items
and maintenance of the affiliate's rolling stock. Beginning in 1997, ICR charges
the affiliate a flat fee for various management services, such as payroll and
accounts payable processing, computer services and legal counsel. The monthly
amount charged under this arrangement was $.2 million for the years 1998 and
1997. Charges between ICR and the affiliate are recorded in loans to affiliates.
17. Selected Quarterly Financial Data - (Unaudited) ($ in millions):
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Revenues ...................$163.0 $162.4 $161.4 $164.5
Operating income 1.......... 45.1 59.4 56.1 46.7
Net income.................. 29.0 35.3 30.9 25.6
1997
Revenues ...................$154.2 $147.9 $152.9 $167.5
Operating income .......... 57.7 56.1 52.4 61.7
Net income.................. 31.9 32.9 30.8 40.6
1996
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
1 Operating income for the first and fourth quarters of 1998 were
decreased by $16.4 and $12.0 million, respectively, relating to the
Special Charge (See Note 2).
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
I N D E X
T O
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
Schedules for the three years ended December 31, 1998:
II-Valuation and qualifying accounts...........................F-26
Pursuant to Rule 5.04 of General Rules of Regulation S-X, all other schedules
are omitted because they are not required or because the required information is
set forth in the financial statements or related notes thereto.
<PAGE>
ILLINOIS CENTRAL RAILROAD COMPANY
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ($ in
millions)
Year Ended December 31, 1998
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
-------------- ------- -------------------- -------
Accrued redundancy reserve..........$ 28.5 $ 2.1 $ 3.7 $ 26.9
Casualty and other reserves.......... 37.9 6.8 3.7 41.0
Environmental........................ 9.1 1.3 3.2 7.2
Bad debt reserve..................... 0.9 1.9 2.1 0.7
Employment security agreements....... - 12.0 2.6 9.4
Taxes................................ 1.5 - - 1.5
--- ---
Total..............................$ 77.9 $ 24.1 $ 15.3 $ 86.7
====== ======== ======== =======
Year Ended December 31, 1997
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
-------------- ------- -------------------- -------
Accrued redundancy reserve..........$ 30.2 $ 1.1 $ 2.8 $ 28.5
Casualty and other reserves.......... 43.7 7.1 12.9 37.9
Environmental........................ 17.1 2.1 10.1 9.1
Bad debt reserve..................... 1.3 1.6 2.0 0.9
Taxes................................ 1.5 - - 1.5
--- ---
Total..............................$ 93.8 $ 11.9 $ 27.8 $ 77.9
====== ======== ======== =======
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
====== ======== ======== =======
<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))
3.6 By-Laws of Illinois Central Railroad Company, as
amended. (Incorporated by reference to Exhibit 3 to the
Quarterly Report of the Illinois Central Railroad
Company on Form 10-Q for the three months ended June
30, 1997. (SEC File No. 1-07092))
* Used herein to identify management contracts or
compensation plans or arrangements as required by Item
14 of Form 10-K.
<PAGE>
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))
<PAGE>
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))
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))
4.15 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))
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))
<PAGE>
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))
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))
<PAGE>
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))
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))
<PAGE>
10.3 * Form of the Corporation 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 the Corporation 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))
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))
<PAGE>
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)
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)
10.18 Form 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 (A)
27 Financial Data Schedule
99 Provisions of the Private Securities Litigation Reform
Act of 1995
(A) Included herein but not reproduced.
<PAGE>
Exhibit 21
ILLINOIS CENTRAL RAILROAD COMPANY
Subsidiaries of the Registrant
as of December 31, 1998
Name
Place of Incorporation
Subsidiaries that are 100% owned by Illinois Central
Railroad Company:
Kensington and Eastern Railroad Company Illinois
Mississippi Valley Corporation Delaware
Waterloo Railroad Company Delaware
<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 12, 1999 (included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998), 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 26, 1999
<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. ICR
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, ICR hereby identifies
the following important factors that could cause ICR's actual financial results
to differ materially from any such results that might be projected, forecast,
estimated or budgeted by ICR in forward-looking statements.
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 ICR'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 could result in the loss of the haulage moves ICR
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 routes traffic around ICR's routes or if it uses its size to block
shippers' routing options or pricing.
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