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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-10720
Illinois Central Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3545405
(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:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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 ....
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 14, 1997, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $2,016 million. For
purposes of the foregoing statement only, directors and executive officers of
the registrant have beenassumed to be affiliates.
As of March 14, 1997, there were 61,406,831 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its 1996 Annual Meeting of Stockholders.
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ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
FORM 10-K
Year Ended December 31, 1996
INDEX
PART I 10-K Page
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 10
Item 3. Legal Proceedings.............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............ 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... . 16
Item 6. Selected Financial Data........................................ 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 18
Item 8. Financial Statements and Supplementary Data.................... 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation ........................................ 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 32
Item 13. Certain Relationships and Related Transactions................. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 33
SIGNATURES................................................................... 34
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PART I
Item 1. Business
Background
Illinois Central Corporation (the "Company"), was incorporated under
the laws of Delaware on January 27, 1989. The principal executive office of the
Company is located at 455 North Cityfront Plaza Drive, Chicago, Illinois
60611-5504 and its telephone number is (312) 755-7500.
The Company, through its wholly-owned subsidiary, Illinois Central
Railroad Company ("ICRR") traces its origin to 1851, when ICRR was incorporated
as the nation's first land grant railroad. On June 13, 1996, the Company
acquired in a purchase transaction CCP Holdings, Inc. (CCPH). ICRR and CCPH are
principally engaged in the rail freight transportation business. ICRR operates
2,600 miles of main line track between Chicago and the Gulf of Mexico, primarily
transporting chemicals, coal, paper, grain and milled grain, and intermodal
trailers and containers. CCPH has two principal operating subsidiaries - the
Chicago Central and Pacific Railroad ("CCPR") and the Cedar River Railroad
("CRR") - which together comprise a Class II railroad system operating 850 miles
of track. CCPR operates from Chicago to Omaha, Nebraska, with connecting lines
to Cedar Rapids and Sioux City, Iowa. CRR runs from Waterloo, Iowa to Albert
Lea, Minnesota. See "Managements Discussion and Analysis of Financial Condition
and Results of Operations Significant Developments" for additional information
on the 1996 acquisition of CCPH.
In addition to ICRR and CCPH, the Company's other wholly-owned
subsidiary, IC Financial Services Corporation ("IC Financial"), was formed to
finance through various special purpose companies the acquisition of locomotives
and freight cars which are leased to ICRR. IC Financial also functions as the
investment vehicle by which non-rail related activities are conducted. See
"Terminal Operations."
Plan 2000
In the spring of 1995, the Company developed and announced Plan 2000.
This new plan is designed to build on the success of the 1992 plan and position
the Company for the next century. Plan 2000 calls for (i) revenue to grow from
the 1994 base of $595 million to $800 million by the end of 1999, (ii) the
continued reduction of the operating ratio to below 60%, and (iii) a Long-Term
Equity Enhancement Program of increased dividends and share repurchases. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Significant Developments."
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Commodities and Customers
ICRR's customers are engaged in a wide variety of businesses and ship a
number of different products that can be classified into commodity groups:
chemicals, coal, grain, paper, grain mill and food products, intermodal and
other commodities. In 1996, a customer accounted for approximately 8% of
revenues (two other customers exceeded 5% and no other customer exceeded 5%)
and the ten largest customers accounted for approximately 37% of revenues.
In order to address the diversity of the Company's customer base,
ICRR's marketing department is organized into two major groups - Bulk and
Consumer Products. The Bulk group is responsible for coal, chemicals and grain
related products. The Consumer group covers forest products, intermodal and
metals. These units work with current and prospective customers to develop
customized shipping solutions.
The principal elements of these commodity groupings are as follows:
CHEMICALS.....A wide variety of chemicals and related products such as
chlorine, caustic soda, potash, soda ash, vinyl chloride monomer,
carbon dioxide, synthetic resins, alcohols, glycols, styrene monomer,
plastics, sulfuric acid, muriatic acid, anhydrous ammonia, phosphates,
mixed fertilizer compounds and carbon blacks.
COAL.....Bituminous and metallurgical coal.
GRAIN.....Corn, wheat, soybeans, sorghum, barley and oats.
PAPER.....Pulpboard, fiberboard, woodpulp, printing paper, newsprint and
scrap or waste paper.
GRAIN MILL & FOOD PRODUCTS.....Products obtained by processing grain and
other farm products such as feed, soybean meal, corn syrup, flour and middlings,
animal packinghouse by-products (tallow), canned food, corn oil, soybean oil,
vegetable oils, malt liquors, sugar and molasses
INTERMODAL......A wide variety of products shipped either in containers or
trailers on specially designed cars.
OTHER.....Pulpwood and chips, lumber and other wood products; sand, gravel
and stone, coke and petroleum products, metallic ores and other bulk
commodities; primary and scrap metals, machinery and metal products, appliances,
automobiles and parts, transportation equipment and farm machinery; glass and
clay products, ordnance and explosives, rubber and plastic products, and general
commodities.
The respective percentage contributions by principal commodity group to
ICRR's freight revenues and revenue ton miles during the past five years are set
forth below:
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Contributions to Total Freight Revenues by Commodity Group for ICRR
Commodity
Group 1996 1995 1994 1993 1992
Chemicals.......................... 27.6% 26.4 % 24.8% 25.0% 24.3%
Coal............................... 14.1 13.5 15.2 12.8 15.3
Grain.............................. 10.3 14.1 10.2 14.0 12.2
Paper.............................. 12.6 12.6 12.2 12.4 12.1
Grain mill & food products......... 8.6 8.9 8.5 9.8 8.8
Intermodal......................... 8.7 7.6 6.6 5.4 5.4
All other.......................... 18.1 16.9 22.5 20.6 21.9
Total..............................100.0% 100.0% 100.0% 100.0% 100.0%
Contribution to Revenue Ton Miles by Commodity Group for ICRR
Commodity
Group 1996 1995 1994 1993 1992
Chemicals..........................16.6% 14.6% 15.8% 15.9% 15.1%
Coal...............................24.1 20.8 24.0 15.1 18.2
Grain..............................18.3 26.8 20.0 27.9 27.3
Paper.............................. 9.3 9.0 9.8 9.6 9.0
Grain mill & food products......... 9.3 9.8 9.3 9.9 9.0
Intermodal......................... 6.5 5.5 5.5 3.7 3.1
All other..........................15.9 13.5 15.6 17.9 18.3
Total.............................100.0% 100.0% 100.0% 100.0% 100.0%
At CCPH, revenues of $40.2 million were comprised of grain (39%), coal
(19%), chemicals (14%) and all others (28%).
In 1996, approximately 68% of ICRR's freight traffic originated on its
own lines, of which approximately 21% was forwarded to other carriers.
Approximately 17% of ICRR's freight traffic was received from other carriers for
final delivery by ICRR, and the balance of approximately 15% represented bridge
or through traffic.
Terminal Operations
The Company currently has three terminal facilities either operating or
under construction. The first facility is a "transload" facility located in
Harvey, Illinois. This facility stores cars of plastic pellets which are loaded
subsequently into tanker trucks (i.e., transload) for distribution to smaller,
non-rail served manufacturers. During 1997, the Company plans to double the size
of this facility.
In 1996, IC Financial formed a subsidiary, IC RailMarine Terminal
Company, to construct and operate an import/export, dry-bulk handling terminal
on the Lower Mississippi River. And recently IC Financial made an investment
($5.9 million) in a liquid-bulk storage and distribution terminal that has been
serving the petroleum and petrochemical industries for more than 15 years. Both
facilities are located just south of Baton Rouge, Louisiana. The dry-bulk
terminal will be operational in late 1997 or early 1998.
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Operating Statistics
Set forth below is certain information relating to ICRR's freight
traffic during the past five years:
1996 1995 1994 1993 1992
Carloads (in thousands) 927 957 915 848 852
Freight train miles
(in thousands)1............. 7,950 7,758 7,179 5,659 5,149
Revenue ton miles of freight
traffic (in millions)2...... 22,132 24,635 21,160 20,334 18,734
Revenue tons per carload 71.7 74.7 76.3 79.1 76.6
Average length of haul
(in miles).................. 309 328 286 293 284
Gross freight revenue per
ton mile3................... $.026 $ .025 $ .027 $ .027 $ .029
Net freight ton miles per
average route mile
(in millions)............... 8.4 9.3 7.9 7.5 6.8
Gallons per ton mile4......... .00236 .00234 .00248 .00251 .00269
Active locomotives............ 331 333 328 322 331
Track resurfacing (miles) 1,360 1,360 1,397 1,293 1,465
Percent resurfaced............ 33.7% 32.2% 33.0% 29.8% 32.0%
Ties laid in replacement
(including switch ties).....425,999 408,760 346,994 323,764 296,536
Slow order miles.............. 100.00 209.76 275.79 152.32 135.42
1 Freight train miles equals the total number of miles traveled by all trains in
the movement of freight.
2 Revenue ton miles of freight traffic equals the product of the weight in tons
of freight carried for hire and the distance in miles between origin and
destination.
3 Revenue per ton mile equals net freight revenue divided by revenue ton miles
of freight traffic.
4 Gallons per ton mile equals the amount of fuel required to move one ton of
freight one mile.
The following tables summarize operating expense-to-revenue ratios of the
Company for each of the past five years, excluding the effect of the $8.9
million pretax special charge in 1992. The first table analyzes the various
components of operating expenses based on the line items appearing on the income
statements, whereas the second table is based on Surface Transportation Board
("STB") functional groupings. Ratios for 1996 reflect the results of CCPH for
the period June 13, 1996 (date of acquisition) to December 31, 1996. As a
result, 1996 is not directly comparable to prior periods.
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Ratio 1996 1995 1994 1993 1992
Operating 1..................... 63.3% 64.3% 66.4% 68.3% 70.8%
Labor and fringe benefits ...... 29.2 30.2 31.0 31.1 32.0
Leases and car hire ............ 6.8 7.2 8.2 11.9 12.6
Diesel fuel .................... 5.8 5.1 5.3 5.4 5.5
Materials and supplies ......... 5.0 5.4 6.0 6.2 5.8
Depreciation and amortization .. 6.0 5.3 4.6 4.2 4.4
Casualty, insurance and losses . 1.8 2.7 4.0 3.8 4.8
Other taxes .................... 2.8 2.8 3.0 2.9 2.4
Other .......................... 5.9 5.6 4.3 2.8 3.3
1996 1995 1994 1993 1992
Operating1 .............. 63.3% 64.3% 66.4% 68.3% 70.8%
Transportation2 ......... 27.9 28.2 28.9 29.6 31.6
Maintenance of way3 ..... 7.2 7.8 7.7 7.2 7.0
Maintenance of equipment4 18.5 18.9 19.2 20.7 22.5
1 Operating ratio means the ratio of operating expenses before special charge
over operating revenues.
2 Transportation ratio means the ratio of transportation expenses (such as
expenses of operating, servicing, inspecting, weighing, assembling and
switching trains) over operating revenues.
3 Maintenance of way ratio means the ratio of maintenance of way expenses (such
as the expense of repairing, maintaining, leasing, depreciating and retiring
right-of-way and trackage structures, buildings and facilities) over operating
revenues.
4 Maintenance of equipment ratio means the ratio of maintenance of equipment
expenses (such as the expense of repairing, maintaining, leasing, depreciating
and retiring transportation and other operating equipment) over operating
revenues.
Employees; Labor Relations
Labor relations in the railroad industry are subject to extensive
governmental regulation under the Railway Labor Act. Employees in the railroad
industry are covered by the Railroad Retirement System instead of Social
Security. Employer contribution rates under the Railroad Retirement System are
currently more than double those in other industries and may rise further as the
proportion of retired employees receiving benefits increases relative to the
number of working employees. Railroad employees are also covered by the Federal
Employer's Liability Act ("FELA") rather than by state no-fault workmen's
compensation systems. FELA is a fault-based system, with compensation for
injuries determined by individual negotiation or litigation.
Approximately 90% of all employees are represented by one of eleven
unions. The general approach to labor negotiations by Class I railroads is to
bargain on a collective national basis. For several years now, one of
management's guiding principles is that local -- rather than national,
industry-wide -- negotiations will result in labor agreements that better
address both employees' concerns and preferences and the Company's actual
operating environment. Therefore, beginning in late 1994, ICRR began negotiating
separate distinct agreements with each of its eleven unions. To date, ten of
ICRR's eleven bargaining units, representing 85% of ICRR's represented
workforce, have ratified local agreements that resolve wage and work-rule issues
through 1999 for shop crafts and through the year 2000 for trainmen. The latter
agreement is similar to the national agreement,
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except that the timing of various rate increases and lump sum payments has been
changed. ICRR continues to negotiate with the Brotherhood of Locomotive
Engineers, its only unsigned union. At CCPH, labor negotiations are all local
and nine of the ten agreements have become subject to renegotiation, however,
cost of living allowance provisions and other terms in each agreement will
continue until new agreements are reached.
There are risks associated with negotiating locally. Presidents and
Congress have repeatedly demonstrated they will step in to avoid national
strikes, while a local dispute may not generate federal intervention, making a
work stoppage potentially more likely. ICRR's management believes the potential
mutual benefits of local bargaining outweigh the risk.
The following table shows the average annual employment levels for the last five
years:
1996 1995 1994 1993 1992
Total employees - ICRR 3,238 3,268 3,250 3,306 3,421
- CCPH 379 N/A N/A N/A N/A
N/A = Not Applicable
Management believes that over the next several years attrition and
retirements will be the primary source of future declines in employment levels.
Increases in employment levels, particularly in train operations, are possible
in response to growth of business in accordance with Plan 2000. See also,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Significant Developments - CCP Holdings, Inc. Acquisition."
Regulatory Matters; Freight Rates; Environmental Considerations
ICRR is subject to significant governmental regulation by the STB and
other federal, state and local regulatory authorities with respect to rates,
service, safety and operations.
The jurisdiction of the STB encompasses, among other things, rates
charged for certain transportation services, assumption of certain liabilities
by railroads, mergers or the acquisition of control of one carrier by another
carrier and extension or abandonment of rail lines or services.
The Federal Railroad Administration, the Occupational Safety and Health
Administration and certain state transportation agencies have jurisdiction over
railroad safety matters. These agencies prescribe and enforce regulations
concerning car and locomotive safety equipment, track safety standards, employee
work conditions and other operating practices.
ICRR currently transports a significant volume of Southern Illinois
coal. Much of the coal from mines in that area will not meet the environmental
standards of the Clean Air Act without blending with compliance coal or
installation of air scrubbers at point of use. As a result, this source of
traffic is expected to decline. On the other hand, ICRR expects to participate
in additional movements of Western coal and certain Southern Illinois coal which
does comply. Overall, management believes that implementation of the Clean Air
Act is unlikely to have a material adverse effect on the results of the Company.
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Currently, the utility industry is undergoing deregulation. Some
analysts have suggested that utility deregulation will significantly reduce rail
revenues. However, the impact of utility deregulation on the Company should be
less than the affect on other railroads because there are no captive utilities
served by the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Outlook" for additional comments.
The Company is and will continue to be subject to extensive regulation
under environmental laws and regulations concerning, among other things,
discharges into the environment and the handling, storage, transportation and
disposal of waste and hazardous materials. Inherent in the operations and real
estate activities of the Company and other railroads is the risk of
environmental liabilities. See Item 2. "Properties - Environmental Conditions"
for discussion of sites on which the Company currently or formerly conducted
operations that are subject to governmental action in connection with
environmental degradation. The EPA is expected to propose regulations limiting
locomotive emissions which may significantly increase the purchase price or
operating expense of locomotives. Additional expenditures by the Company may be
required in order to comply with existing and future environmental and health
and safety laws and regulations or to address contaminated sites which may be
discovered.
Competition
ICRR and CCPH, to a lesser extent, face intense competition for freight
traffic from motor, water, and pipeline carriers and from other railroads.
Competition is generally based on the rates charged and the quality and
reliability of the service provided. Low fuel prices disproportionately benefit
trucking operations over railroad operations since fuel costs are a relatively
larger cost component for trucking companies. The trucking industry frequently
is more cost and transit-time competitive than railroads, particularly for
distances of less than 300 miles. While deregulation of freight rates under the
Staggers Act has greatly increased the ability of railroads to compete with each
other and alternate modes of transportation, changes in governmental regulations
(particularly changes to the Staggers Act) could significantly affect the
Company's competitive position. At December 31, 1996, there were 10 railroads in
the United States and Canada classified by revenues as Class I railroads. ICRR
is ninth in revenues and has the best operating ratio.
To a greater degree than other rail carriers, ICRR is vulnerable to
barge competition because its main routes are parallel to the Mississippi River
system. The use of barges for some commodities, particularly coal and grain,
sometimes represents a lower cost mode of transportation. As a result, ICRR's
revenue per ton-mile has generally been lower than industry averages for these
commodities. Barge competition and barge rates are affected by navigational
interruptions from ice, floods and droughts. These interruptions cause widely
fluctuating rates. ICRR's ability to maintain its market share of the available
freight has traditionally been affected by the navigational conditions on the
river. However, it appears to the Company that worn-out barges are coming off
the Mississippi at a faster rate than new barge capacity is being added. A net
reduction of barge capacity could lead to firmer, less variable barge pricing
than has been the case over the last 15 years or so. If this trend develops,
ICRR may benefit.
Most of the Company'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 the
Company. The mega-carriers could use their size and pricing power to block
shippers' access to efficient gateways and routing options that are currently
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and have been historically available. To date, mergers have not had a material
adverse impact on the results or financial condition of the Company.
While there may be risks from future mergers, the Company believes
those risks are manageable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Liens on Properties
Approximately 59 (75%) locomotives and 1,510 (78%) rail cars owned by
IC Financial are subject to liens by the lenders. Neither the Company, ICRR nor
CCPH are subject to these liens.
Liability Insurance
The Company is self-insured for the first $5 million of each loss. The
Company carries $245 million of liability insurance per occurrence, subject to
an annual cap of $335 million in the aggregate for all losses. This coverage is
considered by the Company's management to be adequate in light of the Company's
safety record and claims experience.
Item 2. Properties
Physical Plant and Equipment
System. As of December 31, 1996, ICRR's total system consisted of
approximately 4,500 miles of track comprised of 2,600 miles of main line, 200
miles of secondary main line and 1,700 miles of passing, yard and switching
track. ICRR owns all of the track except for 190 miles operated by agreements
over track owned by other railroads. CCPH's total system consisted of
approximately 850 miles of track.
Track and Structures. The following amounts have been spent during the
five years ended December 31, 1996, on track and structure to construct and
maintain rail lines and related signal equipment, and other facilities ($ in
millions):
Capital
Expenditures Maintenance Total
19961 .......... $ 95.4 $ 25.6 $ 121.0
1995 ........... 66.9 33.5 100.4
1994 ........... 63.2 29.1 92.3
1993 ........... 50.3 25.1 75.4
1992 ........... 46.4 23.0 69.4
Total $ 322.2 $ 136.3 $ 458.5
1 Includes CCPH from June 13, 1996, $4.2 million, $1.9 million, $6.1 million,
respectively.
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These expenditures have concentrated primarily on the rehabilitation of
the track roadway and bridges. Approximately, 1,400 miles of roadway ballast was
resurfaced in each of the last three years. In 1996 a total of $20.1 million was
spent to construct an intermodal terminal facility for the Canadian National
Railroad ("CN Terminal"). The largest projects were a total of $11.4 million to
complete the conversion of 198 miles of track, known as the Yazoo District, to a
single track with centralized traffic control in 1993 and 1994 and a total of
$11.4 million was spent to construct new or expanded intermodal facilities in
Chicago and Memphis in 1992 and 1994. Some of the projects at CCPH were
performed with grants from the Iowa Department of Transportation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of future capital expenditures.
Locomotives and Freight Cars. The Company's fleet has undergone
significant rationalization and modernization since 1985 when locomotives and
cars were at their peak of 862 and 28,616, respectively. Over the last four
years purchases of 61 used SD-40-2's and 20-new SD-70's have enabled ICRR to
replace older, lower horsepower and less efficient locomotives. (The 20 SD-70's
replaced 31 older, smaller locomotives.)
IC Financial acquired the SD-70's in 1995 and all are leased to ICRR.
Management is currently rationalizing CCPH's locomotive fleet and instituting
revised maintenance, fueling and train assignment practices. Less-efficient,
high-maintenance locomotives are being stored, sold or scrapped.
Locomotive modernization and acquisition were part of a change in
operational philosophy concerning equipment which resulted in adoption of an
equipment ownership program in 1993.
The program included lease conversions whereby equipment was acquired
outright or leased under more favorable lease terms by the Company. Through
1995, the conversion program involved 118 locomotives and 4,228 freight cars. As
a result of the new lease terms, $7.1 million and $24.7 million of capital
leases were recorded in 1995 and 1994, respectively. Most of these leases
contain fixed price options whereby the equipment can be acquired at or below
fair market value at some point during the lease term.
Approximately 1,800 of the cars owned by IC Financial are leased to
ICRR. The remaining cars are leased to other non-affiliated companies. When
those leases expire, ICRR has first right of refusal to lease the equipment. If
ICRR exercises its rights, other leased equipment will be returned to the
independent and third-party lessors or short-term car hire agreements are
terminated.
The third segment of the equipment program was a significant upgrade of
the highway trailer fleet used in intermodal service. In 1992, the entire fleet
of old leased trailers, approximately 880, was replaced with 800 brand new
trailers. Expanding intermodal volume necessitated the addition of another 100
trailers in 1994.
During 1994 ICRR repaired and reconditioned approximately 173 cars at a
cost of $2.9 million. This equipment is being leased on a short-term basis to
other carriers until ICRR anticipates it will need the equipment.
In 1996, ICRR began a covered hopper fleet program under which existing
equipment was either modernized or replaced. Approximately 800 cars, operated
under short-term car hire
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arrangements or various leases, were returned and replaced by 600 newly built
high capacity hoppers which are being leased under an operating lease from an
unrelated third party.
The following is the overall fleet at December 31:
Total Units: 1996 1995 1994 1993 1992
Locomotives1..... 435 397 417 468 449
Freight cars..... 16,619 15,872 16,498 16,634 15,877
Work equipment... 655 654 625 745 902
Highway trailers. 889 898 898 898 203
1 Approximately 55 locomotives need repair before they can be returned to
service. This equipment is repaired if needed on an ongoing basis or sold.
ICRR sold 6, 40, 48, 23 and 66 surplus locomotives in 1996, 1995, 1994, 1993
and 1992, respectively. The active fleet is 331 as of December 31, 1996.
The components of the fleet by subsidiary and in total for 1996 and in total
for 1995 are shown below:
IC
ICRR CCPH Financial 1996 1995
Description1 Total(2)(3) Total Total Total Total
Locomotives:
Multipurpose ........ 230 42 79 351 312
Switching ........... 82 2 -- 84 85
Total ..... 312 44 79 435 397
Freight Cars:
Box (general service) 318 -- 1,126 1,444 1,481
Box (special purpose) 2,523 34 384 2,941 3,011
Gondola .............. 1,555 60 -- 1,615 1,428
Hopper (open top) .... 3,784 43 436 4,263 4,287
Hopper (covered) ..... 3,945 525 -- 4,470 3,554
Flat ................. 596 14 -- 610 705
Other ................ 1,276 -- -- 1,276 1,406
Total 13,997 676 1,946 16,619 15,872
Work Equipment ....... 655 655 654
Highway trailers .... 889 889 898
1 In addition, approximately 1,575 freight cars were being used by ICRR under
short-term car hire agreements.
2 Includes 25 locomotives and 765 freight cars under capital leases.
3 Excludes equipment listed under IC Financial.
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Environmental Conditions
ICRR faces potential environmental cleanup costs associated with
approximately 25 contaminated sites and various fueling facilities for which a
total of $17 million has been reserved as of December 31, 1996. The most
significant of those sites are described below.
Mobile, Alabama
ICRR owned property in Mobile prior to 1976 upon which a lessee
conducted creosoting operations. The Alabama Department of Environmental
Management has determined that the soil and groundwater are contaminated with
creosote, pentachlorophenol and possibly dioxins. ICRR has been participating in
joint cleanup efforts with the current owner and ICRR's former lessee. See Item
3. "Legal Proceedings."
Jackson, Tennessee
A rail yard in Jackson, Tennessee, formerly owned by ICRR has been
placed on the federal and state "superfund" list as a result of the discovery of
Trichloroethane (TCE) in the adjacent municipal water well field. ICRR formerly
operated a shop facility at the site and TCE is a common component of solvents
similar to those believed to have been used in the shop. ICRR believes it has
demonstrated that the TCE did not come from its operation, or from this site.
See Item 3. "Legal Proceedings."
McComb, Mississippi
ICRR has conducted a site assessment of a facility where car repairs
were formerly performed to determine the nature and extent of contamination,
primarily lead from removed paint, at the site. Currently, ICRR 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 ICRR at this scene of a
1994 derailment in which about 22,000 gallons of TCE were released. The spill
has been contained by construction of an impervious wall extended into the
bedrock and encircling the site. ICRR has enrolled in Illinois' Pre-Notice Site
Cleanup Program and is voluntarily remediating the site. Estimates of remaining
clean up costs range between $1.4 million and $7.0 million. ICRR believes the
shipper bears some responsibility for the release and has initiated legal
action.
East Hazel Crest, Illinois
In 1994 ICRR learned that an underground fuel line had leaked about
100,000 gallons of diesel fuel into the soil and groundwater. The Company
has replaced the fuel tank and piping, has constructed a groundwater
remediation system and has enrolled the site in Illinois' Pre-Notice Site
Cleanup Program. See Item 3. "Legal Proceedings."
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Fueling Facilities
ICRR has maintained fueling facilities at more than 20 locations at
various times from the 1950's to date. Many of those sites are or may be
contaminated with spilled fuel. Those stations currently in use are equipped
with drip pans and treatment facilities and ICRR has initiated a program of
rebuilding all fuel lines above ground.
Waste Oil Generation
ICRR has been identified as a Potentially Responsible Party ("PRP") at
a site where waste oil was allegedly processed and disposed. ICRR is alleged to
have generated some of the waste oil. ICRR believes any contribution it may have
made to the site contamination is de minimis. See Item 3. "Legal Proceedings."
Item 3. Legal Proceedings
State of Alabama, et al. v. Alabama Wood Treating Corporation, Inc.,
et al., S.D. Ala. No. 85-0642-C
The State of Alabama and Alabama State Docks ("ASD") filed suit in 1985
seeking damages for alleged pollution of land in Mobile, Alabama, stemming from
creosoting operations over several decades. Defendants include ICRR, which owned
the land until 1976, Alabama Wood Treating Corporation, Inc., and Reilly
Industries, Inc. ("RII"), which leased the land from ICRR and conducted creosote
operations on the site. In December 1976, ICRR sold the premises to ASD. The
complaint sought payment for the clean-up cost together with punitive and other
damages.
In 1986, ASD, RII and ICRR agreed to form a joint technical committee
to clean the site, sharing equally the cost of clean-up, and in October 1986 the
court stayed further proceedings in the suit. Under the agreement the joint
technical committee has spent approximately $6.8 million and has been authorized
to expend up to a total of $6.9 million. ICRR has contributed $2.3 million.
Further clean-up activities are anticipated, the cost of which could range from
$1.8 million to $10.7 million depending upon the clean up standards and
remediation methods ultimately required and utilized. Under the agreement,
ICRR's share of the costs would range from $600,000 to $3.6 million.
Under the agreement, if any party disagrees with the amount determined
by the joint technical committee to be expended or otherwise disagrees with any
aspect of the clean-up, such party may decline further participation and
recommence legal proceedings. However, amounts already contributed by any party
will be credited against that party's eventual liability and may not be
recovered from any other party. No party has declined further participation.
In the Matter of Illinois Central Railroad Company, et al., Tennessee
Division of Superfund No. 94-0187
The Tennessee Department of Environment and Conservation, on June 6,
1994, issued a Remedial Order requiring cleanup by ICRR and the current owners
of a site in Jackson, Tennessee. ICRR operated a rail yard and locomotive repair
facility at the site. Trichloroethane ("TCE") has been found in several
municipal water wells near the site. TCE is a common component of solvents
similar to those believed to have been used at the shop. In addition,
concentrations of metals and
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organic chemicals have been identified on the surface of the site. A preliminary
remedial investigation and feasibility study has been completed which indicates
the TCE in the water wells came from an adjacent municipal dump and not from
operations on this site. Exclusive of ground-water, cleanup, ICRR estimates
total clean up costs between $3.5 million and $7.6 million and expects another
PRP's to share in the expense.
People of the State of Illinois v. Illinois Central Railroad Company
No. 95 CH842 (Circuit Court of Cook County, Illinois)
On February 2, 1995, the State of Illinois filed a Complaint for
Injunction and Civil Penalties against ICRR relating to a release of diesel fuel
from an underground pipeline at ICRR's Markham Yard facility in East Hazel
Crest, Illinois. The Complaint alleges that ICRR violated State water pollution
statutes by allowing diesel fuel to enter waters of the State and seeks an order
compelling ICRR to take necessary corrective actions at the site and to pay a
civil penalty of $100,000. ICRR has replaced its fueling tanks and pipelines,
and expects remaining clean up costs to range between $.4 million and $3.0
million.
South Eighth Street Landfill, West Memphis, Arkansas.
ICRR was named by the EPA as a Potentially Responsible Party in
connection with a sludge oil pit at this location. It is alleged that ICRR along
with numerous other commercial and governmental entities generated used oil
which was processed at this site and thus contributed to the contaminated sludge
on the site. ICRR has entered into an agreement with numerous other PRP's under
which ICRR's share of the clean up cost will be .2%. Based on estimates of the
likely remediation cost, ICRR's contribution under the PRP agreement is expected
to be less than $20,000.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during fourth quarter.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock is listed on the New York Stock Exchange, Inc. under the
symbol "IC."
The following table sets forth, for the periods indicated, (I) the high
and low sale prices of the Common Stock as reported on the New York Stock
Exchange Composite Tape and (ii) the per share amount of dividends paid. The
following table has been restated to give effect to a 3-for-2 stock split
declared in January 1996.
Stock Price Dividends Paid
High Low Per Share
1994
First Quarter...................... $25.750 $21.583 $ .14
Second Quarter..................... 25.250 20.333 .14
Third Quarter...................... 21.167 19.550 .14
Fourth Quarter..................... 21.000 19.083 .14
1995
First Quarter...................... $23.500 $20.500 $ .17
Second Quarter..................... 23.750 21.833 .17
Third Quarter...................... 28.000 23.000 .17
Fourth Quarter..................... 28.667 24.500 .17
1996
First Quarter...................... $28.750 $23.667 $ .20
Second Quarter..................... 30.750 27.000 .20
Third Quarter...................... 31.875 26.875 .20
Fourth Quarter..................... 34.375 29.500 .20
1997
First Quarter (through
March 14, 1997) $36.125 $30.500 $ .23
As of March 14, 1997, there were approximately 25,000 stockholders
based on estimates of beneficial ownership. The closing price of the Common
Stock as reported on the New York Stock Exchange Composite Tape on March 14,
1997 was $34.125 per share.
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated
financial data of the Company for the five years ended December 31, 1996, all
derived from the consolidated financial statements of the Company which were
audited by Arthur Andersen LLP. This summary should be read in conjunction with
the consolidated financial statements included elsewhere in this Report and the
schedules and notes thereto. The selected financial data for 1996 includes the
results of CCPH for the period June 13, 1996 (date of acquisition) to December
31, 1996. Therefore, data for 1996 is not directly comparable to pre 1996 data.
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<TABLE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
($ in millions, except share data)
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income Statement Data (1):
Revenues................... $ 657.5 $ 645.3 $ 595.3 $ 565.9 $ 548.5
Operating expenses before
special charge.............. 416.3 414.8 395.0 386.4 388.1
Special charge................. - - - - 8.9
Operating income............... 241.2 230.5 200.3 179.5 151.5
Other income (expense), net.... 8.6 (0.2) 1.0 1.7 2.0
Interest expense, net.......... (34.1) (29.5) (28.4) (33.1) (43.6)
Income before income taxes,
extraordinary item and cumulative
effect of changes in accounting
principles.................. 215.7 200.8 172.9 148.1 109.9
Provision for income taxes..... 79.1 71.0 59.0 56.4 37.4
Income before extraordinary item
and cumulative effect of changes
in accounting principles.... 136.6 129.8 113.9 91.7 72.5
Extraordinary item, net........ - (11.4) - (23.4) -
Cumulative effect of changes in
accounting principles....... - - - (0.1) 23.4
Net income ................ $ 136.6 $ 118.4 $ 113.9 $ 68.2 $ 95.9
Income per share (2):
Before extraordinary item and
accounting changes... $ 2.21 $ 2.06 $ 1.78 $ 1.43 $ 1.13
Extraordinary item.......... - (0.18) - (0.36) -
Accounting changes.......... - - - - 0.37
Net income per share $ 2.21 $ 1.88 $ 1.78 $ 1.07 $ 1.50
Weighted average number of
common shares outstanding
(in thousands)(2)........... 61,877 62,885 64,089 64,020 63,900
Cash dividends declared per
common share (2)........ $ 0.83 $ 0.71 $ 0.59 $ 0.46 $ 0.33
Operating ratio (3)............ 63.3% 64.3% 66.4% 68.3% 70.8%
</TABLE>
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At December 31,
1996 1995 1994 1993 1992
Balance Sheet Data (4):
Total assets............. $ 1911.4 $ 1437.5 $ 1308.7 $ 1258.7 $ 1206.1
Long-term debt............... 633.7 383.6 328.6 360.3 367.3
Stockholders' equity..... ... 555.5 470.1 454.1 377.4 338.8
Working capital (deficit).... 16.6 (76.1) (65.4) (32.4) (2.9)
1. Results for 1996 include results of CCPH since June 13, 1996.
2. Restated to give effect to a 3-for-2 stock split declared in January 1996.
3.Operating ratio is the ratio of operating expenses before special charge to
revenues.
4. Data for 1996 includes CCPH.
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Significant Developments
CCP Holdings, Inc. Acquisition
On June 12, 1996, ICRR used proceeds it received from the issuance of
Commercial Paper (average interest rate 5.52% and average maturity 30 days) to
pay a $50.0 million dividend to the Company and to loan $59.9 million (5.625%
per annum) to the Company. The Company used the $109.9 million and its bank
credit lines to acquire CCP Holdings, Inc. ("CCPH"). The transaction closed June
13, 1996, following the effective date of the approval order issued by the
Surface Transportation Board ("STB"). The purchase price was $147.1 million in
cash, the assumption of approximately $2.5 million in debt and approximately
$17.3 million of capitalized lease obligations existing on the acquisition date.
Additionally, under the Stock Purchase Agreement the actual purchase price is
subject to various potential adjustments for up to one year after the closing
date.
CCPH has two principal operating subsidiaries - the Chicago Central and
Pacific Railroad ("CCPR") and the Cedar River Railroad ("CRR") - which together
comprise a Class II railroad system operating 850 miles of road. CCPR operates
from Chicago to Omaha, Nebraska, with connecting lines to Cedar Rapids and Sioux
City, Iowa. CRR runs from Waterloo, Iowa to Albert Lea, Minnesota.
Stock Split
On January 25, 1996, the Board declared a 3-for-2 stock split in the
form of a stock dividend to holders of record on February 14, 1996. New
certificates were issued March 14, 1996. Fractional shares were settled in cash
at a rate of $25.94 per share. When certificates were issued, the approximate
41.0 million shares outstanding increased to approximately 61.4 million. All
share counts, options outstanding, option prices and per share information
presented in this annual report have been restated to reflect the 3-for-2 split
as if it had occurred at the beginning of the earliest period presented.
1992 Four-Year Growth Plan and Plan 2000
In 1992 the Company announced its first growth plan, for the years 1993
through 1996. Since the key concepts--$100 million in revenue growth and an
operating ratio of 66.7%--were reached by the end of 1995, the Company announced
a second growth plan called Plan 2000.
Plan 2000 calls for (i) revenue to grow from the 1994 base of $595
million to $800 million by the end of 1999, (ii) the continued reduction of the
operating ratio to below 60%, and (iii) a Long-Term Equity Enhancement Program
of increased dividends and share repurchases.
As designed, Plan 2000 is intended to focus management on increasing
operating performance and responding to general economic trends quickly. The
plan assumes that the Company's growth, excluding coal use and worldwide grain
demand, will be between 1.2% and 1.7% per year. This assumption is based on
internal analysis of published economic forecasts available when the plan was
developed, such as the Blue Chip Economic Forecast, which predicted industrial
production would gain 2.4% to 2.8% per year. As for grain, Plan 2000 assumes
that export grain demand will be approximately 45,000 carloads annually.
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<PAGE>
To achieve Plan 2000, the Company will concentrate on expanding the
volume of business from current customers, seeking to locate new businesses or
expansions by existing customers on our system, and raising rates when possible
to reflect the value of the services the Company provides. To increase business
in coal and grain, the Company will work with shippers to develop strategies and
service schedules to permit them to participate in the increasingly competitive
world market. For example, the Company developed a concept of moving export
grain to the Gulf in unit trains of customer-supplied cars, operating in
dedicated, continuous service approximately ten months of the year.
As stated, a key goal of Plan 2000 was revenue growth from $595 million
to $800 million or approximately 6% per year or 34% in total. After achieving
revenues of $645 in 1995 (or an 8.4% increase), ICRR did not meet its revenue
objectives in 1996; in fact, ICRR's revenues declined 4.2% to $617.2 million.
See "-Results of Operations" and "- Outlook" for the cause of the 1996 shortfall
and a discussion of 1997.
Because the acquisition of CCPH was not contemplated when Plan 2000 was
developed , the Company considers CCPH's revenues will be additive to ICRR's
$800 million revenue goal.
Achieving Plan 2000 is key to the Company's incentive compensation
programs because those programs are dependent on revenue growth and return on
total capital ("ROTC"). In 1995 ICRR's revenue growth of 8.4% exceeded the
revenue goal of 5% but in 1996, as stated, revenues declined 4.2% missing the 5%
goal. For 1997, the Company's growth target is 7.5%.
In 1996, ICRR had an ROTC of 12%, essentially meeting threshold
performance and matching 1995's performance. For 1997, the Company's target ROTC
of 11.2% recognizes that several capital projects like the terminals will use
capital but not provide return until 1998.
Results of Operations
The discussion below takes into account the financial condition and
results of operations of the Company for the years presented in the consolidated
financial statements and includes CCPH since June 13, 1996 (date of
acquisition).
1996 Compared to 1995
Total revenues for 1996 increased from the prior year by $12.2 million
or 1.9% to $657.5 million. At ICRR revenues declined $28.0 million following a
3.1% decrease in the number of carloadings coupled with a 1.5% decrease in the
average freight revenue per carload.
Grain and grain mill accounted for 17% of ICRR's carloads and 27% of
ton-miles in 1996. Against 1995, carloads, ton-miles and revenues were down 17%,
31% and 22% respectively. Grain was clearly the primary cause of the 1996
revenue shortfall. The comparisons were particularly difficult against a record
grain carloading year in 1995. Illinois' 1995 corn and soybean harvest was
abnormally small so that by the third quarter 1996 grain elevators were
essentially depleted and the new harvest was still weeks away. Rail rates were
higher on average this year versus last; demand for grain was strong; the
product just was not available to move. The smaller crop also affected grain
mill since domestic processors were forced to cut back on their usual
production.
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<PAGE>
Coal accounted for 22% of ICRR's carloads and 24% of ton-miles in 1996.
Against 1995, carloads, ton-miles and revenues were down 6%, up 6% and flat,
respectively. A large coal contract for 25,000 carloads was not renewed in July
1995 as a large customer wanted more aggressive pricing and went elsewhere.
Thus, loads in late 1995 and the first half of 1996 compared with 1995 were
significantly depressed. However, for a second year in a row, coal margins, and
the return on the assets involved, improved.
Chemicals accounted for 15% of ICRR's carloads and 17% of ton-miles in
1996. Compared with 1995, ton-miles were down 2% while carloads and revenues
were flat. Rail rates, under pressure in the earlier months of the year, firmed
in the second half. The softness observed in the economy, especially in the
first two quarters was reflected in the building of chemical manufacturers'
inventories and softness in our customers' pricing. Our customers' markets
firmed in the latter half of the year so that the Company came in essentially
flat in both chemical loads and revenues.
Paper and Forest Products at ICRR were 15% of 1996 carloads and 14% of
ton-miles. Total carloads were down 6% while ton-miles and revenues were down 3%
versus 1995. Rail rates held up reasonably well throughout the year. Paper and
forest products are economically sensitive commodities that respond to
industrial production, housing starts and other basic economic indicators. Fiber
and pulpboard were depressed all year.
Bulk Commodities contributed 6% of carloads and ton-miles in 1996 for
ICRR. This represents carload and revenue growth of approximately 4% while
ton-miles were down slightly from the 1995 level. Bulk commodities are primarily
stone and other construction materials and are closely tied to state highway
projects. This smaller commodity group fluctuates with the timing of projects as
well as the availability of freight cars for this lower-margin business.
Metals accounted for 4% of ICRR's carloads and 5% of ton-miles in 1996.
For 1996, versus 1995, carloads, ton-miles and revenues were up 9%, 21% and 11%,
respectively. The steel industry had another strong year, and ICRR set another
record for metals loads and revenues.
Finally, Intermodal accounted for 21% of ICRR's loads and 7% of
ton-miles. Versus 1995, carloads were up 10%, with ton-miles and revenues up 9%.
These results were achieved in an industry that saw trailer rate weakness
earlier in the year and some weakness in automotive parts traffic later in the
year.
At CCPH, revenues of $40.2 million were comprised of grain (39%), coal
(19%), chemicals (14%) and all others (28%).
Operating expenses overall increased $1.5 million or .4% in 1996. Of
the total $416.3 million, $28.3 million was incurred at CCPH for the period June
13, 1996 to December 31, 1996. Labor and fringe costs include the wage increases
of 3% negotiated with nine of the ICRR's unions and costs for CCPH for the last
half of 1996. The decline in this category is primarily the result of lower
traffic levels, particularly grain, and the elimination of the high overtime
caused by the congestion experienced in 1995. Leases and car hire also benefited
from the elimination of congestion to return to more normal operating levels. In
1995, favorable one-time adjustments on several capital leases were recorded.
Fuel expense reflects the increase in cost per gallon (13.8%) partially offset
by decreased usage (9.4%). Increased depreciation is a result of the acquisition
of CCPH. The decrease in casualty, insurance and losses reflects the emphasis on
safety and improved claims
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<PAGE>
experience. Other expenses reflect the one-time reversal of non-revenue related
accruals to actual ($2.5 million) and favorable performance payments in joint
facilities that congestion in 1995 prevented us from receiving ($.7 million).
Operating income for 1996 increased by $10.7 million or 4.6% to $241.2
million for the reasons cited above.
On October 3, 1996, ICRR sold its investments in an industry-captive
insurance company, RAIL, Inc., which resulted in a one-time gain, recorded as
Other Income Expense, Net, of approximately $7 million or $.07 per share.
Net interest expense of $34.1 million for 1996 increased 15.6% compared
to $29.5 million in 1995. The 1996 expense includes $3.6 million from increased
borrowings to support the $109.9 million transferred from ICRR in June 1996 in
connection with the acquisition of CCPH. Overall in 1996, average borrowings
have been greater than 1995 and interest rates have been lower.
1995 Compared to 1994
Revenues for 1995 increased from the prior year by $50.0 million or
8.4% to $645.3 million. The increase was a result of a 4.6% increase in
carloadings coupled with a 2.1% increase in the average freight revenue per
carload. In 1995, ICRR experienced increased carloadings in intermodal (31.2%),
grain and grain mill products (13.2%), paper (6.4%) and chemicals (4.1%),
partially offset by decreased loadings in coal (11.9%).
Operating expenses for 1995 increased $19.8 million or 5.0%. Labor and
fuel expenses increased reflecting the increased loadings experienced in 1995
over 1994. Depreciation expense was higher in 1995 because of the Company's
increased ownership of equipment. Other expenses, which include joint
facilities, net and equipment related expenses, increased $9.3 million.
Partially offsetting the increased expenses was a $2.1 million decrease in lease
and carhire expense and decreased casualty, insurance and loss expense ($6.3
million) reflecting the Company's emphasis on safety and improved claims
experience.
Operating income for 1995 increased $30.2 million or 15.1% to $230.5
million for the reasons cited above.
Net interest expense of $29.5 million for 1995 increased 3.9% compared
to $28.4 million in 1994. Increased debt burden primarily associated with
equipment additions and stock repurchases account for the increase in interest
expense. Results for 1995, also reflect the issuance of lower coupon debt in
connection with the prepayment of the ICRR's $160 million Senior Notes at face
value, plus accrued interest and a prepayment penalty. The prepayment resulted
in an extraordinary loss of $18.4 million, $11.4 million after tax. See "-
Liquidity and Capital Resources."
Net income was further affected by a $4.3 million after tax gain on the
resolution of prior period tax issues.
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Outlook
-NOTE-
This section is intended to provide an understanding of factors that
will impact the Company in 1997 and beyond. This discussion contains "forward
looking statements" within the meaning of the federal securities laws including
statements of expectations, beliefs, plans, and similar expressions concerning
matters that are not historical facts. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in the statements. These risks and uncertainties affecting the Company
are discussed in greater detail in a separate exhibit to the Company's Form 10-K
for 1996.
Illinois Central Corporation is now an operationally intergrated
holding company of freight railroads and terminals which are coordinated by
operating and marketing initiatives to originate, direct and control traffic
over our service areas.
The Company's principal subsidiary remains the ICRR. However, as a
result of the CCPH acquisition, the smaller Chicago, Central & Pacific and Cedar
River railroads are now subsidiaries. As previously mentioned the revenues from
these railroads are considered additive to Plan 2000.
The Company has also formed a subsidiary, called IC RailMarine Terminal
Company, to construct and operate an import/export, dry-bulk handling terminal
on the Lower Mississippi River. And recently the Company made an investment in a
liquid-bulk storage and distribution terminal that has been serving the
petroleum and petrochemical industries for more than 15 years. Both facilities
are located just south of Baton Rouge, Louisiana. The dry-bulk terminal will be
operational in late 1997 or early 1998. The importance of this facility is
highlighted in the commodity comments for Metals below.
On a commodity basis:
GRAIN: Following a disappointing 1996, the good news is that 1996 corn
and soybean harvests in both Illinois and Iowa were excellent. The strong
harvests did not immediately translate into improved traffic as farmers withheld
product for better pricing. Also, export demand for U.S. wheat has fallen in
competition with other wheat-exporting countries. However, world grain
stockpiles have been at historic lows and will take several consistently good
growing seasons worldwide to fully replenish. Iowa and Illinois together account
for more than 35% of all the corn produced in the U.S.; ICRR and CCPH run
through some of the richest and most productive farmland in the country. We
believe the fundamental grain outlook over the next several years is very
positive for us, even as we recognize the vagaries of the weather and that
export demand for U.S. grains, from year-to-year, will always be more volatile
than domestic demand, subject to the expansions and contractions of world supply
as well as international agricultural and trade policies.
COAL: Based on our current projections, dependent on stockpiles and
weather in the service territories of the utilities we serve, the Company
expects to move approximately the same number of loads in 1997 as 1996.
The subject of coal often evolves to the utility deregulation issue and
its impact on the Company. Since coal transportation represents a large cost
factor for coal-fired plants, some believe
22
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more intense competition among utilities, including "power wheeling" and
"coal-by-wire," may cause the pattern of coal movements to shift and rail rates
to come under pressure. While this may turn out to be an impact on the industry
as a whole (reflecting the effects on the dominant coal-hauling railroads),
applying the same logic to a niche player like ICRR is probably overly
simplistic. The Company doesn't have captive utilities. We compete with low-cost
barge transportation on the Mississippi and Ohio Rivers.
At this point, there are too many variables to know if utility
deregulation will have a neutral, modestly positive or modestly negative effect
on the Company long-term. However, it is worth noting that today we enjoy better
margins on coal than we did five years ago.
CHEMICALS: Based on the improved economy experienced in late 1996,
growth of base chemical in 1997 should be consistent with the solid growth rates
seen in the last few months of 1996. Growth beyond 1997 will come through
expansions of current facilities on our line (for example, Shell and Fina) and
through the addition of new manufacturing capability. In this latter category,
Shintech, a subsidiary of Shin-Etsu Chemical Co., has announced construction of
a major production complex on our line near Geismar, Louisiana, which is
expected to begin operation in 1998.
Two years ago we built in the Chicago area a facility to store plastic
pellets in bulk and load them for customers into trucks for delivery to non-rail
served sites. That facility has proven so successful, it will be expanded in
1997 to approximately double its size. Additionally, the liquid-bulk terminal
offers off-site storage and handling capacity to our customers and eventually
will allow them to expand their manufacturing capabilities.
PAPER AND FOREST PRODUCTS: Following strong demand in 1994 and 1995,
producers increased production capacity in 1995 and early 1996. Now the
producers must struggle with the excess capacity in the industry. Therefore, we
are not expecting a rapid turnaround in this commodity group, although longer
term we believe we are well-positioned for modest growth.
One of our largest customers has been re-tooling a major mill to shift
to long-log input. Re-tooling has not been completed as quickly as expected,
however, the conversion will benefit us longer term. As we will be able to carry
the raw material into the mill in addition to hauling the finished product.
Georgia Pacific has completed a major distribution center on our line
in northern Illinois. As this facility grows additional inbound and outbound
carloads will add to paper volumes.
METALS: We expect 1997 metals volumes to approximate this year's very
strong performance. In late 1997, Birmingham Steel will complete a mini-mill in
Memphis. This mill represents significant new manufacturing on our line and
enhances the industrial park for potential future development.
Metals will benefit from both this new mini-mill in Memphis and the IC
RailMarine Terminal being constructed south of Baton Rouge. RailMarine's anchor
customer is a joint venture between Birmingham Steel and GS Industries. The
venture was formed to construct and operate a $200 million direct-reduced iron
(DRI) plant which will be adjacent to and served by our facility.
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The joint venture will import iron ore through our terminal into their
facility to produce DRI. The output will supply Birmingham Steel's and GS
Industries' own mills. Much if not all of Birmingham Steel's share of the output
will become input to their Memphis mill.
INTERMODAL: This class of traffic is expected to continue its growth in
1997. Although CCP is best known as a grain-hauling railroad, we believe there
is significant potential for intermodal growth, taking trucks off east/west
Interstate 80 and Highway 20. Within 90 days of the acquisition, we began
dedicated intermodal service between Chicago and ramps in Council Bluffs, Sioux
City, Fort Dodge, Waterloo and Dubuque. The marketplace has already begun to
respond to this new service with higher levels of traffic moving via rail.
In August, the Burlington Northern Santa Fe ("BNSF") began
interchanging with us at Memphis in a traffic corridor that stretches from the
West Coast to the Southeast. The business originates and terminates in Mobile
and the arrangement creates a sufficient base of business to allow us to re-open
our previously underutilized Mobile intermodal ramp. In addition to serving
the BNSF, re-opening the Mobile ramp allows us to market our own Mobile-to-
Chicago service offering.
Recently we began a new partnership with Conrail which efficiently
links the southern half of our system to their northeast markets.
OTHER GROWTH OPPORTUNITIES: One of the Company's strengths is its
diverse customer base including chemical, grain, coal, forest products, metals
and intermodal shippers. In addition to our traditional customers, the Company
actively markets its services and facilities to other railroads so that today
many of the major railroads are customers. Two of the most recent examples are
the 75-acre Gateway Intermodal Terminal we built for the Canadian National
Railway and a service and joint marketing agreement with BNSF (the "BNSF
Agreement") to move traffic, originating primarily in Texas, north over our
line.
Other Issues:
CONSOLIDATIONS: The American railroad system has seen accelerated
consolidation in the last few years and pending transactions suggest the trend
will continue. Each rail merger presents a risk that rail traffic will be
diverted around the Company's railroads. In the most extreme circumstances rail
mergers could have a material adverse impact on revenues. However, we believe
that the Company could adjust its operations to retain current levels of
profitability. Management expects to continue to monitor developments and take
actions to mitigate the impact of rail consolidations. Of course, no assurances
can be given that such consolidations will not have a material adverse affect on
the Company.
The Company also believes that consolidations are not necessarily
problematic. As is evident in the evolution of the Company over the last several
years, the Company is inclined to see a changing landscape as a source of
potential new opportunity for us. And the Company has done well in capitalizing
on new opportunities that have developed out of the consolidation in the West as
reflected by the BNSF Agreement.
FUTURE INVESTMENTS: The Company continually considers a variety of
investment opportunities including acquisition of rail and other properties. The
Company is registered as an
24
<PAGE>
interested potential bidder in the privatization of the Mexican railway
system. Specifically, the Company is interested in the Southeast
territory.
Liquidity and Capital Resources
Operating Data ($ in millions):
1996 1995 1994
Cash flows provided by (used for):
Operating activities..................... $183.9 $177.4 $205.5
Investing activities..................... (300.6) (127.0) (80.4)
Financing activities..................... 170.9 (69.6) (111.6)
Net change in cash and
temporary cash investments. $ 54.2 $ (19.2) $ 13.5
Cash from operating activities in 1996, 1995 and 1994 was primarily net
income before depreciation, deferred taxes and extraordinary item and 1994 was
also affected by the sales of accounts receivable.
Investing Data
Additions to property were as follows ($ in millions):
1996 1995 1994
Communications and signals... $ 12.2 $ 10.7 $ 13.8
Equipment/rolling stock...... 29.4 61.5 28.3
Track and bridges............ 57.8 47.0 44.7
Other........................ 25.4 9.6 3.3
Total $124.8 $128.8 $ 90.1
For 1996, Track and Bridges and Other include $3.3 million and $16.8
million, respectively, for the CN Terminal. In 1995, Equipment includes $25.9
million for 20 new SD-70 locomotives placed in service in the fourth quarter. In
1996, 1995 and 1994 capital expenditures exceeded original estimates as several
opportunities to acquire equipment were acted upon in accordance with the
Company's strategy of owning more of its equipment. Property retirements and
removals generated proceeds of $6.9 million, $5.4 million, and $8.2 million in
1996, 1995 and 1994, respectively.
The Company anticipates that capital expenditures for 1997 will be
approximately $172 million. Base expenditures of $93 million will concentrate on
track maintenance, bridges and freight car upgrades. Another $60 million will be
spent on constructing the dry bulk transfer facility and expanding the recently
acquired liquid bulk transfer facility located along the Mississippi River in
Louisiana. The Company expects to fund 40% of the dry bulk transfer facility
cash requirements by the sale of a minority interest in the terminal. Most of
the remainder of these expenditures are expected to be met from current
operations or other available sources.
25
<PAGE>
In June 1996, following the effectiveness of the order by the STB, the
Company acquired the stock of CCPH Holdings, Inc. (See Note 17.) The Company
used its own bank credit lines and funds received from ICRR (a loan of $59.9
million and a $50 million dividend) to complete the $147 million
transaction. The acquisition is being treated as a purchase and under
the Stock Purchase Agreement, the actual purchase price is subject to
potential adjustments for up to one year.
Financing Activities
The Company has a $50 million 364-day floating-rate revolving loan
agreement which expires in August 1997. In June 1996, the Company borrowed $40
million under this agreement to acquire CCPH (see Note 17), which was repaid in
June. At December 31, 1996, no amounts were drawn under this agreement. IC
Financial leases equipment to ICRR and has approximately $9.6 million in
long-term borrowing agreements which were used to acquire locomotive and freight
car equipment during 1993 and 1991. IC Financial lease revenue and corresponding
expense at ICRR, which is eliminated in consolidation, was $14.4 million for
1996.
For the three years ended December 31, 1996, the Company has paid
$126.3 million in cash dividends on its common stock. Dividends from ICRR
($103.2 million in 1996, $107.7 million in 1995 and $42.5 million in 1994) were
used to fund these payments to stockholders, the acquisition of CCPH and the $60
million stock repurchase in 1995. (See "-Long-Term Equity Enhancement Program.")
Included in the 1996 dividends to the Company is the March 1996 transfer by ICRR
of its ownership in the Chicago Intermodal Company ("CIC") via a dividend of CIC
stock. The book value of the CIC investment was $5.7 million.
In June 1996, CCPH entered into a revolving credit agreement with its
bank lending group for an unsecured $50 million revolving credit facility, (the
"CCPH Revolver"). The CCPH Revolver has a $5 million sublimit for letters of
credit and expires in 2001. The revolver can be used for general corporate
purposes. Fees and borrowing spreads are predicated on the ratio of CCPH's
funded debt to CCPH's earnings before income taxes, interest, depreciation and
amortization ("EBITDA"). Currently, the annual commitment fee is 25 basis points
and borrowings are at the Eurodollar offered rate plus 62.5 basis points. The
credit agreement contains various financial covenants including minimum
consolidated tangible net worth, minimum interest coverage and maximum leverage
ratio. CCPH does not anticipate any difficulty in maintaining compliance with
such covenants. At December 31, 1996, $15.5 million of CCPH's Revolver was
outstanding. CCPH used $5 million to repay amounts outstanding under a
predecessor revolver which was then canceled.
ICRR has a commercial paper program whereby a total of $200 million can
be issued and outstanding at any one time. The program is supported by a $250
million Revolver with the Railroad's lending group (see below). At December 31,
1996, Standard & Poor's Corporation ("S&P"), Moody's Investor Services
("Moody's") and Fitch Investors Service ("Fitch") have rated the commercial
paper A2, P2 and F2, respectively, and $20.0 million was outstanding. The
average interest rate on commercial paper for the year ended December 31, 1996,
was 5.61% with a range of 5.41% to 6.06%. ICRR views this program as a
significant long-term funding source and intends to issue replacement notes as
each existing issue matures. Therefore, commercial paper borrowings are
classified as long-term. ICRR's public debt is rated Baa2 by Moody's and BBB by
S&P.
26
<PAGE>
In 1994, ICRR entered into a revolving agreement to sell undivided
percentage interests in certain of its accounts receivable, with recourse, to a
financial institution. The agreement, which expires in June 1998, allows for
sales of accounts receivable up to a maximum of $50 million at any one time.
ICRR services the accounts receivable sold under the agreement and retains the
same exposure to credit loss as existed prior to the sale. At December 31, 1996,
$48 million had been sold pursuant to the agreement. Costs related to the
agreement fluctuate with changes in prevailing interest rates. These costs,
which are included in Other Income (Expense), Net, were $2.9 million, $3.2
million and $2.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively. ICRR's accounting for the sale of accounts receivable is impacted
by SFAS No. 125. As a result, the agreement is expected to be modified to comply
with this new standard so that the accounting and reporting for the sale of
accounts receivables will remain unchanged.
In April 1996, ICRR concluded negotiations with its bank lending group
whereby the Railroad's $250 million Revolver was amended and restated. The
amendment reduced various facility fees and borrowing spreads, lowered the
tangible net worth requirement beginning in the second quarter of 1996 and
extended the expiration date to 2001. Fees and borrowing spreads are predicated
on ICRR's long-term credit ratings. Currently, the annual facility fee is 15
basis points and borrowings under this agreement are at Eurodollar offered rate
plus 22.5 basis points. The Revolver is used primarily for backup for ICRR's
commercial paper program but can be used for general corporate purposes. The
available amount is reduced by the outstanding amount of commercial paper
borrowings and any letters of credit issued on behalf of ICRR under the
facility. No amounts have been drawn under the Revolver. At December 31, 1996,
the $250 million was limited to $230.0 million because $20.0 million in
commercial paper was outstanding.
Certain covenants of ICRR's debt agreements and CCPH's Revolver require
among others specific levels of tangible net worth but not a specific dividend
restriction. At December 31, 1996, ICRR and CCPH exceeded their tangible net
worth covenants by $26.9 million and $22.8 million, respectively. Both ICRR and
CCPH were in compliance with all covenants at December 31, 1996, and do not
contemplate any difficulty maintaining such compliance.
Throughout 1996 and 1995, ICRR has been active in the public debt
market, issuing bonds and medium-term notes ("MTN's"). In December 1996, ICRR
issued $125 million aggregate amount of 100-year 7.7% debentures, due September
15, 2096. These bonds may not be redeemed until 2026 and then only at a premium
which declines to par in 2056. In 1995, $100 million 7.75% non-callable 10-year
notes due May 2005 ("2005 Notes") were issued. (See below.) A total of $230
million in MTN's were issued over the two years as follows ($ in millions):
Principal Year
Amount Coupon Issued Matures
$20 6.27% 1995 1998
30 6.83 1995 2000
50 6.98 1996 2007
50 7.12 1996 2001
30 6.85 1996 1999
50 6.72 1996 2001
27
<PAGE>
The shelf registration from 1995 has been fully used. A shelf
registration from 1996 can be used to issue an additional $70 million in MTN's
or other debt until 2000. Currently, there are no plans to issue additional debt
but capital investments in the terminal facilities, other ventures and labor
settlements could necessitate use.
In 1995, ICRR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The monies used to
fund the prepayment were provided by commercial paper, the net proceeds of the
2005 Notes and $40 million from existing lines of credit. The prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax
($.18 per share). The line of credit borrowings were replaced with the proceeds
of MTN's.
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.
Miscellaneous
ICRR has entered into various diesel fuel collar agreements designed to
mitigate significant changes in fuel prices. As a result, approximately 17% of
ICRR's short-term diesel fuel requirements through June 1997 are protected
against significant price changes.
The Company has paid approximately $3 million in 1996 and $6 million in
each of 1995 and 1994 for severance, lump sum signing awards and other costs
associated with various labor agreements. Under the terms of local bargaining
agreements, wages will rise 3%-4% per year.
In October 1996, the Brotherhood of Maintenance of Way Employees
membership ratified a new agreement which settles wage and work rules through
1999. In January 1997, the United Transportation Union ("UTU") ratified a new
agreement which settles wage and work rule issues through 2000. The UTU
agreement is similar to the nationally negotiated agreement in effect with other
Class I carriers. The main distinction is timing of the various lump sum payouts
and scheduled wage increases. ICRR continues to negotiate with its remaining
operating union on a local level. While no agreement is pending, an agreement
may be reached that requires significant lump sum payment. It is too early to
determine if a separate agreement will be reached but management believes
available funding sources will be sufficient to meet any required payment.
Long-Term Equity Enhancement Program
The Company paid its twentieth consecutive quarterly cash dividend on
January 8, 1997. The Board believes quarterly dividends are an integral part of
its announced Long-Term Equity Enhancement Program designed to increase
stockholder value through dividend payments and stock repurchases. Actual
dividends are declared by the Board of Directors based on profitability, capital
expenditure requirements, debt service and other factors.
During 1995, the Company completed a $60 million stock repurchase
program acquiring 2,475,000 shares in open market transactions. While intended
to be an annual component of the Long-Term Equity Enhancement Program, the Board
concluded that alternative funding needs, most notably the acquisition of CCP
Holdings, Inc., the expansion of the intermodal facility in Chicago and the
construction of a bulk transfer facility in Louisiana warranted the suspension
of share
28
<PAGE>
repurchases under the program for 1996. Further purchases are dependent on
market conditions, the economy, cash needs and alternative investment
opportunities. The Board intends to review stock repurchases annually.
Environmental Liabilities
The Company's operations are subject to comprehensive environmental
regulation by federal, state and local authorities. Compliance with such
regulation requires the Company to modify its operations and expend substantial
manpower and financial resources.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("Superfund"), and similar state and federal laws, the
Company is potentially liable for the cost of clean-up of various contaminated
sites. The Company generally participates in the clean-up at sites where other
substantial parties share responsibility through cost-sharing arrangements, but
under Superfund and other similar laws the Company can be held jointly and
severally liable for all environmental costs associated with such sites.
The Company is aware of approximately 25 contaminated sites at
which it is probably liable for some portion of any required clean-up.
Of these, 17 involve contamination primarily by diesel fuel which can be
remediated without material cost. Five other sites are expected to require
more than $1 million in clean-up costs. At four of these sites other
parties are expected to contribute the majority of the costs incurred.
The Company paid approximately $2.8 million toward the investigation and
remediation at all sites in 1996, and anticipates similar expenditures
annually.
For all known sites of environmental contamination where Company loss
or liability is probable, the Company has recorded an estimated liability at the
time when a reasonable estimate of remediation cost and Company liability can
first be determined. Adjustments to initial estimates are recorded as necessary
based upon additional information developed in subsequent periods. Estimates of
the Company`s potential financial exposure for environmental claims or incidents
are necessarily imprecise because of the difficulty of determining in advance
the nature and extent of contamination, the varying costs of alternative methods
of remediation, the regulatory clean-up standards which will be applied, and the
appropriate allocation of liability among multiple responsible parties. At
December 31, 1996, the Company estimated the probable range of its liability to
be $17 million to $53 million, and in accordance with the provisions of SFAS No.
5 had a reserve of $17 million for environmental contingencies. This amount is
not reduced for potential insurance recoveries or third-party 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 the Company leased substantial amounts of property to
industrial tenants, and ICRR continues to haul hazardous materials which are
subject to occasional accidental release. Because the ultimate cost of known
contaminated sites cannot be definitively established and because additional
contaminated sites yet unknown may be discovered or future operations may result
in accidental releases, no assurance can be given that the Company 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,
29
<PAGE>
based on these known facts and circumstances, to have a material adverse effect
on the Company`s financial position, results of operations, cash flow or
liquidity.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS No. 125"), issued by the Financial Accounting Standards Board in 1996 and
effective for 1997, provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities. The
accounting for the ICRR's sales of accounts receivable agreement is impacted by
this standard. As a result, the agreement is expected to be modified to comply
with the SFAS No. 125 requirements so that the accounting and reporting for the
sale of the ICRR's accounts receivable will remain unchanged.
In March 1997, the Financial Accounting Standards Board released FASB
Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). The new statement is
effective December 15, 1997; early adoption is not permitted. When adopted,
SFAS No. 128 will require restatement of prior years' earnings per share. The
Company has not determined the effect that the new standard will have on its
financial statements.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on page 36 of this Report.
Item 9. Changes in and Disagreement with Accountants in Accounting
Financial Disclosures
NONE
30
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) See Note below concerning Directors who are not also Executive
Officers.
(b) The executive officers of the Company are identified in the table
below. Each executive officer of the Company currently holds an
identical position with ICRR and CCPH. Executive officers of the
Company, ICRR and CCPH serve at the pleasure of the respective Boards
of Directors.
Name Age Position(s)
Gilbert H. Lamphere 44 Chairman of the Board of Directors
E. Hunter Harrison 52 President and Chief Executive Officer, Director
John D. McPherson 50 Senior Vice President - Operations
Donald H. Skelton 53 Senior Vice President - Marketing and Sales
James M. Harrell 44 Vice President - Human Resources
David C. Kelly 52 Vice President - Maintenance
Ronald A. Lane 46 Vice President and General Counsel and Secretary
Dale W. Phillips 42 Vice President and Chief Financial Officer
John V. Mulvaney 46 Controller
Biographical Information
The following sets forth the periods during which the executive
officers of the Company have served as such and a brief account of the business
experience of such persons during the past five years. Unless otherwise stated
each individual holds a similar position at ICRR and CCPH.
Mr. Lamphere has been a director of the Company and ICRR since 1989
and of CCPH since June 1996. He has been Chairman of the Board since 1993, and
Chairman of the Executive Committee of the Board since 1990. Mr. Lamphere is
Managing Director of the Fremont Group, a diversified investment company. He was
Co-Chairman and Chief Executive Officer of The Noel Group, Inc. from 1991 until
1994 and was the Chairman and Chief Executive Officer of The Prospect Group,
Inc. until 1994, for which he had served in various capacities since becoming a
director in 1983.
Mr. Harrison was appointed President, Chief Executive Officer and a
director of the Company and ICRR in February 1993 and of CCPH in June 1996. He
joined the Company as Vice President and Chief Transportation Officer in 1989.
In November 1991 he was appointed Senior Vice President - Transportation and was
named Senior Vice President - Operations in July 1992.
Mr. McPherson joined the Company in July 1993. He was named Senior
Vice President - Operations in 1994. He also serves as a Director of ICRR, and
since June 1996 of CCPH. Mr. McPherson is also a director of the Peoria & Pekin
Union Railroad. Prior to joining the Company
31
<PAGE>
he held various positions with the Atchison, Topeka and Santa Fe Railway Company
from 1966 to 1993, most recently as Assistant Vice President - Safety.
Mr. Skelton was elected Senior Vice President-Marketing and Sales of
the Company in January 1996. He serves as a director of ICRR, and since June
1996 of CCPH. He joined the Company as Vice President Marketing and Sales in
October 1994. He was previously employed by Mark VII Transportation and as an
independent consulting specialist in international transportation. From 1987 to
1993 he was employed by the Atchison, Topeka and Santa Fe Railway Company
holding various executive positions including Vice President Marketing and Sales
and Vice President International/Domestic Customer Development.
Mr. Harrell joined the Company in his current position in 1992. He
served as Director of Labor Relations for The Atchison, Topeka and Santa Fe
Railway Company from 1989 to 1992.
Mr. Kelly joined the Company as Vice President and Chief Engineer in
1989. In January 1994, he was appointed Vice President - Maintenance.
Mr. Lane joined the Company as Vice President and General Counsel and
Secretary in 1990. He also serves as a Director of ICRR, and since June 1996 of
CCPH.
Mr. Phillips was appointed to his present position in the Company in
April 1990. He also serves as a Director of ICRR, and since June 1996 of CCPH.
Mr. Mulvaney joined the Company as Controller in June 1990.
No family relationship exists among the officers of the Company, ICRR
or CCPH.
(c) Pursuant to Item 405 of Regulation S-K, Mr. D. H. Skelton's Form 4
for November 1996 reflecting the sale of 2,000 shares was filed thirty
(30) days late.
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information required by Item 10a, Item 11, Item 12 and Item 13 is
incorporated by reference to the sections of the Company's definitive proxy
statement for its 1997 Annual Meeting of Stockholders (which is expected to be
filed with the Securities and Exchange Commission on or before March 27, 1997)
entitled Nominees for Election as Class III Directors who would hold office
until 2000, Class II Directors continuing in office until 1999, Class I
Directors continuing in office until 1998, Committees of the Board of Directors,
Compensation of Executive Officers and Directors, Ownership of Common Stock and
Certain Transactions-Certain Transactions and General-Compliance with the
Securities Exchange Act. However, the Compensation Committee Report and the
Performance Graph are specifically not incorporated by reference.
32
<PAGE>
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 36 of this
Report.
2. Financial Statement Schedules:
See Index to Financial Statement Schedules on page F-27 of this
Report.
3. Exhibits:
See items marked with "*" on the Exhibit Index beginning on page E-1
of this Report. Items so marked identify management contracts or
compensatory plans or arrangements as required by Item 14.
(b) 1. Reports on Form 8-K:
During the fourth quarter of 1996 the Registrant filed with the
Securities and Exchange Commission the following reports on Form 8-K
on the dates indicated to report the events described:
On December 4, 1996, a current report on Form 8-K was filed updating
current year's expected results, an increase in dividends from $.20
per share to $.23 per share and announcing the signing of an
agreement with the United Transportation Union subject to a January
ratification vote by UTU membership.
On December 4, 1996, a current report on Form 8-K was filed
reporting a contract agreement proposed between the Company and the
United Transportation Union.
(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.
33
<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 CORPORATION
By: /s/ DALE W. PHILLIPS
Dale W. Phillips
Vice President and Chief Financial Officer
Date: March 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title(s) Date
/s/ GILBERT H. LAMPHERE Chairman of the Board and Director March 19, 1997
Gilbert H. Lamphere
/s/ E. HUNTER HARRISON President and Chief Executive Officer March 19, 1997
E. Hunter Harrison (principal executive officer), Director
/s/ DALE W. PHILLIPS Vice President March 19, 1997
Dale W. Phillips and Chief Financial Officer
(principal financial officer)
/s/ JOHN V. MULVANEY Controller March 19, 1997
John V. Mulvaney (principal accounting officer)
/s/ GEORGE D. GOULD Director March 19, 1997
George D. Gould
/s/ WILLIAM B. JOHNSON Director March 19, 1997
William B. Johnson
/s/ ALEXANDER P. LYNCH Director March 19, 1997
Alexander P. Lynch
/s/ SAMUEL F. PRYOR, IV Director March 19, 1997
Samuel F. Pryor, IV
/s/ F. JAY TAYLOR Director March 19, 1997
F. Jay Taylor
/s/ JOHN V. TUNNEY Director March 19, 1997
John V. Tunney
/s/ ALAN H. WASHKOWITZ Director March 19, 1997
Alan H. Washkowitz
34
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENTS
SUBMITTED IN RESPONSE TO ITEM 8
35
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants.................................... F-1
Consolidated Statements of Income for the three years ended
December 31, 1996......................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995................... F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996......................................................... F-4
Consolidated Statements of Stockholders' Equity and Retained
Income for the three years ended December 31, 1996........................ F-5
Notes to Consolidated Financial Statements for the three years
ended December 31, 1996................................................... F-6
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Illinois Central Corporation:
We have audited the accompanying consolidated balance sheets of
Illinois Central Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
cash flows and stockholders' equity and retained income for each of the three
years in the period ended December 31, 1996. These financial statements and the
schedules referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Illinois Central
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
financial statement schedules herein are presented for purposes of complying
with the Securities and Exchange Commission's rules and are not part of the
basic financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 20, 1997
F1
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions, except share data)
Years Ended December 31,
1996 1995 1994
Revenues ......................... $ 657.5 $ 645.3 $ 595.3
Operating expenses:
Labor and fringe benefits ...... 192.0 194.8 184.2
Leases and car hire ............ 45.0 46.5 48.6
Diesel fuel .................... 38.4 33.2 31.5
Materials and supplies ......... 32.9 35.0 35.6
Depreciation and amortization .. 39.3 33.9 27.4
Casualty, insurance and losses . 12.1 17.4 23.7
Other taxes .................... 18.2 18.2 17.6
Other .......................... 38.4 35.8 26.4
Operating expenses ............... 416.3 414.8 395.0
Operating income ................. 241.2 230.5 200.3
Other income (expense), net ...... 8.6 (0.2) 1.0
Interest expense, net ............ (34.1) (29.5) (28.4)
Income before income taxes and
extraordinary ................... 215.7 200.8 172.9
Provision for income taxes ....... 79.1 71.0 59.0
Income before extraordinary item . 136.6 129.8 113.9
Extraordinary item, net .......... -- (11.4) --
Net income ....................... $ 136.6 $ 118.4 $ 113.9
Income per share:
Before extraordinary item ....... $ 2.21 $ 2.06 $ 1.78
Extraordinary item, net ......... -- (0.18) --
Net income per share ............. $ 2.21 $ 1.88 $ 1.78
Weighted average number of shares
of common stock and common stock
equivalents outstanding ........ 61,877,268 62,885,121 64,088,609
The following notes are an integral part of the consolidated financial
statements.
F2
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
December 31, December 31,
ASSETS 1996 1995
Current assets:
Cash and temporary cash investments $ 59.2 $ 5.0
Receivables, net of allowance for doubtful accounts
of $1.3 in 1996 and $2.0 in 1995 107.0 84.8
Secured financing receivable 32.6 -
Materials and supplies, at average cost 17.3 14.9
Assets held for disposition 1.6 7.7
Deferred income taxes - current 20.3 19.1
Other current assets 10.6 2.6
Total current assets 248.6 134.1
Investments 17.5 13.6
Properties:
Transportation:
Road and structures, including land 1375.0 1,052.1
Equipment 261.2 225.6
Other, principally land 41.5 41.0
Total properties 1677.7 1,318.7
Accumulated depreciation (53.6) (44.0)
Net properties 1624.1 1,274.7
Other assets 21.2 15.1
Total assets $ 1911.4 $ 1,437.5
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 6.3 $ 12.4
Accounts payable 60.4 56.6
Dividends payable 14.1 11.9
Income taxes payable 1.1 5.0
Casualty and freight claims 21.1 24.9
Employee compensation and vacations 21.4 16.9
Taxes other than income taxes 17.4 16.3
Accrued redundancy reserve 4.9 4.3
Other accrued expenses 85.3 61.9
Total current liabilities 232.0 210.2
Long-term debt 633.7 383.6
Deferred income taxes 356.6 246.2
Other liabilities and reserves 133.6 127.4
Contingencies and commitments (Note 15)
Stockholders' equity:
Common stock, par value $.001,
authorized 100,000,000 shares,
64,297,834 shares issued and 61,406,831 shares
outstanding 0.1 0.1
Additional paid-in capital 167.1 166.3
Retained income 453.8 368.2
Treasury stock (2,891,003 shares) (65.5) (64.5)
Total stockholders' equity 555.5 470.1
Total liabilities and stockholders' equity $ 1911.4 $ 1,437.5
The following notes are an integral part of the consolidated financial
statements.
F4
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
Years Ended December 31,
1996 1995 1994
Cash flows from operating activities :
Net income $ 136.6 $ 118.4 $ 113.9
Reconciliation of net income to
net cash provided
by (used for) operating activities :
Extraordinary item, net - 11.4 -
Depreciation and amortization 39.3 33.9 27.4
Deferred income taxes 36.4 30.7 17.4
Equity in undistributed earnings
of affiliates,
net of dividends received (0.5) (0.8) (0.4)
Net gains on sales of real estate (1.6) (0.1) (2.0)
Cash changes in working capital (15.0) (8.0) 54.3
Changes in other assets (6.1) (1.7) (4.4)
Changes in other liabilities and
reserves (5.2) (6.4) (0.7)
Net cash provided by operating
activities 183.9 177.4 205.5
Cash flows from investing activities :
Additions to properties (124.8) (128.8) (90.1)
Acquisitions (152.9) - -
Proceeds from sales of real estate 3.0 2.5 3.8
Proceeds from equipment sales 3.9 2.9 4.4
Proceeds from sales of investments 2.3 0.8 2.7
Secured financing (32.6) - -
Other 0.5 (4.4) (1.2)
Net cash (used for) investing activities (300.6) (127.0) (80.4)
Cash flows from financing activities :
Proceeds from issuance of debt 335.5 250.0 134.7
Principal payments on debt (77.4) (259.8) (184.6)
Net proceeds (payments) - Commercial Paper (37.0) 42.0 (23.1)
Dividends paid (48.7) (41.9) (35.7)
Stock repurchases (1.0) (59.8) (0.2)
Proceeds from exercise of stock options and
warrants 0.2 0.1 -
Purchase of subsidiary's common stock (0.7) (0.2) (2.7)
Net cash provided by (used for) financing
activities 170.9 (69.6) (111.6)
Changes in cash and temporary cash investments 54.2 (19.2) 13.5
Cash and temporary cash investments at beginning
of year 5.0 24.2 10.7
Cash and temporary cash investments at end
of year $ 59.2 $ 5.0 $ 24.2
Supplemental disclosure of cash flow information :
Cash paid during the year for:
Interest (net of amount capitalized) $ 31.6 $ 32.1 $ 28.9
Income taxes $ 50.9 $ 31.0 $ 42.7
The following notes are an integral part of the consolidated financial
statements.
F5
<PAGE>
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Retained Income
Shares Equity ($ in millions)
(000's) Total
Additional Stock-
Common Common Paid-in Retained Treasury holders'
Stock Stock Capital Income Stock Equity
Balance
December 31, 1993 63,922 $ 0.1 $ 164.1 $ 216.5 $ (3.3)$ 377.4
Issuance of Common Stock:
Exercise stock option 2 - - -
Restricted stock awards 22 - 0.9 0.9
Stock repurchased (31) (0.7) (0.7)
Dividends (37.4) (37.4)
Net income 113.9 113.9
Balance
December 31, 1994 63,915 0.1 165.0 293.0 (4.0) 454.1
Issuance of Common Stock:
Exercise stock options 4 - - -
Restricted stock awards - - 1.3 1.3
Stock repurchased/
forfeited (2,494) (60.5) (60.5)
Dividends (43.2) (43.2)
Net income 118.4 118.4
Balance
December 31, 1995 61,425 0.1 166.3 368.2 (64.5) 470.1
Issuance of Common Stock:
Exercise stock options 13 - 0.2 0.2
Restricted stock awards - - 0.6 0.6
Stock repurchased (31) (1.0) (1.0)
Dividends (51.0) (51.0)
Net income 136.6 136.6
Balance
December 31, 1996 61,407 $ 0.1 $ 167.1 $453.8 $(65.5) $ 555.5
The following notes are an integral part of the consolidated financial
statements.
F7
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The Company
Illinois Central Corporation (the "Company"), a holding company, was
incorporated under the laws of Delaware. The Company, through its wholly-owned
subsidiaries, Illinois Central Railroad Company ("ICRR") and CCP Holdings, Inc.
("CCPH"), is principally engaged in the rail freight transportation business.
ICRR operates 2,600 miles of main line track between Chicago and the Gulf of
Mexico, primarily transporting chemicals, grain and milled grain, coal, paper
and intermodal commodities. CCPH has two principal operating subsidiaries - the
Chicago Central and Pacific Railroad ("CCPR") and the Cedar River Railroad
("CRR") - which together comprise a Class II railroad system operating 850 miles
of track. CCPR operates from Chicago to Omaha, Nebraska, with connecting lines
to Cedar Rapids and Sioux City, Iowa. CRR runs from Waterloo, Iowa to Albert
Lea, Minnesota. IC Financial Services, the Company's remaining direct
subsidiary, conducts financing operations for railroad equipment and is the
investment vehicle for non-rail related activities including terminal
operations.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company 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. Results for 1996 include CCPH from June 13, 1996 (date of
acquisition). See Note 17.
Properties
Depreciation is computed by the straight-line method and includes
depreciation on properties under capital leases. The depreciation rates for the
equipment owned by the Company's finance subsidiary are based on estimated
useful life and anticipated salvage value. Lives used range from 18 to 20 years.
The operating subsidiaries use the composite method of depreciation for track
structure, other road property, and equipment. In the case of routine
retirements, removal cost less salvage recovery is charged to accumulated
depreciation. Expenditures for maintenance and repairs are charged to operating
expense.
The approximate ranges of annual depreciation rates for major property
classifications are as follows:
ICRR CCPH
Road properties.............................1% - 8% 2% - 16%
Transportation equipment....................1% - 7% 8% - 14%
ICRR's rates were approved by the predecessor of the Surface
Transportation Board ("STB"), an independent agency of the Department of
Transportation.
F6
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenues
Revenues are recognized based on services performed and include
estimated amounts relating to movements in progress for which the settlement
process is not complete. Estimated revenue amounts for movements in progress are
not significant.
Income Taxes
Deferred income taxes are accounted for on the asset and liability
method by applying enacted statutory tax rates to differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. The resulting deferred tax liabilities and assets represent taxes
to be paid or collected in the future when the related assets and liabilities
are recovered and settled, respectively.
Cash and Temporary Cash Investments
Cash in excess of operating requirements is invested in certain funds
having original maturities of three months or less. These investments are stated
at cost, which approximates market value.
Income Per Share
Income per common share of the Company is based on the weighted average
number of shares of common stock and common stock equivalents outstanding for
the period. Dilution, which could result if all outstanding common stock
equivalents were exercised, is not significant.
Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company has entered
into various diesel fuel collar agreements with the objective of mitigating
significant fluctuations in fuel prices. Premiums paid for the purchase of these
agreements are amortized to fuel expense over the terms of the agreements.
Unamortized premiums are included in Other Assets in the Consolidated Balance
Sheets. Amounts receivable or payable under the collar agreements are accrued as
increases or decreases to Diesel Fuel Expense.
See Note 7.
Casualty Claims
The Company accrues for injury and damage claims based on actuarially
determined estimates of the ultimate costs associated with asserted claims and
claims incurred but not reported. As a result of significant improvements in
safety performance and enhancements in claim and settlement approaches, the
Company has experienced continuing reductions in its final claim settlement
amounts. It is reasonably possible that future actuarial valuations will reflect
additional improvements that could result in a reduction in the near term to
casualty costs and related expenses.
F7
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock-Based Compensation
The Company has elected to adopt SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), for disclosure purposes only. The
Company accounts for compensation under its Long-Term Incentive Plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 14.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain items relating to prior years have been reclassified to conform
to the presentation in the current year.
3. Stock Repurchase Program
In 1994, the Board of Directors adopted a plan to target approximately
75% to 150% of projected free cash flow after capital expenditures and
dividends, subject to maintaining a target debt-to-capital ratio of not more
than 45%, for the repurchase of Common Stock. The Board annually reviews the
appropriate level of repurchases for the following year. For 1995, the Board
authorized the purchase of $60 million of Common Stock. Purchases in 1994 and
1995 under the program, 2,475,000 shares of Common Stock, were funded by a
special $60 million dividend from ICRR which was declared in 1994 and paid in
1995. Further purchases are dependent on market conditions, the economy, cash
needs and alternative investment opportunities. The Board determined that
various capital needs such as the acquisition of CCPH (see Note 17) precluded
stock repurchases under the program for 1996. However, open market purchases in
conjunction with option exercises did occur in 1996.
4. Extraordinary Item
In 1995, ICRR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The prepayment
resulted in an extraordinary loss of $18.4 million, $11.4 million after-tax. The
loss resulted from the premium paid, the write-off of unamortized financing fees
and costs associated with the prepayment. The monies used to fund the prepayment
were provided by commercial paper, the net proceeds of the 7.75% Notes and $40
million from existing lines of credit. See Note 9.
F8
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. Other Income (Expense), Net
Other Income (Expense), Net consisted of the following ($ in millions):
Years Ended December 31,
1996 1995 1994
Rental income, net ........................ $ 2.9 $ 3.5 $ 3.3
Net gains (losses) on sales of real estate 1.6 (.1) 2.0
Equity in undistributed
earnings of affiliates ................. .8 .9 .7
Sales of accounts receivable (see Note 10) (2.9) (3.2) (2.2)
Terminated merger discussions with
Kansas City Southern ................... -- -- (2.7)
Sale of RAIL (see below) .................. 7.3 -- --
Other, net ................................ (1.1) (1.3) (.1)
Other Income (Expense), Net ............ $ 8.6 $ (.2)$ 1.0
On October 3, 1996, ICRR sold its investment in an industry captive
insurance company which resulted in a one-time gain of approximately $.07 per
share.
6. Supplemental Cash Flow Information
Cash changes in components of working capital, exclusive of Current
Maturities of Long-Term Debt, included in the Consolidated Statements of Cash
Flows were as follows ($ in millions):
Years Ended December 31,
1996 1995 1994
Receivables, net .............. $ (5.1) $ (17.6) $ 46.3
Materials and supplies ........ 1.0 .8 4.4
Other current assets .......... (7.5) .7 .6
Accounts payable .............. (12.2) 2.2 2.8
Income taxes payable .......... (8.1) 11.1 (1.3)
Accrued redundancy reserve ... .6 (2.5) --
Other current liabilities ..... 16.3 (2.7) 1.5
Cash Changes in Working Capital $ (15.0) $ (8.0) $ 54.3
ICRR entered into capital leases of $7.1 million covering 328 freight
cars in 1995 and $24.7 million covering 65 locomotives and 1,623 freight cars in
1994. See Note 8 for the present value of the minimum lease payments.
F9
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7. Materials and Supplies
Materials and Supplies, valued using the average cost method, consist of
track material, switches, car and locomotive parts and fuel.
As of December 31, 1996, ICRR was party to one diesel fuel collar
agreement under which the Company receives or makes monthly payments based on
the monthly average near-by contract price for Heating Oil #2 traded on the New
York Mercantile Exchange (the "Contract Price"), which was $.722 per gallon for
December 1996. Under the agreement, ICRR receives or makes monthly payments on
800,000 notional gallons based on the excess or deficiency of the Contract Price
over or under $.55 or $.43 per gallon, respectively.
8. Leases
As of December 31, 1996, the Company leased 5,437 of its cars and 40 of
its locomotives. These leases generally have original terms of 15 years and
expire between 1997 and 2003. Under the terms of the majority of its lease
agreements, the Company 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.
The Company also leases office facilities, computer equipment and vehicles.
Net obligations under capital leases at December 31, 1996 and 1995,
included in the Consolidated Balance Sheets were $34.5 million and $23.2
million, respectively. The gross assets under capitalized leases were $37.4
million and $40.8 million at December 31, 1996 and 1995, respectively, and are
included in Properties in the Consolidated Balance Sheets.
At December 31, 1996, minimum rental payments under capital and
operating leases that have initial or remaining noncancellable terms in excess
of one year were as follows ($ in millions):
Capital Operating
Leases Leases
1997.................................... $ 6.7 $ 25.0
1998.................................... 6.3 22.5
1999.................................... 6.6 21.4
2000.................................... 5.5 13.4
2001.................................... 6.6 12.3
Thereafter.............................. 14.4 61.4
Total minimum lease payments........ 46.1 $156.0
Less: Imputed interest.................. 11.6
Present value of minimum payments... $34.5
Total rent expense applicable to noncancellable operating leases
amounted to $26.7 million in 1996, $19.9 million in 1995 and $38.1 million in
1994. Most of the leases provide that the Company pay taxes, maintenance,
insurance and certain other operating expenses.
F10
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. Long-Term Debt and Interest Expense
Long-Term Debt at December 31, consisted of the following ($ in
millions):
1996 1995
Equipment obligations, due annually to 2000,
6.11% to 9.254% .... $ 7.8 $ 9.7
Debentures and other debt, due 1997 to 2056,
4.5% to 10.89% ...... 27.6 10.2
Debentures, due 2096, 7.7% ...................... 125.0 --
Commercial Paper, at average interest rate 5.61%
in 1996 and 6.19% in 1995....................... 20.0 57.0
Notes, due 2003, 6.75% .......................... 100.0 100.0
Notes, due 2005, 7.75% .......................... 100.0 100.0
Medium term notes, due 1998 to 2007,
6.27% to 7.12% .............. 230.0 100.0
Capitalized leases (see Note 8) ................. 30.4 12.8
Unamortized discount, net ....................... (7.1) (6.1)
Total Long-Term Debt ............... $ 633.7 $ 383.6
At December 31, 1996, the aggregate annual maturities and sinking fund
requirements for debt payments for 1997 through 2002 and thereafter were $6.3
million, $46.2 million, $39.9 million, $34.3 million, $127.8 million, $3.5
million and $382.0 million, respectively. The weighted-average interest rate for
1996 and 1995 on total debt excluding the effect of discounts, premiums and
related amortization was 7.2% and 8.0%, respectively.
In December 1996, ICRR issued $125 million aggregate amount of 100-year,
7.7% debentures due September 15, 2096. These bonds may not be redeemed until
2026 and then only at a premium which declines to par in 2056.
In 1995, ICRR prepaid the holders of its $160 million Senior Notes at
face value plus accrued interest and a prepayment penalty. The monies used to
fund the prepayment were provided by commercial paper, the net proceeds of the
$100 million 7.75% 10-year notes due May 2005 and $40 million from existing
lines of credit. In connection with the prepayment, ICRR amended and restated
its revolver with its bank lending group (the "Revolver").
ICRR has a commercial paper program whereby a total of $200 million can
be issued and outstanding at any one time. The commercial paper is rated A2 by
S&P, P2 by Moody's and F2 by Fitch and is supported by the Revolver. ICRR views
commercial paper as a significant long-term funding source and intends to issue
replacement debt as maturities occur. Therefore, the $20 million outstanding at
December 31, 1996, has been classified as long-term.
ICRR has a $250 million Revolver that expires in 2001. ICRR pays an
annual fee of 15 basis points on the Revolver and the Eurodollar offered rate
plus 22.5 basis points for any borrowings. The Revolver may be used as backup
for commercial paper and for general corporate purposes. The
F11
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
available amount is reduced by the outstanding amount of commercial paper
borrowings and any letters of credit issued on behalf of ICRR under the
facility. No amounts have been drawn under the Revolver. At December 31, 1996,
the Revolver was limited to $230 million because $20 million in commercial paper
was outstanding.
CCPH has a floating rate revolving loan agreement for an unsecured $50
million (the "CCPH Revolver"). The CCPH Revolver has a $5 million sublimit for
letters of credit and expires in 2001. The CCPH Revolver can be used for general
corporate purposes. The annual commitment fee is 25 basis points and borrowings
are at the Eurodollar offered rate plus 62.5 basis points. At December 31, 1996,
$15.5 million was outstanding.
The Company has a $50 million 364-day floating-rate revolving loan
agreement which expires in August 1997. In June 1996, the Company borrowed $40
million under this agreement to acquire CCPH (see Note 17), which was repaid in
June. At December 31, 1996, no amounts were drawn under this agreement. The
Company's financing/leasing subsidiaries have approximately $9.6 million in
long-term borrowing agreements for which the original proceeds were used to
acquire a total of 61 locomotives during 1993 and 1991. Such borrowings are
secured by the locomotives which are leased to ICRR and mature in 1999 and 2000.
Various borrowings of the Company's subsidiaries are governed by
agreements which contain certain affirmative and negative covenants customary
for facilities of this nature including restrictions on additional indebtedness,
investments, guarantees, liens, distributions, sales and leasebacks, and sales
of assets and capital stock. Some also require satisfaction of certain financial
tests, including a leverage ratio, an earnings before interest and taxes to
interest charges ratio, and minimum consolidated tangible net worth
requirements. See Note 13.
Interest Expense, Net consisted of the following ($ in millions):
Years Ended December 31,
1996 1995 1994
Interest expense........................ $37.4 $32.2 $31.2
Less:
Interest capitalized ................ 1.7 1.3 1.4
Interest income...................... 1.6 1.4 1.4
Interest Expense, Net................... $34.1 $29.5 $28.4
F12
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Receivables
In 1994, ICRR entered into a revolving agreement to sell undivided
percentage interests in certain of its accounts receivable, with recourse, to a
financial institution. The agreement allows for sales of accounts receivable up
to a maximum of $50 million at any one time. ICRR services the accounts
receivable sold under the agreement and retains the same exposure to credit loss
as existed prior to the sale. During June 1995, the agreement was extended one
year and now expires in June 1998. At December 31, 1996, $48 million had been
sold pursuant to the agreement. Costs related to the agreement fluctuate with
changes in prevailing interest rates. These costs, which are included in Other
Income (Expense), Net, were $2.9 million, $3.2 million and $2.2 million for
1996, 1995 and 1994, respectively.
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
issued by the Financial Accounting Standards Board in 1996 and effective for
1997, provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. The accounting for the
ICRR's sales of accounts receivable agreement is impacted by this standard. As a
result, the agreement is expected to be modified to comply with the SFAS No. 125
requirements so that the accounting and reporting for the sale of the ICRR's
accounts receivable will remain unchanged.
At December 31, 1996, the Company had a $32.6 million receivable in
connection with the secured financing of freight equipment acquired by an
unrelated third party. This amount was repaid on January 3, 1997.
11. Benefit Plans
All employees of ICRR and CCPH are covered under the Railroad Retirement
System instead of Social Security. Additionally, various retirement plans,
postemployment benefits and postretirement benefits are provided.
Retirement Plans.
ICRR has two qualified plans permitting participants to make "pre-tax"
contributions of their salary up to Internal Revenue Code limitations and each
contains a company match provision. The union plan, which started in mid-1995,
allows union employees covered by local contracts to participate. ICRR matches
25% of the first 4% of employee contributions. The management plan's matching
provisions are 50% of the first 6% of salary deferral. The management plan also
contains a separate defined contribution portion of 2% of each employee's
salary. Expenses related to both plans were $1.2 million, $1.1 million, and $1.0
million in 1996, 1995 and 1994, respectively. All ICRR contributions are fully
vested upon contribution.
ICRR also has a supplemental executive retirement plan ("SERP") which
covers officers and certain other management employees. The SERP provides for a
monthly benefit equal to 35% of a participant's final average compensation as
defined in the plan. The monthly benefit is subject to offsets such as employer
contributions to the 401(k) plan. The plan was adopted in 1994. The cost was not
material in the three years ended December 31, 1996.
F13
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's former Chairman, President and Chief Executive Officer is
covered by a non-qualified, unfunded supplemental retirement benefit agreement
which provides for a defined benefit payable annually, in the amount of $250,000
per year, until the year 2008.
The Company's non-employee directors are covered by a non-qualified,
unfunded retirement plan. This plan provides an annual payment equal to the
annual retainer at the time of the director's retirement and is paid for the
number of years the director served up to a maximum of ten years. The 1996 and
1995 expenses for the plan were $.8 million and $.9 million, respectively.
Salary Deferral Plans. In addition to the 401(k) plan, all officers and
certain other management employees may elect to defer up to 50% of base salary
and 100% of annual bonus. Participant deferrals are fully vested and earn
interest at a specified, variable rate. Approximately $1.1 million, $.5 million
and $.3 million were deferred in 1996, 1995 and 1994 respectively.
Beginning in 1995 the Company's non-employee directors may also defer
their annual retainer and meeting fees. All deferrals are 100% vested and earn
interest at a specified, variable rate.
Deferrals in 1996 and 1995 were not material.
Unfunded Plan. ICRR has an unfunded plan whereby 10% of an officer's
combined salary and bonus in excess of a wage offset factor ($104,500 in 1996)
is accrued and earns interest. Amounts accrued are paid when the employee leaves
the Company, normally at retirement. Expenses for this plan were $.4 million,
$.4 million and $.3 million in 1996, 1995 and 1994, respectively.
Postemployment Benefit Plans. The Company provides certain
postemployment benefits such as long-term salary continuation and waiver of
medical and life insurance co-payments while on long-term disability.
Postretirement Plans. In addition to retirement plans, ICRR has three
benefit plans which provide some postretirement benefits to most former
full-time salaried employees and selected former union-represented employees.
The medical plan for salaried retirees is contributory, with retiree
contributions adjusted annually if expected medical cost inflation rate exceeds
9.5%, and contains other cost sharing features such as deductibles and
co-payments. ICRR's contribution will be fixed at the 1999 year end rate for all
subsequent years. Salaried retirees are covered by a life insurance plan which
provides a nominal death benefit and is non-contributory. The medical plan for
locomotive engineers who retired under a special early retirement program in
1987 provides non-contributory coverage until age 65. All benefits under this
plan terminate in 1998. There are no plan assets and ICRR funds these benefits
as claims are paid.
CCPH provides to employees of CCPR postretirement medical benefits to
age 65 if the employee attained age 60, worked for CCPR's previous owner, worked
for CCPR since it commenced operations and between the two employers rendered at
least 30 years continuous service. These benefits are subject to deductibles,
co-insurance provisions and other limitations. CCPH may amend or change the plan
periodically subject to its union labor agreements. There are no plan assets and
CCPH funds these benefits as claims are paid.
F14
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The accumulated postretirement benefit obligations ("APBO") of the
postretirement plans were as follows ($ in millions):
December 31,
1996 1995
Medical Life Total Total
Accumulated postretirement benefit
obligation:
Retirees ........................ $ 13.4 2.1 $ 15.5 $ 16.4
Fully eligible active
plan participants .... 1.0 -- 1.0 .9
Other active plan participants .. 5.1 -- 5.1 3.4
Total APBO ............ $ 19.5 2.1 21.6 20.7
Unrecognized net gain ........... 18.3 18.4
Accrued liability for
postretirement benefits ......... $ 39.9 $ 39.1
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1995. As a result of
the change in general interest rates on high quality fixed rate investments in
1996, the Company increased the weighted-average discount rate to 7.75% as of
December 31, 1996. The change in rates resulted in approximately $.7 million
actuarial gain. The actuarial gains and losses along with actual experience
gains, primarily fewer claims and lower medical rate inflation, resulted in a
total $18.3 million unrecognized net gain as of December 31, 1996. In accordance
with SFAS No. 106, the excess gain is subject to $1.2 million annual
amortization based on an amortization period of approximately 13 years. The
components of the net periodic postretirement benefits cost were as follows ($
in millions):
Years Ending December 31,
1996 1995
Service costs......................... $ .2 $ .1
Interest costs........................ 1.5 1.7
Net amortization of excess gain....... (1.2) (1.2)
Net periodic postretirement
benefit costs....................... $ .5 $ .6
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (e.g., health care cost trend rate) for the medical
plans is 11.0% for 1997 and is assumed to decrease gradually to 6.25% by 2002
and remain at that level thereafter. The health care cost trend rate assumption
normally has a significant effect on the amounts reported; however, the plan
limits annual inflation for ICRR's portion of such costs to 9.5% each year and
caps ICRR's contribution at the actual 1999 level. Therefore, an increase in the
assumed health care cost trend rates by one percentage point in each year would
have no impact on the Company's accumulated postretirement benefit obligation
for the medical plans as of December 31, 1996, or the aggregate of the service
and interest cost components of net periodic postretirement benefit expense in
future years.
F15
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
12. Provision for Income Taxes
The Provision for Income Taxes for continuing operations consisted of
the following ($ in millions):
Years Ended December 31,
1996 1995 1994
Current income tax:
Federal............................ $38.1 $35.8 $37.5
State.............................. 4.6 4.5 4.1
Deferred income taxes................ 36.4 30.7 17.4
Provision for Income Taxes.......... $79.1 $71.0 $59.0
The effective income tax rates for the years ended December 31, 1996,
1995 and 1994, were 37%, 35% and 34%, respectively. See Note 4 for the tax
benefits associated with the 1995 extraordinary loss.
At December 31, 1996, the Company for tax or financial reporting
purposes had no Federal net operating loss carryovers.
In 1996, 1995 and 1994 tax benefits of $1.8 million, $4.3 million and
$5.0 million, respectively, were recorded to reflect the favorable resolution of
prior-period tax issues.
The items which gave rise to differences between the income taxes
provided for continuing operations in the Consolidated Statements of Income and
the income taxes computed at the statutory rate are summarized below ($ in
millions):
Years Ended December 31,
1996 1995 1994
Expected tax expense computed
at statutory rate............. $75.5 35% $70.3 35% $60.5 35%
Dividends received exclusion... (.2) - (.1) - (.9) -
State income taxes, net
of Federal tax effect......... 6.1 3 5.4 2 3.6 2
Favorable resolution of
prior period tax issues....... (1.8) (1) (4.3) (2) (5.0) (3)
Other items, net............... (.5) - ( .3) - .8 -
Provision for Income Taxes..... $79.1 37% $71.0 35% $59.0 34%
Temporary differences between book and tax income arise because the tax
laws require that certain items of income and expense be treated differently
than under generally accepted accounting principles. As a result, the book
provisions for taxes differ from the actual taxes reported on the income tax
returns. The net results of such differences are included in Deferred Income
Taxes in the Consolidated Balance Sheets.
F16
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deferred Income Taxes consisted of the following ($ in millions):
December 31,
1996 1995
Deferred tax assets.............. $ 77.6 $ 80.5
Less: Valuation allowance........ (1.5) (1.8)
Deferred tax assets,
net of valuation allowance... 76.1 78.7
Deferred tax liabilities......... (412.4) (305.8)
Deferred Income Taxes............ $(336.3) $(227.1)
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 ($63.7 million) and safe harbor leases ($10.8 million). Major types
of deferred tax liabilities are: accelerated depreciation ($376.7 million), land
basis differences ($16.5 million) and debt marked to market ($2.5 million).
The liability for deferred income taxes increased by $72.8 million
attributable to the acquisition of CCPH.
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.
13. Common Stock and Dividends
The Company is authorized to issue 100,000,000 shares of Common Stock,
par value $.001. At December 31, 1996, there were 61,406,831 shares of Common
Stock outstanding. Each holder of Common Stock is entitled to one vote per share
in the election of directors and on all matters submitted to a vote of
stockholders. Subject to the rights and preferences of redeemable preferred
stock, if any, each share of Common Stock is entitled to receive dividends as
may be declared by the Board of Directors out of funds legally available and to
share ratably in all assets available for distribution to stockholders upon
dissolution or liquidation. No holder of Common Stock has any preemptive right
to subscribe for any securities of the Company. No shares of preferred stock
were outstanding at December 31, 1996 and 1995.
On January 25, 1996, the Board of Directors declared a three-for-two
stock split on Common Stock. The split was effected in the form of a stock
dividend and was paid March 14, 1996. Approximately 21 million shares were
issued from declared but unissued shares. Fractional shares were settled in
cash. The effects of the stock split are presented herein as if it took place as
of the
F17
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
earliest period shown. In 1992, the Board of Directors also authorized a
three-for-two stock split on Common Stock.
The Board of Directors has a policy of quarterly dividends on the Common
Stock of the Company. Future dividends may be dependent on the ability of its
subsidiaries to pay dividends to the Company. Covenants of ICRR's Revolver and
CCPH's Revolver require specified levels of tangible net worth. At December 31,
1996, ICRR exceeded its tangible net worth covenant by $26.9 million and CCPH
exceeded its tangible net worth covenant by $22.8 million.
See Note 14 for discussion of restricted stock awards in 1994 and 1993.
14. Stock Based Compensation
The Company grants stock options to employees and directors under the
1990 Long-Term Incentive Plan and has two employee stock purchase plans. The
Company accounts for these plans under APB Opinion 25 under which no
compensation cost has been recognized.
Long-Term Incentive Plan. Under the Company's 1990 Long-Term Incentive
Plan (the "Long-Term Incentive Plan") 3,426,150 shares of Common Stock are
reserved for issuance upon the exercise of incentive options that may be awarded
by the Compensation Committee to directors and selected salaried employees of
the Company and its affiliates under the Executive Compensation Plan and to
certain other individuals who possess the potential to contribute to the future
success of the Company. This amount includes 300,000 shares added following the
approval of Incentive 2000 for Outside Directors at the 1996 Annual Meeting of
Stockholders. The Compensation Committee also has the authority under the
Long-Term Incentive Plan to award stock appreciation rights, restricted stock
and restricted stock units, dividend equivalents and other stock-based awards,
and to determine the consideration to be paid by the participant for any awards,
any limits on transfer of awards, and, within certain limits, other terms of
awards. In the case of options (other than options granted to directors who are
not full-time employees of the Company ("Outside Directors"), as described
below) granted under the Long-Term Incentive Plan, the Compensation Committee
has the power to determine the exercise price of the option (which cannot be
less than 50% of the fair market value on the date of grant of the shares
subject to the option), the term of the option, the time and method of exercise
and whether the options are intended to qualify as "incentive stock options"
pursuant to Section 422A of the Internal Revenue Code. Under the Executive
Compensation Plan the grant price is limited to fair market value. The
Compensation Committee awarded stock options to employees under the Long-Term
Incentive Plan for the first time in 1993. Awards, all at the closing market
price on date of grant, vest ratably over four years and expire 10 years from
date of grant.
Outside Directors also participate in the Long-Term Incentive Plan. On
the date of each Annual Meeting, each Outside Director who serves immediately
prior to such date and who will continue to serve after such date (whether as a
result of such director's re-election or by reason of the continuation of such
director's term) is granted an option to purchase 2,250 shares of Common Stock.
Options granted to Outside Directors entitle such persons to purchase Common
Stock at the fair market value of such Common Stock on the date the option was
granted. Options held by Outside Directors expire 10 years from the date of
grant, or, if earlier, one year following termination of service as a director
for any reason other than death or disability. Such options become exercisable
in full
F18
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
six months after their date of grant. In 1996, each Outside Director was granted
an option for 37,500 shares in connection with the Incentive 2000 Plan approved
by the Stockholders at the 1996 Annual Meeting. These options are exercisable
after December 31, 1999, if the Company's stock price is at least $43.000 for
twenty consecutive days from January 1, 2000 until April 30, 2001.
The Committee awarded 22,500 shares and 37,500 shares of restricted
stock to eligible employees of ICRR in 1994 and 1993, respectively. No cash
payments are required by the individuals. Shares awarded may not be sold,
transferred, or used as collateral by the holders until the shares awarded
become free of the restrictions. Restrictions lapse over a four-year period. All
shares still subject to restrictions will be forfeited and returned to the plan
if the employee's relationship with ICRR is terminated. No shares were forfeited
in 1996. A total of 4,125 shares and 150 shares were forfeited in 1995 and 1994,
respectively. If the employee becomes disabled, or dies, or a change in control
occurs during the vesting period, the restrictions lapse at that time. In
connection with early retirements, 43 and 7,632 shares vested in 1996 and 1995,
respectively. The compensation expense resulting from the award of restricted
stock is valued at the closing market price of the Company's Common Stock on the
date of the award, recorded as a reduction of Stockholders' Equity, and charged
to expense evenly over the vesting period. Compensation expense was $.8 million,
$1.2 million and $.9 million in 1996, 1995 and 1994, respectively.
Stock Purchase Programs. The Company has two stock purchase programs.
The basic program is open to all employees and permits employees to acquire
Company common stock via payroll deductions. The other plan is the Discounted
Stock Purchase Plan ("Discounted Plan"). Only management employees are eligible
to participate in the Discounted Plan which provides for the investment of up to
15% of an eligible employee's salary in the common stock of the Company at a 15%
discount. A participant must continue employment with the Company or its
subsidiaries for two years to retain the 15% discount, and, during that period,
the shares will be held by the plan's administrator. If the employee withdraws
shares or directs the sale of shares within two years, the discount must be
repaid in cash or relinquished shares. No such repayment is required in the
event of death, retirement, disability or change of control of the Company.
Costs associated with these programs have been immaterial to date.
F19
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes changes in shares under options, after
giving effect to the 3-for- 2 stock split declared in January 1996:
Weighted Weighted Weighted
Average Average Fair Average
Exercise Value On Exercisable Exercise
Options Price Grant Date At Year End Price
Outstanding 12-31-94 1,063,500 $16.822 478,500 $14.417
Granted 535,274 23.158 $9.105
Exercised (a) (4,500) 16.834
Forfeited (a) (11,250) 20.833
Outstanding 12-31-95 1,583,024 18.936 812,381 $17.007
Granted 848,250 29.803 $8.247
Exercised (b) (13,125) 22.367
Forfeited (c) (3,375) 22.389
Outstanding 12-31-96 2,414,774 22.730 1,269,355 $18.873
(a) Pre-1995 option awards
(b) Includes 7,875 pre-1995 option awards
(c) Includes 1,125 pre-1995 option awards
The last date exercisable for options granted to Outside Directors is
May 8, 2006, and March 8, 2006, for those granted to employees.
Had the Company adopted the compensation cost recognition methods
outlined in FASB Statement No. 123 "Accounting for Stock-Based Compensation "
("SFAS 123"), the Company's 1996 and 1995 net income and earnings per share
would have been as follows - on a pro forma basis - ($ in millions, except share
data):
1996 1995
As Reported Pro Forma Actual Pro Forma
Income before Extraordinary Item $136.6 $135.0 $129.8 $129.3
Net Income $136.6 $135.0 $118.4 $117.9
EPS before Extraordinary Item $ 2.21 $ 2.17 $ 2.06 $ 2.06
EPS - Net Income $ 2.21 $ 2.17 $ 1.88 $ 1.88
F20
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Of the options outstanding at December 31, 1996, 1,269,355 have exercise
prices between $5.333 and $29.375, with a weighted average exercise price of
$18.873, a weighted average remaining contractual life of 8 years and all are
exercisable. The remaining 1,145,418 options, which are not exercisable, have
exercise prices between $16.583 and $37.875 with a weighted average price of
$27.004 and a weighted average remaining contractual life of 8 years.
The fair value of each option is estimated on the grant date using the
Black-Scholes option pricing models with the following weighted-average
assumptions:
1996 1995
Risk-free interest rate(s) 6.7% and 7.0% 7.2% and 7.3%
Dividend yields 3.2% and 2.7% 2.9% and 3.0%
Days to expiration 3652 3652
Volatility 31.4% 33.1% and 32.9%
15. Contingencies, Commitments and Concentration of Risks
The Company has unconditionally guaranteed its finance subsidiary's
$9.6 million obligations via a pledge of the stock of the finance subsidiary.
The Company is self-insured for the first $5 million of each loss. The
Company carries $245 million of liability insurance per occurrence, subject to
an annual cap of $335 million in the aggregate for all losses. This coverage is
considered by the Company's management to be adequate in light of the Company's
safety record and claims experience.
The Company has guaranteed repayment of certain indebtedness of a
jointly owned company aggregating $7.8 million. The Company's primary share is
$1.0 million; the remainder is a primary obligation of other unrelated owner
companies.
There are various regulatory proceedings, claims and litigation pending
against the Company. While the ultimate amount of liability that may result
cannot be determined, in the opinion of the Company's management, based on
present information, adequate provisions for liabilities have been recorded.
Environmental Contingencies. The Company is aware of approximately 25
contaminated sites at which it is probably liable for some portion of any
required clean up. Of these, 17 involve contamination primarily by diesel fuel
which can be remediated without material cost. Five other sites
F21
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 Company loss
or liability is probable, the Company has recorded an estimated liability at the
time when a reasonable estimate of remediation cost and Company liability can
first be determined. Adjustments to initial estimates are recorded as necessary
based upon additional information developed in subsequent periods. Estimates of
the Company`s potential financial exposure for environmental claims or incidents
are necessarily imprecise because of the difficulty of determining in advance
the nature and extent of contamination, the varying costs of alternative methods
of remediation, the regulatory clean-up standards which will be applied, and the
appropriate allocation of liability among multiple responsible parties. At
December 31, 1996, the Company estimated the probable range of its liability to
be $17 million to $53 million, and in accordance with the provisions of SFAS No.
5 had a reserve of $17 million for environmental contingencies. This amount is
not reduced for potential insurance recoveries or third-party 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 the Company leased substantial amounts of property to
industrial tenants, and ICRR continues to haul hazardous materials which are
subject to occasional accidental release. Because the ultimate cost of known
contaminated sites cannot be definitively established and because additional
contaminated sites yet unknown may be discovered or future operations may result
in accidental releases, no assurance can be given that the Company 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 the Company`s financial
position, results of operations, cash flow or liquidity.
16. 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 $52.8 million and $1.4 million included in Cash
and Temporary Cash Investments as of December 31, 1996 and 1995, respectively,
have been classified and accounted for as held to maturity securities.
Investments. The Company has investments of $11.7 million in 1996 and $8.2
million in 1995 for which there are no quoted market prices. These investments
are in joint railroad facilities, railroad terminal associations, switching
railroads and other transportation companies. For these investments,
F22
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the carrying amount is a reasonable estimate of fair value. The Company's
remaining investments ($5.8 million in 1996 and $5.4 million in 1995) are
accounted for by the equity method.
Long-Term Debt. The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities.
Derivative Financial Instruments. The fair value of diesel fuel collar
agreements is the estimated amount that the Company would receive or pay to
terminate the agreements as of year end, taking into account the current credit
worthiness of the agreement counterparties.
The estimated fair values of the Company's financial instruments are as
follows ($ in millions):
December 31,
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and temporary cash investments $ 59.2 $ 59.2 $ 5.0 $ 5.0
Investments........................... 11.7 11.7 8.2 8.2
Fuel Hedge............................ .1 .1 - -
Debt.................................. (640.0) (634.2) (396.0) (432.7)
17. Acquisition of CCP Holdings, Inc.
On June 12, 1996, ICRR used proceeds it received from the issuance of
Commercial Paper (average interest rate 5.52% and average maturity 30 days) to
pay a $50.0 million dividend to the Company and to loan $59.9 million (5.625%
per annum) to the Company. The Company used the $109.9 million and its bank
credit lines to acquire CCPH. The transaction closed June 13, 1996, following
the effective date of the approval order issued by the STB. The purchase price
was $147.1 million in cash and the assumption of approximately $2.5 million in
debt and approximately $17.3 million of capitalized lease obligations existing
on acquisition date. Additionally, under the Stock Purchase Agreement, the
actual purchase price is subject to various potential adjustments for up to one
year after the closing date.
The acquisition has been accounted for under the purchase method of
accounting. Accordingly, the Company has allocated the purchase cost to CCPH's
assets and liabilities as of June 13, 1996. The allocation of the purchase cost
has been based upon preliminary estimates. Revisions to the carrying values of
CCPH's assets and liabilities will be made as detailed studies of CCPH's
operations, assets and obligations are completed. In general, the purchase price
allocations will be
F23
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
subject to adjustment for one year following the acquisition for preacquisition
contingencies and adjustments to the purchase price.
A summary of the CCPH assets acquired and liabilities assumed at June
13, 1996, after reflecting the preliminary purchase accounting allocations, is
set forth below ($ in millions):
Cash and Cash Equivalents $ 4.9 Accounts Payable $(16.8)
Accounts Receivable 14.1 Other Current Liabilities (10.2)
Other Current Assets 12.3 Long-Term Debt (21.3)
Properties 256.0 Deferred Income Taxes (79.8)
Other Liabilities and Reserves (12.2)
The following unaudited pro-forma results of the Company are
presented to reflect the Company's results of operations for the years ended
December 31, 1996, and 1995, as if CCPH had been acquired on January 1, 1996,
and January 1, 1995, respectively ($ in millions, except share data):
Years Ended December 31,
1996 1995
(Unaudited)
Revenues $697.3 $719.8
Operating income 255.5 251.5
Income before extraordinary item 143.2 135.5
Net income 143.2 124.1
Income per share:
- Before extraordinary item $ 2.32 $ 2.15
- Net Income $ 2.32 $ 1.97
F24
<PAGE>
18. Selected Quarterly Financial Data - (Unaudited) ($ in millions,
except share data):
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
Revenues...................... $162.6 $153.4 $167.9 $173.6
Operating Income.............. 60.3 56.4 61.5 63.0
Net income.................... 33.1 31.4 32.1 40.0
Net income per share.......... $ .54 $ .51 $ .52 $ .65
1995
Revenues...................... $167.9 $156.6 $161.3 $159.5
Operating income.............. 62.5 55.9 53.1 59.0
Income before extraordinary
item, net.................... 34.3 29.6 29.2 36.7
Net income.................... 34.3 18.2 29.2 36.7
Income per share:
Before extraordinary item..... $ .54 $ .47 $ .47 $ .59
Extraordinary item............ - (.18) - -
Net income per share.......... $ .54 $ .29 $ .47 $ .59
1994
Revenues...................... $147.8 $145.6 $147.0 $154.9
Operating income.............. 50.6 45.2 45.9 58.6
Net income.................... 27.7 24.8 25.9 35.5
Net income per share.......... $ .43 $ .39 $ .41 $ .55
Per share amounts have been restated to reflect the 3-for-2 stock split that
was declared in January 1996.
Information for 1996 includes results of CCPH for the period June 13, 1996 (date
of acquisition) to December 31, 1996.
F25
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
F O R M 10-K
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
F26
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
I N D E X
T O
FINANCIAL STATEMENT SCHEDULES
SUBMITTED IN RESPONSE TO ITEM 14(a)
Schedules for the three years ended December 31, 1996:
I-Condensed financial information.............................F-28
II-Valuation and qualifying accounts...........................F-31
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.
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
Illinois Central Corporation--Parent Company
Condensed Statements of Income
($ in millions, except share data)
F27
<PAGE>
Years Ended December 31,
1996 1995 1994
Operating expenses........... $ 0.3 $ 0.7 $ 0.3
Operating (loss)................. (0.3) (0.7) (0.3)
Other income (expense), net...... (1.9) (2.8) (3.7)
Interest income (expense), net... (3.2) (0.5) (0.1)
(Loss) before taxes and earnings
of subsidiaries............... (5.4) (4.0) (4.1)
Earnings of subsidiaries......... 137.7 120.9 116.5
Provision (benefit) for income
taxes (4.3) (1.5) (1.5)
Net income................... $ 136.6 $ 118.4 $ 113.9
Income per share ............ $ 2.21 $ 1.88 $ 1.78
Weighted average number of shares
outstanding (thousands) ......61,877.3 62,885.1 64,088.6
The Notes to Consolidated Financial Statements beginning on page F-6
are an integral part of this schedule.
F28
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
Illinois Central Corporation--Parent Company
Condensed Balance Sheets
($ in millions)
December 31
1996 1995
ASSETS
Current assets:
Cash and temporary cash investments............. $ 0.9 $ 1.3
Receivables........................................ 49.1 6.5
Other current assets............................... 0.5 -
Total current assets............................ 50.5 7.8
Investments in subsidiaries........................... 627.8 476.1
Loan to affiliate..................................... 17.1 17.1
Deferred income taxes................................. 1.4 0.5
Other assets.......................................... 0.2 0.3
Total assets................................. $ 697.0 $ 501.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 56.8 $ 16.8
Dividends payable.................................. 14.1 11.9
Income taxes payable............................... - -
Total current liabilities....................... 70.9 28.7
Intercompany debt..................................... 67.0 -
Other liabilities and reserves........................ 3.6 3.0
Contingencies and commitments
Stockholders' equity:
Common stock, par value $.001 authorized
100,000,000 shares, 64,297,834 shares issued
and 61,406,831 shares outstanding 0.1 0.1
Additional paid-in capital......................... 167.1 166.3
Retained income........................... ... 453.8 368.2
Treasury stock (2,891,003 shares).............. (65.5) (64.5)
Total stockholders' equity...................... 555.5 470.1
Total liabilities and stockholders' equity.. $ 697.0 $ 501.8
F29
<PAGE>
The Notes to Consolidated Financial Statements beginning on page F-6
are an integral part this schedule.
F30
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
Illinois Central Corporation--Parent Company
Condensed Statements of Cash Flows
($ in millions)
Years Ended December
1996 1995 1994
Cash flows from operating activities:
Net income.................................. $ 136.6 $ 118.4 $ 113.9
Reconciliation of net income to net cash
provided by (used for) operating activities:
Deferred income taxes........................ (0.9) (1.5) 0.4
Earnings of subsidiaries.....................(137.7) (120.9) (116.5)
Cash changes in working capital:
Receivables............................... (42.6) (4.1) 0.4
Other current assets...................... (0.5) 0.1 -
Accounts payable...................... ... 40.0 7.9 2.6
Income taxes payable................... . - (0.4) 2.3
Changes in other assets...................... 0.1 0.1 0.1
Changes in other liabilities and reserves.... 2.3 2.2 0.2
Net cash provided by (used for) operating
activities .... (2.7) 1.8 3.4
Cash flows from investing activities:
Acquisitions ....................................(152.9) - -
Loan to subsidiaries............................. - (17.1) -
Loan from subsidiaries........................... 67.0 - -
Capital contribution to subsidiaries............. (6.2) (0.4) (0.3)
Dividends received from subsidiaries............. 143.9 107.7 42.5
Net cash provided by investing activities.. 51.8 90.2 42.2
Cash flows from financing activities:
Proceeds from the issuance of debt............. . 40.0 - -
Prinipal payments on debt........................ (40.0) - -
Dividends paid................................... (48.7) (41.9) (35.7)
Stock repurchases................................ (1.0) (59.8) (0.2)
Proceeds from exercise of stock options and
warrants...... 0.2 - -
Net cash (used for) financing activities... (49.5) (101.7) (35.9)
Changes in cash and temporary cash investments..... (0.4) (9.7) 9.7
Cash and temporary cash investments at beginning of
period........................................... 1.3 11.0 1.3
Cash and temporary cash investments at end of
period....................................... $ 0.9 $ 1.3 $ 11.0
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)...... $ - $ - $ -
Income taxes.............................. $ - $ - $ -
The Notes to Consolidated Financial Statements beginning on page F-6
are an integral part of this schedule.
F32
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYI
($ in millions)
Year Ended December 31, 1996
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve... $ 33.9 $ 2.1 $ 5.2 $ 30.8
Casualty and other reserves...... 55.7 8.9 19.6 45.0
Environmental.................... 12.9 1.9 (2.4) 17.2
Bad debt reserve................. 2.0 1.8 2.5 1.3
Taxes............................ 1.8 - 0.3 1.5
Total.................. $ 106.3 $ 14.7 $ 25.2 $ 95.8
Year Ended December 31, 1995
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve... $ 38.2 $ 3.0 $ 7.3 $ 33.9
Casualty and other reserves...... 61.7 14.3 20.3 55.7
Environmental.................... 13.3 5.3 5.7 12.9
Bad debt reserve................. 2.1 1.9 2.0 2.0
Taxes............................ 1.8 - - 1.8
Total.................. $ 117.1 $ 24.5 $ 35.3 $ 106.3
^Year Ended December 31, 1994
Balance At Additions Payments Balance
Beginning Charged And At End
Classification Of Year To Expense (Charges) Of Year
Accrued redundancy reserve... $ 43.6 $ 1.8 $ 7.2 $ 38.2
Casualty and other reserves...... 62.3 16.9 17.5 61.7
Environmental.................... 11.9 4.4 3.0 13.3
Bad debt reserve................. 3.1 1.9 2.9 2.1
Taxes............................ 2.2 - 0.4 1.8
Total.................. $ 123.1 $ 25.0 $ 31.0 $ 117.1
F33
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
2.1 Stock Purchase Agreement dated as of January 17, 1996
among Illinois Central Corporation, CCP Holdings, Inc.,
Donald R. Wood, Jr. and Lyle D. Reed, and the Ann L. and
Walter A. Drexel Revocable Trust and Reed Charitable
Remainder Unitrust and R. Kevin Trout, John A. Adair and
Gregory L. Amys. (Incorporated by reference to Exhibit 2
to the current report on Form 8-K dated as of May 15, 1996
for the Illinois Central Corporation. (SEC File No.
1-10720))
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))
* Used herein to identify management contracts or compensation plans or
arrangements as required by Item 14 of Form 10-K.
E-1
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
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 Certificate of Elimination of Illinois Central
Corporation. (Incorporated by reference to Exhibit 3.2 to
the Quarterly Report of the Illinois Central Corporation
on Form 10-Q for the three months ended September 30,
1991. (SEC File No. 1-10720))
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))
4.2 Restated Articles of Incorporation of Illinois Central
Corporation (included in Exhibit 3.3)
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))
E-2
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.4 Form of Note Purchase Agreement dated as of July 23, 1991,
among Illinois Central Railroad Company, as issuer, and
Illinois Central Corporation, as guarantor, for 10.02%
Guaranteed Senior Secured Series A Notes due 1999 and for
10.4% Guaranteed Senior Secured Series B Notes due 2001
(including the Form of Series A Note and Series B Note
included as Exhibits A-1 and A- 2, respectively, therein).
(Incorporated by reference to Exhibit 4.3 to the Quarterly
Report of the Illinois Central Railroad Company on Form
10-Q for the three months ended September 30, 1991. (SEC
File No. 1-7092))
4.5 Form of the Loan and Security Agreement dated as of
December 6, 1991, between IC Leasing Corporation I and
Hitachi Credit America Corp. (including the Form of the
Initial Funding Credit Note, the Form of the Refurbishing
Credit Note, the Form of Assignment of Lease and
Agreement, the Form of the Pledge Agreement between IC
Financial Services Corporation and Hitachi Credit America
Corp. and the Form of the Guaranty Agreement between
Illinois Central Corporation and Hitachi Credit America
Corp. included as Exhibits D, E, F, G and H, respectively,
therein). (Incorporated by reference to Exhibit 4.9 to the
Annual Report on Form 10-K for the year ended December 31,
1991, for the Illinois Central Corporation filed March 12,
1992. (SEC File No. 1-10720))
4.6 Form of the Trust Agreement dated as of March 30, 1993,
between IC Leasing Corporation II and Wilmington Trust
Company. (Incorporated by reference to Exhibit 4.1 to the
Current Report of Illinois Central Corporation on Form 8-K
dated May 7, 1993. (SEC File No. 1-10720))
4.7 Form of the Security Agreement and Mortgage dated as of
March 30, 1993, between IC Leasing Trust II and UNUM Life
Insurance Company of America (Including the Form of the
Promissory Note between IC Leasing Trust II and UNUM Life
Insurance Company of America included as Exhibit A,
therein). (Incorporated by reference to Exhibit 4.2 to the
Current Report of Illinois Central Corporation on Form 8-K
dated May 7, 1993. (SEC File No. 1- 10720))
E-3
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.8 Assignment of Lease and Conveyance dated March 30, 1993,
between IC Leasing Corporation II and IC Leasing Trust II.
(Incorporated by reference to Exhibit 4.3 to the Current
Report of Illinois Central Corporation on Form 8-K dated
May 7, 1993. (SEC File No. 1-10720))
4.9 Assignment of Lease and Conveyance dated March 30, 1993,
between IC Leasing Trust II and UNUM Life Insurance
Company of America. (Incorporated by reference to Exhibit
4.4 to the Current Report of Illinois Central Corporation
on Form 8-K dated May 7, 1993. (SEC File No. 1-10720))
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))
4.12 Form of Revolving Credit Agreement between Illinois
Central Corporation and Bank of America National Trust and
Saving Association Dated August 24, 1994. (Incorporated by
reference to Exhibit 4.1 to the Quarterly Report of
Illinois Central Corporation on Form 10-Q for the three
months ended September 30, 1994. (SEC File No. 1-10720))
E-4
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.13 Form of Revolving Credit and Term Loan Agreement between
IC Leasing III and the First National Bank of Boston dated
as of July 5, 1994. (Incorporated by reference to Exhibit
4.2 to the Quarterly Report of Illinois Central
Corporation on Form 10-Q for the three months ended
September 30, 1994. (SEC File No. 1-10720))
4.14 Toronto Dominion Credit Agreement (Incorporated by
reference to Exhibit 4.1 to the Quarterly Report of the
Illinois Central Railroad Company on Form 10-Q for the
three months ended March 31, 1994. (SEC File No. 1-7092))
4.15 Form of Receivables Purchase Agreement dated as of March
29, 1994, between Illinois Central Railroad Company and
Golden Gate Funding Corporation. (Incorporated by
reference to Exhibit 4.2 to the Quarterly Report of the
Illinois Central Railroad Company on Form 10-Q for the
three months ended March 31, 1994. (SEC File No. 1-7092))
4.16 Form of Railcar Management Agreement between Interrail and
IC Leasing Corporation III dated December 3, 1993.
(Incorporated by reference to Exhibit 4.1 to the Current
Report of the Illinois Central Corporation on Form 8-K
dated July 29, 1994. (SEC File No. 1- 10720))
4.17 Form of Note Purchase Agreement dated as of May 1, 1993,
between Illinois Central Railroad Company and The First
National Bank of Boston (Incorporated by reference to
Exhibit 4.1 to the Registration Statement of Illinois
Central Railroad Company on Form S-3. (SEC File No.
33-61410))
4.18 Form of Second Amended and Restated Revolving Credit
Agreement dated as of April 2, 1993, amended and restated
as of October 27, 1993 and further amended and restated as
of November 1, 1994, among Illinois Central Railroad
Company and the Banks named therein (Incorporated by
reference to Exhibit 4.14 to the Annual Report of Illinois
Central Railroad Company on Form 10-K for the year ended
December 31, 1994. (SEC File No. 1-7092))
E-5
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.19 Form of Lease Agreement dated as of July 1, 1994, between
IC Leasing Corporation III and Illinois Central Railroad
Company. (Incorporated by reference to Exhibit 4.10 to the
Annual Report on Form 10-K for the year ended December 31,
1994, for the Illinois Central Railroad Company. (SEC File
No. 1-7092))
4.20 Form of Lease Agreement dated as of July 1, 1994 between
IC Leasing Corporation III and Waterloo Railway Company.
(Incorporated by reference to Exhibit 4.11 to the Annual
Report on Form 10-K for the year ended December 31, 1994,
for the Illinois Central Railroad Company. (SEC File No.
1-7092))
4.21 Form of Options Agreement dated as of July 1, 1994,
between IC Leasing Corporation III and Illinois Central
Railroad Company. (Incorporated by reference to Exhibit
4.12 to the Annual Report on Form 10-K for the year ended
December 31, 1994, for the Illinois Central Railroad
Company. (SEC File No. 1-7092))
4.22 Form of Options Agreement dated as of July 1, 1994,
between IC Leasing Corporation III and Illinois Central
Railroad Company. (Incorporated by reference to Exhibit
4.13 to the Annual Report on form 10-K for the year ended
December 31, 1994, for the Illinois Central Railroad
Company. (SEC File No. 1-7092))
4.23 Third Amended and Restated Revolving Credit Agreement
between Illinois Central Railroad Company and the banks
named therein dated as of April 2, 1993, amended and
restated as of October 27, 1993, further amended and
restated as of November 1, 1994 and further amended and
restated as of April 28, 1995. (Incorporated by reference
to Exhibit 4.1 to the quarterly report of Illinois Central
Railroad Company in Form 10-Q for the three months ended
June 30, 1995. (SEC File No. 1-7092))
4.24 Form of Indenture dated as of April 1, 1995 between
Illinois Central Railroad Company and The First National
Bank of Boston. (Incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-3 of Illinois Central
Railroad Company dated April 12, 1995. (SEC File No.
33-58547))
E-6
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
4.25 Form of Fixed Rate Medium-Term Note dated as of May 1,
1995 between Illinois Central Railroad Company and Lehman
Brothers Inc., Salomon Brothers, Inc and Smith Barney Inc.
(Incorporated by reference to Exhibit 4.1 to the Current
Report of Illinois Central Railroad Company of Form 8-K
dated May 2, 1995. (SEC File No. 1-7092))
4.26 Form of Floating Rate Medium-Term Notes dated as of May 1,
1995 between Illinois Central Railroad Company and Lehman
Brothers Inc, Salomon Brothers Inc and Smith Barney Inc.
(Incorporated by reference to Exhibit 4.2 to the Current
Report of Illinois Central Railroad Company on Form 8-K
dated May 2, 1995. (SEC File No. 1-7092))
4.27 Amendment No. 1, dated as of April 29, 1996 to the Third
Amended and Restated Revolving Credit Agreement, between
Illinois Central Railroad Company and the First National
Bank of Boston initially dated as of April 2, 1993,
amended and restated November 1, 1994, and further amended
and restated as of April 28, 1995. (Incorporated by
reference to Exhibit 4 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, for the Illinois
Central Railroad Company filed on August 13, 1996. (SEC
File No. 1-7092))
4.28 Form of Revolving Credit Agreement between CCP Holdings,
Inc., Chicago, Central & Pacific Railroad Company, Cedar
River Railroad Company, Iron Horse Properties, Inc.,
Missouri River Bridge Company and the First National Bank
of Boston and Bank of America Trust and Savings
Association dated as of June 14, 1996. (Incorporated by
reference to Exhibit 4 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 for the
Illinois Central Corporation filed on November 8, 1996.
(SEC File No. 1-10720))
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))
E-7
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
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)) E-8
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.2 Form of indemnification agreement dated as of January 29,
1991, between Illinois Central Corporation and certain
officers and directors. (Incorporated by reference to
Exhibit 10.9 to the Annual Report on Form 10-K for the
year ended December 31, 1990, for the Illinois Central
Corporation filed on April 1, 1991. (SEC File No.
1-10720))
10.3* Form of IC 1990 Stock Purchase Plan. (Incorporated by
reference to Exhibit 10.6 to the Registration Statement of
Illinois Central Corporation on Form 10 filed on January
5, 1990, as amended. (SEC File No. 1-10720))
10.4* Form of IC Long-Term Incentive Option Plan.
(Incorporated by reference to Exhibit 10.17 to the
Registration Statement of Illinois Central Corporation and
Illinois Central Railroad Company on Form S-1 dated as of
September 26, 1989. (SEC File Nos. 33- 36321 and
33-36321-01))
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))
E-9
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
10.8* Form of Consulting and Non-Competition Agreement between
Illinois Central Corporation and Edward L. Moyers dated as
of February 18, 1993. (Incorporated by reference to
Exhibit 10.10 to Annual Report on Form 10-K for the year
ended December 31, 1992, for the Illinois Central
Corporation filed March 5, 1993. (SEC File No. 1-10720))
10.9* Form of the Note Agreement between the Illinois Central
Corporation and Edward L. Moyers dated February 18, 1993.
(Incorporated by reference to Exhibit 10.11 to Annual
Report on Form 10-K for the year ended December 31, 1992,
for the Illinois Central Corporation filed March 5, 1993.
(SEC File No. 1-10720))
10.10* Form of a Supplemental Retirement Benefit Agreement dated
as of August 20, 1992 between Illinois Central Corporation
and Edward L. Moyers. (Incorporated by reference to
Exhibit 10.3 to the Quarterly Report of the Illinois
Central Corporation on Form 10-Q for the three month ended
September 30, 1992. (SEC File No. 1-10720))
10.11 The Asset Sale Agreement between Allied Railcar
Company and IC Leasing Corporation III dated
December 3, 1993, (Incorporated by reference to
Exhibit 10.13 to the Annual Report on Form 10-K for
the year ended December 31, 1993 for the Illinois
Central Corporation field March 16, 1994, including
the Bill of Sale Agreement and Assumption of
Liabilities included as Exhibits C and D,
respectively, therein). (SEC File No. 1-10720))
10.12 The Purchase Agreement between IC Leasing
Corporation III and The First National Bank
of Maryland dated December 29, 1993.
(Incorporated by reference to Exhibit 10.15
to the Annual Report on Form 10-K for the
Illinois Central Corporation filed March 16,
1994. (SEC File No. 1-10720))
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))
E-10
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
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))
10.19 Form of Illinois Central Corporation Directors Incentive 2000
Option Plan (Incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, for the Illinois Central Corporation filed on May 10, 1996.
(SEC File No. 1-10720))
E-11
<PAGE>
ILLINOIS CENTRAL CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Sequential
No. Descriptions Page No.
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))
11 Computation of Income Per Common Share (Included at E-13)
21 Subsidiaries of Registrant (Included at E-14)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
99 Provisions of the Private Securities Litigation Reform Act of 1995
E-12
<PAGE>
EXHIBIT 11
ILLINOIS CENTRAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON SHARE
($ in millions, except share data)
Years Ended December 31,
1996 1995 1994
Income before extraordinary item $ 136.6 $ 129.8 $ 113.9
Extraordinary item, net - (11.4) -
Net income $ 136.6 $ 118.4 $ 113.9
Calculation of average number of shares outstanding (1):
Primary:
Weighted average number of common
shares outstanding 61,417,769 62,608,274 63,895,566
Effect of shares issuable under
stock options 459,499 276,847 193,043
61,877,268 62,885,121 64,088,609
Fully diluted:
Weighted average number of common
shares outstanding 61,417,769 62,608,274 63,895,566
Effect of shares issuable under
stock options 514,271 302,043 193,043
61,932,040 62,910,317 64,088,609
Income per common share:
Primary:
Before extraordinary item $ 2.21 $ 2.06 $ 1.78
Extraordinary item, net - (0.18) -
Net income $ 2.21 $ 1.88 $ 1.78
Fully diluted:
Before extraordinary item $ 2.21 $ 2.06 $ 1.78
Extraordinary item, net - (0.18) -
Net income $ 2.21 $ 1.88 $ 1.78
(1) Shares restated to reflect the 3-for-2 stock split declared in January
1996 as if it too earliest period shown.
(2) Such items are included in primary calculation. Additional shares
represent difference b price of Common Stock for the period and the end of
period price.
E-14
Exhibit 21
ILLINOIS CENTRAL CORPORATION
Subsidiaries of the Registrant
as of December 31, 1996
Name Place of Incorporation
Subsidiaries included in the financial statements, which are 100% owned:
Illinois Central Railroad Company Delaware
IC Financial Services Corporation Delaware
CCP Holdings, Inc. Delaware
Subsidiaries that are 100% owned by Illinois Central Railroad Company:
Kensington and Eastern Railroad Company Illinois
Mississippi Valley Corporation Delaware
Waterloo Railroad Company Delaware
Subsidiaries that are 100% owned by IC Financial Services Corporation:
IC Leasing Corporation I Nevada
IC Leasing Corporation II Nevada
IC Leasing Corporation III Nevada
IC Terminal Holdings Company Delaware
Subsidiaries that are 100% owned by IC Terminal Holdings Company:
IC RailMarine Terminal Company Delaware
Nordix, Inc. Delaware
Nordix, Inc. of Louisiana Louisiana
NPC, Inc. Louisiana
Subsidiaries that are 100% owned by CCP Holdings, Inc.:
Chicago Central & Pacific Railroad Company Delaware
Cedar River Railroad Company Iowa
Iron Horse Properties, Inc. Delaware
Missouri River Bridge Company Delaware
E-14
<PAGE>
E-15
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
ILLINOIS CENTRAL CORPORATION
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated January 20, 1997 included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, into
Illinois Central Corporation's previously filed Form S-8 Registration
Statements File Nos. 33-41052, 33-51924, 33-54709, 33-57757 and 33-61095.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 19, 1997
E-16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 59200000
<SECURITIES> 0
<RECEIVABLES> 107000000
<ALLOWANCES> 1320000
<INVENTORY> 17300000
<CURRENT-ASSETS> 248600000
<PP&E> 1677700000
<DEPRECIATION> 53600000
<TOTAL-ASSETS> 1911400000
<CURRENT-LIABILITIES> 232000000
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 555500000
<TOTAL-LIABILITY-AND-EQUITY> 1911400000
<SALES> 657500000
<TOTAL-REVENUES> 657500000
<CGS> 416300000
<TOTAL-COSTS> 416300000
<OTHER-EXPENSES> (8600000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34100000
<INCOME-PRETAX> 215700000
<INCOME-TAX> 79100000
<INCOME-CONTINUING> 136600000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136600000
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.21
</TABLE>
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. The
Company 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, the
Company hereby identifies the following important factors which could cause the
Company's actual financial results to differ materially from any such results
which might be projected, forecast, estimated or budgeted by the Company in
forward-looking statements.
Through 1996, the Company was behind the revenue growth rate the
Company estimated was necessary to achieve Plan 2000.
Grain traffic, in total, is subject to the supply domestically and
internationally. A key factor affecting supply is the weather. Grain
traffic for export is further impacted by changes in world supply and
the agricultural and trade policies of both U.S. and foreign
governments.
Coal traffic depends on stockpiles and weather in utilities' service
territories. Deregulation in the utility industry may shift coal
traffic patterns and cause pressure on rail rates.
Chemical traffic and paper shipments are sensitive to the economic
cycles. Other forest products are also sensitive to industrial
production and housing starts. Chemical traffic could be affected if
other railroads decided to build new track into our current service
territories.
Market realities for new ventures, such as the terminals, may differ
from assumptions because of changes in the economy and timing of
construction/expansion.
Because the Company's mainline track parallels the Mississippi River,
barge competition is formidable. Barge rates fluctuate partially based
on water levels and shipping conditions on the river.
The merger of SP and UP, when fully implemented could result in the
loss of the haulage moves the Company performs for the SP.
As to expenses, the most volatile are labor costs and fuel. Negotiating
locally with the labor unions increases the risk of a strike and a
strike may not be averted via governmental intervention as is
frequently the case in national labor disputes in the transportation
industry.
The variability of fuel prices can be offset via hedging but hedging
also brings risk.
Finally, mergers in the railroad industry could create traffic
diversions if the new entity route traffic around the Company's
routes or if it used its size to block shippers' routing options or
pricing.
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