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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
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Commission File Number 0-19150
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3541743
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6250 North River Road, Suite 9000
Rosemont, Illinois 60018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (847) 318-4600
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Indicate by check [X] 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.
X YES NO
--- ---
Indicate the number of shares outstanding of the
Issuer's common stock as of October 31, 1998: 51,136,344 shares
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION
FORM 10-Q
Quarter Ended September 30, 1998
CONTENTS PAGE
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets............................. 1
Consolidated Statements of Income....................... 3
Consolidated Statements of Cash Flows................... 4
Notes to Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K........................ 14
Signatures................................................................. 15
Index to Exhibits.......................................................... 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
Assets
September 30, December 31,
1998 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 2,202 $ 4,630
Receivables, net of allowance for doubtful accounts of $1,811
and $1,628 at September 30, 1998 and December 31, 1997............................. 88,628 79,722
Income taxes receivable............................................................... 881 2,106
Materials and supplies................................................................ 26,342 20,560
Deferred income taxes................................................................. 1,250 1,250
Other current assets.................................................................. 807 1,277
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Total current assets............................................................... 120,110 109,545
Investment in affiliates.................................................................. 170,328 152,489
Properties:
Roadway and structures................................................................ 675,643 609,932
Equipment............................................................................. 130,266 116,781
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Total properties................................................................... 805,909 726,713
Less accumulated depreciation......................................................... (90,845) (77,888)
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Net properties..................................................................... 715,064 648,825
Deferred financing and organization costs, net............................................ 3,465 737
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Total assets....................................................................... $ 1,008,967 $ 911,596
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</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
financial statements.
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<TABLE>
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
Liabilities and Stockholders' Equity
September 30, December 31,
1998 1997
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(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Short-term debt....................................................................... $ 1,416 $ 1,387
Accounts payable...................................................................... 45,839 47,077
Accrued expenses...................................................................... 100,036 80,390
Accrued disputed switching charges and associated interest............................ 21,526 20,611
Interest payable...................................................................... 4,591 1,370
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Total current liabilities.......................................................... 173,408 150,835
Long-term debt............................................................................ 275,281 279,383
Other liabilities......................................................................... 4,452 4,664
Deferred income taxes..................................................................... 119,400 97,199
Deferred income........................................................................... 8,988 9,830
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Total liabilities.................................................................. 581,529 541,911
Stockholders' equity:
Preferred stock, par value $1.00; authorized 1,000,000
shares; none issued or outstanding................................................. --- ---
Common stock, par value $0.01; authorized 150,000,000 shares;
issued and outstanding, 51,136,344 shares at September 30, 1998
and 51,011,042 shares at December 31, 1997......................................... 511 510
Paid in capital....................................................................... 114,751 112,492
Accumulated other comprehensive income................................................ (341) 3,036
Retained earnings..................................................................... 312,517 253,647
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Total stockholders' equity......................................................... 427,438 369,685
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Total liabilities and stockholders' equity......................................... $ 1,008,967 $ 911,596
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</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
financial statements.
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<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
For the Quarter Ended For the Nine Months
September 30, Ended September 30,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Operating revenues........................................... $ 88,814 $ 85,168 $ 257,730 $ 250,422
Operating expenses:
Roadway and structures.................................. 12,986 11,693 38,538 34,524
Equipment ........................................... 15,454 15,662 46,615 52,009
Transportation.......................................... 26,107 26,218 79,523 77,739
General and administrative.............................. 7,917 8,283 26,777 26,606
--------- -------- ---------- ----------
Operating expenses.................................. 62,464 61,856 191,453 190,878
--------- -------- ---------- ----------
Income from operations....................................... 26,350 23,312 66,277 59,544
Other income (expense):
Sale of rights under transportation agreement........... -- -- 5,445 --
Interest expense........................................ (4,321) (3,835) (12,805) (10,687)
Other, net ........................................... 443 428 817 1,023
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Total other income (expense), net................... (3,878) (3,407) (6,543) (9,664)
--------- -------- ----------- ----------
Income before income taxes and
equity in net income of affiliates...................... 22,472 19,905 59,734 49,880
Provision for income taxes................................... 8,899 7,882 23,653 19,752
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Income before equity in
net income of affiliates................................ 13,573 12,023 36,081 30,128
Equity in net income of affiliates........................... 5,841 9,378 22,789 29,588
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Net income................................................... $ 19,414 $ 21,401 $ 58,870 $ 59,716
========= ======== ========== ==========
Earnings per common share:
Basic .................................................. $ 0.38 $ 0.42 $ 1.15 $ 1.17
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Diluted ................................................ $ 0.38 $ 0.42 $ 1.15 $ 1.16
========= ======== ========== ==========
Average common shares outstanding:
Basic................................................... 51,135 50,982 51,059 50,881
========= ======== ========== ==========
Diluted ................................................ 51,304 51,455 51,343 51,426
========= ======== ========== ==========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
financial statements.
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<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
For the Nine Months Ended
September 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $ 58,870 $ 59,716
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization...................................................... 15,154 13,287
Deferred income taxes.............................................................. 22,201 19,657
Equity in net income of affiliates................................................. (22,789) (29,588)
Gains on property sales............................................................ (297) (605)
Net amortization of deferred gain on sale-leaseback of equipment................... (842) (842)
Changes in working capital:
Accounts receivable........................................................... (8,906) (611)
Materials and supplies........................................................ (5,782) (8,739)
Other current assets, excluding deferred income taxes......................... 1,695 (373)
Current liabilities, excluding short-term debt................................ 22,544 18,280
Other, net......................................................................... (863) 582
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Net cash provided by operating activities.............................................. 80,985 70,764
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Cash flows from investing activities:
Property acquisitions.................................................................. -- (92,675)
Property additions..................................................................... (82,470) (76,492)
Property sales and other transactions.................................................. 1,904 3,708
Investment in affiliates............................................................... -- (8,433)
Dividend from affiliate................................................................ 2,224 3,374
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Net cash used for investing activities................................................. (78,342) (170,518)
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Cash flows from financing activities:
Proceeds from sale of debt securities.................................................. 150,000 --
Repayments of long-term debt........................................................... (154,073) --
Other long-term debt issued............................................................ -- 96,637
Debt issuance costs.................................................................... (3,258) --
Issuance of common stock under stock option plans...................................... 2,260 3,927
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Net cash (used for) provided by financing activities................................... (5,071) 100,564
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Net (decrease) increase in cash and cash equivalents................................... (2,428) 810
Cash and cash equivalents, beginning of period......................................... 4,630 5,637
--------- ---------
Cash and cash equivalents, end of period............................................... $ 2,202 $ 6,447
========= =========
Supplemental cash flow information: Cash paid during the period for:
Interest........................................................................... $ 9,566 $ 9,333
Income taxes....................................................................... 227 95
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
financial statements.
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WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1998
Basis of Presentation
The consolidated financial statements presented herein present the results
of operations of Wisconsin Central Transportation Corporation ("WCTC") and its
wholly owned subsidiaries, Wisconsin Central Ltd. ("WCL"), Fox Valley & Western
Ltd. ("FV&W"), WCL Railcars, Inc., Sault Ste. Marie Bridge Company ("SSM"),
Wisconsin Central International, Inc. ("WCI"), WC Canada Holdings, Inc. and
Algoma Central Railway Inc. ("ACRI"). WCTC, through WCI, also holds a 33% equity
interest in English Welsh and Scottish Railway Holdings Limited ("EWS"), whose
subsidiaries operate railways in Great Britain, a 24% equity interest in Tranz
Rail Holdings Limited ("Tranz Rail"), which operates a nationwide railway in New
Zealand, and a 33% equity interest in Australian Transport Network Limited
("ATN") which provides all the commercial rail freight service in Tasmania, an
island state of Australia. WCTC and its subsidiaries are hereinafter referred to
as the Company. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, these
unaudited consolidated financial statements should be read in conjunction with
the Company's audited financial statements and the notes thereto for the year
ended December 31, 1997. In the opinion of management, the information provided
in these statements reflects all adjustments necessary to present fairly such
information. The results of operations for any interim period are not
necessarily indicative of the results of operations for an entire year.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
Comprehensive Income Information
In January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The Company's comprehensive
income consists of (a) net income as reported in the statements of income and
(b) other comprehensive income (loss), which is comprised solely of foreign
currency translation adjustments. The Company has not recorded income tax
effects of its foreign currency translation adjustments. For the first nine
months of 1998, comprehensive income was $55.5 million, as compared to
comprehensive income of $51.1 million for the first nine months of 1997. The
accumulated amount of other comprehensive income through the date of each
balance sheet is presented as a component of stockholders' equity. Comprehensive
income will be reported in a separate financial statement in each of the
Company's future annual reports.
Sale of Debt Securities
In January 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission registering $250 million of debt securities
for potential issuance to the public. In April 1998, the Company sold $150
million of these debt securities in a public offering to take advantage of the
long-term interest rate level as well as the Company's improved
creditworthiness. The net proceeds from the sale have been used to repay
outstanding borrowings under the Company's bank revolving credit facility. The
debt securities mature on April 15, 2008 and bear interest at 6.625% and yield
6.676%. In conjunction with the sale of these securities, the Company incurred
$3.3 million in debt issuance costs which will be amortized to interest expense
over the
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life of the debt. Concurrent with the public sale of debt securities, the
Company reduced the total capacity under its bank revolving credit facility from
$325 million to $175 million.
Canadian National Agreement
In June 1998, the Company reached a long-term agreement with Canadian
National Railway Company ("CN") under which the Company will provide haulage
services for CN's carload and bulk commodity trains between Superior, Wisconsin
and Chicago. The agreement is for 20 years and is renewable. The agreement calls
for accelerated transit times, includes a performance-based fee structure, and
provides for capacity improvements which the Company expects to make in its
Superior-Chicago corridor. The Company began providing service under this
agreement in August 1998.
Sale of Rights Under Transportation Agreement
Prior to November 1997, the Company, together with another railroad,
handled metallic ore movements from the upper Midwest to a steel mill in Utah
under a five year transportation agreement that was scheduled to terminate in
1999. In March 1998, the Company sold its rights under this transportation
agreement for $5.4 million. The amount, payable in two equal installments in
March 1998 and March 1999, was recorded as non-operating income in the Company's
financial statements. The Company received its first installment of $2.7 million
in March 1998.
Safety Compliance Agreement with FRA
In February 1998, WCL and FV&W agreed to a one year extension period for
the voluntary cooperative Safety Compliance Agreement with the Federal Railroad
Administration ("FRA") pursuant to the Safety Assurance and Compliance Program
("SACP") which was originally entered into in February 1997. The SACP is a
program to permit railroads and the FRA to develop and monitor agreed upon
programs to improve safety conditions on a systematic basis throughout a
railroad. The SACP is focusing on improving track conditions, inspection
procedures and training for railroad employees. As a result of the Safety
Compliance Agreement, the Company increased capital expenditures in 1997 to
improve safety and increase the utility of its track. The Company also incurred
certain additional operating expenses related to the disruption of regular train
service while the track improvements were made. The Company expects the
increased level of capital spending to continue during the one-year extension
period of the Safety Compliance Agreement.
ATN Acquisition
In November 1997 the Company led a consortium which acquired the
government-owned rail business in Tasmania, an island state of Australia, for
approximately $15.4 million in a privatization transaction. The Company owns
approximately 33% of the Australian company, ATN, which provides all the
commercial rail freight service in Tasmania over a 460 route mile rail system.
The Company invested approximately $5.1 million in ATN. The purchase was funded
through borrowings under existing revolving credit facilities.
Lomira Derailment
In November 1997, eleven cars of a WCL train derailed in Lomira, Wisconsin.
Several of the cars collided with a portion of the wall of a nearby factory,
damaging the factory, killing one factory worker and injuring four others. No
lawsuits have been filed. WCL intends to use its best efforts to settle any
claims that may arise as a result of this accident. The Company maintains $125.0
million in third party liability insurance coverage for personal injuries,
including death, property damage and other specified risks of its operations in
excess of a self-insured retention of $2.0 million per occurrence (except for
ACRI which has a self-insured retention of $0.5 million per occurrence). The
Company also maintains $20.0 million in all risks property damage coverage,
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including property of shippers, in excess of retentions of $1.0 million per
occurrence with respect to rail accidents. The Company believes any costs
incurred as a result of this derailment in excess of self-insured retentions
will be covered under its insurance policies.
Duck Creek North Acquisition
On January 27, 1997, SSM completed the purchase of 195 route miles of
railroad track and trackage rights in Wisconsin and the Upper Peninsula of
Michigan from another railroad. The rail lines are commonly known as the "Duck
Creek North" lines. The rail lines, together with contiguous property and
associated facilities, were purchased for approximately $85.0 million of cash
plus provisions for labor protection and other reserves of $2.8 million and
deferred acquisition costs of $0.8 million. The purchase was funded through
borrowings under existing revolving credit facilities. This acquisition is
referred to herein as the "Duck Creek North Acquisition".
Waukesha Environmental Matter
On April 2, 1996, WCL received a request for documents from the U.S.
Department of Justice ("DOJ") relating to the demolition of a foundry and
roundhouse on WCL's property in Waukesha, Wisconsin, performed by contractors
for WCL in 1993. A request for additional documents was received on November 21,
1996. WCL has complied with the requests. Previously, in March 1994, WCL had
received a Notice of Violation of the Clean Air Act (the "Act") and the National
Emission Standard for Asbestos (the "Asbestos NESHAP") promulgated thereunder
from the United States Environmental Protection Agency ("EPA") in connection
with the demolition. The Notice of Violation alleged that WCL violated the Clean
Air Act and the Asbestos NESHAP because of the failure of the demolition
contractor hired by WCL to provide notice of its intent to demolish a building
containing asbestos and the failure of the contractor to have on the site during
demolition an authorized representative trained in NESHAP. The Notice of
Violation did not specify any penalty or demand any relief. The EPA held a
conference with WCL on April 11, 1994 to discuss the Notice of Violation prior
to a determination of any enforcement action to be taken under section 113 of
the Act. WCL has not been informed whether the 1996 request for documents is
related to the 1994 Notice of Violation. In June 1997, WCL was notified by the
EPA that the DOJ had determined there was no cause to seek criminal prosecution
against WCL or any individual employee. On March 10, 1998, the Company received
notice that the DOJ is considering a federal court action against WCL seeking
injunctive relief and civil penalties in an unspecified amount, unless the
matter is settled. On November 9, 1998, WCL executed a Consent Decree with the
EPA and the DOJ settling this matter. The Decree is currently circulating for
the signatures of all parties. While settlement appears certain, WCL will defend
itself vigorously if a settlement is not possible. If it were to be determined
that WCL violated the Asbestos NESHAP or the Act, WCL could be subject to fines
of up to $25,000 per day for each violation.
BOCT Complaint
On June 4, 1993, WCL was served with a complaint filed by the Baltimore &
Ohio Chicago Terminal Railway Company ("BOCT") in the United States District
Court for the Northern District of Illinois, Eastern Division. In its complaint,
the BOCT claimed that WCL owed BOCT for intermediate switching and car hire
reclaim charges allegedly incurred from July 1988 through February 1993.
Arbitration hearings were held in 1995, and in June 1996 the arbitration panel
ruled in favor of BOCT. The arbitration panel's ruling awarded BOCT $16.8
million of disputed switching and car hire reclaim charges, and $2.5 million of
interest relating to such charges. Additional interest of $2.2 million has been
accrued on the unpaid award amount through September 30, 1998.
In April 1997, WCL filed a petition with the Surface Transportation Board
("STB") contesting substantially all BOCT switching charges. That matter is
pending before the STB. The U.S. District Court issued a final ruling on the
case affirming the arbitration award on August 28, 1997. WCL appealed this
ruling to the U.S. Court of Appeals in September 1997. Along with the appeal,
WCL posted a $23.5 million letter of credit to cover
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amounts which may be payable to BOCT if all appeals are unsuccessful. In August
1998, the Court of Appeals affirmed the District Court's ruling and in October
1998 denied WCL's petition for rehearing. WCL is currently reviewing the
possibility of filing a Writ of Certiorari with the U.S. Supreme Court.
Separately, during the U.S. District Court proceedings, WCL was authorized to
pursue with the STB various matters included in the dispute.
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and related notes included herein.
Results of Operations: Third Quarter 1998 Compared to Third Quarter 1997
The Company's net income for the quarter ended September 30, 1998 was $19.4
million compared to $21.4 million for the same period in 1997.
Operating revenues. Operating revenues during the quarter ended September
30, 1998 were $88.8 million, or 4% higher then the year ago quarter. Gross
revenues for the quarter ended September 30, 1998 increased in four of six
commodity groups, compared with the same period in 1997. Volume, as measured by
carloads handled (including as a carload each trailer or container), for the
quarter ended September 30, 1998 approximated 139,400 carloads compared with
approximately 142,600 carloads in 1997.
Gross revenues for paper and other forest products increased by 3%,
primarily due to the Company's increased market share of lumber shipments
originating in Canada, as well as an increased market share for shipments of
paper by rail versus truck. Volume and gross revenues for industrial products
increased by 4% and 7%, respectively, primarily due to increased market share of
rail shipments of petroleum coke in the Company's operating territory. Food and
grain volume and gross revenues increased by 18% and 20%, respectively,
primarily due to increased corn shipments in the Company's operating territory.
Gross revenues for minerals decreased by 7% primarily due to a decrease in
metallic ore shipments, partially offset by increased shipments of aggregates.
The third quarter 1997 included approximately 6,600 carloads of metallic ore
handled under a five year transportation agreement that was scheduled to
terminate in 1999. No carloads were handled under this agreement in the third
quarter of 1998. As discussed in the Notes to Consolidated Financial Statements,
the Company's rights under this transportation agreement were sold in the first
quarter of 1998. In addition, a major customer of ACRI closed an iron ore mining
operation in Canada in July 1998.
Volume and gross revenues for intermodal shipments decreased by 34% and
43%, respectively, primarily due to the conversion of approximately 4,900
intermodal units to a haulage arrangement. Intermodal units subject to this
haulage agreement are not included in the Company's carload volume. Intermodal
haulage revenue of approximately $0.9 million for the third quarter of 1998 is
included in operating revenues.
As discussed in the Notes to Consolidated Financial Statements, the Company
began providing haulage services in August 1998 for CN's carload and bulk
commodity trains between Superior, Wisconsin and Chicago. Operating revenues for
the third quarter of 1998 include $3.1 million related to this new service.
Operating expenses. Operating expenses for the third quarter of 1998 were
$62.5 million, an increase of $0.6 million or 1% compared to last year. The
increase is attributable primarily to an increase in labor costs offset by
reductions in casualty costs and property tax expense. The Company's operating
ratio (operating expenses as a percentage of operating revenues) was 70.3% in
the third quarter of 1998, compared to 72.6% in
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the third quarter of 1997. Operating income for the third quarter of 1998 was
$26.4 million, $3.0 million or 13% higher than last year.
Labor expense increased by $4.0 million or 16% in the third quarter of 1998
as compared to the same period in 1997 primarily due to an increase in the
profit based incentive plan provision based upon the Company's improved
operating income. Casualty costs decreased by $1.9 million or 68% in the third
quarter of 1998 primarily due to a reduction in personal injury claim costs as
compared to the same period in 1997. Property tax expense decreased by $1.2
million in the third quarter of 1998 due to a successful appeal of property tax
assessments for the tax years 1994 through 1997.
Interest expense and income taxes. Interest expense increased $0.5 million
in the third quarter of 1998 to $4.3 million, primarily due to the increased
borrowings related to the higher capital spending programs, as well as a
slightly higher effective interest rate as a result of the $150 million sale of
public debt securities as discussed in the Notes to Consolidated Financial
Statements.
The income tax provision for the third quarter of 1998 was $8.9 million, an
increase of $1.0 million from the third quarter of 1997, due to an increase in
pre-tax income.
Equity in net income of affiliates. The Company's 1998 third quarter
results included equity in net income of its affiliates of $5.8 million as
compared to $9.4 million for the same period of 1997. The third quarter 1998
equity in net income of affiliates amount consists of contributions from EWS of
$5.2 million versus $8.3 million in the same quarter a year ago; from Tranz Rail
of $0.3 million, versus $1.1 million in the same quarter a year ago; and from
ATN of $0.3 million. ATN began operations in November 1997 as discussed in the
Notes to Consolidated Financial Statements.
EWS's third quarter 1998 operating revenues increased by 8% over the year
ago quarter primarily as a result of the acquisition of Railfreight Distribution
("RfD") in November 1997 and the acquisition of the National Power ("NP") rail
unit in March 1998. Excluding the contributions from RfD and the NP rail unit,
operating revenues decreased by 5% as compared to the year ago quarter. This
decrease is primarily the result of recently renegotiated transportation
contracts which reduced freight rates to competitive market levels.
EWS's operating expenses for the third quarter 1998 increased by 22% over
the year ago quarter primarily as a result of the acquisitions of RfD and the NP
rail unit. Excluding the operating expenses added by these acquisitions,
operating expenses increased by 6% over the year ago quarter. This increase is
primarily due to favorable adjustments recorded in the third quarter of 1997
related to EWS's finalization of a new track access contract. Excluding these
favorable adjustments in the third quarter of 1997, and excluding the effects of
RfD and the NP rail unit, EWS's operating expenses for the third quarter of 1998
were slightly less than the year ago quarter.
The decrease in Tranz Rail's contribution is largely the result of
continued softness in the New Zealand and Asian economies. As measured in NZ
dollars, Tranz Rail's operating revenues for the third quarter of 1998 were
slightly below the year ago quarter, while operating expenses increased by 4%.
This increase is primarily the result of increased depreciation expense related
to capital improvement work recently undertaken by Tranz Rail. As measured in NZ
dollars, net interest expense increased by 125% in the third quarter of 1998 due
to higher levels of debt related to the increased capital spending. Also
contributing to the decrease in Tranz Rail's contribution is the decline in the
average value of the New Zealand dollar versus the U.S. dollar which was US
$0.51 per NZ dollar this year vs. US $0.65 per NZ dollar in last year's quarter
or a decline of 22%.
Results of Operations: Nine Months of 1998 Compared to Nine Months of 1997
The Company's net income for the nine months ended September 30, 1998 was
$58.9 million compared to $59.7 million for the same period in 1997.
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Operating revenues. Operating revenues during the nine months ended
September 30, 1998 were $257.7 million compared with $250.4 million for the same
period in 1997. Gross revenues for the nine months ended September 30, 1998
increased in three of six commodity groups, compared with the same period in
1997. Volume, as measured by carloads handled, for the nine months ended
September 30, 1998 approximated 414,400 carloads compared with approximately
425,800 carloads in 1997.
Volume and gross revenues for paper and other forest products increased by
2% and 5%, respectively, primarily due to the Company's increased market share
of lumber shipments originating in Canada, woodfiber for the paper industry and
continued strong demand for coated paper. Volume and gross revenues for
industrial products increased by 8% and 11%, respectively, primarily due to
increased demand for inbound unfinished steel for a major customer of ACRI, as
well as increased market share of rail shipments of petroleum coke in the
Company's operating territory. Food and grain volume and gross revenues
increased by 9% and 12%, respectively, primarily due to increased corn shipments
in the Company's operating territory.
Gross revenues for minerals decreased by 7% primarily due to a decrease in
metallic ore shipments, partially offset by increased shipments of aggregates.
The nine months of 1997 included approximately 22,400 carloads of metallic ore
handled under a five year transportation agreement that was scheduled to
terminate in 1999. No carloads were handled under this agreement in the nine
months of 1998. As discussed in the Notes to Consolidated Financial Statements,
the Company's rights under this transportation agreement were sold in the first
quarter of 1998. In addition, a major customer of ACRI closed an iron ore mining
operation in Canada in July 1998. Volume for the nine months of 1998 included
metallic ore shipments for a full nine months from the Company's Duck Creek
North lines which were acquired on January 27, 1997.
Volume and gross revenues for intermodal shipments decreased by 33% and
37%, respectively, primarily due to the conversion of approximately 17,500
intermodal units to a haulage arrangement. Intermodal units subject to this
haulage agreement are not included in the Company's carload volume. Intermodal
haulage revenue of approximately $3.1 million for the nine months of 1998 is
included in operating revenues.
As discussed in the Notes to Consolidated Financial Statements, the Company
began providing haulage services in August 1998 for CN's carload and bulk
commodity trains between Superior, Wisconsin and Chicago. Operating revenues for
the nine months of 1998 include $3.1 million related to this new service.
Operating expenses. Operating expenses for the nine months of 1998 were
$191.5 million, or 0.3% higher then the year ago period. Operating expenses for
1998 included increases in labor and depreciation, offset by decreases in
equipment rents, property taxes and fuel costs. The Company's operating ratio
(operating expenses as a percentage of operating revenues) was 74.3% for the
nine months of 1998, compared to 76.2% for the same period of 1997. Operating
income for the nine months of 1998 was $66.3 million, $6.7 million or 11% higher
than last year.
Labor expense increased by $9.0 million or 12% in the nine months of 1998
as compared to the same period in 1997 primarily due to an increase in the
profit based incentive plan provision based upon the Company's improved
operating income, an average 3% increase in wages and salaries granted to
employees at the beginning of the year, and a 4% increase in the work force in
anticipation of higher business volumes. Depreciation increased by $1.7 million
or 13% primarily due to higher capital spending programs related to the Safety
Compliance Agreement with the FRA and the Duck Creek North Acquisition, both
discussed in the Notes to Consolidated Financial Statements. Net equipment rent
expense decreased by $6.2 million or 27% for the nine months of 1998, primarily
due to a 16% reduction in transit times as a result of improved operating
performance, as well as a 49% reduction in intermodal equipment lease costs due
to the conversion of approximately 17,500 intermodal units to a haulage
arrangement. Property tax expense decreased by $2.0 million or 47% due primarily
to a successful appeal of property tax assessments for the tax years 1994
through 1997 as well as lower assessments for 1998. Fuel expense decreased by
$1.4 million or 8% in the nine months of 1998 compared with the same period of
1997 primarily as a result of a 10% decrease in fuel prices.
-10-
<PAGE>
Interest expense and income taxes. Interest expense increased $2.1 million
in the nine months of 1998 to $12.8 million, primarily due to the increased
borrowings to finance the Duck Creek North Acquisition and the higher capital
spending programs, as well as a slightly higher effective interest rate as a
result of the $150 million sale of public debt securities as discussed in the
Notes to Consolidated Financial Statements.
The income tax provision for the nine months of 1998 was $23.7 million, an
increase of $3.9 million from the same period of 1997, due to an increase in
pre-tax income.
Equity in net income of affiliates. The Company's results for the nine
months of 1998 included equity in net income of its affiliates of $22.8 million
as compared to $29.6 million for the same period of 1997. The nine months of
1998 equity in net income of affiliates amount consists of contributions from
EWS of $18.7 million versus $22.9 million for the same period a year ago; from
Tranz Rail of $3.7 million, versus $6.7 million for the same period a year ago;
and from ATN of $0.3 million. ATN began operations in November 1997 as discussed
in the Notes to Consolidated Financial Statements.
EWS's operating revenues for the nine months of 1998 increased by 7% over
the year ago period primarily as a result of the acquisitions of RfD and the NP
rail unit. Excluding the contributions from RfD and the NP rail unit, operating
revenues decreased by 5% compared to the year ago period. This decrease is
primarily the result of recently renegotiated transportation contracts which
reduced freight rates to competitive market levels. EWS's operating expenses for
the nine months of 1998 increased by 13% over the year ago period primarily as a
result of the acquisitions of RfD and the NP rail unit. Excluding the operating
expenses added by these acquisitions, operating expenses decreased by 2% as
compared to the year ago period.
The decrease in Tranz Rail's contribution is largely the result of
continued softness in the New Zealand and Asian economies. As measured in NZ
dollars, Tranz Rail's operating revenues and operating expenses for the nine
months of 1998 were slightly below the year ago period. Net interest expense and
amortization of deferred financing costs increased by 141% in the nine months of
1998 due to higher levels of debt related to increased capital spending. Also
contributing to the decrease in Tranz Rail's contribution is the decline in the
average value of the New Zealand dollar versus the U.S. dollar which was US
$0.54 per NZ dollar for the nine months 1998 vs. US $0.68 per NZ dollar in last
year's period or a decline of 21%.
Financial Condition: September 30, 1998 Compared to December 31, 1997
The Company generated cash in the amount of $87.4 million during the first
nine months of 1998 from operations, cash dividends received from Tranz Rail,
the sale of assets and equity issuances. These resources, as well as cash on
hand, were used to finance capital-related expenditures of $82.5 million, debt
issue costs of $3.3 million related to the sale of public debt securities
discussed in the Notes to Consolidated Financial Statements and repayment of
long-term debt of $4.1 million.
The Company had $276.7 million of total debt outstanding at September 30,
1998, which constituted 39.3% of its total capitalization, compared to $280.8
million of total debt outstanding at December 31, 1997, or 43.2% of its total
capitalization. At September 30, 1998, the Company's aggregate unused borrowing
availability under its loan facilities totaled $44.5 million.
As discussed in the Notes to Consolidated Financial Statements, in April
1998, the Company sold $150 million of debt securities in a public offering to
take advantage of the long-term interest rate level as well as the Company's
improved creditworthiness. The net proceeds from the sale have been used to
repay outstanding borrowings under the Company's bank revolving credit facility.
The debt securities mature on April 15, 2008 and bear interest at 6.625% and
yield 6.676%. In conjunction with the sale of these securities, the Company
incurred $3.3 million in debt issuance costs which will be amortized to interest
expense over the life of the debt. Concurrent with the public sale of debt
securities, the Company reduced the total capacity under its bank revolving
credit facility from $325 million to $175 million.
-11-
<PAGE>
Year 2000
In 1997 WCTC began to assess and modify its computer systems so that they
can process transactions involving the Year 2000 and beyond. Costs to modify
these systems are currently estimated to be $1.6 million and are expensed as
incurred. Approximately $0.6 million was spent through September 30, 1998. In
addition the Company plans to replace certain hardware and systems with a total
cost estimated to be approximately $1 million. Through September 30, 1998,
approximately $0.2 million of this amount has been spent and capitalized.
Estimates of the remaining costs are expected to become more precise as the
Company refines its Year 2000 assessment by the end of this year. The Company
plans to use a third party consulting firm to assist it in this assessment. As
of September 30, 1998, approximately two-thirds of the Company's systems have
been modified, and the remaining systems are expected to be modified by the
middle of 1999. Testing of the Company's Year 2000 modifications began earlier
this year and will continue throughout 1999.
Railroad Operating Systems - The Company's wholly owned operating
subsidiaries lease or license certain railroad operating systems from Union
Pacific Technologies ("UPT"), a division of the Union Pacific Corporation. These
systems represent a significant portion of the Company's total systems and UPT
has the responsibility for making such systems Year 2000 compliant. UPT reported
that approximately 90% of the systems leased or licensed from them by the
Company are Year 2000 compliant with the remainder scheduled to become Year 2000
compliant by March 31, 1999. The Company generally incurs no additional charges
from UPT for making their systems Year 2000 compliant. UPT, along with the
Company, will continue to review and test these systems throughout 1999.
Financial and Administrative Systems - The Company generally utilizes
off-the-shelf software which it runs on IBM AS/400 hardware for its financial
and administrative systems. In addition, the IBM AS/400 platform along with
personal computers, including client-server systems, are utilized in a variety
of ways throughout the operations of the Company. This hardware and software is
expected to be modified or replaced by the middle of 1999 and tested throughout
that year.
Electronic Interchange - WCTC has electronic exchange of information with
customers, vendors, other railroads, and financial institutions. The railroad
industry has agreed to a standard 4-digit year for all electronic interchanges
which the Company expects to be able to use by March 31, 1999. In addition, the
Company is in the process of contacting other parties with whom it exchanges
data to determine the status of their Year 2000 modification efforts. The
Company expects to be able to process electronic interchange transactions in
existing formats with proper interpretation of the century date by the middle of
1999. The Company is working with UPT in testing the new standard with other
railroads and with its trading partners.
Vendor Supplied and Embedded Systems - In addition to traditional computer
hardware and software, the Company utilizes a variety of vendor supplied
equipment, machinery and systems which contain embedded systems or software that
could experience Year 2000 problems. The Company is contacting and working with
its suppliers on those items that are critical to operations or safety related
and with other railroads on those items that are common to the industry. As of
September 30, 1998, these efforts are approximately one-third complete with the
remainder expected to be substantially completed by the middle of 1999. Testing
will continue throughout the remainder of 1998 and 1999.
Contingency Plans - The Company plans to develop and have in place
contingency plans for areas of particular concern by the end of the third
quarter of 1999.
WCTC believes that its systems will be successfully and timely modified .
However the failure to do so, or the failure to become Year 2000 compliant on
the part of third parties with whom the Company does business or is dependent
upon, could materially impact the operations and financial results of the
Company for the Year 2000.
-12-
<PAGE>
The Company's international affiliates are also dealing with Year 2000
compliance. The Company's investments in those affiliates and its equity in
their earnings could be affected by the success or failure of their Year 2000
efforts.
EWS - EWS is replacing approximately one-third of its information systems
with Year 2000 compliant systems, retiring some non-compliant systems, and
remediating the remainder of its systems so that they will be Year 2000
compliant. EWS projects that it will be Year 2000 compliant on all critical
systems, components and processes by June 1999. EWS's expenditures for Year 2000
compliance were approximately $1.3 million through September 30, 1998, and it
estimates that an additional $8.6 million will be required, in addition to the
cost of replacement systems. The railway system used by EWS is owned and
operated by Railtrack, and EWS's operations and financial results could be
materially adversely affected if Railtrack fails to achieve Year 2000
compliance. Railtrack has indicated that it will be Year 2000 compliant, and EWS
is maintaining close liaison with Railtrack's Year 2000 program. EWS is
developing contingency plans within each of its business areas and with key
customers to deal with problems that may arise out of Year 2000 non-compliance.
Tranz Rail - Tranz Rail is replacing its core financial systems with a new
system that is Year 2000 compliant and updating its other systems to be Year
2000 compliant. Tranz Rail reports that it expects to be substantially Year 2000
compliant by December 31, 1998. Tranz Rail's capital expenditures for new
financial systems and Year 2000 compliance were approximately NZ$14.0 million
through June 30, 1998, and it estimates that an additional NZ$6.0 million of
such expenditures will be required. Tranz Rail plans to develop contingency
plans to cover unexpected failures of essential supplies or undetected internal
process faults should they occur.
Both the Company and its affiliates could be adversely affected, directly
and indirectly, by any general disruption in business activity that results from
actual or feared failures related to Year 2000 problems.
Disclaimer Regarding Forward-Looking Statements
This report contains certain statements that are "forward-looking", within
the meaning of Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other matters, the beliefs, expectations, plans and
estimates of the Company with respect to certain future events, including
without limitation matters discussed under "Year 2000", the impact of
governmental regulation, the impact of litigation and regulatory proceedings,
the actions to be taken by others and similar expressions concerning matters
that are not historical facts. Such forward-looking statements are not
guarantees of future performance and involve known and unknown risks,
uncertainties and other factors that could cause actual events to differ
materially from those expressed in those statements.
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The exhibit set forth on the accompanying Index to Exhibits are filed as
part of this report.
The Company filed a report on Form 8-K dated August 12, 1998, reporting
that the Company had increased the size of its Board of Directors and that two
Directors were elected to fill the resulting vacancies.
-14-
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WISCONSIN CENTRAL TRANSPORTATION
CORPORATION
Date: November 13, 1998 By: /s/ Walter C. Kelly
--------------------------------
Walter C. Kelly
Vice President, Finance
and Chief Accounting Officer
-15-
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Description Page
- ---------- ----------------------- ----
27 Financial Data Schedule 19
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet at September 30, 1998 (unaudited) and the
Condensed Consolidated Statement of Income for the Three Months Ended September
30, 1998 (unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,202
<SECURITIES> 0
<RECEIVABLES> 90,439
<ALLOWANCES> (1,811)
<INVENTORY> 26,342
<CURRENT-ASSETS> 120,110
<PP&E> 805,909
<DEPRECIATION> (90,845)
<TOTAL-ASSETS> 1,008,967
<CURRENT-LIABILITIES> 173,408
<BONDS> 275,281
0
0
<COMMON> 511
<OTHER-SE> 426,927
<TOTAL-LIABILITY-AND-EQUITY> 1,008,967
<SALES> 0
<TOTAL-REVENUES> 88,814
<CGS> 0
<TOTAL-COSTS> 62,464
<OTHER-EXPENSES> (443)
<LOSS-PROVISION> 88
<INTEREST-EXPENSE> 4,321
<INCOME-PRETAX> 22,472
<INCOME-TAX> 8,899
<INCOME-CONTINUING> 13,573
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,414
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
