Annual Report — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K Annual Report 33 146K
2: EX-3 Exhibit 3.2 9 35K
3: EX-4 Exhibit 4.16E 10 31K
4: EX-4 Exhibit 4.17C 12 29K
5: EX-10 Exhibit 10.10 67 222K
6: EX-10 Exhibit 10.15 96 292K
7: EX-10 Exhibit 10.26 3 16K
8: EX-10 Exhibit 10.60 6 28K
9: EX-10 Exhibit 10.61 21 70K
10: EX-10 Exhibit 10.62 21 70K
11: EX-10 Exhibit 10.63 21 70K
12: EX-10 Exhibit 10.64 21 70K
13: EX-10 Exhibit 10.65 21 70K
14: EX-10 Exhibit 10.66 21 70K
15: EX-10 Exhibit 10.67 51 214K
16: EX-10 Exhibit 10.68 8 23K
17: EX-10 Exhibit 10.69 1 7K
18: EX-13 Annual or Quarterly Report to Security Holders 29 115K
19: EX-21 Subsidiaries of the Registrant 1 7K
20: EX-27 Financial Data Schedule (Pre-XBRL) 1 11K
22: EX-99 Exhibit 99.1 2 10K
21: EX-99 Miscellaneous Exhibit 2 9K
EX-13 — Annual or Quarterly Report to Security Holders
| EX-13 | 1st Page of 29 | TOC | ↑Top | Previous | Next | ↓Bottom | Just 1st |
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Market for the Registrant's Common Equity and Related Stockholders Matters
Stock Listing
The company's common stock is traded on the New York, Midwest,
Philadelphia and Boston Stock Exchanges under the symbol CNW.
High Low
Fourth quarter 1994 20-7/8 18-1/4
Third quarter 1994 24-1/4 19-3/8
Second quarter 1994 25 21-5/8
First quarter 1994 28-1/8 24-1/8
Dividends
No dividends have been paid on the common stock during 1994 (see Note
6(e) to Consolidated Financial Statements).
Shareholders
As of December 31, 1994, there were 1,070 holders of record.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: 1994 - 1993
In 1994, operating revenues increased by $86.6 million due to increased
traffic in all of the Company's business groups. Western coal shipments
increased to 86.7 million tons, a 16.1% increase, while core railroad coal
shipments, including western coal moving to Midwest destinations, increased
15.9%. Traffic in the Auto, Steel and Chemicals and Intermodal groups each
increased in excess of 7%. Agricultural Commodities traffic increased 3.7%
despite the poor 1993 harvest caused by Midwest flooding. A record harvest
occurred in 1994, leaving an abundance of high-quality corn in the Company's
service territory.
Operating expenses for the year increased $69.8 million primarily due to
increased costs related to the additional traffic and congestion on both the
core railroad and the Company's subsidiary, Western Railroad Properties,
Incorporated ("WRPI"), caused by capacity constraints on WRPI. The Company
continued programs to enhance productivity in 1994, which has allowed its
operating ratio to remain stable at 80.0% despite the increased costs related
to congestion. The Company is expanding WRPI's train handling capacity
through a $80 million capital expenditure program during 1994 and 1995. Under
this program, the Company placed 20.6 miles of double-track in service prior
to year-end, which is already providing relief from congestion. The Company
has acquired $279 million of equipment in 1994 under operating leases and
plans to acquire an additional $185 million in 1995 to efficiently handle
increased traffic volumes on WRPI and the core railroad.
Interest expense decreased $7.9 million in 1994 primarily due to the
repayment of $73 million of debt and a negotiated interest rate reduction.
Operating Revenues
As reflected in the following table, freight revenues were $1,019.8
million in 1994, an increase of $87.1 million (or 9.3%) compared with 1993.
Freight rates in 1994 decreased for the Energy business group due to contracts
that were entered into or renewed at rates lower than those previously
realized.
2
Revenue Comparison by Business Group)
(dollars in millions) 1994 1993
Percent Percent Percent
change of net of net
Net from freight Net freight
revenues 1993 revenues revenues revenues
Energy (Coal):
WRPI $ 225.1 9.9 % 22.1% $ 204.9 22.0%
Core railroad 127.8 15.3 12.5 110.8 11.9
Agricultural Commodities 189.8 6.3 18.6 178.5 19.1
Automotive, Steel
and Chemicals 208.9 10.6 20.5 188.9 20.2
Intermodal 125.2 7.7 12.3 116.3 12.5
Consumer Products 143.0 7.3 14.0 133.3 14.3
Net freight revenues $1,019.8 9.3 % 100.0% $ 932.7 100.0%
Commuter 82.4 (3.2) 85.1
Other 27.6 8.7 25.4
Operating revenues $1,129.8 8.3 % $1,043.2
Load Comparison by Business Group
(loads in thousands) 1994 1993
Percent
Change Percent Percent
Total from of total Total of total
loads 1993 loads loads loads
Energy (Coal):
WRPI 824.0 16.2% 32.1% 708.9 30.1%
Core railroad 1/ 83.3 8.7 3.2 76.6 3.3
Agricultural Commodities 315.9 3.7 12.3 304.5 12.9
Automotive, Steel
and Chemicals 358.1 7.8 14.0 332.3 14.1
Intermodal 765.4 7.2 29.9 714.0 30.4
Consumer
Products 217.1 0.8 8.5 215.3 9.2
Total loads 2,563.8 9.0 100.0% 2,351.6 100.0%
1/ Excludes 284,400 and 240,600 loads in 1994 and 1993, respectively, which
originated on WRPI (and are treated as WRPI loads) and moved over the core
railroad to midwestern utilities.
3
Energy (Coal) - Coal transportation, primarily to utility customers, is
the Company's largest single revenue-producing activity. WRPI volume and
revenues increased due to new contracts and increased coal originations for
existing customers handled from the southern Powder River Basin in Wyoming
(the "Powder River Basin"). Core railroad coal traffic, including western
coal moving over the core railroad to midwestern utilities, increased 15.9%,
primarily due to increased WRPI originations. Of the total coal loads handled
in 1994, 90.8% originated on WRPI compared with 90.7% in 1993. Western coal
growth capacity is being enhanced through a $80 million capital program during
1994 and 1995 to increase train handling capacity and improve operations.
This expansion is necessary to meet the increasing demand for low-sulfur coal
from the Powder River Basin. Coal shipments and revenue for 1995 are expected
to be higher than 1994.
Agricultural Commodities - Volume and revenues increased despite the poor
1993 harvest caused by midwestern flooding. Shipments of raw grains increased
due to an improved soybean crop. Corn shipments decreased due to the poor
1993 harvest; however, barley and wheat were used as replacements in the corn
feeder market, partially offsetting the decrease in corn. Potash and sulfur
shipments increased due to additional business diverted from the Soo Line
because of its strike and to strong advance sales of fertilizer. Grain
shipments are expected to increase in 1995 due to a record 1994 corn harvest.
Automotive, Steel and Chemicals - Volume and revenues increased compared
with 1993. Automobile shipments increased due to higher production and market
share gains from General Motors' Janesville, Wisconsin, plant; increased
overhead volumes resulting from industry-wide increase in automobile
production and sales; and the resumption of shipments from Chrysler's
Belvidere, Illinois, plant, which was closed from May 1993 until November 1993
for model changeover. Metallic ore shipments increased as a result of new
business in 1994 and reduced shipments in 1993 due to a mine workers' strike;
the gain was partially offset by the loss of an ore contract. Petroleum and
inorganic chemicals shipments increased compared to 1993 due to increased
traffic resulting from the Soo Line strike and to increased shipments of
asphalt resulting from increased production and market share gains.
Industrial chemical shipments increased due to increased shipments of soda ash
from various Wyoming origins. Volume and revenues in 1995 are expected to
remain flat.
Intermodal - Volume and revenues increased due to increased traffic from
existing international steamship and TOFC (trailer-on-flat-car) customers.
Volume increases were slightly higher than revenue increases as a result of
traffic moving at lower rates due to market pressures. Volume and revenue
increases are expected to continue in 1995.
Consumer Products - Volume and revenues increased compared with 1993.
Fresh fruit and vegetables increased due to a better crop of Idaho potatoes,
which resulted in more rail shipments in 1994 than in 1993. Volume and
revenue for pulp mill fibers increased due to increased shipments of scrap
paper and logs; revenue increased at a greater rate than loads due to low
rated traffic lost to a competitor in 1993 being replaced by new shipments
having a longer haul and higher revenues. Volume and revenue increases are
expected to continue in 1995.
4
Operating Expenses
Operating expenses in 1994 were $69.8 million (or 8.4%) higher than 1993
primarily due to increased traffic volumes and congestion, which resulted in
increased spending for employee compensation and benefits, fuel, materials and
purchased services and car hire. The Company's capital program to expand WRPI
train handling capacity is expected to alleviate this congestion and improve
operating efficiency.
Operating Expense Comparison
Percent change
(dollars in millions) 1994 from 1993 1993
Compensation and benefits $416.8 7.0 % $389.5
Diesel fuel 85.2 21.5 70.1
Material & purchased services 82.7 9.7 75.4
Hire of freight equipment 72.3 16.4 62.1
Other rents 75.6 5.1 71.9
Depreciation 73.8 7.3 68.8
Casualties 44.9 6.1 42.3
Other* 47.8 (2.4) 49.0
Operating expenses before
special charges $899.1 8.4 $829.1
Special charges 4.8 (4.0) 5.0
Total operating expenses $903.9 8.4 $834.1
*Other includes property taxes, utilities, vehicle operating costs, FRA and
railroad association fees and other general expenses.
Compensation and benefits expense increased due to new employees hired
for train and engine service, increased overtime related to volume increases
and congestion, and training costs for new personnel. Fringe benefit costs
increased due to an increase in the health and welfare insurance rate and
increased profit sharing and management incentive compensation. Payroll taxes
increased due to the increased number of employees.
Diesel fuel expense increased due to a 17.1% increase in consumption and
a 3.7% increase in the average price per gallon. Consumption increased due to
a 15.4% increase in revenue ton miles and less efficient operations due to
traffic congestion.
Material and purchased services increased due to reduced billings for
repairing foreign line cars and increased maintenance, crew-related costs and
intermodal contractor fees due to increased traffic volumes and congestion.
Hire of freight equipment increased due to increased traffic levels and
congestion. Other rents increased due to new locomotive leases, partially
offset by reduced computer rentals due to lease expirations and lower WRPI
contingent rent.
Depreciation increased due to increased traffic levels on WRPI where
track structure components are depreciated on the unit of production method
and increases in the depreciation base due to property additions.
5
During 1994, the Company accrued a $4.8 million special charge for
employee severance and related costs for an employee reduction program
covering management personnel. During 1993, the Company accrued a special
charge of $5.0 million for severance and related costs, relocation costs
related to the closing of a diesel shop and a management fee payable to one of
the Company's previous principal shareholders.
Other Income, Net
See Note 3 to Consolidated Financial Statements for a summary of other
income, net.
Interest Expense
1994 interest expense decreased $7.9 million compared with 1993 due to
the Company's refinancing of the Term and Standby Loans in September 1993, and
lower average debt levels, partially offset by increasing interest rates.
Included in interest expense is amortization of financing fees totaling $7.2
million in 1994 and $8.1 million in 1993.
Income Taxes
The income tax provision for 1994 increased due to increased pretax
income; the prior year included the impact of the increase in the federal
corporate tax rate on prior years' deferred taxes.
Due to the availability of approximately $132 million of net operating
losses and $43 million of investment tax credits, the Company does not
anticipate payment of significant amounts of income taxes until 1996. See
Note 2 to Consolidated Financial Statements.
RESULTS OF OPERATIONS: 1993 - 1992
In 1993, operating revenues increased $58.2 million, primarily due to a
23.1% increase in coal traffic volume. Increased coal revenues were partially
offset by significant losses of corn traffic due to substantial flooding in
the upper Midwest during June through September of 1993. Operating expenses,
excluding special charges, increased $48.3 million, reflecting the effects of
midwestern flooding and increased traffic levels. The Company believes the
net effect of reduced revenues and increased expenses related to the flooding
was approximately $14 million pretax.
The Company continued to improve its capital structure in 1993 through a
negotiated interest rate reduction for a portion of its senior secured debt
facilities through prepayments of debt, including the remaining outstanding
15.5% senior subordinated debentures and through the issuance of 1,371,265
shares of common stock in connection with a secondary stock offering.
6
Operating Revenues
As reflected in the following table, net freight revenues were $932.7
million in 1993, an increase of $59.9 million (or 6.9%). Revenues and volumes
compared with 1992 were higher in the Energy; Automotive, Steel and Chemicals;
and Intermodal business groups. Freight rates in 1993 decreased for the
Energy business group due to contracts that were entered into or renewed at
rates lower than those previously realized.
Revenue Comparison by Business Group
(dollars in millions) 1993 1992
Percent Percent Percent
change of net of net
Net from freight Net freight
revenues 1992 revenues revenues revenues
Energy (Coal):
WRPI $ 204.9 21.2 % 22.0% $169.0 19.4%
Core Railroad 110.8 14.5 11.9 96.8 11.1
Agricultural Commodities 178.5 (1.0) 19.1 180.3 20.7
Automotive, Steel
and Chemicals 188.9 6.1 20.2 178.0 20.4
Intermodal 116.3 4.6 12.5 111.2 12.7
Consumer Products 133.3 (3.1) 14.3 137.5 15.7
Net freight revenues $ 932.7 6.9 % 100.0% $872.8 100.0%
Commuter 85.1 (4.8) 89.4
Other 25.4 11.4 22.8
Operating revenues $1,043.2 5.9 % $985.0
Load Comparison by Business Group
(loads in thousands) 1993 1992
Percent
change Percent Percent
Total from of total Total of total
loads 1992 loads loads loads
Energy (Coal):
WRPI 708.9 27.8 % 30.1% 554.9 25.3%
Core Railroad 1/ 76.6 (7.8) 3.3 83.1 3.8
Agricultural Commodities 304.5 (5.0) 12.9 320.6 14.6
Automotive, Steel
and Chemicals 332.3 4.5 14.1 318.0 14.5
Intermodal 714.0 3.6 30.4 689.2 31.5
Consumer Products 215.3 (4.9) 9.2 226.4 10.3
Total loads 2,351.6 7.3 100.0% 2,192.2 100.0%
1/ Excludes 240,600 and 174,100 loads in 1993 and 1992, respectively, which
originated on WRPI (and are treated as WRPI loads) and moved over the core
railroad to midwestern utilities.
7
Energy (Coal) - WRPI volume and revenues increased due to new contracts
and increased coal originations for existing customers. The increases were
also partially due to lower than expected shipments in 1992 due to mild
weather. Core railroad coal traffic, including western coal moving over the
core railroad to midwestern utilities, increased 23.3% due to increased WRPI
originations. Of the total coal loads handled in 1993, 90.7% originated on
WRPI compared with 87.3% in 1992.
Agricultural Commodities - Volume and revenues decreased due to
midwestern flooding that reduced the quantity and quality of the corn harvest
in the Company's service territory. This decrease was partially offset by an
increase in fertilizer shipments required to replace soil nutrients lost due
to the flooding.
Automotive, Steel and Chemicals - Volume and revenues increased as a
result of increased automobile production; improved market share from General
Motors' Janesville, Wisconsin plant; increased demand and market share for
steel shipments from on-line mills; increased soda ash shipments to glass
producers and new plastics business. These increases were partially offset by
reduced traffic due to Chrysler's Belvidere, Illinois, assembly plant being
closed for model changeover during the latter half of 1993.
Intermodal - Volume and revenues increased due to growth from existing
customers. Volume increases were slightly higher than revenue increases as a
result of traffic moving at lower rates due to market pressures.
Consumer Products - Volume and revenues decreased primarily as a result
of business that was diverted to a competitor.
Operating Expenses
Operating expenses in 1993 were $23.3 million (or 2.9%) higher than 1992.
1993 operating expenses, before special charges, were $48.3 million (or 6.2%)
higher than 1992 primarily due to increased traffic volumes and the effects of
midwestern flooding, causing increased expense for employee compensation and
benefits, fuel and material and purchased services; as well as increased
environmental reserves.
Operating Expense Comparison
Percent change
(dollars in millions) 1993 from 1992 1992
Compensation and benefits $389.5 3.3 % $376.9
Diesel fuel 70.1 18.8 59.0
Material & purchased services 75.4 18.4 63.7
Hire of freight equipment 62.1 6.9 58.1
Other rents 71.9 (1.2) 72.8
Depreciation 68.8 6.0 64.9
Casualties 42.3 16.9 36.2
Other 49.0 (0.4) 49.2
Operating expenses before
special charges $829.1 6.2 $780.8
Special charges 5.0 NM 30.0
Total operating expenses $834.1 2.9 $810.8
NM - not meaningful.
8
Compensation and benefits expense, excluding special charges for employee
reductions and relocations, increased as a result of higher wage levels and
increased train crew costs due to traffic increases and midwestern flooding,
partially offset by a slight decline in the average number of employees.
Payroll taxes decreased due primarily to the elimination of the railroad
unemployment insurance repayment tax and a reduction in the number of
employees. Other fringe benefits increased due to increased health and
welfare costs and increased accruals for profit sharing and management
incentive compensation.
Diesel fuel expense increased due to a 12.8% increase in revenue ton
miles, less efficient operations due to midwestern flooding, severe winter
weather early in the year and a 0.9% increase in the average price per gallon.
Material and purchased services increased due to reduced billings for
repairing foreign line cars; increased joint facility expenses; and increased
maintenance and transportation expenses due to increased traffic volumes and
midwestern flooding.
Depreciation increased primarily due to increased traffic levels on WRPI
where track structure components are depreciated on the unit of production
method.
Casualties increased due to an increased charge for environmental
liability and a 1992 reduction in personal injury expense due to the favorable
settlement of a serious personal injury case.
During 1993, the Company accrued a special charge of $5.0 million for
severance and related costs, relocation costs related to the closing of a
diesel shop and a management fee payable to one of the Company's previous
principal shareholders. During 1992, the Company accrued a special charge of
$30.0 million for employee reductions related to the consolidation of its
customer service functions and the closing of a diesel shop.
Other Income, Net
See Note 3 to Consolidated Financial Statements for a summary of other
income, net.
Interest Expense
1993 interest expense decreased $20.7 million compared with 1992 due to a
recapitalization, lower average interest rates and reduced debt levels.
Interest expense included amortization of financing fees totaling $8.1 million
in 1993 and $8.7 million in 1992.
Income Taxes
The income tax provision for 1993 increased $31.9 million compared with
1992 primarily due to a $58.5 million increase in taxable income and an
increase in the federal corporate tax rate. Approximately $7.1 million of the
increase is related to the impact of the higher corporate rate on prior years'
deferred taxes.
9
Other Matters
The Company is a party to several proceedings before federal and state
regulatory agencies relating to environmental issues. The Company has been
named a potentially responsible party in several administrative proceedings
for the cleanup of various waste sites, including some Superfund sites. In
the opinion of management, based on the information currently available and
reserves provided for such costs, the ultimate liability resulting from these
environmental matters will not materially affect the results of operations or
financial position of the Company. See Note 8 to Consolidated Financial
Statements.
Liquidity
At December 31, 1994, the Company's working capital totaled a negative
$90.8 million, while cash and cash equivalents totaled $105.4 million. The
Company historically operates with negative working capital due to a higher
turnover rate for receivables than accounts payable. Consolidated
indebtedness is substantial in relation to its common shareholders' equity.
As of December 31, 1994, the Company had long-term indebtedness, including
current maturities, of $1.1 billion and common shareholders' equity of $316
million. The Company's ratio of debt to total capitalization decreased to
78.1% at December 31, 1994 from 84.2% at December 31, 1993.
The Company's cash requirements for financing activities are comprised of
interest and principal payments under its outstanding indebtedness. The
Company is required to make scheduled principal repayments of approximately
$95 million in 1995; $106 million in 1996; $93 million in 1997; $175 million
in 1998; $145 million in 1999; and additional amounts thereafter. WRPI's Loan
agreement requires accelerated debt payments subsequent to December 31, 1996
if there is excess cash flow as defined in the agreement.
The Company's cash requirements for investing activities are comprised of
capital expenditures, primarily for track improvements. During 1994, the
Company amended its credit agreement to eliminate a capital expenditures
limitation covenant.
The Company believes that its cash flow from operations will allow it to
meet its liquidity requirements, including debt service and capital
expenditures, during the foreseeable future. However, the Company's ability
to make principal and interest payments on its outstanding indebtedness and to
comply with the financial covenants under its debt agreements, including a
current ratio, an interest coverage ratio, a leverage ratio and a net worth
test, is dependent upon the Company's future performance and business growth,
which are subject to financial, economic, competitive and other factors
affecting the Company and its subsidiaries, many of which are beyond the
Company's control.
The Company's debt agreements and certain other agreements materially
restrict the Company from paying dividends on or redeeming capital stock. See
Note 6(e) to the Consolidated Financial Statements.
10
Capital Expenditures
The Company allocates funds for capital expenditures based on its capital
needs indicated by its long-term planning and availability of internally
generated funds or suitable long-term financing.
Capital expenditures for 1994 were $140.7 million, which included
expansion of train handling capacity from the Powder River Basin by WRPI,
expansion of the Company's Global Two double-stack terminal and construction
of new facilities to serve shippers.
The Company's 1995 capital expenditures are currently budgeted at
approximately $144 million. The majority of the capital expenditures program
covers replacement of rail, ties and other track material system-wide,
expansion of WRPI train handling capacity and construction of new facilities
to serve shippers.
The Company acquired 128 locomotives and 1,598 freight cars under
operating leases with a cost to the lessors of approximately $279 million in
1994. The Company expects to acquire 52 locomotives and approximately 1,900
freight cars under operating leases which have a cost to the lessors of
approximately $185 million in 1995.
1
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Millions of dollars except for per share amounts
Years Ended December 31,
1994 1993 1992
Operating revenues $1,129.8 $1,043.2 $ 985.0
Operating expenses 903.9 834.1 810.8
Operating income $ 225.9 $ 209.1 $ 174.2
Other income, net 7.1 11.0 8.1
Interest expense 97.5 105.4 126.1
Income before income taxes $ 135.5 $ 114.7 $ 56.2
Income taxes 51.5 50.7 18.8
Income before extraordinary item
and cumulative effect of a
change in method of accounting $ 84.0 $ 64.0 $ 37.4
Extraordinary loss on prepayment of
long-term debt, net of income taxes - (10.8) (91.0)
Cumulative effect of a change in method
of accounting for other postretirement
benefits, net of income taxes - - (2.6)
Net income (loss) $ 84.0 $ 53.2 $ (56.2)
Preferred stock dividends - - 11.9
Excess of liquidation value over
carrying value of preferred
stock called for redemption - - 46.8
Income (loss) available for
common shareholders $ 84.0 $ 53.2 $ (114.9)
Earnings (loss) per common share:
Before extraordinary item and
cumulative effect of a change
in method of accounting $ 1.86 $ 1.44 $ (.58)
Extraordinary item - (.24) (2.50)
Cumulative effect of a change in
method of accounting - - (.07)
Total $ 1.86 $ 1.20 $(3.15)
Shares used in earnings per share
computation (thousands) 45,092 44,261 36,457
See accompanying Notes to Consolidated Financial Statements.
2
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Millions of dollars
December 31,
1994 1993
ASSETS
Current assets:
Cash and cash equivalents $ 105.4 $ 70.9
Accounts receivable 143.7 140.9
Materials and supplies 27.6 27.7
Prepaid expenses and other 6.2 9.3
Total current assets $ 282.9 $ 248.8
Property:
Road $2,055.0 $1,938.6
Equipment 148.5 155.3
Accumulated depreciation (330.7) (273.1)
Net property $1,872.8 $1,820.8
Other assets $ 62.9 $ 66.3
Total assets $2,218.6 $2,135.9
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 212.1 $ 179.4
Payroll and vacation pay 35.6 35.3
Interest 10.7 10.9
Taxes 19.9 16.2
Total, excluding long-term debt
due within one year $ 278.3 $ 241.8
Long-term debt due within one year 95.4 58.9
$ 373.7 $ 300.7
Casualties and environmental reserves 76.7 78.3
Other liabilities 68.6 84.3
Deferred income taxes 350.0 303.6
Long-term debt, excluding amounts
due within one year 1,033.7 1,142.8
Total liabilities $1,902.7 $1,909.7
Shareholders' equity:
Common stock, par value $.01 per share,
authorized 250,000,000 shares of
which 125,000,000 are non-voting;
issued and outstanding 44,063,235
and 43,650,561 shares, respectively
(of which 12,835,304 are non-voting) $ 0.4 $ 0.4
Capital surplus 543.2 537.5
Retained income (227.7) (311.7)
Total shareholders' equity $ 315.9 $ 226.2
Total liabilities and shareholders' equity $2,218.6 $2,135.9
See accompanying Notes to Consolidated Financial Statements.
3
CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of dollars
Years Ended December 31,
1994 1993 1992
Cash flow from operating activities:
Net income (loss) $ 84.0 $ 53.2 $ (56.2)
Items not affecting cash flow from
operating activities:
Depreciation 73.9 68.8 64.9
Amortization of debt cost 7.2 8.1 8.7
Gain from sales of property, net (1.0) (4.4) (1.9)
Deferred income taxes 49.3 49.4 18.8
Extraordinary items, net - 10.8 91.0
Cumulative effect of a change
in method of accounting - - 2.6
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (2.8) (11.2) 25.2
(Increase) decrease in other current
assets except cash 3.2 3.8 7.1
Increase (decrease) in accounts payable
and accruals 36.5 5.6 (39.3)
Other, net (20.7) (3.5) 7.2
Net cash flow from operating activities $ 229.6 $ 180.6 $ 128.1
Cash flow from financing activities:
Proceeds from debt financing $ 0.1 $ 6.7 $ 758.5
Proceeds from sale of common stock 2.8 26.4 216.0
Payments on debt (57.2) (50.9) (54.1)
Prepayment on long-term debt (16.0) (32.9) (842.9)
Repurchase of interest rate swap agreements - - (7.2)
Redeem preferred stock - - (124.7)
Net cash flow used for
financing activities $ (70.3) $ (50.7) $ (54.4)
Cash flow from investing activities:
Additions to property $(140.7) $(115.4) $ (83.3)
Proceeds from property dispositions 14.5 9.9 12.8
Other, net 1.4 2.3 (2.5)
Net cash flow used for
investing activities $(124.8) $(103.2) $ (73.0)
Increase in cash and cash equivalents $ 34.5 $ 26.7 $ 0.7
Cash and cash equivalents -
Beginning of period 70.9 44.2 43.5
End of period $ 105.4 $ 70.9 $ 44.2
See accompanying Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
a) Principles of Consolidation.
The consolidated financial statements reflect the results of
operations and financial position of the Company and its subsidiaries.
All significant intercompany transactions have been eliminated. The
Company's primary subsidiaries are the Chicago and North Western Railway
Company (the "Railway") and Western Railroad Properties, Incorporated
("WRPI").
WRPI's operations consist of the movement of unit coal trains from
the southern Powder River Basin in Wyoming to a connection with the Union
Pacific Railroad in Nebraska. The Railway operates WRPI under an agency
agreement. WRPI's assets include a 103-mile rail line, jointly owned
with the Burlington Northern Railroad; 101 miles of track and support
facilities financed by a capital lease with a trust ("WRPI Trust") for
the benefit of a subsidiary of Union Pacific Corporation (together with
its subsidiaries "UP"); a wholly-owned, six-mile rail line; and certain
other assets.
b) Derivative Financial Instruments.
The Company uses a program of financial derivatives to limit its
exposure to interest rate volatility and fuel commodity price risks.
Derivatives are not held or issued for trading purposes and, therefore,
are not marked to market.
The Company is exposed to losses in the event of nonperformance by
counterparties to its derivative instruments. The Company anticipates
that the counterparties, each a financial institution with a minimum of
an "A" rating, will be able to fully satisfy their obligations under the
contracts.
The Company's interest rate program includes the use of swap
agreements and caps. Gains and losses are reported as interest expense
in the period realized. (See note 4 for descriptions of the classes of
interest rate derivatives.)
The Company's fuel program uses collars and caps. Gains or losses
are reported as fuel expense in the period realized. As of December 31,
1994, the Company had purchased collars with a floor of 44 cents per
gallon and a ceiling of 56 cents per gallon covering ten million gallons
of fuel per month (the Company's approximate usage) for January through
June 1995.
c) Revenue Recognition.
The Company recognizes transportation revenue proportionately as
shipments move from origin to destination.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
d) Cash Equivalents.
Cash equivalents are highly liquid short-term investments purchased
less than ninety days from maturity and recorded at cost.
e) Materials and Supplies.
Materials and supplies, which consist mainly of fuel oil and items to
be used for maintenance and capital additions to road and equipment
properties, are stated at average cost.
f) Property and Depreciation.
Property balances include assets under capital leases with costs
(before accumulated depreciation) of $255.9 million and $256.6 million at
December 31, 1994 and 1993, respectively.
Depreciation is provided at composite straight-line rates except for
the track structure components of WRPI, which are depreciated on the unit
of production method. For 1994, 1993 and 1992, the overall depreciation
provision approximated an annual rate of 4.2%, 4.4% and 4.2%,
respectively, of depreciable property.
Additions and renewals constituting a unit of property are
capitalized. Other renewals, repairs and maintenance are charged to
expense. Track removal costs and costs of units of property retired or
replaced, less salvage, are charged to accumulated depreciation.
Overhead costs related to assets constructed by Company personnel are
capitalized.
g) Changes in Method of Accounting.
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits."
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
2. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
Years ended December 31,
1994 1993 1992
(Millions of dollars)
Provision (benefit) from:
Continuing operations $ 51.5 $ 50.7 $ 18.8
Extraordinary loss - (6.6) (57.0)
Change in method of accounting - - (1.5)
Total income tax provision (benefit) $ 51.5 $ 44.1 $(39.7)
Current - Federal $ 2.2 $ 1.3 $ -
- State - - -
Deferred 20.0 26.7 3.9
Loss carryover benefit used (generated) 29.3 16.1 (40.8)
Reduction of deferred tax asset
valuation allowance - - (2.8)
Total income tax provision (benefit) $ 51.5 $ 44.1 $(39.7)
The 1993 provision includes a $7.1 million charge to reflect the effect
of the increase in the federal corporate tax rate on the deferred tax balance
as of December 31, 1992.
Total income taxes reflected in the Consolidated Statement of Income
differ from the amounts computed by applying the federal statutory corporate
tax rate as follows:
Years ended December 31,
1994 1993 1992
(Millions of dollars)
Tax provision (benefit):
At the federal statutory rate $ 45.2 $ 32.5 $(30.4)
Change in federal corporate tax rate - 7.1 -
Reduction of deferred tax asset
valuation allowance - - (2.8)
Federal income tax provision $ 45.2 $ 39.6 $(33.2)
State income tax provision 6.3 4.5 (6.5)
Total income tax provision (benefit) $ 51.5 $ 44.1 $(39.7)
As of December 31, 1994, the Company has net operating losses (NOLs) of
approximately $132 million and $50 million for regular and alternative minimum
taxes (AMTs), respectively. The Company's NOLs are recognized for financial
statement purposes as a reduction of the deferred tax liability and expire as
follows:
2000 $ 27 million
2002 5 million
2008 100 million
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
In addition, the Company has approximately $43 million of investment tax
credits for tax return purposes which expire as follows:
1995 $ 10 million 1999 $ 9 million
1996 8 million 2000 5 million
1997 5 million 2001 2 million
1998 4 million
These investment tax credits are subject to certain limitations as to
their future use. For financial statement purposes, the Company has
established a $31 million valuation reserve for credits which are unlikely to
be used. The estimate of NOLs and ITCs likely to be used was determined
using internal Company projections of future taxable income. The Company
generated book income before income taxes of $136 million in 1994 and $97
million in 1993 and a book loss before income taxes of $96 million in 1992.
Taxable gains for 1994 and 1993 were somewhat lower, while the taxable loss
for 1992 is somewhat higher, primarily due to temporary differences related to
property additions. The Company's projections to support the recognition of
these deferred tax assets do not require continued operating income
improvements.
The components of the deferred tax liability include:
Amounts as of
December 31,
1994 1993
(millions of dollars)
Deferred tax liabilities:
Depreciation and basis differences $ 534.6 $ 512.9
All other 8.0 15.4
Total deferred tax liabilities $ 542.6 $ 528.3
Deferred tax assets:
Property treated as leased for tax purposes $ (57.6) $ (59.6)
Tax loss carryforwards (50.2) (79.5)
Accruals and reserves (60.4) (59.2)
Investment tax credit carryforwards, net of
valuation reserves of $31.4 and $37.6 (11.5) (11.5)
All other (12.9) (14.9)
Total deferred tax assets $(192.6) $(224.7)
Net deferred income tax liability $ 350.0 $ 303.6
3. OTHER INCOME, NET:
Years ended December 31,
(millions of dollars) 1994 1993 1992
Interest income $ 4.3 $ 2.5 $ 2.8
Gains from sales of property and investments 1.0 6.0 1.9
Rents from property not used for operations 3.2 3.9 3.7
Financing commitment and amendment fees (1.8) (0.6) (0.8)
Proceeds from note receivable
previously written-off 3.3 - -
Other, net (2.9) (0.8) 0.5
Total $ 7.1 $11.0 $ 8.1
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
4. LONG-TERM DEBT
a) Non-Current Portion of Long-Term Debt:
Amounts as of
December 31,
1994 1993
(Millions of dollars)
C&NW Railway:
9.92% Senior Secured Notes
due from 1998 to 2001 $ 465.0 $ 465.0
Term Loan due from 1996 to 1997 39.1 72.5
Standby Loan due from 1996 to 1998 96.6 132.7
Equipment and other obligations
due from 1996 to 2006 33.5 41.5
Capital lease obligations due from
1996 to 2005 (Note 5) 15.2 18.7
Total C&NW Railway $ 649.4 $ 730.4
WRPI:
Term Loan due from 1996 to 2002 $ 248.4 $ 275.8
Capital lease with WRPI Trust
due from 1996 to 2002 (Note 5) 104.7 104.7
Capital lease with UP due from
1996 to 2011 (Note 5) 31.2 31.9
Total WRPI $ 384.3 $ 412.4
Total $1,033.7 $1,142.8
b) C&NW Railway Debt.
The 9.92% Senior Secured Notes are fixed rate obligations; however,
in order to take advantage of relatively low floating rates, the Company,
in 1992 reverse swapped $425 million of those obligations to floating
through January, 1996. Under the terms of those reverse swaps, the
Company receives an average of 7.8% and pays three-month LIBOR.
The Term Loan and Standby Loan bear interest at a floating rate equal
to (at the Company's option) either: i) the Adjusted LIBOR Rate plus
1.5%; ii) the Alternate Base Rate plus 0.5% or iii) the Adjusted CD rate
plus 1.625% (in each case as defined in the credit agreement). The
composite interest rates for C&NW Railway debt net of the effect of
interest rate cap, swap and reverse swap agreements at December 31, 1994,
1993 and 1992, were 8.4%, 7.1% and 8.3%, respectively. As of December
31, 1994 and 1993, interest rates on $635.5 million and $678.7 million,
respectively, of debt floated with short-term interest rates; these
amounts included $425 million of fixed rate debt referred to above,
reverse swapped to floating.
The Company has hedged the interest rate exposure related to its
floating rate Railway debt, including fixed rate debt reserve swapped to
floating, by entering into interest rate swap agreements covering $450
million of debt through April 15, 1995, whereby the railroad pays an
average fixed rate of 6.3% and receives the three-month LIBOR. The
railroad is also a party to interest rate swap agreements covering $260
million of debt from April 15, 1995 to January 15, 1996 whereby the
railroad pays an average fixed rate of 6.8% and receives the three-month
LIBOR.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
Additionally, the railway has entered various interest rate cap
agreements under which LIBOR is effectively capped as follows:
$250 million; LIBOR capped at 5.0% through 4/15/95
$100 million; LIBOR capped at 7.0% from 4/15/95 to 1/15/96
$100 million; LIBOR capped at 5.0% from 4/15/95 to 1/15/96
See Note 12 for a discussion of the Company's 1992 recapitalization.
c) WRPI Debt.
WRPI's debt consists of a Term Loan, a capital lease obligation to
WRPI Trust and a capital lease obligation to UP.
The Term Loan and capital lease with WRPI Trust bear interest at
floating rates calculated at the option of WRPI or the WRPI Trust, as
applicable, equal to either: i) the Adjusted LIBOR Rate plus 1.25%; ii)
the Alternate Base Rate plus 0.25% or iii) the Adjusted CD Rate plus
1.375% (in each case as defined in WRPI's debt agreement). The capital
lease with UP bears interest at 12% per annum.
The composite interest rates, net of the effect of interest rate cap
and swap agreements as of December 31, 1994, 1993 and 1992 were 8.5%,
7.1% and 7.2%, respectively.
WRPI has hedged its floating rate interest exposure by entering
interest rate swap agreements covering $165 million of debt, through
February 7, 1996, whereby WRPI pays an average fixed rate of 8.2% and
receives three month LIBOR. Additionally, WRPI has entered various
interest rate cap agreements under which LIBOR on $200 million of debt is
effectively capped at 7.0% from April 15, 1995 to January 15, 1996 and
LIBOR on $300 million of debt is effectively capped at 8.0% from January
15, 1996 to January 15, 1997.
d) Annual Debt Payments.
Scheduled principal payments (including capital lease obligations)
due in 1995 through 1999 are as follows:
C&NW
Railway WRPI Total
(millions of dollars)
1995 $ 72.7 $ 22.7 $ 95.4
1996 80.9 25.0 105.9
1997 60.5 32.1 92.6
1998 137.5 37.2 174.7
1999 121.6 22.9 144.5
The WRPI Term Loan and capital lease obligation to WRPI Trust require
accelerated debt payments subsequent to December 31, 1996 if there is
excess cash flow as defined in the WRPI Loan agreement.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
e) Principal Encumbrances.
Borrowings under the Railway's Senior Secured Notes and Term and
Standby Loans are secured by the assets and guarantees of all of the
Company's subsidiaries other than WRPI. Borrowings under WRPI's Term
Loan and capital lease with WRPI Trust are secured by WRPI's assets,
excluding certain intercompany loans.
f) Extraordinary Items.
The 1993 extraordinary loss resulted from the refinancing of a
portion of the Railway's Term and Standby Loans. The total pretax loss
was $17.4 million and the related income tax benefit was $6.6 million.
The 1992 extraordinary loss resulted primarily from the retirement of
debentures in connection with the Recapitalization (see Note 12). The
total pretax loss was $148.0 million and the related income tax benefit
was $57.0 million.
5. LONG-TERM LEASES
The Company has substantial lease commitments for rolling stock, vehicles
and portions of the track structure and related facilities of WRPI. Those
leases which meet the criteria established by SFAS No. 13 are capitalized.
The remainder are reported as operating leases.
Minimum annual rental commitments for noncancelable leases at December
31, 1994 were as follows:
Capital leases
Operating
C&NW Railway WRPI leases
(Millions of dollars)
1995 $ 5.1 $ 13.5 $ 117.5
1996 4.1 13.5 115.8
1997 2.7 13.5 108.3
1998 2.7 13.5 103.6
1999 2.7 13.5 100.8
After 1999 9.8 178.7 735.2
Total $ 27.1 $246.2 $1,281.2
Less imputed interest
(at rates from 6.15% to 12.5%) 8.6 109.6
Present value of net minimum
lease payments $ 18.5 $136.6
The Company's lease agreements have terms of 3 to 28 years and expiration
dates ranging from 1995 to 2018. The majority of the leases contain options
allowing the Company a right of first refusal to purchase the leased property
at the end of the lease for fair market value, or at a set percentage of its
cost.
Lease rental expense for operating leases, including cancelable leases,
was $126.6 million in 1994 and $111.3 million in 1993 and 1992.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
The above amounts include insignificant amounts of rental income from
subleases. Excluded from such amounts are contingent rentals on freight cars
based on off-line car hire earnings of $0.5 million, $0.3 million and $0.9
million in 1994, 1993 and 1992, respectively. Also excluded from the above
amounts are contingent rentals payable by WRPI out of its cash flow of $14.0
million for 1994, $18.2 million for 1993 and $15.6 million for 1992.
6. SHAREHOLDERS' EQUITY
a) Changes in Shareholders' Equity.
(millions of dollars)
Common Capital Retained
stock surplus income
December 31, 1991 $ 0.2 $112.5 $(211.2)
Issuance of common stock 0.2 395.7 (38.8)
Net loss for the period - - (56.2)
Exercise of stock options - 0.3 -
Dividends on and accretion of
preferred stock* - - (11.9)
Excess of liquidation value over
carrying value of preferred stock
called for redemption* - - (46.8)
December 31, 1992 $ 0.4 $508.5 $(364.9)
Net income for the period - - 53.2
Issuance of common stock - 24.4 -
Exercise of stock options - 4.6 -
December 31, 1993 $ 0.4 $537.5 $(311.7)
Net income for the period - - 84.0
Exercise of stock options - 5.7 -
December 31, 1994 $ 0.4 $543.2 $(227.7)
*Preferred dividends of the Company, all paid in additional shares, were
13% per annum for each share of UP Convertible Preferred Stock, and 17%
per annum for each share of Merger Preferred Stock. See Note 12 for
discussion of preferred stock redemption.
b) Preferred Stock.
The authorized capital stock of the Company includes 15 million
shares of preferred stock, par value $.01 per share. There is no
preferred stock outstanding at December 31, 1994.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
c) Secondary Stock Offering.
In 1993 Blackstone Capital Partners, L.P. ("Blackstone"), DLJ Capital
Corporation ("DLJ"), and related investors sold substantially all of
their respective shares in a secondary offering at $19.25 per share. UP
Rail, Inc. ("UP Rail"), a subsidiary of Union Pacific Corporation,
purchased 500,000 shares from the selling shareholders, thereby
increasing its ownership to 12,835,304 shares, all of which are non-
voting. On January 29, 1993, Union Pacific Corporation filed an
application with the ICC requesting approval to convert the non-voting
common stock to common stock. On December 13, 1994, the ICC in a voting
conference orally approved the conversion subject to certain conditions;
however, on release of a written Commission order the Company and Union
Pacific must determine if the conditions to the conversion are
acceptable. The Company must accept the conditions if they are
acceptable to the Union Pacific and if the cost of compliance can
reasonably be determined and if the Union Pacific shall have fully and
adequately indemnified the Company and its affiliates.
In connection with the secondary offering, the underwriters exercised
overallotment options under which the Company issued an additional
1,371,265 shares of common stock for which it received net proceeds after
underwriting discount and issuance expenses of approximately $24.4
million. Such net proceeds were used for the payment of a portion of the
amounts owing under the Company's debt agreements.
d) Stock Option Agreements.
1,820,012 options on common stock, with an exercise price of $5.88,
were granted in 1989 and an additional 247,582 such options were granted
in 1990. As of December 31, 1994, 785,218 options had been exercised,
113,484 had been canceled and 1,168,892 were exercisable. In addition,
323,542 options, all of which are exercisable, with exercise prices
between $1.09 and $2.07 were granted in 1989 to certain executives. As
of December 31, 1994, 62,500 of the 323,542 options have been exercised.
All options expire on the tenth anniversary of the grant date or earlier
under certain circumstances.
1,000,000 options, with an exercise price of $21.375 were granted on
December 8, 1992. An additional 359,500 options were granted during
1994, with exercise prices between $20.125 and $22.625. These options
become exercisable for 20% of the shares subject thereto, annually,
beginning on the first anniversary of the grant date and expire on the
tenth anniversary of the grant date. As of December 31, 1994, 16,400
options have been exercised, 32,800 have been canceled and 374,800 are
exercisable. Additionally, 740,107 and 2,000,000 options are available
to be granted under the 1992 and 1994 stock option plans, respectively.
e) Dividend Restrictions.
The Company's debt agreements limit the payment of dividends or
making other distributions with respect to the common stock to 10% of
income, as defined by the debt agreements, plus the amount of proceeds
from equity issuances subsequent to the Recapitalization. As of December
31, 1994, the Company's potential dividend payments were limited to
approximately $40 million.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
7. EMPLOYEE BENEFIT PLANS
a) Pensions.
The Company has a noncontributory defined benefit pension plan for
employees who are not covered by a collective bargaining agreement. The
benefits are based on years of service and the employee's average
compensation over the last five years of employment. These benefits are
reduced by eligible retirement benefits under the Company's Profit
Sharing and Retirement Savings Plan and the Railroad Retirement Act. The
Company makes annual contributions to the plan based on actuarial
determinations and cash requirements. The plan's assets are invested in
a guaranteed investment contract with an insurance company.
Net pension expense was $0.3 million in each of 1994, 1993 and 1992,
which consisted primarily of interest on the projected benefit
obligation. The projected benefit obligation was $5.7 million and $7.0
million as of December 31, 1994 and 1993, respectively.
The Company has accrued pension liabilities of $4.1 million and $4.3
million as of December 31, 1994 and 1993, respectively, consisting of the
projected benefit obligation and unrecognized net gains (losses) less the
fair value of plan assets. The fair value of plan assets was $2.3
million and $2.9 million as of December 31, 1994 and 1993, respectively.
Pension expense was determined using a weighted average discount rate
of 7.0% for 1994 and 8.25% for 1993. The projected benefit obligation
was determined using a weighted average discount rate of 8.5% at December
31, 1994 and 7.0% at December 31, 1993. The expected long-term rate of
return on plan assets was 8.75%. The assumed rate of compensation
increase was 6.0% at December 31, 1994 and 1993.
b) Postemployment Benefits
SFAS No. 106 primarily affects the Company's plan under which life
insurance is provided for retired employees not covered under collective
bargaining agreements. The Company's plan is unfunded. Operating
expense of $0.4 million was recognized in each of 1994, 1993, and 1992,
consisting primarily of interest on the accumulated postretirement
benefit obligation.
Certain employees not covered by collective bargaining agreements
also have received postretirement health care benefits to age 65 under
special employee severance programs. The amount paid for these benefits,
which was accrued by the Company prior to the employees' retirement was
$1.6 million in 1994, $1.2 million in 1993 and $1.1 million in 1992.
The Company provides health care benefits through a multi-employer
insurance plan for retired employees between the ages of 62 and 65 who
are covered by collective bargaining agreements. The cost of these
benefits for retired employees was $1.6 million in 1994 and $1.7 million
in 1993 and 1992.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
8. CONTINGENT LIABILITIES AND COMMITMENTS
The Company expects to expend $144 million for 1995 capital projects and
plans to acquire equipment under operating leases with a cost to the lessors
of $185 million.
The Company's operations are subject to a variety of federal, state and
local environmental and pollution control statutes and regulations. The
Company has been named as a potentially responsible party ("PRP") in three
proceedings under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), and in five state Superfund
matters, all but one of which is in the Midwest. The Company is also a
defendant in one private CERCLA cost recovery action. The current estimate of
the total cost of remediation for CERCLA, state and private cost recovery
proceedings to all PRPs aggregates approximately $82 million. The Company has
assumed that other PRPs will pay appropriate shares of remediation
obligations, except when the Company is aware they are incapable of doing so.
In such instances, the Company has reapportioned the potential liability and
provided a reserve.
The Company is the lessor of real property under approximately 1,600
leases for commercial, agricultural and industrial uses and owns or leases
numerous other sites. The Company has additionally provided reserves for
environmental exposure from current and former railroad operating properties,
fueling facilities, leased properties and pending litigation and enforcement
actions. The Company's environmental exposure is reevaluated periodically.
At December 31, 1994, the Company's reserve for environmental liabilities
was $30 million. No offsets were credited for possible insurance recoveries,
as the Company believes, to a large extent, it would not be able to obtain
such recoveries. The reserve was determined based on the Company's
anticipated cost of remediation at all known sites, including those where no
claim or enforcement action has been issued, taking into consideration the
extent of damage and the Company's remediation cost history. The Company has
not discounted its environmental liabilities as the timing of remediation
payments is uncertain. Environmental regulations and remediation processes
are subject to future change, and determining the actual cost of remediation
will require further investigation and remediation experience. Therefore, the
ultimate cost cannot be determined at this time. However, while such cost may
vary from the Company's current estimate, the Company believes the difference
between its reserve and the ultimate liability will not be material.
The Railroad is a party to service interruption insurance agreements under
which additional premiums of up to a maximum of $18.7 million may arise in the
event of work stoppages on other railroads. Conversely, the Railroad is
entitled to receive payments under certain conditions if a work stoppage
occurs on its property.
The Company is a party to a number of other legal actions arising in the
ordinary course of business, including actions involving personal injury
claims. The Company believes that the legal actions will not have a material
adverse impact upon the financial position or results of operations of the
Company.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(millions of dollars except per share amounts)
1994 Quarters Ended March 31 June 30 September 30 December 31
Operating revenues $273.9 $282.6 $290.7 $282.6
Operating income 48.2 53.3 67.9 56.5 a/
Net income 16.0 21.5 27.1 19.4
Net income per share .35 .47 .60 .43
(millions of dollars except per share amounts)
1993 Quarters Ended March 31 June 30 September 30 December 31
Operating revenues $254.7 $257.0 $262.9 $268.6
Operating income 45.6 52.7 49.2 b/ 61.6
Income before
extraordinary item 14.6 18.7 6.2 24.5
Net income (loss) 14.6 18.7 (4.6) c/ 24.5
Income before extraordinary
item per share .33 .43 .14 .54
Net income (loss) per share .33 .43 (.10) .54
a/ Includes $4.8 million charge for employee buyouts and related costs.
b/ Includes $5.0 million charge for employee buyouts, relocation costs and a
management fee payable to one of the Company's previous principal
shareholders.
c/ Includes a $10.8 million extraordinary charge from a debt refinancing.
10. RELATED PARTY TRANSACTIONS
Union Pacific Corporation and its subsidiaries ("UP") are related parties
as a result of their ownership of common stock of the Company. Blackstone is
a related party as James J. Mossman, a general partner, is a member of the
Company's Board of Directors. DLJ was formerly a related party as a result of
its or its affiliates' ownership of common stock of the Company
The Company paid Blackstone $250,000 in 1994 and $1.0 million in each of
1993 and 1992 for management and advisory fees, and $1.2 million in 1992 with
respect to the Recapitalization. The Company paid DLJ $1.2 million in fees in
1992 related to the Recapitalization. In addition, DLJ, acting as a lead
underwriter, realized aggregate selling concessions of $2.3 million in
connection with the Company's 1993 secondary offering and $4.1 million in
connection with the Company's 1992 stock offering.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
In connection with the Recapitalization, the Company exchanged 10,153,304
shares of non-voting common stock for the outstanding UP Convertible Preferred
Stock and an additional cash investment of $28 million. In connection with
the secondary offering, UP Rail purchased an additional 500,000 shares of non-
voting common stock. See Note 6(c).
Approximately 67% of the Company's total loads in 1994, 65% in 1993 and
62% in 1992 were interchanged with the UP with revenue shared in accordance
with standard industry procedures. Pursuant to a trackage rights agreement,
approved by the Interstate Commerce Commission, among the Company and
subsidiaries of UP, the Company hauls certain traffic for subsidiaries of UP
under terms that preserve the Company's revenue on that traffic. Note 5
details WRPI capital lease payments (including contingent rent payable out of
cash flow) made to a trust for the benefit of a subsidiary of UP.
11. OTHER DISCLOSURES
a) Additional Disclosures for Consolidated Statement of Cash Flows.
The following cash payments occurred in the periods shown:
1994 1993 1992
(millions of dollars)
Interest $ 90.0 $103.0 $118.6
Income taxes 2.7 .9 -
Noncash financing activities of the Company consisted of UP
convertible preferred stock dividends of $4.8 million and a $141.4
million exchange of UP convertible preferred stock for non-voting common
stock in 1992.
b) Cash Resources.
The Company has a credit line available through a $50 million
revolving credit facility. Approximately $45 million was available under
this credit line as of December 31, 1994.
c) Concentration of Credit Risk.
The Company is not dependent upon a single customer or on a few
customers. However, approximately 35% of the Company's 1994 traffic was
coal, primarily destined to electric utilities in the United States.
Approximately 67% of the Company's 1994 traffic was interchanged with
subsidiaries of the Union Pacific Corporation.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
d) Fair Value of Financial Instruments.
The estimated fair value of the Company's financial instruments as of
December 31, 1994 was as follows:
Carrying Fair
value value
(millions of dollars)
Assets:
Cash and cash equivalents $ 105.4 $ 105.4
Other current assets 177.5 177.5
Investments 5.5 5.5
Interest rate and fuel price hedges - 9.9
Liabilities:
Current liabilities 373.7 373.7
Long-term debt 1,033.7 1,060.1
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Current Assets and Current Liabilities: The carrying value
approximates fair value due to the short maturity of these items.
Investments: The Company has a minor amount of assets accounted for
on the cost basis for which the Company believes the carrying value
approximates fair value.
Long-Term Debt: The fair value of long-term debt and related swaps
is estimated based on quoted market prices for similar issues.
12. RECAPITALIZATION
On April 7, 1992, the Company issued 20,069,463 shares of common stock,
of which 9,916,159 shares were issued to the public and 10,153,304 non-voting
shares were issued to UP Rail as part of a recapitalization plan (the
"Recapitalization") to: (i) eliminate dividends on its 17% cumulative
exchangeable preferred stock, par value $.01 per share (the "merger preferred
stock") and 13% cumulative convertible exchangeable senior pay-in-kind
preferred stock, par value $.01 per share (the "UP convertible preferred
stock") issued in connection with the acquisition of CNW Corporation in 1989
(the "Acquisition"); (ii) increase common shareholders' equity; and (iii)
reduce the interest costs of the Company's consolidated indebtedness. The
principal sources of funds in the Recapitalization were: (i) the public
common stock issuance; (ii) new senior secured debt facilities for borrowings
of up to $850 million; and (iii) an investment by UP Rail of $28 million,
along with the surrender of the UP convertible preferred stock in exchange for
the issuance of non-voting common stock to UP Rail.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd.)
The proceeds of the Recapitalization (approximately $1.2 billion) were
used to: (i) redeem all of the issued and outstanding shares of merger
preferred stock at an aggregate redemption price equal to its liquidation
value plus accrued and unpaid dividends to the redemption date of May 8, 1992;
(ii) prepay all borrowings outstanding under the credit agreement (the "Merger
Credit Agreement") entered into in connection with the Acquisition; (iii)
retire $362 million of the 15-1/2% senior subordinated debentures due 2001
(the "Debentures") issued by a subsidiary of the Company in connection with
the Acquisition; (iv) exchange all of the issued and outstanding shares of UP
convertible preferred stock (plus an additional cash investment by UP Rail of
$28 million) for 10,153,304 shares of non-voting common stock; (v) fund a
portion of employee severance costs; (vi) terminate certain interest rate swap
agreements; and (vii) pay financing and transaction costs. In connection with
the Recapitalization, the Company recorded a first quarter after-tax
extraordinary charge to earnings of approximately $91 million (net of $57
million of income taxes) related to the retirement of the Debentures and the
termination of the Merger Credit Agreement and a charge of approximately $47
million to accrete the merger preferred stock to its liquidation value.
Concurrent with the common stock issuance, the Company effected an 32.25-
for-one stock split. Share and per share data included in the Consolidated
Financial Statements have been restated for the stock split.
On a pro forma basis, as of January 1, 1992, the Recapitalization would
have reduced 1992 interest expense by $9.2 million and eliminated all
preferred stock dividends.
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Chicago and North Western Transportation Company:
We have audited the accompanying consolidated balance sheets of Chicago
and North Western Transportation Company (a Delaware corporation) and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income and cash flows for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements 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 Chicago and North
Western Transportation Company and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As explained in Note 1(g) to the financial statements, effective January
1, 1992, the Company changed its method of accounting for other postretirement
benefits.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1995
Dates Referenced Herein and Documents Incorporated by Reference
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