10-Q 1 c58511e10-q.txt QUARTERLY REPORT 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended Commission File Number September 30, 2000 2-54754 -------------------- GATX RAIL CORPORATION Incorporated in the IRS Employer Identification No. State of New York 36-2827991 500 West Monroe Street Chicago, IL 60661-3676 (312) 621-6200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No --- Registrant had 1,000 shares of common stock outstanding (all owned by GATX Corporation) as of October 31, 2000. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GATX RAIL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS)

(1) The consolidated balance sheet at December 31, 1999 has been derived from the audited financial statements at that date. All other consolidated financial statements are unaudited but include all adjustments, consisting only of normal recurring items, which management considers necessary for a fair statement of the consolidated results of operations and financial position for the respective periods. Operating results for the nine months ended September 30, 2000 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2000. Certain amounts in 1999 have been reclassified to conform to the current presentation. (2) Discontinued operations -- Operating results for GATX Terminals Corp. are shown net of taxes of $5.9, $4.8, $13.3, and $15.8, respectively, for the four periods displayed. 1 3 GATX RAIL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS)

2 4 GATX RAIL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)

3 5 GATX RAIL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (IN MILLIONS)

4 6 GATX RAIL CORPORATION AND SUBSIDIARIES FINANCIAL DATA OF BUSINESS SEGMENTS FOR CONTINUING OPERATIONS (UNAUDITED) (IN MILLIONS)

5 7 GATX RAIL CORPORATION AND SUBSIDIARIES FINANCIAL DATA OF BUSINESS SEGMENTS FOR CONTINUING OPERATIONS (UNAUDITED) (IN MILLIONS)

6 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FIRST NINE MONTHS OF 2000 TO FIRST NINE MONTHS OF 1999 GATX Rail Corporation's (GRC) net income for the first nine months of 2000 of $85 million was $1 million lower than the first nine months of 1999. The prior year's net income included $3 million primarily related to a gain on the sale of 1,700 grain cars partially offset by certain incremental operating expenses. Excluding this gain, the current period net income was up $2 million from the prior year. GRC is a wholly owned subsidiary of GATX Corporation. On July 11, 2000, GATX Corporation announced its intention to sell GATX Terminals Corporation (Terminals), a segment of GRC. As a result of this action, operating results for Terminals have been segregated as discontinued operations in the accompanying consolidated statements of income. Prior year results of operations have been restated to reflect the current year's presentation of Terminals as a discontinued operation. RESULTS OF CONTINUING OPERATIONS GRC's gross income from continuing operations of $454 million was $5 million higher than the prior year. Net income from continuing operations for the first nine months of 2000 was $62 million compared to $65 million for the first nine months of 1999. GATX RAIL GATX Rail's gross income for the first nine months of 2000 increased slightly over the prior year period as revenue generated by a larger active fleet more than offset the absence of last year's gain associated with the sale of 1,700 grain cars. Approximately 85,400 tank and freight cars were on lease throughout North America at September 30, 2000, compared to 81,900 railcars a year ago. The average rental rate remained essentially flat with the prior year. Growth in the active domestic fleet and rental rates has been slowed by industry factors. Consolidation among major chemical customers has led to fleet rationalization, and railroads have improved efficiency following a period of merger-related congestion. These factors are expected to continue affecting car demand and lease rates during the remainder of the year. Due to the current market conditions, GATX Rail's utilization decreased to 93% as of September 30, 2000 from 95% at the end of prior year period, reflecting an increase in the number of idle railcars. Correspondingly, fleet growth was scaled back in the third quarter and for the remainder of the year. In addition to the challenging market conditions, GATX Rail is addressing an important issue with respect to its domestic service network. Employees at its four domestic service centers, represented by the United Steelworkers of America, have rejected the terms of a company-proposed labor contract. The company's proposal is designed to improve the long-term competitive position of GATX Rail's service centers. As a result of the uncertainty this situation has caused, the amount of work at our service centers has declined and the use of third party contract shops has increased to 7 9 ensure seamless customer service. The service centers continue to remain open and operational, but with smaller staffs given the lower volume of work. While this has been an effective service alternative, GATX Rail will incur abnormally high maintenance expenses during the fourth quarter absent the prompt signing of a new contract. Prior year net income included $3 million primarily related to a gain on the sale of 1,700 grain cars partially offset by certain incremental operating expenses. Excluding this gain, net income was up slightly from the prior year as revenues from the larger active fleet and lower operating expenses were partially offset by higher SG&A and ownership costs. OTHER All financing activities considered non-operational to Rail have been isolated in the Other segment. Net income of $10 million is comparable to the prior year period. RESULTS OF DISCONTINUED OPERATIONS On July 11, 2000, GATX Corporation announced its intention to sell Terminals. Therefore, the segment is no longer considered to be an ongoing operation and its results have been segregated as discontinued operations in the accompanying consolidated income statements. Operating results for the first nine months of 2000 were $23 million, up $2 million from the prior year period. Strong results in the domestic terminal and pipeline business offset the absence of a nonrecurring gain recognized last year on the sale of rights along the Central Florida Pipeline and lower affiliate contribution from Olympic Pipeline Company (Olympic). Terminals owned 25.1% of the common shares of Olympic Pipeline Company. On June 10, 1999, a pipeline rupture and explosion occurred on one of the pipelines owned by Olympic. The affected section of the pipeline is not expected to resume operations until next year. Several lawsuits have been filed against Olympic and its operator. On September 20, 2000, Terminals sold its entire 25.1% ownership of Olympic's common shares to BP's Pipelines Business Unit. CASH FLOW AND LIQUIDITY Net cash provided by operating activities for the first nine months of 2000 was $169 million, a $12 million increase from last year's period, due to higher depreciation being taken in the current year by GATX Rail and the timing of working capital requirements. Proceeds from other asset sales of $330 million increased $81 million from last year's period and includes the proceeds from the sale-leaseback of railcars at GATX Rail. Capital additions for the first nine months of 2000 totaled $422 million, an increase of $76 million from the first nine months of 1999. GATX Rail invested $346 million, a $48 million increase from the prior year period, in its railcar fleet, facilities, and international affiliates. Railcar additions at GATX Rail are not anticipated to continue at the same rate for the remainder of 2000 in response to current market conditions. Internally generated cash flow and GRC's external sources will be used to fund future capital additions. 8 10 GRC had unused committed lines of credit of $281 million at September 30, 2000. GRC issued $30 million of medium-term notes and $130 million of other long-term debt during the first nine months of 2000. Additional financing needs were met by cash flow from operations, short-term debt and proceeds from asset sales, which included two sale-leaseback financings. GRC has a $650 million shelf registration of which $477 million has been issued through September 30, 2000. OTHER MATTERS Effective January 1, 2001, GATX will adopt Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB statement No. 133. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging instruments. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments though earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. GRC uses interest rate and currency swap agreements as hedges that manage the exposure to interest rate and currency rate risk on existing and anticipated transactions. Since these derivatives are used in a hedging capacity, the effect of this change in accounting is not expected to be material to GRC's results of operations and financial position. Management's discussion includes statements that may constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, unanticipated changes in the markets served by GRC such as the rail, petroleum and chemical industries. 9 11 COMPARISON OF THIRD QUARTER 2000 TO THIRD QUARTER 1999 For the third quarter of 2000 net income was $28 million as compared to $29 million for the third quarter of 1999. Income from continuing operations of $19 million for the third quarter of 2000 was down $4 million from the comparable prior year period. Increases and decreases in gross income and net income between third quarter 2000 and third quarter 1999 for all segments were principally due to the same reasons as discussed previously in relation to the nine-month period. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Calnev Pipe Line Company ("Calnev"), a wholly owned subsidiary of GATX Terminals Corporation, has agreed in a Compliance Order with Region 9 of the U.S. Environmental Protection Agency ("EPA") to comply with and correct certain alleged violations of the Clean Air Act. In general, the Order requires Calnev to: (a) complete construction of a new vapor recovery unit in Las Vegas and limit use of another; (b) comply with certain throughput limits and VOC emission limits at the Las Vegas loading rack; (c) engage in certain recordkeeping; and, (d) comply with certain authority and permitting requirements of the EPA and the Clark County, Nevada, Health District. Calnev has not admitted to any violation of permit, law or regulation. The United States of America, the State of Nevada and Clark County have reserved the right to assess civil penalties. GRC and its subsidiaries are engaged in various matters of litigation, including but not limited to those described above, and have a number of unresolved claims pending, including proceedings under governmental laws and regulations related to environmental matters. While the amounts claimed are substantial and the ultimate liability with respect to such litigation and claims cannot be determined at this time, it is the opinion of management that damages, if any, required to be paid by GRC and its subsidiaries in the discharge of such liability are not likely to be material to GRC's consolidated financial position nor results of operations. 10 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) 12 Statement regarding computation of earnings to fixed charges. 27 Financial Data Schedule for GRC for the quarter ended September 30, 2000. Submitted to the SEC along with the electronic submission of this Quarterly Report on Form 10-Q. Any instrument defining the rights of security holders with respect to nonregistered long-term debt not being filed on the basis that the amount of securities authorized does not exceed 10 percent of the total assets of the company and subsidiaries on a consolidated basis will be furnished to the Commission upon request. (b) Form 8-K filed on July 12, 2000 reporting GATX Corporation's intention to sell GATX Terminals Corporation, its wholly owned subsidiary specializing in the storage and distribution of bulk petroleum and chemical products. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GATX RAIL CORPORATION (Registrant) /s/ Deborah A. House ------------------------------------------------ Deborah A. House Controller and Chief Accounting Officer (Duly Authorized Officer) Date: November 13, 2000 11

GATX RAIL CORP 10-Q