2013 ANNUAL REPORT Investing in North Carolina
North Carolina Railroad Company 2809 Highwoods Blvd., Suite 100 Raleigh, NC 27604-1000 www.ncrr.com
NORTH CAROLINA RAILROAD CORRIDOR
2013 ANNUAL REPORT Investing in North Carolina
North Carolina Railroad Company 2809 Highwoods Blvd., Suite 100 Raleigh, NC 27604-1000 www.ncrr.com
Chairman’s Letter
3
2013: A Year of Strategy and Focus
4
NCRR by the Numbers
9
Investing in North Carolina
10
Board of Directors and Management Team
15
Financial Report
17
Our Mission:
To develop the unique North Carolina Railroad assets for the good of the people of North Carolina.
Our Vision:
To improve our state by: Enabling freight to grow business; Expanding rail to move people; Investing in North Carolina.
2
“As Secretary of Commerce, I see the economic benefits of rail every day. I commend the North Carolina Railroad Company on their 165th anniversary, and we wish them continued success as a strategic partner for many years to come.” –Sharon Decker Secretary N.C. Department of Commerce
North Carolina Railroad Company
3
Chairman’s Letter
Text
Since the turn of the 21st century, the North Carolina Railroad Company has invested in North Carolina’s unique 317-mile railroad corridor. Now, looking to the future, it is imperative that our invaluable corridor continue to be managed in the best interests of our single shareholder, the people of North Carolina. The property stretching between Charlotte and Morehead City overseen by the NCRR is a treasured asset, one currently being managed effectively and with entrepreneurial flexibility, owing to our unique combination of public ownership and private management that includes our great team at the North Carolina Railroad Company. That combination was at work in 2013, when the General Assembly created a freight and safety fund to expand the rail corridor’s reach and to increase its economic development potential. The North Carolina Railroad Company’s initial dividend payments totaled $19.2 million. In effect, the North Carolina Railroad Company has been paying a dividend to the state by investing around 80 percent of lease revenues in corridor upgrades such as bridges, double-tracking, sidings, crossings and other improvements that expand capacity, improve efficiency and enhance safety. This constant improvement of the corridor has been made possible through the company’s trackage rights agreement with Norfolk Southern and other revenues. In 2013, our board of directors approved new strategic planning to reflect the company’s growing role in our state’s efforts to create jobs by recruiting and expanding business. The year also brought five new board members who are making valuable contributions to the mission and vision of the North Carolina Railroad Company. Along with fresh planning come new opportunities for collaboration with our partners, including Norfolk Southern, the North Carolina Department of Transportation, the North Carolina Department of Commerce, the General Assembly, transit authorities, chambers of commerce, local governments and our state’s economic development community. The North Carolina Railroad Company looks forward to delivering on a mission that has always been in place: To develop the unique North Carolina Railroad assets for the good of the people of North Carolina. It is my honor to serve the State of North Carolina along with my fellow directors on the North Carolina Railroad Company Board. Duane Long Chairman, NCRR Board of Directors
2013 Annual Report
4
2013:
A YEAR OF STRATEGY & FOCUS A
C
D
E
North Carolina Railroad Company
5 A University of North Carolina at Greensboro Chancellor Dr. Linda Brady has been an enthusiastic partner with NCRR during the design and construction of a pedestrian walkway beneath the rail corridor at the university campus.
F
B From left: NCRR Board member John Atkins, B
NCRR President Scott Saylor and Dr. Paul Friga with the UNC Kenan-Flagler Business School Executive Development Program, finalize the North Carolina Railroad’s strategic planning process.
C The NCRR Board plays an active role in
managing the railroad. Directors from left: Murray Greason, Jim Nance, Thomas Glasgow, Franklin Rouse, Walter LaRoque, Jim Powell and Fred Ruffin.
D A freight train travels through Salisbury as
NCDOT officials announce plans for the Klumac Road grade separation on the North Carolina Railroad corridor. From left: NCRR President Scott Saylor, Salisbury Mayor Paul Woodson, N.C. Secretary of Transportation Tony Tata and N.C. Board of Transportation Member Jake Alexander.
G
E Brad Dixon, vice president of the Heart of Cary
Association, gets into the spirit of National Train Day.
F NCRR Directors Dave Woodard and Bob Brown tour Spencer Rail Yard at Linwood, N.C., with other Board members, management and employees.
G NCRR Board member John Atkins shares a laugh with 2013 Rail Forum speaker Jeanette Goldsmith, a principal with McCallum Sweeney Consulting of Greenville, S.C.
H In addition to creating partnerships for
freight and passenger transport and economic development, the NCRR is committed to being a good safety partner, supporting efforts to promote safe practices along railroads. Marvin Rogers, a Norfolk Southern engineer and Operation Lifesaver volunteer, gives a safety briefing on an Operation Lifesaver Safety Train.
H
2013 Annual Report
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The North Carolina Railroad Company marked 2013 by focusing on the future. After a lengthy strategic planning process facilitated by the University of North Carolina Kenan-Flagler Business School Executive Development Program, the Railroad’s Board of Directors approved a new mission and vision for the North Carolina Railroad Company to reflect its ever-increasing role in our state’s efforts to recruit and expand business and create jobs. The North Carolina Railroad Company is a treasured asset that belongs to the people of North Carolina, and in 2013, the General Assembly created a freight and safety fund to expand the Railroad’s reach and to increase its economic development potential. The North Carolina Railroad Company’s initial dividend payment to the state totaled $19.2 million. The NCRR marked 2013 with its commitment to economic development and progress, and contributed to North Carolina’s well-being through programming, capital improvements, community involvement and safety. One of the year’s highlights was NCRR’s fourth Progress in Motion Rail Forum in Raleigh, which brought together more than 300 top railroad, transportation, commerce and economic development executives for a day and a half of speakers, programs and fellowship. The year also brought opportunities for NCRR to continue its valuable partnerships with the N.C. Department of Commerce, Norfolk Southern, the North Carolina Department of Transportation, colleges and universities, and the many towns and cities that lie along the rail corridor. The NCRR continued its commitment to rail safety, and participated in safety awareness programs with North Carolina Operation Lifesaver and the NCDOT’s Be Rail Safe program. During 2013, the company welcomed five new board members, who bring energy and excitement to the operations and make important decisions on investing in the rail infrastructure that will enhance our state’s economic competitiveness for years to come. Along with a new mission, vision and focus come new opportunities for collaboration and new opportunities to develop the unique North Carolina Railroad assets for the good of the people of North Carolina.
North Carolina Railroad Company
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2013: A YEAR OF STRATEGY & FOCUS
K
I NCRR President Scott Saylor (left) maintains contacts with the cities and towns along the North Carolina Railroad corridor. Ed Clement (right) welcomes Saylor to a meeting of the Salisbury Rotary Club. J Members of the NCRR Board welcome Norfolk Southern CEO Wick Moorman at the 2013 Rail Forum in Raleigh. From left: Bill Kincheloe, Walter LaRoque, Wick Moorman, Duane Long and Dave Woodard. I
K Contractors use precise GPS survey equipment to place a geodetic monument along the NCRR 200-foot boundary in Jones County, as NCRR continues an innovative monumentation project along the entire 317-mile rail corridor. Workers are installing geodetic markers along the corridor’s boundary for corridor management, engineering and planning purposes.
J
2013 Annual Report
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“The North Carolina Railroad Company’s efforts to refurbish the Webb Avenue bridge in Burlington are very much appreciated. It is gratifying to see the results after the renovations. We are thankful to the NCRR and Norfolk Southern for their contributions to improving the appearance of a key city artery. ” –Allen Gant, Jr. President and CEO, Glen Raven, Inc.
North Carolina Railroad Company
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NCRR by the
NUMBERS
200 317 503
7,662
30
Feet – The North Carolina Railroad corridor is 200 feet wide
Miles – NCRR is 317 miles long, stretching from Morehead City to Charlotte Colleges – The NCRR is within a two-mile radius of 30 colleges, universities and community colleges Crossings – There are 503 crossings on the NCRR, including 149 private crossings and 354 public crossings
Acres – The NCRR covers 7,662 acres
1849
The year Governor John Motley Morehead chartered the NCRR as an economic tree of life for North Carolina 2013 Annual Report
10
INVESTING IN NORTH CAROLINA
h D urham County: State, local and federal officials, along with railroad executives, break ground in Durham County for a grade separation, passing siding and curve straightening project near Hopson Road at Research Triangle Park in Durham County to improve safety and allow freight and passenger trains to travel at faster speeds. Federal grants to the NC Department of Transportation made construction possible following land acquisition by NCRR.
Craven County: NCRR replaced draw span lifts on the Trent River Bridge in New Bern h
to improve train speed.
North Carolina Railroad Company
11
h
Rowan County: Workers construct a temporary detour track while the Klumac Road grade separation is constructed. This portion of the NCRR carries 50 freight trains and 8 passenger trains daily. Federal grants to the N.C. Department of Transportation made this project possible.
h L enoir County: A new culvert near LaGrange is part
of a series of bridge and culvert projects in eastern North Carolina to improve drainage and operational efficiency.
f R owan
and Davidson Counties: Track improvements help rail capacity and safety under the new I-85 bridges over the Yadkin River. The NC Department of Transportation secured key federal grants in excess of $300 million for projects that improve capacity and safety on the NCRR.
h
Alamance County: The Webb Avenue Bridge in Burlington was refurbished by cleaning the concrete abutments and wing walls and painting the structure for preservation.
2013 Annual Report
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h G uilford County: A new pedestrian underpass at the
University of North Carolina at Greensboro will improve safety at the rail corridor and allow the campus to expand. NCRR contributed $1 million to the UNCG initiative.
g Carteret
County: Replacement of the 105-year-old bridge over the Newport River was completed, giving the bridge a new span, which will improve safety and speed. The NCRR donated the old span to the Town of Newport where it will be refurbished and put on display.
h
J ohnston County: Construction of a fourth track and
reconfiguring configuring track alignments in Selma will improve capacity and operations in the Selma Rail Yard.
North Carolina Railroad Company
13
INVESTING IN NORTH CAROLINA
The North Carolina Railroad is one of North Carolina’s most unique assets — a 317-mile ribbon of steel and timber, spanning our state from Morehead City to Charlotte. Through its capital improvement program, the North Carolina Railroad Company has invested in bridges track improvements, sidings, double tracking, safety measures and other infrastructure to attract business and industry and create jobs. Governor John Motley Morehead chartered the railroad 165 years ago as an economic tree of life for the state, and today, the North Carolina Railroad Company is hard at work, enabling freight to grow business, expanding rail to move people and investing in our state. In 2013, the North Carolina Railroad Company began or completed significant projects in nearly every one of the 16 counties through which the rail corridor runs.
L enoir County: With no passing sidings for 114 miles
h
between Selma and Morehead City, there were no options for more than one train to travel that segment of the NCRR. In 2013, a two-mile passing siding was constructed near LaGrange. This siding will improve capacity in eastern North Carolina.
2013 Annual Report
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“The University of North Carolina at Greensboro is grateful to the North Carolina Railroad for partnering with us on an innovative and useful pedestrian underpass. The underpass enables the campus to grow by ensuring safe passage for students, faculty and staff who travel back and forth from our main campus to the new student village each day.”
Photo by: Chris English, UNCG University Relations
–Dr. Linda Brady Chancellor, University of North Carolina at Greensboro
North Carolina Railroad Company
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Board of Directors and Management Team Board of Directors
Management Team
Duane Long Chairman Research Triangle Park Chairman, Longistics
Scott M. Saylor President
Franklin Rouse Vice Chairman Leland President, Rouse Insurance Agency, Inc.
Daniel P. Halloran, CPA Vice President and Chief Financial Officer James K. Kessler, P.E. Vice President, Engineering
David T. Woodard Secretary/Treasurer Raleigh General Agent, Union Central Financial
Charles E. Burnell, Jr. Vice President, Real Estate
John L. Atkins III Research Triangle Park Chairman and CEO O’Brien/Atkins Associates
Cathy Deeley Real Estate Representative
Robert Brown High Point Chairman and CEO, B&C Associates
Catherine A. Campbell Planning Director
Melissa DeVita Administrative Assistant Kristian D. Forslin, GISP, PLS GIS Coordinator
Thomas Glasgow Morehead City Retired Vice President and CEO Clancy and Theys Construction Company, Virginia Division
Justin Madigan Infrastructure Manager
Jeffrey Goodman Asheville Chairman and CEO, Hedrick Industries
Hilary Perez Archivist
Murray C. Greason, Jr. Winston-Salem Attorney, Partner (retired) Womble Carlyle Sandridge & Rice, PLLC Fred Klein Charlotte Senior Managing Partner Childress Klein Properties
William C. Miller Property Manager
Nancy Pickett Office Manager John L. Spencer Real Estate Representative Richard Wiley Senior Consultant for Economic Development
Walter D. LaRoque IV Kinston Owner, East Carolina Realty Services, LLC James E. Nance Albemarle Managing Member North State Acquisitions, LLC John M. Pike Goldsboro Director of Operations Goldsboro Milling Company George Rountree III Wilmington Senior Partner and Attorney Rountree Losee, LLP
2013 Annual Report
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“In 2013, our Board of Directors approved a new mission and vision for the NCRR to reflect its everincreasing role in our state’s efforts to recruit and expand business and to create jobs.” –Scott Saylor President, North Carolina Railroad Company
See accompanying note to consolidated financial statements.
North Carolina Railroad Company
Financial Report
17
2013
Financial Report Consolidated Financial Statements Years Ended December 31, 2013 and 2012
See accompanying note to consolidated financial statements. 2013 Annual Report
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Financial Report
North Carolina Railroad Company Consolidated Financial Statements Years Ended December 31, 2013 and 2012
North Carolina Railroad Company
Financial Report
19
North Carolina Railroad Company
TABLE OF CONTENTS Page No. Independent Auditors’ Report ........................................................................................................
20
Consolidated Financial Statements: Consolidated Balance Sheets ........................................................................................................
22
Consolidated Statements of Income .............................................................................................
24
Consolidated Statements of Stockholder’s Equity .......................................................................
25
Consolidated Statements of Cash Flows ......................................................................................
26
Notes to Consolidated Financial Statements ................................................................................
27
2013 Annual Report
20
Financial Report
Independent Auditors’ Report T o th e D ir ector s and Stock h older N or th C ar olina R ailr oad C ompany R aleigh , N or th C ar olina W e h av e au dited th e accompanying consolidated financial statements of N or th C ar olina R ailr oad C ompany and su b sidiar y, w h ich compr ise th e consolidated b alance sh eets as of D ecemb er 3 1 , 2 0 1 3 and 2 0 1 2 , and th e r elated consolidated statements of income, stock h older ’ s eq u ity, and cash flow s for th e year s th en ended, and th e r elated notes to th e consolidated financial statements. Management’s Responsibility for the Financial Statements M anagement is r esponsib le for th e pr epar ation and fair pr esentation of th ese consolidated financial statements in accor dance w ith accou nting pr inciples gener ally accepted in th e U nited States of A mer ica; th is inclu des th e design, implementation, and maintenance of inter nal contr ol r elev ant to th e pr epar ation and fair pr esentation of consolidated financial statements th at ar e fr ee fr om mater ial misstatement, w h eth er du e to fr au d or er r or . Auditors’ Responsibility O u r r esponsib ility is to ex pr ess an opinion on th ese consolidated financial statements b ased on ou r au dits. W e condu cted ou r au dits in accor dance w ith au diting standar ds gener ally accepted in th e U nited States of A mer ica. T h ose standar ds r eq u ir e th at w e plan and per for m th e au dit to ob tain r easonab le assu r ance ab ou t w h eth er th e consolidated financial statements ar e fr ee fr om mater ial misstatement. A n au dit inv olv es per for ming pr ocedu r es to ob tain au dit ev idence ab ou t th e amou nts and disclosu r es in th e consolidated financial statements. T h e pr ocedu r es selected depend on th e au ditor s’ j u dgment, inclu ding th e assessment of th e r isk s of mater ial misstatement of th e consolidated financial statements, w h eth er du e to fr au d or er r or . I n mak ing th ose r isk assessments, th e au ditor consider s inter nal contr ol r elev ant to th e entity’ s pr epar ation and fair pr esentation of th e consolidated financial statements in or der to design au dit pr ocedu r es th at ar e appr opr iate in th e cir cu mstances, b u t not for th e pu r pose of ex pr essing an opinion on th e effectiv eness of th e entity’ s inter nal contr ol. A ccor dingly, w e ex pr ess no su ch opinion. A n au dit also inclu des ev alu ating th e appr opr iateness of accou nting policies u sed and th e r easonab leness of significant accou nting estimates made b y management, as w ell as ev alu ating th e ov er all pr esentation of th e consolidated financial statements. W e b eliev e th at th e au dit ev idence w e h av e ob tained is su fficient and appr opr iate to pr ov ide a b asis for ou r q u alified au dit opinion. Opinion I n ou r opinion, th e consolidated financial statements r efer r ed to ab ov e pr esent fair ly, in all mater ial r espects, th e financial position of N or th C ar olina R ailr oad C ompany and su b sidiar y as of D ecemb er 3 1 , 2 0 1 3 and 2 0 1 2 , and th e r esu lts of th eir oper ations and th eir cash flow s for th e year s th en ended in accor dance w ith accou nting pr inciples gener ally accepted in th e U nited States of A mer ica.
See accompanying note to consolidated financial statements.
North Carolina Railroad Company
Financial Report
21
Adjustments to Prior Period Financial Statements In our report dated May 22, 2013, we qualified our opinion on the 2012 financial statements due to the fact we did not obtain sufficient audit evidence supporting capital contributions received from the State of North Carolina representing capital improvement projects of $2,004,821 during the year ended December 31, 2012, nor did we obtain sufficient audit evidence supporting the capital contributions received in years prior to 2012. We have since obtained sufficient audit evidence supporting capital contributions from the State of North Carolina resulting in a restatement of the previously issued financial statements for 2012 (Note 9). Accordingly, our present opinion on the 2012 financial statements, as presented herein, is different from that expressed in our previous report.
Raleigh, North Carolina May 28, 2014
2013 Annual Report
22
Financial Report
North Carolina Railroad Company Consolidated Balance Sheets December 31, 2013 and 2012
A SSE T S C u r r ent assets: C ash and cash eq u iv alents $
6 ,9 5 0 ,1 8 3
A ccou nts r eceiv ab le, inclu ding and allow ance for dou b tfu l accou nt of $ 3 0 8 , 0 0 0 and $ 0 for 2 0 1 3 and 2 0 1 2 , r espectiv ely
T otal cu r r ent assets P r oper ty and eq u ipment R oadw ay and land T r ack s, signals and b r idges L and B u ildings and impr ov ements E q u ipment and fu r nitu r e C onstr u ction in pr ogr ess
$
3 ,8 2 8 ,0 7 8
4 9 ,7 5 9 3 2 ,6 6 9
5 3 9 ,7 7 2 3 8 ,8 7 9
7 ,0 3 2 ,6 1 1
4 ,4 0 6 ,7 2 9
P r epaid ex penses
7 ,8 1 2 5 ,1 4 ,5 1 5 ,8 1 ,4 1 2 ,6
4 8 7 5 7 0 7 5 8 4 1 7
,7 ,6 ,8 ,9 ,1 ,7
4 2 8 0 7 5 5 9 7 2 9 1
7 ,8 1 2 3 ,6 4 ,6 1 5 ,4 1 ,4 5 ,6
4 8 ,7 6 0 ,0 1 3 ,5 9 4 ,4 4 5 ,7 0 0 ,8
4 2 4 6 5 5 3 9 7 3 7 9
1 6 7 ,5 7 3 ,2 1 9
1 5 8 ,6 6 3 ,4 3 4
8 2 ,2 1 8 ,3 8 2
7 1 ,0 7 1 ,0 5 4
8 5 ,3 5 4 ,8 3 7
8 7 ,5 9 2 ,3 8 0
er assets u nded capital pr oj ects ong- ter m r eceiv ab le eposits
7 2 ,2 8 0 ,3 0 6 2 ,6 3 4 ,3 3 4 2 1 ,2 2 3
7 2 ,2 2 0 ,6 1 6 1 ,7 2 4 ,5 6 7 2 2 ,5 4 1
T otal oth er assets
7 4 ,9 3 5 ,8 6 3
7 3 ,9 6 7 ,7 2 4
L ess accu mu lated depr eciation P r oper ty and eq u ipment, net O th F L D
2012 As restated
2013
T otal assets
accompanying notes to consolidated financial statements. SeeSee accompanying note to consolidated financial statements.
North Carolina Railroad Company
$
1 6 7 ,3 2 3 ,3 1 1
$
1 6 5 ,9 6 6 ,8 3 3
P age 3
Financial Report
23
North Carolina Railroad Company Consolidated Balance Sheets (Continued) December 31, 2013 and 2012 2012 As restated
2013
L I A B I L I T I E S A N D ST O C K H O L D E R ' S E Q U I T Y C u r r ent liab ilities: A ccou nts payab le and accr u ed ex penses D iv idends payab le C u r r ent por tion of th e u near ned R ent T otal cu r r ent liab ilities
$
L ong- ter m liab ilities Secu r ity deposits D efer r ed tax liab ility U near ned r ent T otal long- ter m liab ilities T otal liab ilities
3 ,9 7 6 ,5 2 2 3 ,6 5 4 ,1 5 7 2 1 7 ,5 9 8
$
1 ,2 8 9 ,0 6 9 -
7 ,8 4 8 ,2 7 7
1 ,2 8 9 ,0 6 9
4 7 ,5 1 4 1 ,2 3 4 ,0 0 0 1 1 ,2 2 5 ,4 5 4
6 1 ,6 0 1 5 3 3 ,0 0 0
1 2 ,5 0 6 ,9 6 8
5 9 4 ,6 0 1
2 0 ,3 5 5 ,2 4 5
1 ,8 8 3 ,6 7 0
1 5 9 1 9 9 ,0 0 1 ,8 5 7 ( 5 2 ,1 8 9 ,2 0 1 )
1 5 9 1 9 9 ,0 0 0 ,6 2 9 ( 3 4 ,9 1 7 ,6 2 5 )
-
C ommitments ( N ote 3 ) Stock h older ' s E q u ity C ommon stock , $ 0 .5 0 par v alu e; 1 0 , 0 0 0 , 0 0 0 sh ar es au th or iz ed; 3 1 7 sh ar es issu ed and ou tstanding A dditional paid- in capital A ccu mu lated deficit A ccu mu lated oth er compr eh ensiv e income: U nr ealiz ed gain on av ailab le- for - sale secu r ities, net of defer r ed tax es T otal stock h older ' s eq u ity
1 5 5 ,2 5 1
T otal liab ilities and stock h older ' s eq u ity
See accompanying notes to consolidated financial statements.
$
1 4 6 ,9 6 8 ,0 6 6
-
1 6 7 ,3 2 3 ,3 1 1
$
1 6 4 ,0 8 3 ,1 6 3 1 6 5 ,9 6 6 ,8 3 3
age 4 See accompanying note toP consolidated financial statements.
2013 Annual Report
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Financial Report
North Carolina Railroad Company Consolidated Statements of Income For the Years Ended December 31, 2013 and 2012
2013 I ncome: L ease of r oadw ay and land O th er lease income T otal lease income
$
E x penses: W ages and b enefits P r ofessional fees C ontr acted ser v ices F r anch ise and pr oper ty tax es I nsu r ance R epor ting and pu b lic r elations D epr eciation E ngineer ing, su r v eying and mapping P r oper ty and cor r idor management B ad deb ts G ener al and administr ativ e T otal ex penses
2012
1 4 ,6 1 6 ,6 2 8 2 ,3 4 6 ,8 2 8
$
1 4 ,3 1 1 ,3 6 7 1 ,9 9 1 ,6 3 8
1 6 ,9 6 3 ,4 5 6
1 6 ,3 0 3 ,0 0 5
1 ,7 9 3 6 3 6 4 4 1 3 1 2 1 1 ,1 4 3 5 3 4 3 0 6 4
1 ,4 9 5 1 3 5 4 3 1 3 1 6 1 1 ,3 0 1 8 3 1
9 ,2 5 ,1 6 ,4 6 ,4 8 ,9 0 ,8 7 ,3 8 ,4 5 ,7 8 ,7 9 ,7
0 7 5 7 9 4 4 3 0 7 8 1 2 8 5 4 6 2 4 9 9 8
5 ,5 5 ,4 4 ,3 5 ,6 1 ,0 6 ,8 8 ,3 5 ,0 5 ,5
1 9 8 7 1 3 8 0 0 3 6 1 8 8 9 0 4 1 9 4 5 5 0 9 ,6 8 0
1 6 ,0 4 7 ,1 8 0
1 5 ,4 1 8 ,5 0 7
8 1 0 ,4 1 4 1 5 7 ,9 2 0 8 8 3 ,4 5 3
8 9 2 ,0 2 5 4 2 ,7 5 5 1 ,0 5 2 ,4 9 2
T otal oth er income
1 ,8 5 1 ,7 8 7
1 ,9 8 7 ,2 7 2
I ncome b efor e income tax es
2 ,7 6 8 ,0 6 3
2 ,8 7 1 ,7 7 0
8 8 5 ,4 8 1
5 1 ,7 3 9
O th er income: I nv estment income G ain on disposition of assets O th er income
I ncome tax ex pense N et income
1 ,8 8 2 ,5 8 2
O th er C ompr eh ensiv e I ncome U nr ealiz ed gain
$
C ompr eh ensiv e I ncome
accompanying notes to consolidated financial statements. SeeSee accompanying note to consolidated financial statements.
North Carolina Railroad Company
$
2 ,8 2 0 ,0 3 1
$
1 5 5 ,2 5 1 2 ,0 3 7 ,8 3 3
$
2 ,8 2 0 ,0 3 1
P age 5
Financial Report
25
North Carolina Railroad Company Consolidated Statements of Stockholder's Equity For the Years Ended December 31, 2013 and 2012 A dditional P aid- in C apital
C ommon Stock B alance at J anu ar y 1 , 2 0 1 2 , as pr ev iou sly r epor ted
$
1 5 9
R estatement for cu mu lativ e adj u stments in accou nting for N C D O T capital impr ov ements on N C R R pr oper ty
$
1 5 9
1 5 9
C apital contr ib u tion r elated to capital impr ov ement pr oj ects -
N et income
$
1 5 9
( 3 4 ,9 1 7 ,6 2 5 )
$
1 9 9 ,0 0 1 ,8 5 7
See accompanying notes to consolidated financial statements.
2 ,0 0 4 ,8 2 1 -
2 ,8 2 0 ,0 3 1
-
1 6 4 ,0 8 3 ,1 6 3
-
( 1 9 ,1 5 4 ,1 5 8 ) $
1 ,8 8 2 ,5 8 2 ( 5 2 ,1 8 9 ,2 0 1 ) $
3 3 5 ,5 0 0
-
-
1 5 8 ,9 2 2 ,8 1 1
1 5 9 ,2 5 8 ,3 1 1
2 ,8 2 0 ,0 3 1
1 ,2 2 8 -
$
-
-
1 9 9 ,0 0 0 ,6 2 9
T otal Stock h older ' s E q u ity
-
( 3 7 ,7 3 7 ,6 5 6 )
2 ,0 0 4 ,8 2 1
-
-
7 0 5 ,6 4 3
-
N et income
D iv idends
( 3 8 ,4 4 3 ,2 9 9 ) $
1 9 6 ,9 9 5 ,8 0 8
-
B alance at D ecemb er 3 1 , 2 0 1 2 , as r estated
$
( 3 7 0 ,1 4 3 )
C apital contr ib u tion r elated to capital impr ov ement pr oj ects
B alance at D ecemb er 3 1 , 2 0 1 3
1 9 7 ,3 6 5 ,9 5 1
-
B alance at J anu ar y 1 , 2 0 1 2 , as r estated
A ccu mu lated D eficit
A ccu mu lated O th er C ompr eh ensiv e I ncome
-
1 ,2 2 8
1 5 5 ,2 5 1
( 1 9 ,1 5 4 ,1 5 8 )
1 5 5 ,2 5 1
$
2 ,0 3 7 ,8 3 3 1 4 6 ,9 6 8 ,0 6 6
age 6 See accompanying note to P consolidated financial statements.
2013 Annual Report
26
Financial Report
North Carolina Railroad Company Consolidated Statements of Cash Flows For the Years Ended December 31, 2013 and 2012
C A SH F L O W S F R O M O P E R A T I N G A C T I V I T I E S N et income A dj u stments to r econcile net income to net cash pr ov ided b y oper ating activ ities: P r ov ision for b ad deb ts D epr eciation D efer r ed income tax ( b enefit) I nter est ear ned b y fu nded capital pr oj ect inv estments G ain on disposal of pr oper ty and eq u ipment C h anges in oper ating assets and liab ilities: A ccou nts r eceiv ab le L ong- ter m r eceiv ab le P r epaid ex penses D eposits A ccou nts payab le and accr u ed ex penses U near ned r ev enu es Secu r ity deposits
2013 $
2012
2 ,0 3 7 ,8 3 3
3 0 1 1 ,1 4 7 0 (8 6 (1 5
8 ,7 7 ,3 1 ,0 8 ,7 7 ,9
1 8 1 (9 0 9 6 1 (6 2 8 1 1 ,2 2 5 (1 4
N et cash pr ov ided b y oper ating activ ities C A SH F L O W S F R O M I N V E ST I N G A C T I V I T I E S P u r ch ase of pr oper ty and eq u ipment P r oceeds fr om sale of pr oper ty T r ansfer of u nr estr icted cash and cash eq u iv alents to fu nded capital pr oj ects to fu nd b oar d designations T r ansfer s of fu nded capital pr oj ects monies to cash and cash eq u iv alents for capital ex penditu r es N et cash u sed in inv esting activ ities C A SH F L O W S F R O M F I N A N C I N G A C T I V I T I E S P ayment of div idend N et cash u sed in inv esting activ ities
$
2 ,8 2 0 ,0 3 1
4 9 2 8 0 0 6 7 ) 2 0 )
,2 6 ,7 6 ,2 1 ,3 1 ,2 6 ,4 5 ,0 8
1 1 ,3 0 8 (8 (8 0 0 (4 2
3
,3 ,0 ,4 ,7
8 8 0 0 ) 4 0 ) 5 5 )
( 3 0 2 ,6 1 3 9 2 0 ,8 1 1 (5 ( 5 ,8 1 6 ( 1 ,0 4 8 ,5 1 7
7 ) 0 8 4 ) 7 )
-
2 3 ,0 3 0 ,3 5 0
1 2 ,8 4 1 ,0 8 4
( 5 ,4 1 7 ,9 2 2 ) 2 0 0 ,6 0 0
( 4 ,9 6 1 ,0 8 1 ) 4 2 ,7 5 5
( 5 ,5 0 0 ,0 0 0 )
( 1 2 ,0 0 0 ,0 0 0 )
6 ,3 0 9 ,0 7 7
5 ,7 6 8 ,2 5 9
( 4 ,4 0 8 ,2 4 5 )
( 1 1 ,1 5 0 ,0 6 7 )
( 1 5 ,5 0 0 ,0 0 0 )
-
( 1 5 ,5 0 0 ,0 0 0 )
1 ,6 9 1 ,0 1 7
C ash and cash eq u iv alents at b eginning of year
3 ,8 2 8 ,0 7 8
2 ,1 3 7 ,0 6 1
SU P P L E M E N T A L C A SH F L O W
) -
3 ,1 2 2 ,1 0 5
$
) )
4
N E T I N C R E A SE I N C A SH A N D C A SH E Q U I V A L E N T S
C ash and cash eq u iv alents at end of year
)
6 ,9 5 0 ,1 8 3
$
3 ,8 2 8 ,0 7 8
IN F O R M A T IO N
C ash paid for income tax es
$
1 4 5 ,0 0 0
$
5 3 ,3 4 4
SU P P L E M E N T A L SC H E D U L E O F N O N C A SH I N V E ST I N G A N D F IN A N C IN G A C T IV IT IE S A dditions to pr oper ty and eq u ipment paid b y th e N or th C ar olina D epar tment of T r anspor tation $
1 ,2 2 8
$
C onstr u ction costs inclu ded in accou nts payab le and accr u ed ex penses $
3 ,5 3 3 ,3 1 5
$
A ccr u ed div idends payab le
$
3 ,6 5 4 ,1 5 8
$
2 ,0 0 4 ,8 2 1
accompanying notes to consolidated financial statements. SeeSee accompanying note to consolidated financial statements.
North Carolina Railroad Company
9 6 1 ,5 8 0 -
P age 7
Financial Report
27
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 1 - Nature of Business and Significant Accounting Policies Nature of Business The North Carolina Railroad Company and subsidiary, a North Carolina company, (collectively referred to as the “Company”), owns approximately 317 miles of continuous railroad line extending from Charlotte, North Carolina to Morehead City, North Carolina. The Company’s railroad facilities are operated by Norfolk Southern Railway Company (“NSR”). The State of North Carolina is the sole owner of all the common stock of the Company. N.C. Railroad, Inc. (“NCRI”), a wholly owned subsidiary of the North Carolina Railroad Company (“NCRR”), was formed on December 15, 2006. NCRI conducts certain taxable activities, such as leasing of commercial real estate, while NCRR conducts all tax exempt activities, such as leasing of railroad facilities and corridor management. A summary of the Company’s significant accounting policies follows. Basis of Consolidation The accompanying consolidated financial statements include the accounts of NCRR and its wholly owned subsidiary, NCRI. All intercompany transaction and balances have been eliminated in consolidation. Use of Estimates In preparing its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the consolidated balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents For purposes of the consolidated statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents include money market funds. Cash and cash equivalents that are restricted or designated by the Board of Directors for capital projects are reflected as funded capital projects in the accompanying consolidated balance sheets. See Note 4. At times the Company places cash and cash equivalents and certificates of deposits with original maturities of three months or more with financial institutions in amounts that are in excess of Federal Deposit Insurance Company insurance limits. The Company has not experienced any losses in such accounts. The financial condition of financial institutions is periodically reassessed, and the Company believes the risk of any loss is minimal. Accounts Receivable Accounts receivable are uncollateralized obligations due under agreements. The Company provides an allowance for doubtful accounts equal to the estimated losses that are expected to be incurred in their collection. The allowance is based on historical collection experience and management’s review of the current status of the existing receivables. An account receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 30 days.
Page 8
2013 Annual Report
28
Financial Report
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 1 - Nature of Business and Significant Accounting Policies (continued) Property and Equipment Property and equipment are stated at cost less accumulated depreciation. The Company computes depreciation using the straight-line method over the following estimated useful lives: Estimated Useful Lives (Years) Buildings and building improvements Bridges Track and signals Equipment and furniture
25 25 10 3-7
Values of the properties included in roadway and land approximate 1916 valuations by the Interstate Commerce Commission. Theses properties represent fully depreciated roadway or undepreciated land. The Company assesses long-lived assets for impairment whenever events or changes indicate that the carrying amount of the assets may not be recovered based on estimated future undiscounted cash flows. In the event such cash flows are not expected to be sufficient to recover the carrying value of the assets, the useful lives of the assets are revised or the assets are written down to their estimated fair values. Securities Held to Maturity Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as “held-to-maturity� and are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity Securities Available for Sale Investments in marketable equity securities and debt securities not classified as held-to-maturity securities are classified as available-for-sale and are reported at fair value, with changes in net unrealized gains and losses included in other comprehensive earnings, net of tax, if any. When securities are sold, gains and losses are determined using the specific identification method for all investments except mutual funds which are determined using the average cost method. Investments are classified as noncurrent due to the board designations of investments for capital improvements. The Company reviews securities when quoted market prices are less than cost to determine if the impairment is other than temporary. Declines in the fair value of individual securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value with such write down being included in earnings as realized losses. Fair values The Company uses market data or assumptions that market participants would use in pricing assets and liabilities at fair value, and establishes a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include values based on quotes in active markets for identical assets (Level 1), values estimated based on other available market information including quoted market prices for similar assets in active and non-active markets and pricing models based on observable inputs(Level 2), and values based on management’s estimates using various valuation methods (Level 3).
Page 9
North Carolina Railroad Company
Financial Report
29
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 1 - Nature of Business and Significant Accounting Policies (continued) Revenue Recognition Lease of Roadway and Land Revenue received from property that is operated by NSR is reflected in the consolidated statements of income when earned in accordance with the Company’s lease arrangements. Other Lease Income The Company leases certain property that is not operated by NSR. Revenue is reflected in the consolidated statements of income when earned. The Company also collects license fee revenue which is recognized when earned. The Company defers recognition of contingent rentals until the requirements are met. Income Taxes Pursuant to Section 11146 of the Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005 (the “Act”), a substantial portion of the Company’s income is exempt from federal and state income taxes. The activities that generate income which is not exempt from federal and state income taxes pursuant to the Act are conducted in NCRI. Deferred tax assets and liabilities are recognized in NCRI for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. Reclassifications Certain amounts in the 2012 income statement have been reclassified to be consistent with the current year presentation. The reclassifications had no effect on net income previously presented. Note 2 - Investment Securities The following is a summary of the securities portfolio by major classification at December 31, 2013 and 2012: Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value December 31, 2013 Held to Maturity: Certificates of deposit $ 15,000,000 $ $ $ 15,000,000 Corporate bonds 14,981,380 22,550 6,000 14,997,930 $ 29,981,380
$
22,550
$
6,000
$ 29,997,930
Page 10
2013 Annual Report
30
Financial Report
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 2 - Investment Securities (continued)
December 31, 2013 (continued) Available for Sale: Foreign debt instruments $ U.S Government and federal Agencies Mortgage backed securities Collateralized mortgage Obligations State and local governments Corporate debt securities Mutual funds
December 31, 2012 Held to Maturity: Certificates of deposit Corporate bonds
Gross Unrealized Gains
Amortized Cost 912,750
$
Gross Unrealized Losses -
$
Fair Value
14,105
$
898,645
2,140,696 9,475,805
30,190
24,071 65,806
2,116,625 9,440,189
6,261,445 3,317,396 9,559,695 8,022,000
11,478 377 4,065 383,989
46,192 14,058 110,616 -
6,226,731 3,303,715 9,453,144 8,405,989
$ 39,689,787
$
430,099
$
274,848
$ 39,845,038
$ 25,000,000 20,000,000
$
242,150
$
-
$ 25,000,000 20,242,150
$ 45,000,000
$
242,150
$
-
$ 45,242,150
Held to maturity securities are carried in the financial statements at amortized cost. Available for sale securities are carried in the financial statements at fair value. Net unrealized holding gains on available for sale securities in the amount of $155,251 for the year ended December 31, 2013 have been included in accumulated other comprehensive income. As all held to maturity investments were purchased in 2013 all unrealized losses are under 12 months. The fair values of securities carried at fair value in the accompanying financial statements are determined as follows: Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable December 31, Assets Inputs Inputs 2013 (Level 1) (Level 2) (Level 3) Foreign debt instruments U.S Government and federal Agencies Mortgage backed securities Collateralized mortgage Obligations State and local governments Corporate debt securities Mutual funds
$
898,645
$
-
$
898,645
$
-
2,116,625 9,440,189
-
2,116,625 9,440,189
-
6,226,731 3,303,715 9,453,144 8,405,989
8,405,989
6,226,731 3,303,715 9,453,144 -
-
8,405,989
$ 31,439,049
$ 39,845,038
$
$
Page 11
North Carolina Railroad Company
Financial Report
31
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 2 - Investment Securities (continued) In addition to the investments disclosed above Funded Capital Projects includes cash and cash equivalents totaling $2,129,486 and $26,831,227 and accrued interest receivable totaling $324,402 and $389,389 at December 31, 2013 and 2012 respectively. Investment management fees totaling $17,226 in 2013 are net against investment income in 2013. There were no investment management fees incurred in 2012. The amortized cost and fair values of held to maturity and available for sale securities at December 31, 2013 by contractual maturity are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. No securities have been in a continuous loss position for more than 12 months.
December 31, 2013 Held to Maturity: Due within one year Due after one year through five years Available for sale: Due within one year Due after one year through five years Due after five years through ten years Due after 10 years Equities December 31, 2012 Held to Maturity: Due within one year Due after one year through five years
Amortized Cost
Fair Value
$ 25,000,000 4,981,380
$ 25,018,300 4,979,630
$ 29,981,380
$ 29,997,930
$
$
2,341,919 10,770,841 10,069,136 8,485,894 8,022,000
2,329,709 10,689,714 9,962,857 8,456,769 8,405,989
$ 39,689,790
$ 39,845,038
$ 15,000,000 30,000,000
$ 15,094,000 30,148,150
$ 45,000,000
$ 45,242,150
Note 3 - Trackage Rights Agreement and Leases on Roadway and Land Prior to 1999, substantially all of the Company's assets were leased to NSR or its predecessors, in two leases originally dating back to 1895 and 1939. The terms of the leases did not require either the Company or Norfolk Southern to renew the leases. On August 10, 1999, the Board of Directors of the Company approved a Trackage Rights Agreement ("TRA�) concurrent with NSR terminating the original leases. The TRA's term is 15 years with two 15year renewal options by NSR (45 years) for a base annual rental of $11,000,000 (minimum) beginning January 1, 2000, with annual adjustments based upon an inflation index and a 4.5% annual cap (arbitration of cap if it exceeds an average of 4.5% over any 7-year period). The TRA provides for transition of management of certain non-rail properties to the Company, maintenance of the Company's rail property, inspections, records sharing, and audit. The TRA was approved by the Surface Transportation Board on September 1, 1999.
Page 12
2013 Annual Report
32
Financial Report
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 2 - Investment Securities (continued) In addition to the investments disclosed above Funded Capital Projects includes cash and cash equivalents totaling $2,129,486 and $26,831,227 and accrued interest receivable totaling $324,402 and $389,389 at December 31, 2013 and 2012 respectively. Investment management fees totaling $17,226 in 2013 are net against investment income in 2013. There were no investment management fees incurred in 2012. The amortized cost and fair values of held to maturity and available for sale securities at December 31, 2013 by contractual maturity are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. No securities have been in a continuous loss position for more than 12 months.
December 31, 2013 Held to Maturity: Due within one year Due after one year through five years Available for sale: Due within one year Due after one year through five years Due after five years through ten years Due after 10 years Equities December 31, 2012 Held to Maturity: Due within one year Due after one year through five years
Amortized Cost
Fair Value
$ 25,000,000 4,981,380
$ 25,018,300 4,979,630
$ 29,981,380
$ 29,997,930
$
$
2,341,919 10,770,841 10,069,136 8,485,894 8,022,000
2,329,709 10,689,714 9,962,857 8,456,769 8,405,989
$ 39,689,790
$ 39,845,038
$ 15,000,000 30,000,000
$ 15,094,000 30,148,150
$ 45,000,000
$ 45,242,150
Note 3 - Trackage Rights Agreement and Leases on Roadway and Land Prior to 1999, substantially all of the Company's assets were leased to NSR or its predecessors, in two leases originally dating back to 1895 and 1939. The terms of the leases did not require either the Company or Norfolk Southern to renew the leases. On August 10, 1999, the Board of Directors of the Company approved a Trackage Rights Agreement ("TRA�) concurrent with NSR terminating the original leases. The TRA's term is 15 years with two 15year renewal options by NSR (45 years) for a base annual rental of $11,000,000 (minimum) beginning January 1, 2000, with annual adjustments based upon an inflation index and a 4.5% annual cap (arbitration of cap if it exceeds an average of 4.5% over any 7-year period). The TRA provides for transition of management of certain non-rail properties to the Company, maintenance of the Company's rail property, inspections, records sharing, and audit. The TRA was approved by the Surface Transportation Board on September 1, 1999.
Page 12
North Carolina Railroad Company
Financial Report
33
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 3 - Trackage Rights Agreement and Leases on Roadway and Land (continued) The TRA grants exclusive freight trackage rights to NSR to conduct all freight operations over the NCRR railroad line. Under federal law the National Rail Passenger Corporation (“Amtrak”) operates over NSR operated lines under agreements with NSR. NSR is obligated under the TRA to provide rail service to all industries on the NCRR line. NSR is obligated to maintain the NCRR line and any improvements made to the line by NSR for freight operations. Under the TRA, NSR does not have financial responsibility for passenger improvements made by the Company, North Carolina Department of Transportation (NCDOT), Amtrak, or other parties. Approximately 38 parcels not used in railroad operations have been returned to the Company for separate (non-NSR) management. These noncorridor properties are managed by the Company after transition from NSR management. The TRA contains provisions for responsibility for environmental matters by NSR and the Company. NSR is responsible for any taxes on its freight operations. A Policy Planning Committee comprised of NCRR and NSR representatives addresses all future planning issues, capital improvements, and any disputes that arise under the TRA. In the event of any disagreements, NCRR and NSR are subject to binding arbitration under the TRA. A lease of certain properties in Charlotte, North Carolina to NSR (the 1968 Lease) expires on December 31, 2067, and provides for an annual rental of $81,319 through December 2018. The 1968 lease provides that beginning on January 1, 2019, the annual rental for the remaining term of the 1968 Lease is 6% of the appraised value of the property on that date. Under the terms of the 1968 Lease, all taxes connected with the property, except income taxes, are paid by the lessee. The 1968 Lease was not affected by the TRA. Pursuant to agreements signed in each year since 2008, NCRR has assigned to NSR all of the NCRR lines that constitute eligible railroad tracks solely for purposes of allowing NSR to qualify as an eligible taxpayer with respect to such track and to claim tax credits under section 45G(a) for qualified railroad track maintenance expenditures it pays or incurs during each year under agreement with respect to such track. In exchange, NSR agrees to pay to NCRR fifty percent of the tax credits NSR claims. Payment of the amount owed under the agreement is not due until the amount of the allowable credit is not subject to further appeal, review or modification through proceedings or otherwise. As such, prior to the year ended December 31, 2012, the Company has deferred recognition of tax credit revenue as payment was uncertain. In 2012, the Company received $1,844,926, including $147,426 in accumulated interest at 4%, from NSR representing repayment of the Company’s fifty percent share of the 2009 and 2010 tax credit claimed by NSR. In addition, as the Company has sufficient evidence that payment will occur, the Company recorded a long-term receivable of $2,634,334, representing $2,546,250 of total tax credit revenue that the Company is due for tax years 2013 and 2014 from NSR, plus accumulated interest of $88,084, as of December 31, 2013.
Page 13
2013 Annual Report
34
Financial Report
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 4 - Capital Commitments Capital Improvement Agreement On March 20, 2002, the Company entered into a Capital Improvement Agreement (the "Capital Agreement”) with NSR in order to establish an understanding between the parties about desired capital improvements as well as a means to fund individual projects pursuant to the TRA. The Capital Agreement calls for certain identified capital improvements to be made to the Company's railroad line (the “Projects”). As of December 31, 2013, the Company's share of the Projects totals approximately $102 million and is scheduled for completion between 2014 and 2018. The Capital Agreement calls for the execution of individual project agreements as appropriate and contains certain provisions with regard to construction responsibilities and cost allocation. The Capital Agreement provides for the funding of a capital program escrow account with an initial deposit of $500,000 by the Company and additional deposits of obligated Company capital improvement funds held pursuant to N.C. General Statute 124-5.1 to fund capital improvements as recommended and approved by the Company's Board of Directors. Capital Account Funds Agreement On June 21, 2002, the Company and the NCDOT entered into a Capital Account Funds Agreement (the "CAFA”) pursuant to N.C.G.S. 124-5.1. NCDOT has various capital improvement projects in progress under the CAFA as of December 31, 2013 and management expects to record a capital contribution and related asset as the improvements are completed in future periods. ARRA/PRIIA High-Speed Passenger Rail Projects In 2011, the State of North Carolina was selected to receive certain federal grant awards through the American Recovery and Reinvestment Act of 2009 (“ARRA”) and the Passenger Rail Investment Act of 2008 (“PRIIA”) for the capital funding of certain high speed intercity passenger rail projects, under which NCDOT is the grantee of the awards. On December 15, 2010, the Company, the NCDOT, and NSR entered into an Agreement on Principles (“AOP”), which outlined certain terms for capital improvements within and along the NCRR corridor operated by NSR (Note 2). On March 21, 2011, the Company, NCDOT, NSR and Amtrak entered into a Definitive Service Outcomes Agreement (“DSOA”), clarifying the individual parties’ responsibilities and further detailing the projects to be funded by the grants to NCDOT. On March 21, 2012, the Company and the NCDOT entered into a Railroad Corridor Property Acquisition Agreement (“RCPA”) regarding rail corridor property, including acquisition of additional railroad corridor property needed in connection with certain projects funded by the grants to NCDOT. As a result of these agreements, management expects to record a capital contribution and related assets for a portion of the improvements that will be made by NCDOT as the improvements are completed in future periods, in addition to the commitment of funds made by the Company described below. Under the AOP, DSOA, and RCPA, the Company has committed up to a total of $31,000,000 of capital investment toward certain projects in order to assist in completion of certain track capacity improvement projects and engineering Out of its $31,000,000 commitment, the AOP and DSOA also provide that the Company reserve up to $10,000,000 for a Capital Reserve Fund, which is designated by the Company for the purpose of making further capacity improvements to the NCRR line in the future in order to improve passenger and freight train reliability caused by identified unacceptable train delays. Investments by the Company under these agreements are to be applied against and reduce the Company’s commitment under the agreements. The Company also has committed use of the Company’s rail corridor lands for such capacity and other related improvement projects. As of December 31, 2013, the Company has designated approximately $36,000,000 as restricted under construction contracts in funded capital projects on the consolidated balance sheet. Page 14
North Carolina Railroad Company
Financial Report
35
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 4 - Capital Commitments (continued) Board Designated Funds The Board of Directors passed resolutions during 2013 and 2012 to designate $5,500,000 and $12,000,000, respectively, of unrestricted cash for use on capital improvement projects. The Company has designated the following amounts (invested in cash, certificates of deposit or debt securities) for capital improvement projects as follows: 2013 Restricted under construction contracts Restricted under the CAFA Restricted for other capital improvements Board designated funds Funded capital projects
2012
$
36,565,170 145,587 35,569,549
$
41,707,044 113 145,282 30,368,177
$
72,280,306
$
72,220,616
Note 5 - Employee Benefit Plan The Company sponsored a SEP-IRA Plan covering substantially all employees. Employees who earn greater than $400 in wages during the year were eligible to receive the contribution. There were no employer contributions for the year ended December 31, 2012. The Company incurred no plan administrative expenses during 2012. During 2012, the SEP-IRA Plan was terminated and replaced with a 401(k) Plan. The Company established a Safe Harbor 401(k) Plan effective January 1, 2012 to provide retirement benefits for its employees. All full-time employees who meet certain eligibility requirements are qualified to participate in the 401(k) Plan. Participants may make pre-tax deferrals up to 90% of their compensation subject to Internal Revenue Service limitations. Participants are fully vested in their contributions plus actual earnings thereon and any rollovers into their accounts. The Company contributes 3% of the compensation of all eligible active participants. In addition, the Company may elect each plan year whether to make a discretionary employer contribution on behalf of eligible active participants. Employer contributions for the years ended December 31, 2013 and 2012 were $87,957 and $72,959, respectively, including $50,261 and $41,691, respectively, of discretionary contributions. On April 18, 2013, the Company established a deferred compensation plan with an officer. The compensation will be paid out according to the terms of the plan unless the employee is terminated for cause as defined in the plan. The Company incurred expenses of $68,522 related to the plan in 2013. Note 6 - Future Minimum Lease Revenue The Company derives income from leased commercial space and other property under non-cancellable operating leases. Of the non-cancellable leases, one lease, described in Note 2, comprises 86% of the lease income. Rental income received from this lease during 2013 and 2012 was approximately $14.6 million and $14.3 million, respectively. The remaining non-cancellable leases are related to the rental of commercial space. Future minimum rentals, excluding renewal periods, on the non-cancellable operating leases are as follows for the years ending December 31:
Page 15
2013 Annual Report
36
Financial Report
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 6 - Future Minimum Lease Revenue (Continued) Amount 2014 2015 2016 2017 2018 Thereafter
$
14,917,721 760,817 561,470 529,364 425,878 7,625,686
$
24,820,936
Minimum lease payments do not include contingent rentals that may be received under certain leases. The Company’s policy is to defer recognition of such contingent rentals until the requirements are met. Contingent rental income earned during the years ended December 31, 2013 and 2012 totaled $19,415 and $30,487, respectively. City of Charlotte Lease Agreement The Company and the City of Charlotte (“Charlotte”) entered into an agreement (“Lease Agreement”) dated May 3, 2012, whereby Charlotte leased a segment of the North Carolina Railroad corridor, approximately 2.7 miles in length parallel to the Company’s main line railroad tracks and facilities, for the purpose of the extension of Charlotte’s LYNX Blue Line light rail transit system. The Lease Agreement provides for a one time rent payment to be paid to the Company within one year after the approval of full funding grant agreements by the United States Federal Transit Administration and the State of North Carolina, but in any event, no later than January 1, 2017. The Lease Agreement provides for a total lease fee in the amount of Eleven Million Seven Hundred Sixty Thousand ($11,760,000) as rent for the fifty (50) year lease term all of which was received in full on October 16, 2013. The Lease Agreement provides that Charlotte is responsible for all construction, operations, maintenance, taxes, assessments and costs related to Charlotte’s use of the segment. Coincident with the execution of the Lease Agreement, Charlotte entered into a Construction and Reimbursement Agreement and an Operations Agreement with NSR related to Charlotte’s use of the segment and the compatibility thereof with NSR’s operation and maintenance of the Company’s rail line. The Lease Agreement provides that design and construction is to be provided by Charlotte at its expense, subject to the approval of the Company. The Lease Agreement is subject to early termination, in which event a portion of the lease fee may be refundable. The Lease Agreement contains one renewal term at a rate agreed upon by the parties, or in the absence of agreement, based upon an appraised value. The Company has recorded an unearned rent liability for $11,443,052 at December 31, 2013, of which $200,455 is current.
Page 16
North Carolina Railroad Company
Financial Report
37
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 7 - Income Taxes The Company's income before income taxes for the years ended December 31, 2013 and 2012 is as follows: 2013
2012
Income before income taxes: Nontaxable entity Taxable entity
$
2,470,568 297,495
$
2,710,115 161,655
Income before income taxes
$
2,768,063
$
2,871,770
The difference between the federal income tax computed by the statutory federal income tax rate of 34% and NCRI's income tax expense as reflected in the consolidated financial statements is as follows: 2013 Income tax at statutory federal income tax rates Increase attributable to: State income tax, net of federal income tax benefit Other Transfer of assets not eligible for tax depreciation
$
101,148
2012 $
13,548 2,785 768,000 $
885,481
54,963 7,264 (10,488) -
$
51,739
The Company's taxable subsidiary, NC Railroad Inc. has a deferred income tax liability at December 31, 2013 and 2012 as follows: 2013 2012 Noncurrent deferred tax liability, property and equipment
$
1,234,000
$
533,000
The Company's total tax expense for 2013 and 2012 is summarized as follows: 2013 Current income tax expense Deferred income tax (benefit) expense Total income tax expense
2012
$
184,481 701,000
$
59,739 (8,000)
$
885,481
$
51,739
The Company has determined that it does not have any material unrecognized tax benefits or obligations as of December 31, 2013 and 2012. With few exceptions, the Company is no longer subject to income tax examinations by the federal, state, or local tax authorities for years before 2009. Note 8 - Advertising The Company paid $52,870 and $107,922 in advertising expenses for 2013 and 2012, respectively.
Page 17
2013 Annual Report
38
Financial Report
North Carolina Railroad Company Notes to Consolidated Financial Statements Years Ended December 31, 2013 and 2012
Note 9 - Prior Period Adjustment The Company has restated its previously issued financial statements for 2012 to reflect adjustments related to accounting for certain NCDOT capital improvement projects that were constructed on NCRR property prior to 2012. As such stockholder’s equity as of January 1, 2012 has been restated and there was no effect on 2012 net income. The effect of the adjustments on the balance sheet as of December 31, 2012 is as follows: Reported Tracks, signals and bridges
$ 124,030,189
Restatement $
As Restated
(370,143) $ 123,660,046
Accumulated depreciation
(71,776,697)
705,643
(71,071,054)
Additional paid in capital
199,370,772
(370,143)
199,000,629
Accumulated deficit
(35,623,268)
705,643
(34,917,625)
Note 10 - Subsequent Event The Company has evaluated subsequent events through May 28, 2014, which is the date the financial statements were available to be issued.
Page 18
North Carolina Railroad Company
Financial Report
39
2013 Annual Report
40
North Carolina Railroad Company
NORTH CAROLINA RAILROAD CORRIDOR
2013 ANNUAL REPORT Investing in North Carolina
North Carolina Railroad Company 2809 Highwoods Blvd., Suite 100 Raleigh, NC 27604-1000 www.ncrr.com